**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-Q**
 
  **(Mark
                  One)**x
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**For
                  the quarterly period ended June 30, 2006o
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**Commission
                  File Number: 000-26529
 
 
 **AUDIBLE,
        INC.**
 (Exact
        name of registrant as specified in its charter)
 
 **DELAWARE**
                (State
                  or other jurisdiction of
                incorporation
                  or organization)
              
              **22-3407945**
                (I.R.S.
                  employer
                identification
                  number)**65
                  WILLOWBROOK BLVD. WAYNE, NEW JERSEY**
                (Address
                  of principal executive offices)
              
              **07470**
                (Zip
                  Code)
 
 
 **(973)
        837-2700**
 (Registrant's
        telephone number, including area code)
 
 **None**
 (Former
        name, former address and former fiscal year, if changed since last
        report)
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.
 **Yes** x   **No** o
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer or a non-accelerated filer. See definition of “accelerated and
        large accelerated filer” in Rule 12b-2 of the Exchange Act.
 o **** **Large
        Accelerated Filer**  x **Accelerated Filer** **** **** o **Non-accelerated filer**
 
 Indicate
        by check mark whether the registrant is a shell company (as define in Rule
        12b-2
        of the Exchange Act).
 **Yes** o **** **** **No** x
  As
        of
        August 4, 2006, 24,390,193 shares of the registrant's common stock were
        outstanding.
  
 
  **AUDIBLE, INC.
        AND SUBSIDIARY**
 **TABLE
        OF CONTENTS**
 
 **PART
                  I**
              **FINANCIAL
                  INFORMATION**
              **PAGE**Item
                  1.
              Financial
                  Statements:Condensed
                  Consolidated Balance Sheets as of June 30,
                  2006 (unaudited) and December 31, 2005
              3Condensed
                  Consolidated Statements of Operations for
                  the three and six month periods ended June 30, 2006 and 2005
                  (unaudited)
              4Condensed
                  Consolidated Statements of Cash Flows for
                  the six month periods ended June 30, 2006 and 2005
                  (unaudited)
              5Notes
                  to Condensed Consolidated Financial
                  Statements (unaudited)
              6Item
                  2.
              Management's
                  Discussion and Analysis of
                  Financial Condition and Results of Operations
              28Item
                  3.
              Quantitative
                  and Qualitative Disclosures about
                  Market Risks
              43Item
                  4.
              Controls
                  and Procedures
              43**PART
                  II**
              **OTHER
                  INFORMATION**Item
                  1.
              Legal
                  Proceedings
              44Item
                  1A.
              Risk
                  Factors
              45Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              45Item
                  3.
              Defaults
                  Upon Senior Securities
              45Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              45Item
                  5.
              Other
                  Information
              45Item
                  6.
              Exhibits
              45**Signatures**
              
              46
 
 
  
 
 
 
 -2-
 Table
            of Contents
  **PART I
        - FINANCIAL INFORMATION**
  **ITEM
        1.    Financial Statements**
  **AUDIBLE,
        INC. AND SUBSIDIARY**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 **(in
        thousands, except share and per share data)**
  **June
                  30,**
              
              **December
                  31,****2006**
              
              **2005****(unaudited)****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              10,707
              
              $
              11,549Short-term
                  investments
              
              
              49,834
              
              
              55,616Interest
                  receivable on short-term investments
              
              
              495
              
              
              428Accounts
                  receivable, net of provision for refunds and chargebacks of $31
                  at June
                  30, 2006 and December 31, 2005
              
              
              1,930
              
              
              2,337Accounts
                  receivable, related parties
              
              
              607
              
              
              594Royalty
                  advances
              
              
              431
              
              
              471Prepaid
                  expenses and other current assets
              
              
              1,696
              
              
              899Inventory
              
              
              801
              
              
              498Total
                  current assets
              
              
              66,501
              
              
              72,392Property
                  and equipment, net
              
              
              10,001
              
              
              8,159Other
                  assets
              
              
              935
              
              
              114Total
                  assets
              
              $
              77,437
              
              $
              80,665**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              2,698
              
              $
              4,750Accrued
                  expenses
              
              
              3,633
              
              
              4,802Accrued
                  royalties
              
              
              5,111
              
              
              5,104Accrued
                  compensation
              
              
              1,297
              
              
              868Deferred
                  revenue
              
              
              9,639
              
              
              6,459Total
                  current liabilities
              
              
              22,378
              
              
              21,983Deferred
                  revenue, noncurrent
              
              
              271
              
              
              99Royalty
                  obligations, noncurrent
              
              
              172
              
              
              188Commitments
                  and contingenciesStockholders'
                  equity:Common
                  stock, par value $.01. Authorized 40,000,000 shares at June 30,
                  2006 and
                  December 31, 2005; 24,390,193 and 24,326,503 shares issued and
                  outstanding
                  at June 30, 2006 and December 31, 2005, respectively
              
              
              244
              
              
              243Additional
                  paid-in capital
              
              
              190,324
              
              
              192,547Deferred
                  compensation
              
              
              --
              
              
              (3,696
              )Accumulated
                  other comprehensive (loss) income
              
              
              (16
              )
              
              15Accumulated
                  deficit
              
              
              (135,936
              )
              
              (130,714
              )Total
                  stockholders' equity
              
              
              54,616
              
              
              58,395Total
                  liabilities and stockholders' equity
              
              $
              77,437
              
              $
              80,665
 
 See
        accompanying notes to condensed consolidated financial statements.
  
 -3-
 Table
            of Contents
  **AUDIBLE,
        INC. AND SUBSIDIARY**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(in
        thousands, except share and per share data)**
 **(Unaudited)**
  **Three
                  month periods ended**
                **June
                  30,**
              
              **Six
                  month periods ended**
                **June
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Revenue,
                  net:Content
                  and services revenue:Consumer
                  content
              
              $
              18,835
              
              $
              15,159
              
              $
              38,116
              
              $
              27,997Point
                  of sale rebates
              
              
              (126
              )
              
              (231
              )
              
              (293
              )
              
              (587
              )Services
              
              
              26
              
              
              21
              
              
              59
              
              
              40Total
                  content and services revenue
              
              
              18,735
              
              
              14,949
              
              
              37,882
              
              
              27,450Hardware
                  revenue
              
              
              85
              
              
              86
              
              
              210
              
              
              190Related
                  party revenue
              
              
              257
              
              
              259
              
              
              630
              
              
              533Other
                  revenue
              
              
              64
              
              
              4
              
              
              134
              
              
              29Total
                  revenue, net
              
              
              19,141
              
              
              15,298
              
              
              38,856
              
              
              28,202Operating
                  expenses:Cost
                  of content and services revenue:Royalties
                  and other content charges
              
              
              7,720
              
              
              5,414
              
              
              15,703
              
              
              9,567Discount
                  certificate rebates
              
              
              305
              
              
              363
              
              
              603
              
              
              964Total
                  cost of content and services revenue
              
              
              8,025
              
              
              5,777
              
              
              16,306
              
              
              10,531Cost
                  of hardware revenue
              
              
              206
              
              
              301
              
              
              881
              
              
              596Cost
                  of related party revenue
              
              
              42
              
              
              44
              
              
              200
              
              
              73Operations
              
              
              2,861
              
              
              2,275
              
              
              5,963
              
              
              4,122Technology
                  and development
              
              
              4,484
              
              
              1,843
              
              
              8,178
              
              
              3,468Marketing
              
              
              3,573
              
              
              2,935
              
              
              7,874
              
              
              5,195General
                  and administrative
              
              
              2,843
              
              
              1,689
              
              
              6,044
              
              
              3,225Total
                  operating expenses
              
              
              22,034
              
              
              14,864
              
              
              45,446
              
              
              27,210(Loss)
                  income from operations
              
              
              (2,893
              )
              
              434
              
              
              (6,590
              )
              
              992Other
                  income (expense):Interest
                  income
              
              
              714
              
              
              456
              
              
              1,374
              
              
              870Interest
                  expense
              
              
              --
              
              
              --
              
              
              --
              
              
              (1
              )Other
                  income, net
              
              
              714
              
              
              456
              
              
              1,374
              
              
              869(Loss)
                  income before income taxes
              
              
              (2,179
              )
              
              890
              
              
              (5,216
              )
              
              1,861Income
                  tax expense
              
              
              (3
              )
              
              (67
              )
              
              (6
              )
              
              (148
              )Net
                  (loss) income
              
              $
              (2,182
              )
              $
              823
              
              $
              (5,222
              )
              $
              1,713Basic
                  net (loss) income per common share
              
              $
              (0.09
              )
              $
              0.03
              
              $
              (0.21
              )
              $
              0.07Basic
                  weighted average common shares outstanding
              
              
              24,501,629
              
              
              24,169,396
              
              
              24,491,745
              
              
              24,089,237Diluted
                  net (loss) income per common share
              
              $
              (0.09
              )
              $
              0.03
              
              $
              (0.21
              )
              $
              0.07Diluted
                  weighted average common shares outstanding
              
              
              24,501,629
              
              
              25,987,000
              
              
              24,491,745
              
              
              26,052,104
 
 See
        accompanying notes to condensed consolidated financial statements.
 
 -4-
 Table
            of Contents
  **AUDIBLE,
        INC. AND SUBSIDIARY**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(in
        thousands)**
 **(Unaudited)**
  **Six
                  month periods ended****June
                  30,****2006**
              
              **2005**Cash
                  flows from operating activities:Net
                  (loss) income
              
              $
              (5,222
              )
              $
              1,713Adjustments
                  to reconcile net (loss) income to net cash (used in) provided by
                  operating
                  activities:Depreciation
                  and amortization
              
              
              2,385
              
              
              377Share-based
                  compensation expense
              
              
              2,657
              
              
              172Accretion
                  of discounts on short-term investments
              
              
              (449
              )
              
              (626
              )Income
                  tax benefit from exercise of stock options
              
              
              --
              
              
              147Changes
                  in assets and liabilities:Interest
                  receivable on short-term investments
              
              
              (67
              )
              
              (76
              )Accounts
                  receivable, net
              
              
              409
              
              
              (690
              )Accounts
                  receivable, related parties
              
              
              (13
              )
              
              42Royalty
                  advances
              
              
              40
              
              
              (255
              )Prepaid
                  expenses and other current assets
              
              
              (797
              )
              
              (264
              )Inventory
              
              
              (301
              )
              
              243Other
                  assets
              
              
              (821
              )
              
              (11
              )Accounts
                  payable
              
              
              (2,057
              )
              
              627Accrued
                  expenses
              
              
              (1,189
              )
              
              933Accrued
                  royalties
              
              
              --
              
              
              2,059Accrued
                  compensation
              
              
              425
              
              
              275Deferred
                  revenue
              
              
              3,349
              
              
              513Net
                  cash (used in) provided by operating activities
              
              
              (1,651
              )
              
              5,179Cash
                  flows from investing activities:Purchases
                  of property and equipment
              
              
              (3,973
              )
              
              (1,717
              )Capitalized
                  internally developed software costs
              
              
              (254
              )
              
              --Purchases
                  of short-term investments
              
              
              (35,569
              )
              
              (32,649
              )Proceeds
                  from maturity of short-term investments
              
              
              41,800
              
              
              26,000Net
                  cash provided by (used in) investing activities
              
              
              2,004
              
              
              (8,366
              )Cash
                  flows from financing activities:Proceeds
                  from exercise of common stock options
              
              
              354
              
              
              590Proceeds
                  from exercise of common stock warrants
              
              
              750
              
              
              295Purchase
                  of treasury stock at cost
              
              
              (2,287
              )
              
              --Principal
                  payments made on obligations under capital leases
              
              
              --
              
              
              (121
              )Net
                  cash (used in) provided by financing activities
              
              
              (1,183
              )
              
              764Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              (12
              )
              
              14Decrease
                  in cash and cash equivalents
              
              
              (842
              )
              
              (2,409
              )Cash
                  and cash equivalents at beginning of period
              
              
              11,549
              
              
              13,296Cash
                  and cash equivalents at end of period
              
              $
              10,707
              
              $
              10,887
  See
        Note
        11 for supplemental disclosure of cash flow information.
  See
        accompanying notes to condensed consolidated financial statements.
 
 
 -5-
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
              thousands, except share and per share data)**
 **(Unaudited)**
 Table
              of Contents
  **(1)
          Description of Business and Business Conditions**
 
 *The
          Business*
 
 Audible,
          Inc. (together with its subsidiary, the “Company”), incorporated on November 3,
          1995, was formed to create the Audible service, the Internet's leading
          provider
          of digital spoken entertainment information and educational programming
          for
          playback on personal computers and mobile devices. The Company commenced
          commercial operations in October 1997.
 
 For
          the
          three and six month periods ended June 30, 2006, the Company reported a
          net loss
          of $2,182 and $5,222, respectively, and has an accumulated deficit of $135,936
          as of June 30, 2006. The Company's cash and cash equivalents balance as
          of June
          30, 2006 is $10,707. In addition, the Company has short-term investments
          of
          $49,834.
 
 The
          Company may, in the future, need to raise additional funds to finance its
          continued growth. No assurance can be given that such additional financing,
          if
          needed, will be available on terms favorable to the Company or to its
          stockholders, if at all.
 
 **(2)
          Summary of Significant Accounting Policies**
 
 *Basis
          of Presentation*
 
 Commencing
          in the first quarter of 2005, the Company began its international operations
          in
          the United Kingdom, as Audible Limited (“Audible UK”). Audible UK is a
          wholly-owned subsidiary of Audible, Inc. and therefore its results of operations
          are consolidated as of the end of each reporting period. All inter-company
          transactions and balances have been eliminated.
 
 The
          accompanying condensed consolidated financial statements as of June 30,
          2006 and
          for the three and six month periods ended June 30, 2006 and 2005, are unaudited
          and, in the opinion of management, include all adjustments (consisting
          of normal
          recurring adjustments and accruals) necessary to present fairly the results
          for
          the periods presented in accordance with U.S. generally accepted accounting
          principles. Operating results for the three and six month periods ended
          June 30,
          2006 are not necessarily indicative of the results that may be expected
          for the
          year ending December 31, 2006. These condensed consolidated financial statements
          should be read in conjunction with the audited consolidated financial statements
          and notes thereto for the year ended December 31, 2005, from the Company's
          Annual Report on Form 10-K.
 
 *Cash
          and Cash Equivalents*
  The
          Company considers short-term, highly liquid investments with original maturities
          of three months or less at the time of purchase to be cash equivalents.
          Cash
          equivalents consist primarily of money market funds and notes due from
          governmental agencies. Cash consists of funds held in the Company's checking
          account.
 
 *Restricted
          Cash*
 
 During
          the third quarter of 2005, the Company deposited a $25 retainer in an
          interest-bearing account, which is included in Other Assets on the accompanying
          condensed consolidated Balance Sheets.
 
 -6-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
 
 *Short-Term
          Investments*
 
 Investments
          purchased with a maturity of more than three months, and less than twelve
          months, are classified as short-term investments. The Company's short-term
          investments, as of June 30, 2006 and December 31, 2005, of $49,834 and
          $55,616,
          respectively, consisted of governmental agency notes and mortgage-backed
          securities that are to be held to maturity because the Company has the
          positive
          intent and ability to hold these securities to maturity. Held to maturity
          securities are stated at amortized cost, adjusted for amortization of premiums
          and accretion of discounts to maturity. Dividend and interest income are
          recognized when earned. Premiums and discounts are amortized or accreted
          over
          the life of the related held-to-maturity security as an adjustment to yield
          using the effective interest method. A decline in the market value of
          held-to-maturity security below that is deemed to be other-than-temporary
          results in a reduction in carrying amount to fair value. The impairment
          is
          charged to operations and a new cost basis for the security is established.
          To
          determine whether an impairment is other-than-temporary, the Company considers
          whether it has the ability and intends to hold the investment until a market
          price recovery and considers whether evidence indicating the cost of the
          investment is recoverable outweighs evidence to the contrary. Evidence
          considered in this assessment includes the reasons for the impairment,
          the
          severity and duration of the impairment, changes in the value subsequent
          to
          period end, and forecasted performance of the investee.
  The
          amortized cost, gross unrealized holding losses and the fair value of
          held-to-maturity debt securities at June 30, 2006 was $49,834, $36 and
          $49,798,
          respectively.
 
 All
          of
          the debt securities classified as held-to-maturity mature before June
          30, 2007.
  *Provision
          for Refunds and Chargebacks*
 
 The
          provision for refunds and chargebacks is recorded as a reduction of revenue
          and
          is estimated based on a percentage of revenue, taking into account historical
          experience. A portion of the provision is recorded as a reduction of accounts
          receivable based on an estimate of refunds that will be made related to
          sales
          that were unpaid at period-end. The remaining portion of the provision
          is
          reflected as an accrued liability at period-end. Actual refunds and chargebacks
          could differ from the Company’s estimate.
  The
          amount of the provision that was recorded as a reduction of accounts receivable
          as of June 30, 2006 and December 31, 2005 was $31. The amount of the provision
          reflected in the accrued liability was $99 and $287 at June 30, 2006 and
          December 31, 2005, respectively.
 
 *Inventory*
  Inventory
          is stated at the lower of cost or market using the first-in, first-out
          method.
          Inventory consists of digital audio players manufactured by third
          parties.
 
 *Audio
          Production Costs*
 
 The
          Company capitalizes audio production costs incurred in connection with
          the
          creation of the master copy of an audio title, which includes talent, editorial
          and other costs. These costs are included as a non-current asset on the
          condensed consolidated Balance Sheets presented. These costs are stated
          at the
          lower of cost, less accumulated amortization, or fair value. These production
          costs are amortized beginning in the month the title is released, on a
          straight-line basis over a two year period, and are recognized as cost
          of
          content revenue in the condensed consolidated Statement of Operations.
          The
          remaining unamortized balance is periodically reviewed, and adjusted if
          necessary, to reflect the net realizable value.
 
 -7-
 **AUDIBLE,
                INC. AND SUBSIDIARY**
 **NOTES
                TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
 
 *Property
          and Equipment*
  Property
          and equipment, which includes computer server and Web site equipment, office
          furniture and equipment, leasehold improvements, internally developed software,
          studio equipment, and software licenses, are stated at cost. Property and
          equipment under capital leases are stated at the present value of minimum
          lease
          payments. Depreciation is calculated using the straight-line method over
          the
          estimated useful lives of the respective assets, which is three years for
          computer server, Web site equipment, and software licenses, and two years
          for
          internally developed software, and studio equipment. Property and equipment
          held
          under capital leases are amortized on a straight-line basis over the estimated
          useful life of the asset. In June 2006, the Company reassessed the estimated
          useful lives of office furniture and equipment and leasehold improvements.
          Prior
          to June 2006, office furniture and equipment was depreciated using the
          straight
          line method over a two year period and leasehold improvements were amortized
          on
          a straight-line basis over the lease term or the estimated useful life
          of the
          asset, whichever was shorter. In June 2006, the Company changed the estimated
          useful life of these assets to seven months. The change in estimate does
          not
          have a significant impact on the Company’s financial statements, nor is it
          expected to have a significant impact on future periods. The amortization
          is
          included within depreciation expense in the condensed consolidated Statements
          of
          Cash Flows.
 
 Work
          in
          process primarily consists of expenditures for the development of various
          computer software projects incurred subsequent to the completion of the
          preliminary project stage, as well as a software license not yet put into
          use.
          In accordance with SOP 98-1, *Accounting for Costs of Computer Software Developed or Obtained for Internal
          Use* ,
          the
          Company has capitalized external direct costs of material and services
          developed
          or obtained for these projects and certain payroll and payroll related
          expenses
          for employees directly associated with these projects. Amortization for
          each
          software project begins when the computer software is ready for its intended
          use.
  *Impairment
          of Long-Lived Assets*
  The
          Company reviews its long-lived assets for impairment when events or
          circumstances indicate that the carrying amount of an asset may not be
          recoverable. If the sum of the expected cash flows, undiscounted and without
          interest, is less than the carrying amount of the related asset, an impairment
          loss is recognized as the amount by which the carrying amount of the asset
          exceeds its fair value, generally based on discounted cash flow.
  *Royalty
          Advances and Royalty Obligations*
  Royalty
          advances represent payments made and payments to be made to various content
          providers pursuant to minimum guarantees under their royalty agreements,
          net of
          royalties expensed. The corresponding royalty obligations represent payments
          to
          be made to the content providers for audio content delivered pursuant to
          minimum
          guarantees under their royalty agreements. These agreements give the Company
          the
          right to sell digital audio content over the Internet. The royalty obligations
          recorded in the accompanying condensed consolidated Balance Sheets are
          classified between current (included in accrued expenses) and non-current
          based
          on the payment terms specified in the agreements. The Company periodically
          adjusts the balance of these advances to reflect their estimated net realizable
          value based on the difference, if any, between the carrying amount of the
          asset
          and the discounted future revenue stream. Royalty expense is included in
          cost of
          content and services revenue in the accompanying condensed consolidated
          Statements of Operations.
 
 *Fair
          Value of Financial Instruments*
  Financial
          instruments that potentially subject the Company to significant concentrations
          of credit risk consist of cash and cash equivalents, short-term investments,
          accounts receivable, accounts receivable from related parties, accounts
          payable
          and accrued expenses. At June 30, 2006 and December 31, 2005, the fair
          values of
          these financial instruments approximated their carrying values due to the
          short-term nature of these instruments.
 
 -8-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
  *Foreign
          Currency Translation*
 
 In
          accordance with the provision of Statement of Financial Accounting Standard
          (“SFAS”) No. 52, *Foreign Currency Translation* , ** Audible
          UK, whose functional currency is the British Pound, translates its balance
          sheet
          into U.S. dollars at the prevailing rate at the balance sheet date and
          translates its revenues, costs and expenses at the average rates prevailing
          during each reporting period. Net gains or losses resulting from the translation
          of Audible UK's financial statements are accumulated and charged directly
          to
          accumulated other comprehensive (loss) income, a component of stockholders'
          equity.
  Since
          the
          inception of Audible UK operations, Audible Inc. has made periodic cash
          fundings
          to Audible UK to assist with the cash flow needs of the start up subsidiary.
          Audible Inc. expects these periodic fundings to continue into the foreseeable
          future. In addition to cash fundings, Audible, Inc. has paid certain expenses
          on
          behalf of the subsidiary, such as a security deposit on office space and
          payroll
          of U.S. employees working on the UK business. All of these fundings were
          made
          with the intention of treating them as a long-term investment. In accordance
          with the provisions of SFAS No. 52, the foreign currency gain/loss at each
          reporting period resulting from the inter-company account is recorded to
          accumulated other comprehensive (loss) income.
 
 *Reclassifications*
 
 Certain
          prior period amounts have been reclassified to conform to current period
          presentation.
  *Revenue
          Recognition*
  Content
          and Services
 
 Consumer
          content revenue consists primarily of content sales made from the Company's
          Web
          sites and content sold through its agreement with the Apple iTunes Music
          Store.
          At the Company's Web site, customers purchase content either through an
          AudibleListener membership plan or on an a la carte basis. When purchased
          on an
          a la carte basis, the Company recognizes revenue from the sale of individual
          content titles in the period when the content is purchased and delivered.
          The
          Company generally recognizes revenue from the sale of a la carte content
          subscriptions pro rata over the term of the subscription period.
 
 The
          “legacy” AudibleListener monthly membership plans generally provide customers
          two audio credits for a fixed monthly fee. Customers may use these audio
          credits
          to download audio of their choice from the Web site. “Legacy” AudibleListener
          audio credits provided under a monthly membership plan have a life of 30
          days,
          after which they expire. The Company recognizes revenue from the sale of
          legacy
          AudibleListener memberships ratably over the AudibleListener's monthly
          membership period, which is 30 days. This results in approximately 50%
          of the
          AudibleListener membership fees received during each calendar month being
          deferred at month end and recognized as content revenue in the following
          month.
 
 In
          December 2005, the Company introduced new AudibleListener membership plans,
          designed to provide customers more flexibility in using their audio credits.
          Depending upon the AudibleListener membership plan, customers receive and
          can
“bank” or delay using a maximum number of audio credits, depending on the
          membership plan. The banking feature will result in audio credits being
          used
          (delivered) over different periods for different customers. This may result
          in
          slower revenue growth than the Company experienced in prior periods because
          the
          customer has a longer period of time to use their audio credits. In addition,
          some of the new AudibleListener plans include new membership benefits,
          ranging
          from a complimentary daily newspaper to everyday discounts of 30% on a
          la carte
          purchases. The daily newspaper and 30% discount benefits are “serial” elements
          that are delivered continuously over the membership period, whereas the
          content
          selections underlying the audio credits are discrete elements that are
          delivered
          at different times based on individual customer behavior. As a result of
          the
          characteristics of the new AudibleListener memberships, they are considered
          revenue arrangements with multiple deliverables; however under EITF
          00-21, *Revenue Arrangements with Multiple Deliverables,* because
          the deliverables are not eligible for separation, they are accounted for
          as a
          single unit of accounting. As a result, revenue is recognized for these
          new
          AudibleListener membership plans using the lesser of straight-line or
          proportional performance (based on content delivery) over the maximum membership
          period.
 Upon
          launch of the new AudibleListener plans in December 2005, the legacy
          AudibleListener plans were no longer available to new customers. Customers
          who
          have legacy memberships have the option of either converting to one of
          the new
          AudibleListener membership plans or continuing their legacy membership.
          Revenue
          is recognized from the sale of UltimateListener, the prepaid discounted
          content
          package, in which the customer receives twelve audio credits, and gift
          programs,
          when the content is downloaded, over the membership period or subscription
          period, as applicable.
 -9-
 **AUDIBLE,
                    INC. AND SUBSIDIARY**
 **NOTES
                    TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                    thousands, except share and per share data)**
 **(Unaudited)**
 Table
                    of Contents
  Point
          of Sale Rebates and Discount Certificate Rebates
 
 Part
          of
          the Company's marketing strategy to obtain new AudibleListeners includes
          retail
          promotions in which the Company pays retailers to offer discounts to consumers
          on their purchase of AudibleReady devices if they become AudibleListeners
          for
          twelve months. The Company also has retail promotions in which it purchases
          electronic discount certificates or gift cards from retailers and gives
          them
          away to the Company's customers when they sign up to be AudibleListeners
          for
          twelve months. Point of sale rebates, which are discounts given by a third
          party
          retailer to a customer on the purchase of a digital audio player at the
          point of
          sale of the Audible membership, are recorded as a reduction of revenue
          in the
          period the discount is given in accordance with Emerging Issues Task Force,
          or
          EITF, Issue No. 01-9, *Accounting for Consideration Given by a Vendor to a Customer (Including
          a
          Reseller of the Vendor's Products)* ,
          or EITF
          01-9. The cost of discount certificate rebates and gift cards that are
          given to
          a customer by Audible at the time the customer purchases the Audible membership
          are recorded as a cost of content and services revenue in accordance with
          EITF
          01-9.
 
 Services
          Revenue
  Corporate
          services revenue consists of library sales and audio production services.
          Where
          applicable, the Company recognizes corporate service revenue as services
          are
          performed after persuasive evidence of an agreement exists, the price is
          fixed,
          and collectibility is reasonably assured. Collectibility is based on past
          transaction history and credit-worthiness of the customer.
 
 Hardware
          Revenue
 
 Hardware
          revenue consists of sales of AudibleReady digital audio players. Most of
          the
          Company's AudibleReady digital audio devices are sold at a discount or
          given
          away when a customer signs up for a three or six-month or one-year commitment
          to
          an AudibleListener membership. For multiple-element arrangements in which
          a
          customer signs up for a membership and receives an audio player for free,
          revenue is first allocated to the two elements (device and membership)
          using the
          relative fair value method under EITF Issue No. 00-21. However, the delivered
          item (hardware) is limited to the non-contingent consideration, which,
          for a
          free device, consists of only shipping and handling fees. The free hardware
          device reflects the subsidy incurred to acquire a customer with a commitment
          to
          AudibleListener. For players sold separately, hardware revenue is recognized
          upon shipment of the device, pursuant to a customer order and credit card
          authorization and includes amounts received for shipping and
          handling.
 
 -10-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
 
 Related
          Party Revenue
 
 Related
          party revenue consists of revenue earned under agreements with Audible
          Germany
          (see Note 7) and France Loisirs (see Note 8). Revenue under the Audible
          Germany
          agreement includes $30 earned per month over the initial 30-month term
          of the
          agreement, which began on August 30, 2004. The Company recognizes $30 per
          month
          only after Audible Germany has agreed that the services delivered for the
          prior
          60-day period were satisfactory and collection of the amount is reasonably
          assured. Revenue under the France Loisirs agreement includes a $1,000 technology
          licensing fee that is being recognized on a straight-line basis over the
          initial
          24-month term of the agreement, which began on September 15, 2004. Of the
          $1,000, France Loisirs has paid $875 as of June 30, 2006; in addition,
          $21 has
          been recorded as a related party accounts receivable as of June 30, 2006.
          Revenue earned under each of these agreements also includes consulting
          services
          performed by certain of the Company's employees and reimbursement of certain
          incremental costs incurred by the Company that are billed to Audible Germany
          and
          France Loisirs in accordance with EITF Issue 01-14, *Income Statement Characterization of Reimbursement Received for ‘Out-of-Pocket’
Expenses Incurred* .
 
 Other
          Revenue
  Other
          revenue for the three and six month periods ended June 30, 2006 primarily
          included revenue from fees earned under a product development and distribution
          agreement, which is being amortized on a straight-line basis over a 58
          month
          period. Other revenue for the three and six month periods ended June 30,
          2005
          primarily consisted of revenue from commissions earned by the Company for
          referring customers to a retail partner to purchase a digital audio device,
          which is recognized in the period when the purchase is completed.
 
 Customer
          Concessions
 
 The
          Company defers revenue for expected replacement audio credits based on
          a
          historical experience of the credits issued. The Company defers revenue
          for
          other audio credits and coupons when they are delivered to the customers
          based
          on estimated values. Actual customer credit and coupon issuance and usage
          patterns could differ from the Company's estimates. The concessions are
          recorded
          as a reduction of revenue and an increase to deferred revenue.
 
 *Shipping
          and Handling Costs*
  Shipping
          and handling costs, which consist of costs and fees associated with warehousing,
          fulfillment, and shipment of digital audio devices to customers, are recorded
          as
          a component of marketing expense in the condensed consolidated Statements
          of
          Operations. These costs totaled $40 and $75, for the three month periods
          ended
          June 30, 2006 and 2005, respectively, and $120 and $162 for the six month
          periods ended June 30, 2006 and 2005, respectively.
  *Cost
          of Content and Services Revenue*
  Cost
          of
          content and services revenue includes royalties incurred on sales of content
          as
          specified by the terms of the content agreements, periodic net realizable
          value
          adjustments to royalty advances, discount certificate rebates, production
          costs
          incurred in connection with creation of certain audio products, and other
          non-recoupable content costs. Royalty expense for sales of content is incurred
          based on either a percentage of revenue or a fixed price per title as per
          the
          royalty agreement. In certain cases, the royalty cost per title may differ
          depending upon whether the title is sold as part of the AudibleListener
          membership or sold as an a la carte sale.
 
 -11-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
 
 *Advertising
          Expenses*
  The
          Company expenses the costs of advertising and promoting its products and
          services as incurred. These costs are included in marketing expense in
          the
          accompanying condensed consolidated Statements of Operations and totaled
          $1,272
          and $809 for the three month periods ended June 30, 2006 and 2005, respectively,
          and $3,103 and $1,401 for the six month periods ended June 30, 2006 and
          2005,
          respectively.
 
 *Legal
          Fees*
 
 The
          Company expenses legal fees, including those expenses expected to be incurred
          in
          connection with loss contingencies, as incurred.
 
 
 *Use
          of Estimates*
 
 The
          preparation of financial statements in conformity with U.S. generally accepted
          accounting principles requires management to make estimates and assumptions
          that
          affect the reported amounts of assets and liabilities, disclosure of contingent
          assets and liabilities at the date of the financial statements, and reported
          amounts of revenues and expenses during the period. Significant items subject
          to
          estimates include the recoverability of the carrying amount of property
          and
          equipment (including internally developed software), the provision for
          refunds
          and chargebacks, customer concessions, recoverability of royalty advances,
          valuation of deferred tax assets, certain accruals and fair value of share-based
          compensation. Actual results could differ from those estimates.
 
 *Income
          Taxes*
 
 The
          Company accounts for income taxes using the asset and liability method
          of SFAS
          No. 109, *Accounting for Income Taxes* .
          Under
          the asset and liability method, deferred tax assets and deferred tax liabilities
          are recognized for the future tax consequences attributable to differences
          between the financial statement carrying amounts of existing assets and
          liabilities and their respective tax basis and operating loss and tax credit
          carryforwards. Deferred tax assets and liabilities are measured using enacted
          tax rates expected to apply to taxable income in the years in which those
          temporary differences are expected to be recovered or settled. The effect
          on
          deferred tax assets and liabilities of a change in tax rates is recognized
          in
          results of operations in the period in which the tax change occurs. Deferred
          tax
          assets are reduced, if necessary, by a valuation allowance for any tax
          benefits,
          which are more likely than not, not going to be realized.
 
 *Equity
          Instruments Issued for Goods and Services*
  The
          Company issues warrants to purchase shares of common stock to non-employees
          as
          part of their compensation for providing goods and services. The Company
          accounts for these warrants in accordance with the EITF Issue No.
          96-18, *Accounting for Equity Instruments that are Issued to Other than Employees
          for
          Acquiring, or in Conjunction with Selling, Goods or Services* .
          The
          exercise price of the warrants is determined by the closing price of Audible's
          common stock on the day of the agreement. Fair value of the warrant issued
          is
          estimated using the Black-Scholes model with the best available assumptions
          concerning risk-free interest rate, expected term of the warrant, dividend
          yield
          and expected volatility. The fair value of the warrant is expensed on a
          straight-line basis over the term of the agreement and is recorded within
          the
          operating expense line item that best represents the nature of the goods
          and
          services provided. Depending on the terms of the warrant, the Company applies
          variable plan or fixed plan accounting in accordance with EITF No.
          96-18.
 
 -12-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
  *Basic
          and Diluted Net (Loss) Income Per Share*
 
 Basic
          net
          (loss) income per share is computed by dividing net (loss) income by the
          weighted average number of common shares outstanding for the period. Diluted
          net
          (loss) income per share reflects the potential dilution that could occur
          if
          securities or other contracts to issue common stock were exercised or converted
          into common stock and resulted in the issuance of common stock. Potential
          common
          shares consist primarily of incremental shares issuable upon the assumed
          exercise of stock options, warrants and restricted stock units using the
          treasury stock method.
 
 For
          the
          three and six month periods ended June 30, 2006 diluted net loss per share
          is
          equal to basic net loss per share, since all potential common stock was
          anti-dilutive. For the three and six month periods ended June 30, 2005,
          diluted
          net income per share is computed by dividing net income by the diluted
          weighted
          average common shares outstanding.
 
 The
          reconciliation of weighted average basic common shares outstanding to weighted
          average diluted common shares outstanding is as follows:
 
 **Three
                    months ended**
                  **June
                    30,**
                
                **Six
                    months ended**
                  **June
                    30,****2006**
                
                **2005**
                
                **2006**
                
                **2005**Basic
                    weighted average common shares outstanding
                
                
                24,501,629
                
                
                24,169,396
                
                
                24,491,745
                
                
                24,089,237Effect
                    of dilutive potential common shares:Stock
                    options
                
                
                --
                
                
                1,600,944
                
                
                --
                
                
                1,698,009Warrants
                
                
                --
                
                
                210,549
                
                
                --
                
                
                260,945Restricted
                    stock
                
                
                --
                
                
                6,111
                
                
                --
                
                
                3,913Diluted
                    weighted average common shares outstanding
                
                
                24,501,629
                
                
                25,987,000
                
                
                24,491,745
                
                
                26,052,104
 
 For
          the
          three and six month periods ended June 30, 2006, all potential common shares
          have been excluded from the diluted calculation because the Company was
          in a net
          loss position, and their inclusion would have been anti-dilutive. For the
          three
          and six month periods ended June 30, 2005, warrants and stock options with
          exercise prices greater than the average market price of the common stock
          in the
          period were excluded from the diluted calculation as their inclusion would
          have
          been anti-dilutive.
  The
          following table summarizes the potential common shares excluded from the
          diluted
          calculation:
 
 **Three
                    months ended**
                  **June
                    30,**
                
                **Six
                    months ended**
                  **June
                    30,****2006**
                
                **2005**
                
                **2006**
                
                **2005**Stock
                    options
                
                
                2,412,730
                
                
                553,092
                
                
                2,412,730
                
                
                455,518Warrants
                
                
                716,723
                
                
                627,110
                
                
                716,723
                
                
                528,822Restricted
                    Stock
                
                
                882,157
                
                
                --
                
                
                882,157
                
                
                --
 
 -13-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
 
 *Share-Based
          Compensation*
  The
          Company's 1999 Stock Incentive Plan (the “Plan”) permits the granting of stock
          options, stock appreciation rights, restricted or unrestricted stock awards,
          performance rights and other stock-based awards to employees. For options
          granted to new Audible employees as part of their compensation package,
          the
          exercise price is determined by the closing price of Audible's common stock
          on
          the day immediately preceding each employee's start date. For the majority
          of
          additional option grants made to existing employees, the exercise price
          is
          determined based on the closing price of the day immediately preceding
          the grant
          date. The majority of the options granted vest over a fifty-month period
          and
          expire ten years from the date of the grant. All stock-based compensation
          is
          granted through share-based employee compensation plans maintained by Audible.
 
 The
          number of authorized common shares available for issuance under the Plan
          is
          5,700,000 shares. As of June 30, 2006 and December 31, 2005, options to
          purchase
          2,412,730 and 2,629,809, respectively, shares of common stock were outstanding.
          As of June 30, 2006 and December 31, 2005, 882,157 and 261,557, respectively,
          of
          restricted share awards had been granted, net of forfeitures.
 
 Effective
          January 1, 2006, the Company adopted SFAS No. 123 (revised), *“Share-Based
          Payment* ”
(“SFAS
          123R") utilizing the modified prospective approach. Prior to the adoption
          of
          SFAS 123R, stock option grants were accounted for in accordance with the
          intrinsic value method prescribed in Accounting Principles Board Opinion
          No. 25, *"Accounting
          for Stock Issued to Employees"* ("APB
          25") and accordingly, no compensation expense was recognized for these
          awards
          except for awards that had intrinsic value on the grant date. Restricted
          stock
          was also accounted for under APB 25 and compensation expense was recognized
          for
          restricted stock awards based on intrinsic value (which was equal to fair
          value).
 
 Under
          the
          modified prospective approach, SFAS 123R applies to all new awards and
          to
          previously issued awards that were unvested on January 1, 2006, and awards
          that
          are modified, repurchased or cancelled after January 1, 2006. Compensation
          expense recognized for the first and second quarters of 2006 includes
          compensation cost for all share-based payments granted prior to, but not
          yet
          vested as of January 1, 2006, based on the grant-date fair value estimated
          in
          accordance with the original provisions of SFAS 123, and compensation expense
          for all share-based payments granted subsequent to January 1, 2006, based
          on the
          grant-date fair value estimated in accordance with the provisions of SFAS
          123R.
          Prior periods were not restated to reflect the impact of adopting the new
          standard. Total compensation expense for share-based payment arrangements
          recognized for the three month periods ended June 30, 2006 and 2005 was
          $1,563
          and $135, respectively, and $2,657 and $172 for the six month periods ended
          June
          30, 2006 and 2005, respectively. At June 30, 2006, Audible had $13,423
          of
          unrecognized compensation expense related to share-based payments which
          is
          expected to be recognized over a weighted-average period of 2.50 years.
          No
          compensation cost was capitalized in any asset for the three or six month
          periods ended June 30, 2006.
 
 The
          unearned share-based compensation related to stock options and restricted
          stock
          awards is being amortized to compensation expense over the requisite service
          period. The Plan does not make a separate reference to provisions regarding
          participant retirement and the vesting terms in stock options and restricted
          stock awards relating to participants eligible for retirement; therefore,
          in
          accordance with the provisions of SFAS 123R, compensation expense, for
          stock
          options and restricted stock awards to participants that are retirement
          eligible
          on the grant date, is amortized to compensation expense over the requisite
          service period, rather than immediately at the grant date.
 
 The
          Company receives a tax deduction for certain stock option exercises, generally
          for the intrinsic value of the award on the exercise date and a tax deduction
          for increases in the value of restricted stock upon vesting. Prior to the
          adoption of SFAS 123R, all tax benefits resulting from the exercise of
          stock
          options and restricted stock were reported as operating cash flows in the
          condensed consolidated Statements of Cash Flows. SFAS 123R requires the
          cash
          flows resulting from tax benefits in excess of the compensation costs recognized
          for these options (excess tax benefits) to be classified as financing cash
          flows. Further, under SFAS 123R, excess tax benefits are recognized as
          a credit
          to additional paid-in capital only in the period in which the deduction
          reduces
          income taxes payable. Since the Company currently has significant net operating
          loss ("NOL") carryforwards that are fully reserved through the valuation
          allowance, any excess tax benefits related to the exercise of stock options
          will
          not be recorded until after the Company utilizes its NOL carryforwards to
          reduce current income taxes payable. For the six month periods ended June
          30, 2006 and 2005, there was none and $147, respectively, excess tax benefit
          recognized resulting from share-based compensation. The Company’s net cash
          proceeds from the exercise of stock options was $354 and $590 for the six
          month
          periods ended June 30, 2006 and 2005, respectively.
 
 -14-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
 
 All
          stock
          incentives (options and restricted stock) issued to employees and non-employee
          directors are awarded according to the applicable plan terms. The source
          of
          shares for exercised stock options and delivery of vested restricted stock
          are
          newly issued shares.
 
 As
          a
          result of adopting SFAS 123R on January 1, 2006, the Company’s loss from
          operations, loss before income taxes, and net loss for the three and six
          month
          periods ended June 30, 2006 is $640 and $1,313 higher than if it had continued
          to account for share-based compensation under APB Opinion No. 25. Basic
          and
          diluted net loss per common share for the three and six month periods ended
          June
          30, 2006 was $0.03 and $0.05 higher than if the Company had continued
          to account for share-based compensation under APB opinion No. 25.
  On
          November 10, 2005, the FASB issued FASB Staff Position 123(R)-3 (“FSP 123R-3”), *“Transition
          Election Related to Accounting For the Tax Effects of Share-Based Payment
          Awards”* ,
          that
          provides an elective alternative transition method of calculating the pool
          of
          excess tax benefits available to absorb tax deficiencies recognized subsequent
          to the adoption of SFAS 123R (the “APIC Pool”) to the method otherwise required
          by paragraph 81 of SFAS 123R. The Company may take up to one year from
          the
          effective date of this FSP to evaluate its available alternatives and make
          its
          one-time election. The Company is currently evaluating the alternative
          methods,
          however neither alternative would have an impact on the Company’s results of
          operations or financial condition for the three or six month periods ended
          June
          30, 2006, due to the fact that the Company currently has net operating
          loss
          carryforwards and has not realized any tax benefits under SFAS 123R. Until
          and
          unless the Company elects the transition method described in this FSP,
          the
          Company will follow the transition method described in paragraph 81 of
          SFAS
          123R.
 
 The
          following table illustrates the effect on the Company’s net income and net
          income per common share had the Company accounted for share-based compensation
          in accordance with SFAS 123 for the three and six month periods ended June
          30,
          2005:
 
 **Three
                    months ended**
                
                ******Six
                    months ended****June
                    30, 2005**
                
                **June
                    30, 2005**Net
                    income, as reported
                
                $
                823
                
                $
                1,713Add:
                    Total share-based employee compensation expense included in reported
                    net
                    income
                
                
                135
                
                
                172Deduct:
                    Total share-based employee compensation expense determined under
                    the fair
                    value method for all awards
                
                
                (741
                )
                
                (1,273
                )Pro
                    forma net income
                
                $
                217
                
                $
                612Basic
                    net income per common share:As
                    reported
                
                $
                0.03
                
                $
                0.07Pro
                    Forma
                
                $
                0.01
                
                $
                0.03Diluted
                    net income per common share:As
                    reported
                
                $
                0.03
                
                $
                0.07Pro
                    forma
                
                $
                0.01
                
                $
                0.02
 
 The
          Company has on occasion issued options to employees to purchase shares
          of common
          stock at a price less than the fair value of the stock at the time of issuance.
          Prior to the adoption of SFAS 123R, the difference between the fair value
          on
          grant date and the exercise price of options issued, as well as the value
          of
          restricted stock on the grant date, was accounted under APB 25 and was
          recorded
          as deferred compensation, a component of stockholders' equity, and was
          amortized
          as compensation expense on a straight-line basis over the vesting term
          of the
          option or restricted stock, as applicable. In connection with the adoption
          of
          SFAS 123R, the unamortized deferred compensation balance of $3,696 at December
          31, 2005 relating to previous grants of options that had intrinsic value
          at the
          time of issuance and restricted stock was eliminated against additional
          paid-in
          capital on January 1, 2006.
 
 -15-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
 
 *Stock
          Options*
  The
          Company uses the Black-Scholes option pricing model to estimate the fair
          value
          of stock options with the following weighted-average assumptions for the
          indicated periods:
 
 **Three
                    months ended**
                
                **Six
                    months ended****June
                    30,**
                
                **June
                    30,****2006**
                
                **2005**
                
                **2006**
                
                **2005**Dividend
                    yield
                
                
                --
                
                
                --
                
                
                --
                
                
                --Expected
                    volatility
                
                
                76.6
                %
                
                116.3
                %
                
                76.6
                %
                
                118.8
                %Risk-free
                    interest rate
                
                
                4.50
                %
                
                3.70
                %
                
                4.50
                %
                
                3.70
                %Expected
                    life of option (years)
                
                
                4.63
                
                
                5.00
                
                
                4.63
                
                
                5.00
 
 The
          assumptions above are based on multiple factors, including historical exercise
          patterns of employees in relatively homogeneous groups with respect to
          exercise
          and post-vesting employment termination behaviors, expected future exercising
          patterns for these same homogeneous groups and both the implied and historical
          volatility of the Company’s stock price. The expected life of the option
          represents the period of time that the option granted is expected to be
          outstanding. Expected volatility is calculated based on the historical
          and
          implied volatility of the Company’s stock price. The risk free interest rate is
          based on the U.S. Treasury yield curve commensurate with the expected term
          in
          effect at the time of grant. For the three months ended June 30, 2006,
          the
          Company did not grant any stock option awards, and therefore there was
          no
          re-measurement done for the assumptions used.
 
 The
          following table represents stock option activity for the six month period
          ended
          June 30, 2006:
 
 **Stock
                    Options**
                
                **Number
                    of Shares**
                
                **Weighted-Average
                    Exercise Price Per Share**
                
                **Aggregate
                    Intrinsic Value**
                
                **Weighted-Average
                    Remaining Contractual Life**Balance,
                    December 31, 2005
                
                
                2,629,809
                
                $
                8.13
                
                
                
                
                
                6.98
                    YearsGranted
                
                
                13,100
                
                $
                10.85Exercised
                
                
                (133,524
                )
                $
                2.66Forfeited
                
                
                (80,367
                )
                $
                12.87Expired
                
                
                (16,288
                )
                $
                13.23Balance,
                    June 30, 2006
                
                
                2,412,730
                
                $
                8.26
                
                $
                9,897
                
                
                6.35
                    YearsOptions
                    exercisable at June 30, 2006
                
                
                1,774,733
                
                $
                8.19
                
                $
                7,720
                
                
                5.79
                    YearsVested
                    and expected to vest at June 30, 2006
                
                
                2,359,969
                
                $
                8.24
                
                $
                9,747
                
                
                6.31
                    Years
 
 The
          following table summarizes stock option activity for the six month periods
          ended
          June 30:
 
 **Stock
                    Options**
                
                **2006**
                
                **2005**Weighted-average
                    grant date fair value of options granted
                
                $
                6.86
                
                $
                13.63Total
                    fair value of options that vested during the period
                
                $
                1,335
                
                $
                954Total
                    intrinsic value of options exercised during the period
                
                $
                1,000
                
                $
                2,986
 
 -16-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
 
 *Restricted
          Stock*
 
 During
          the three month periods ended June 30, 2006 and 2005, the Company granted
          awards
          to receive 649,000 and 118,500 restricted stock units, respectively, to
          employees under the Plan. During the six month periods ended June 30, 2006
          and
          2005, the Company granted awards to receive 661,400 and 146,500 units of
          restricted stock, respectively, to employees under the Plan. The restricted
          shares either cliff-vest or vest periodically between three months to
          forty-eight months after the grant date. During the three month periods
          ended
          June 30, 2006 and 2005, 37,300 and no units of restricted stock were forfeited
          due to employee termination. During the six month periods ended June 30,
          2006
          and 2005, 40,800 and no units of restricted stock were forfeited due to
          employee
          termination. The fair value of restricted stock on the grant date is determined
          by the closing price of Audible's stock on the day immediately preceding
          the
          grant date. Actual shares under these awards are not issued until vesting
          is
          complete. Under the terms of the restricted stock awards, unless different
          provisions are noted on the restricted stock award, the Company is required
          to
          issue to the recipient the number of whole shares of common stock that
          equals
          the number of vested whole restricted stock shares following the date on
          which
          the restricted stock share becomes vested.
 
 The
          following table summarizes nonvested restricted stock activity for the
          six month
          period ended June 30, 2006:
 
 **Weighted-Average
                    Grant-Date****Nonvested
                    Restricted Stock**
                
                **Units**
                
                **Fair
                    Value**Nonvested
                    at December 31, 2005
                
                
                258,083
                
                $
                16.23Granted
                
                
                661,400
                
                $
                10.45Vested
                
                
                (3,333
                )
                $
                12.82Forfeited
                
                
                (40,800
                )
                $
                11.46Nonvested
                    at June 30, 2006
                
                
                875,350
                
                $
                12.09
 
 The
          following table summarizes restricted stock activity for the six month
          periods
          ended June 30:
 
 **Restricted
                    Stock**
                
                **2006**
                
                **2005**Weighted-average
                    grant date fair value of shares granted
                
                $
                10.45
                
                $
                16.87Total
                    fair value of shares that vested during the period
                
                $
                43
                
                $
                30
  Total
          stock available for future stock option and restricted stock grants is
          approximately 977,000.
  -17-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
  **(3)**  **Property
          and Equipment**
 
 Property
          and equipment at June 30, 2006 and December 31, 2005 consists of the
          following:
  **June
                      30,**
                    **2006**
                  
                  **December
                      31, 2005**Computer
                      server and Web site equipment
                  
                  
                  8,897
                  
                  
                  6,599Software
                      licenses
                  
                  
                  4,235
                  
                  
                  745Internally
                      developed software
                  
                  
                  2,538
                  
                  
                  1,357Office
                      furniture and equipment
                  
                  
                  1,633
                  
                  
                  1,558Leasehold
                      improvements
                  
                  
                  1,006
                  
                  
                  975Studio
                      equipment
                  
                  $
                  660
                  
                  $
                  652Work
                      in process
                  
                  
                  427
                  
                  
                  3,283Total
                      property and equipment
                  
                  
                  19,396
                  
                  
                  15,169Less:
                      accumulated depreciation and amortization
                  
                  
                  (9,395
                  )
                  
                  (7,010
                  )Total
                      property and equipment, net
                  
                  $
                  10,001
                  
                  $
                  8,159
  Depreciation
          and amortization expense on property and equipment totaled $1,263 and $238
          during the three month periods ended June 30, 2006 and 2005, respectively,
          and
          $2,385 and $377, during the six month periods ended June 30, 2006 and 2005,
          respectively.
 
 The
          gross
          amount of property and equipment and related accumulated amortization recorded
          under capital leases were as follows:
  **June
                    30,**
                  **2006**
                
                **December
                    31, 2005**Computer
                    server and Web site equipment
                
                $
                743
                
                $
                743Less:
                    accumulated amortization
                
                
                (561
                )
                
                (437
                )Total
                    computer server and Web site equipment, net
                
                $
                182
                
                $
                306
 
 **(4)**  **Accrued
          Expenses**
  The
          components of the accrued expenses balance are as follows:
 
 **June
                    30,**
                  **2006**
                
                **December
                    31, 2005**Professional
                    fees
                
                $
                725
                
                $
                1,084Revenue
                    sharing and bounty payments
                
                
                708
                
                
                774Retail
                    rebates and discounts
                
                
                658
                
                
                578Refunds
                    and chargebacks
                
                
                99
                
                
                287Marketing
                
                
                129
                
                
                468Accrued
                    expense - related parties
                
                
                399
                
                
                333Royalty
                    obligations
                
                
                275
                
                
                293Other
                    accrued expenses
                
                
                640
                
                
                985Total
                    accrued expenses
                
                $
                3,633
                
                $
                4,802
  -18-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
  **(5)**  **Stockholders'
          Equity**
 
 The
          following is a summary of the consolidated Stockholders' Equity activity
          for the
          six month period ended June 30, 2006:
 
 **Common
                    Stock**
                
                **Treasury
                    Stock****Shares**
                
                **Par
                    value**
                
                **Shares**
                
                **Cost**
                
                **Additional
                    paid-in capital**
                
                **Deferred
                    compensation**
                
                **Accumulated
                    other comprehensive (loss) income**
                
                **Accumulated
                    deficit**
                
                **Total
                    stockholders' equity**Balance
                    at December 31, 2005
                
                
                24,326,503
                
                $
                243
                
                
                --
                
                
                --
                
                $
                192,547
                
                $
                (3,696
                )
                $
                15
                
                $
                (130,714
                )
                $
                58,395Exercise
                    of common stock warrants
                
                
                166,666
                
                
                2
                
                
                
                
                
                
                
                
                748
                
                
                
                
                
                
                
                
                
                
                
                750Exercise
                    of common stock options
                
                
                133,524
                
                
                1
                
                
                
                
                
                
                
                
                353
                
                
                
                
                
                
                
                
                
                
                
                354Repurchase
                    of treasury stock
                
                
                
                
                
                
                
                
                (236,500
                )
                
                (2,287
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,287
                )Retirement
                    of treasury stock
                
                
                (236,500
                )
                
                (2
                )
                
                236,500
                
                
                2,287
                
                
                (2,285
                )
                
                
                
                
                
                
                
                
                
                
                --Share-based
                    compensation expense
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,657
                
                
                
                
                
                
                
                
                
                
                
                2,657Elimination
                    of deferred compensation upon FAS 123R adoption
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (3,696
                )
                
                3,696
                
                
                
                
                
                
                
                
                --Foreign
                    currency translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (31
                )
                
                
                
                
                (31
                )Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (5,222
                )
                
                (5,222
                )Balance
                    at June 30, 2006
                
                
                24,390,193
                
                $
                244
                
                
                --
                
                
                --
                
                $
                190,324
                
                
                --
                
                $
                (16
                )
                $
                (135,936
                )
                $
                54,616
 
 
 
 -19-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
  *Common
          Stock*
  As
          of
          June 30, 2006 and December 31, 2005, the Company had issued 24,390,193
          and
          24,326,503 respectively, shares of common stock. As of June 30, 2006 and
          December 31, 2005, the Company had 4,011,610 and 3,774,755, respectively,
          shares
          of common stock reserved for common stock warrants, options and restricted
          stock.
  *Warrants*
  The
          Company issues common stock warrants to third parties in exchange for services.
          The fair values of warrants issued in exchange for services are determined
          by
          the Black-Scholes model, in accordance with EITF Issue No. 96-18 and are
          recognized as an expense under fixed plan or variable accounting depending
          on
          the terms of the agreements over the periods in which services are being
          performed. The assumptions used in the Black-Scholes pricing model to calculate
          fair values, including risk-free interest rate and volatility, are determined
          using available information on the measurement date. Expected dividend
          yield of
          zero is used for all calculations. There were no warrants issued in the
          2006 or
          2005 periods. All warrants previously issued were fully vested as of December
          31, 2004. Accordingly, there was no expense related to warrants recognized
          during the six month periods ended June 30, 2006 or 2005.
 
 *Common
          Stock Repurchase Program and Treasury Stock*
 
 In
          February 2006, the Company's Board of Directors authorized a new common
          stock
          repurchase program, pursuant to which the Company may from time to time
          repurchase (through open market repurchases at prevailing market prices),
          up to
          an aggregate of $25,000 of the Company's outstanding common stock. During
          the
          six month period ended June 30, 2006, 236,500 shares were repurchased at
          an
          average price of $9.67. The Company subsequently legally retired the treasury
          stock. At the February 8, 2005 Board of Directors meeting, the Board voted
          that
          all 229,741 shares of common stock held as treasury shares by the Company
          at
          that time were to be retired, and the Company subsequently legally retired
          the
          treasury stock. As of June 30, 2006 and December 31, 2005, the Company
          held no
          shares of common stock as treasury stock.
 
 *Comprehensive
          (Loss) Income*
 
 The
          following table sets forth comprehensive (loss) income for the periods
          indicated:
 
 **Three
                    months ended June 30,**
                
                **Six
                    months ended**
                  **June
                    30,****2006**
                
                **2005**
                
                **2006**
                
                **2005**Net
                    (loss) income
                
                $
                (2,182
                )
                $
                823
                
                $
                (5,222
                )
                $
                1,713Other
                    comprehensive (loss) income:Foreign
                    currency translation adjustment
                
                
                (26
                )
                
                17
                
                
                (31
                )
                
                18Comprehensive
                    (loss) income
                
                $
                (2,208
                )
                $
                840
                
                $
                (5,253
                )
                $
                1,731
 
 **(6)
          Audible UK**
 
 In
          February 2005, the Company launched Audible UK, a spoken audio Web site
          service
          mirroring the audible.com service, but focused on the UK marketplace. Audible,
          Inc. purchased one share of Audible UK stock on February 7, 2005, which
          at that
          date became a wholly-owned subsidiary of Audible Inc. Audible UK began
          commercial operations in June 2005.
  
 -20-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
  **(7)
          Audible Germany Agreement**
 
 On
          August
          30, 2004, the Company, Verlagsgruppe Random House GmbH (“Random House”) and
          Holtzbrinck Networxs AG (“Holtzbrinck”) entered into a joint venture agreement
          (the “Joint Venture”) to form Audible GmbH (“Audible Germany”). Random House is
          an affiliate of Bertelsmann AG. Bertelsmann AG and its affiliates own
          approximately 5.6% of Audible's common stock, inclusive of certain common
          stock
          warrants held by the entities.
  Audible
          Germany has the exclusive rights to operate a German language Audible Web
          site.
          Under the Joint Venture, Random House and Holtzbrinck each contributed
          approximately $17 in exchange for each receiving a 24.5% interest in Audible
          Germany. The Company was required to contribute $34 in exchange for a 51%
          interest in Audible Germany. After the initial formation, Random House
          and
          Holtzbrinck were to provide additional financing of approximately $1,490
          each in
          certain installments, subject to Audible Germany meeting certain milestones.
          The
          full amount has been funded by Random House and Holtzbrinck. In the event
          of
          liquidation of Audible Germany, this additional financing by Random House
          and
          Holtzbrinck accrues interest at 8% per annum and is senior to Audible's
          capital
          investment. The Company may, but is not obligated to, contribute additional
          capital to the entity. Also under the License, Audible Germany will pay
          the
          Company royalties ranging from 0.5% to 3% of revenue up to an annual royalty
          cap
          of the U.S. dollar equivalent of €1.5 million, subject to Audible Germany
          achieving certain operating margins. No royalties have been received by
          the
          Company under the License. Any profits distributed by Audible Germany are
          to be
          distributed in accordance with the ownership interests. In July 2006, a
          new
          investor contributed €280,000 for a 5% interest in Audible Germany. This
          contribution then reduced the Company’s interest to 48% and Random House and
          Holzbrinck ownership percentage to 23.5% each.
  The
          Company previously determined that Audible Germany is not a variable interest
          entity as defined in FASB Interpretation No. 46R, *Consolidation of Variable Interest Entities, an interpretation of ARB No.
          51* (“FIN
          46R”) because, as a development stage enterprise, Audible Germany has sufficient
          equity to permit it to finance the activities in which it is currently
          engaged
          in without additional subordinated financial support. In addition, the
          other
          criteria within FIN 46R that would characterize Audible Germany as a variable
          interest entity were not met. Rather, Audible Germany is considered to
          be a
          voting interest entity. Another analysis under FIN 46R is expected to be
          performed during the third quarter of 2006 when Audible Germany is expected
          to
          receive additional funding.
  Under
          EITF 96-16, *Investor's Accounting for an Investee When the Investor has a Majority
          of the
          Voting Interest but the Minority Shareholder or Shareholders Have Certain
          Approval or Veto Rights* ,
          the
          Company has determined that the minority shareholders, together, have
          significant participatory rights, allowing them to participate in significant
          decisions of Audible Germany and to block significant decisions proposed
          by
          Audible. As a result of the significant participatory rights held by the
          minority shareholders, the Company does not have unilateral control over
          Audible
          Germany. Therefore, Audible does not consolidate the results of Audible
          Germany
          but rather accounts for its investment in Audible Germany under the equity
          method of accounting. Under the equity method of accounting, the Company
          records
          51% of the profits, if any, and 51% of the equity losses but only until
          such
          time that the Company records losses equal to the initial investment of
          the
          Company plus any profits previously recorded. The initial investment was
          reduced
          to zero during 2004. Audible has no further obligation to fund the operations
          of
          Audible Germany. The Company will continue to monitor its portion of unreported
          equity losses in the event that Audible Germany subsequently generates
          income.
          The Company would resume applying the equity method after its share of
          profits
          equals the unreported equity method losses.
 
 In
          connection with the Joint Venture, on August 30, 2004, the Company entered
          into
          a license and services agreement with Audible Germany (the “License”). Under the
          License, Audible Germany has launched a German language spoken word audio
          service. The terms provide for the Company to provide intellectual property
          and
          substantially all of the technological infrastructure for the operation
          of the
          service. In return, Audible Germany is required to pay Audible $30 each
          month
          for a period of 30 months, beginning in September 2004. Every 60 days during
          this agreement, the parties meet to review and accept the services. The
          monthly
          payments are subject to refund if Audible Germany does not accept the services,
          subject to reasonable cure. Under the License, Audible recognizes $30 of
          revenue
          per month once Audible Germany has agreed that the services delivered for
          the
          prior 60-day period were satisfactory and collection of the amount is reasonably
          assured.
  During
            the three and six month periods ended June 30, 2006 the Company recognized
            $90
            and $180, respectively, in related party revenue under the L icense
            agreement as the related services were delivered and accepted on or before
            June
            30, 2006. During the three and six month periods ended June 30, 2005,
            the
            Company recognized $90 and $210, respectively, under this License agreement.
            As
            of June 30, 2006 the $180 related to revenues recognized for the six
            months
            ended June 30, 2006 have not been collected. These accounts receivable
            were
            capitalized as part of the Company’s equity investment in Audible Germany.
            During the three months ended June 30, 2006, the Company recorded its
            share of
            the equity loss up to the amount of its investment of $180, included
            in general
            and administrative expenses on the accompanying condensed consolidated
            Statements of Operations. As of June 30, 2006, an agreement pertaining
            to future
            funding for Audible Germany has not been reached, with the intention
            that it
            will be finalized in the third quarter of 2006.
 In
          addition, the Company also recognized none and $108, and $31 and $50 in
          billings
          for certain consulting services and related incremental reimbursable costs
          incurred in connection with the License in accordance with EITF 01-14 during
          the
          three and six month periods ended June 30, 2006 and 2005, respectively.
          These
          amounts are included in related party revenue on the condensed consolidated
          Statements of Operations. The Company accrues for amounts to be paid to
          Audible
          Germany related to revenues earned by Audible Inc at the Apple Germany
          iTunes
          music store. These amounts are included in accrued expenses in the condensed
          consolidated Balance Sheets as of June 30, 2006 and December 31,
          2005.
 -21-
 **AUDIBLE,
                    INC. AND SUBSIDIARY**
 **NOTES
                    TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                    thousands, except share and per share data)**
 **(Unaudited)**
 Table
                    of Contents
 **(8)
          France Loisirs Agreement**
 
 On
          September 15, 2004, the Company, France Loisirs S.A.S. (“France Loisirs”) and
          Audio Direct S.A.S., a wholly owned subsidiary of France Loisirs (“Audio
          Direct”), entered into a 24-month Master Alliance Agreement (the “Agreement”).
          France Loisirs is a wholly owned subsidiary of Bertelsmann AG. Bertelsmann
          AG
          and its affiliates own 5.6% of Audible's common stock, inclusive of certain
          common stock warrants held by the entities.
 
 Under
          the
          Agreement, in the first quarter of 2005, France Loisirs launched a French
          language spoken word audio service through Audio Direct. The terms provide
          for
          Audible to provide intellectual property and substantially all of the
          technological infrastructure for the operation of the service. In return,
          France
          Loisirs is required to pay Audible $1,000, payable as follows: $250 in
          September
          2004, $250 in October 2004, $250 in January 2005 and $21 for each of the
          following 12 months. As of June 30, 2006, the Company had received the
          three
          installments of $250 each and six monthly payments of the $21. Commencing
          the
          first fiscal year after the business achieves positive net income, the
          Company
          will receive a royalty of 5% of the business's net paid revenue. Net paid
          revenue refers to net revenues for digital spoken word content after the
          deduction of taxes but excluding certain hardware revenue. The 5% royalty
          will
          apply until the business net paid revenue exceeds €20,000,000. Once net paid
          revenue exceeds €20,000,000, the Company will receive a flat fee of €1,000,000.
          If net paid revenue exceeds €33,300,000, the Company will receive a royalty
          payment of €1,000,000, plus 3% of net paid revenue in excess of €33,300,000. An
          additional royalty is payable equal to one-half of the distributable pre-tax
          profits of the business.
  FIN
          46R
          addresses the consolidation by business enterprises of variable interest
          entities (VIEs) and requires that if an enterprise is the primary beneficiary
          of
          a variable interest entity, the assets, liabilities, and results of the
          activities of the variable interest entity should be consolidated in the
          financial statements of the enterprise.
  Audio
          Direct is considered a VIE because its equity is not sufficient to permit
          the
          entity to finance its activities without additional subordinated financial
          support. Audible and France Loisirs form a related party group, as defined
          in
          FIN 46R, as a result of the Bertelsmann affiliation and the number of seats
          that
          Bertelsmann holds on the Audible Board of Directors. Under FIN 46R, the
          entity
          within the related party group that is most closely associated with the
          variable
          interest entity is the primary beneficiary.
  Based
          upon analysis, the Company determined that France Loisirs is more closely
          associated with Audio Direct, primarily because France Loisirs is required
          to
          fund the operations of Audio Direct, including the $1,000 payment due to
          Audible. France Loisirs is therefore considered to be the primary beneficiary
          of
          Audio Direct. As a result, the Company does not consolidate the results
          of Audio
          Direct but rather accounts for its variable interest in Audio Direct under
          the
          cost method of accounting.
  Because
          the Company has not made and is not required to provide any funding to
          France
          Loisirs or Audio Direct, it has no exposure to loss under the
          Agreement.
 
 The
          $1,000 in fees are non-refundable and not subject to any acceptance provisions.
          Since fair values do not exist for the different services (elements) that
          Audible is providing, the services are considered a single unit of accounting
          under EITF 00-21 and accordingly, the $1,000 in fees is recognized as related
          party revenue on a straight-line basis over the 24-month term at the rate
          of $42
          per month, provided collectibility is reasonably assured.
 
 During
          the three and six month periods ended June 30, 2006 and 2005, the Company
          recognized $125 and $250 in related party revenue in connection with the
          Agreement, representing the straight-line recognition of $1,000 in revenue
          being
          recognized over the 24-month term of the Agreement. As of June 30, 2006
          and
          December 31, 2005, none and $187, respectively, was recorded as deferred
          revenue
          related to the Agreement. In addition, for the three and six month periods
          ended
          June 30, 2006 and 2005 the Company recognized $42 and $92, and $13 and
          $23,
          respectively, in billings for certain consulting services and related
          incremental reimbursable costs incurred in connection with the Agreement
          in
          accordance with EITF 01-14. These amounts are included in related party
          revenue on the condensed consolidated Statements of Operations. The Company
          accrues for amounts to be paid to France Loisirs related to revenues earned
          by
          Audible Inc at the Apple France iTunes music store. These amounts are included
          in accrued expenses in the condensed consolidated Balance Sheets as of
          June 30,
          2006 and December 31, 2005.
 -22-
 **AUDIBLE,
                    INC. AND SUBSIDIARY**
 **NOTES
                    TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                    thousands, except share and per share data)**
 **(Unaudited)**
 Table
                    of Contents
 **(9)
          Product Development, Licensing, Marketing and Distribution
          Agreement**
 
 On
          May
          16, 2005, the Company entered into a five-year agreement with a new
          content provider to develop, license, market and distribute audio
          content. The Company will be paid an exclusivity fee, a product development
          fee and production fees for audio content produced under the
          agreement. In addition, the Company will make royalty and revenue
          sharing payments to the publisher based on sales of the products produced.
          As of June 30, 2006, the Company billed the publisher $732, of which the
          full
          amount has been received as of June 30, 2006, in connection with this
          agreement. The fees associated with this agreement are being amortized
          over a 58
          month period beginning in the month the Company commenced production of
          audio
          through the expiration of the agreement. During the three month periods
          ended
          June 30, 2006 and 2005, $64 and none, respectively, was recorded as other
          revenue in connection with this agreement. During the six month periods
          ended
          June 30, 2006 and 2005, $129 and none, respectively, was recorded as other
          revenue in connection with this agreement. As of June 30, 2006 and December
          31,
          2005, the Company recorded $255 and $233, and $252 and $99
          as deferred revenue current and non-current, respectively, on the
          accompanying condensed consolidated Balance Sheets, relating to this agreement,
          representing cash received in advance of being recognized as
          revenue.
 
 **(10)
          Commitments and Contingencies**
 
 *Lease
          Obligations*
  The
          Company has an operating lease on its office space in Wayne, New Jersey
          that
          expires in December 2008. The lease contains a renewal option for a period
          of
          three years. In February 2005, Audible UK signed a one year lease for office
          space, which includes office amenities. This lease was subsequently amended
          in
          the second quarter of 2005 for additional space and was renewed in May
          2006 for
          an additional two years. Total future minimum lease obligations as of June
          30,
          2006 under these lease arrangements are $1,787.
  Rent
          expense of $233 and $148 was recorded under operating leases for the three
          month
          periods ended June 30, 2006 and 2005, respectively, and $360 and $248 for
          the
          six month periods ended June 30, 2006 and 2005, respectively.
 
 There
          are
          no future minimum lease payments due under capital leases as of June 30,
          2006,
          which were paid in full during the first quarter of 2005.
 
  
 -23-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
 
 *Royalty
          Obligations*
 
 Royalty
          obligations represent payments to be made to various content providers
          pursuant
          to minimum guarantees under their royalty agreements, net of royalties
          paid. The
          royalty obligations recorded in the accompanying condensed consolidated
          Balance
          Sheets are classified between current and non-current based on the payment
          terms
          specified in the agreements, and relate to audio content that has been
          delivered
          to Audible. Royalty obligations pursuant to minimum guarantees for audio
          content
          to be delivered in the future are reflected as a commitment in the table
          below.
 
 *Service
          Agreements*
 
 The
          Company has entered into operational and marketing agreements and purchase
          orders with various vendors to provide certain contracted services. The
          majority
          of the amounts committed are for hosting services related to the Company's
          Web site.
  *Committed
          Purchases*
 
 Committed
          purchases represent agreements the Company has made for future purchases
          of
          goods and service. The balance primarily consists of consulting services
          for
          technology and development projects and marketing services.
 
 **Summary
          of Cash Commitments and Obligations**
  The
          following table shows future cash payments due under the Company's commitments
          and obligations as of June 30, 2006:
 
 **Year**
                
                **Operating
                    Leases**
                
                **Royalty
                    Obligations**
                  **(1)**
                
                **Service
                    Agreements**
                
                **Committed
                    Purchases**
                
                **Total**2006
                
                $
                438
                
                $
                511
                
                $
                1,284
                
                $
                496
                
                $
                2,7292007
                
                
                742
                
                
                265
                
                
                1,286
                
                
                --
                
                
                2,2932008
                
                
                607
                
                
                1
                
                
                868
                
                
                --
                
                
                1,4762009
                
                
                --
                
                
                --
                
                
                15
                
                
                --
                
                
                152010
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --2011
                    and thereafter
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --Total
                
                $
                1,787
                
                $
                777
                
                $
                3,453
                
                $
                496
                
                $
                6,513
 
 (1)
          Of
          the $777 in total royalty obligations, $275 is recorded in accrued expenses
          and
          $172 is recorded as royalty obligations, non-current, in the accompanying
          condensed consolidated Balance Sheet as of June 30, 2006. The remaining
          obligation of $330 relates to content that has not yet been delivered as
          of June
          30, 2006.
 
 **Contingencies**
  Various
            legal actions, claims, assessments and other contingencies arising in
            the normal
            course of business, including certain matters described below, are pending
            against the Company. These matters are subject to many uncertainties,
            and it is
            possible that some of these matters could be ultimately decided, resolved
            or
            settled adversely. The Company has recorded accruals for losses related
            to those
            matters which it considers to be probable and that can be reasonably
            estimated.
            Although the ultimate amount of liability at June 30, 2006 that may result
            from
            those matters for which accruals have been recorded may differ, the Company
            believes that any amounts exceeding the recorded accruals would not be
            material
            to the consolidated financial position or results of
            operations.
 -24-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
 
 In
          June
          2001, the Company and certain of its officers were named as defendants
          in a
          securities class action filed in United States District Court for the Southern
          District of New York related to its initial public offering in July 1999.
          The
          lawsuits also named certain of the underwriters of the IPO as well as certain
          of
          the Company's officers and directors and former directors as defendants.
          Approximately 300 other issuers and their underwriters have had similar
          suits
          filed against them, all of which are included in a single coordinated proceeding
          in the Southern District of New York (the “IPO Litigations”). An amendment
          complaint was filed on April 19, 2002. The complaints allege that the prospectus
          and the registration statement for the IPO failed to disclose that the
          underwriters allegedly solicited and received “excessive” commissions from
          investors and that some investors in the IPO allegedly agreed with the
          underwriters to buy additional shares in the aftermarket in order to inflate
          the
          price of the Company's stock. The Company and certain of its officers,
          directors, and former directors were named in the suits pursuant to Section
          11
          of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934,
          and
          other related provisions. The complaints seek unspecified damages, attorneys'
          and expert fees, and other unspecified litigation costs.
  On
          July
          1, 2002, the underwriter defendants in the consolidated actions moved to
          dismiss
          all of the IPO Litigations, including the action involving the Company.
          On July
          15, 2002 the Company along with other non-underwriter defendants in the
          coordinated cases also moved to dismiss the IPO Litigations. On February
          19,
          2003, the court ruled on the motions. The court granted the Company's motion
          to
          dismiss the claims against the Company under Rule 10b-5, due to the
          insufficiency of the allegations against the Company. The motions to dismiss
          the
          claims under Section 11 of the Securities Act were denied as to virtually
          all of
          the defendants in the consolidated cases, including the Company. The Company's
          individual officers, directors and former director defendants in the IPO
          Litigation signed a tolling agreement and were dismissed from the action
          without
          prejudice on October 9, 2002.
  In
          June
          2003, a proposed settlement of this litigation was reached among the plaintiffs,
          the issuer defendants in the consolidated actions, the issuer officers
          and
          directors named as defendants, and the issuers' insurance companies. The
          settlement would provide, among other things, a release for the Company
          and for
          the individual defendants for the conduct alleged to be wrongful in the
          amended
          complaint. The Company would agree to undertake other responsibilities
          under the
          partial settlement, including agreeing to assign away, not assert, or release
          certain potential claims the Company that may have against the underwriters.
          Any
          direct financial impact of the proposed settlement is expected to be borne
          by
          the Company's insurance carriers.
 
 In
          June
          2004, the proposed settlement was submitted to the court for preliminary
          approval. The court requested that any objections to preliminary approval
          of the
          settlement be submitted by July 14, 2004, and the underwriter defendants
          formally objected to the settlement. The plaintiff and issuer defendants
          separately filed replies to the underwriter defendants' objections to the
          settlement on August 4, 2004. The court granted preliminary approval on
          February
          15, 2005, subject to certain modifications.
 
 On
          August
          31, 2005, the court issued a preliminary order further approving the
          modifications to the settlement and certifying the settlement cases. The
          court
          also appointed the Notice Administrator for the settlement and ordered
          that
          notice of the settlement be distributed to all settlement class members
          beginning on November 15, 2005 and completed by January 15, 2006. The settlement
          fairness hearing was held on April 24, 2006, and the court reserved decision.
          If
          the court determines that the settlement is fair to the class members,
          the
          settlement will be approved. There can be no assurance that this proposed
          settlement would be approved and implemented in its current form, or at
          all.
  Due
          to
          the inherent uncertainties of litigation and because the settlement approval
          process is not complete, the Company cannot accurately predict the ultimate
          outcome of the matter.
 
 Starting
            on or about February 22, 2005, several class actions were filed against
            Audible
            and two of the Company's executives in the United States District Court
            for the
            District of New Jersey.  The plaintiffs purport to represent a class
            consisting of all persons (other than Audible's officers and directors
            and their
            affiliates) who purchased the Company's securities between November 2,
            2004 and
            February 15, 2005 (the "Class Period").  The plaintiffs allege that the
            defendants violated Section 10(b) of the Securities Exchange Act of 1934
            and
            Rule 10b-5 there under by failing to make complete and accurate disclosures
            concerning the Company's future plans and prospects.  The individual
            defendants are also alleged to be liable under Section 20(a) of the Exchange
            Act.  All of the defendants are alleged to have sold stock at inflated
            prices during the Class Period. In December 2005, the United States District
            Court for the District Court of New Jersey consolidated the class action,
            appointed a group of lead plaintiffs and appointed lead plaintiff’s counsel. By
            prior agreement, the plaintiff’s consolidated amended complaint was filed on
            February 14, 2006.
 -25-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
 
 On
          April
          20, 2006, the Company provided the plaintiffs’ counsel in the consolidated
          securities class actions with a memorandum in support of a motion to dismiss
          the
          consolidated amended class action complaint. On June 26, 2006, the plaintiffs’
counsel provided the Company with a memorandum in opposition to the motion.
          On
          or about August 11, 2006, the Company intends to provide the
          plaintiffs’ counsel with a reply brief in further support of the motion to
          dismiss. At the suggestion of the Court, the Company has agreed with the
          plaintiffs’ counsel not to file the motion to dismiss and the supporting papers
          until the briefing has been completed.
  In
          April
          2005, a derivative action was filed in the state court of New Jersey against
          Audible, the two executives named as individual defendants in the class
          actions
          described above, six of the Company's outside directors, and three of the
          Company's stockholders.  The derivative action makes the same factual
          allegations as the class actions described above and adds allegations that
          the
          six outside directors named as defendants and/or the stockholders who nominated
          them sold stock at inflated prices at or about the time of the secondary
          offering of securities that the Company made in November 2004. The plaintiff
          in
          this derivative action purports to seek a recovery of the damages allegedly
          sustained by Audible rather than by investors who allegedly purchased securities
          at inflated prices.
 
 In
          May
          2005, the Company learned of a second derivative action which was filed
          during
          April 2005 in the United States District Court for the District of New
          Jersey
          against Audible, the two executives named as individual defendants in the
          class
          actions described above, and all seven of the Company's outside directors.
          The
          derivative action makes the same allegations as the class actions described
          above and adds allegations that all of the individual defendants are responsible
          for an alleged failure of internal controls that resulted in the 45-day
          delay in
          the filing of the Company's Form 10-K for 2004. The plaintiff in this derivative
          action purports to seek a recovery of the damages allegedly sustained by
          Audible
          rather than by investors who allegedly purchased securities at inflated
          prices.
 
 The
          plaintiffs in the derivative actions voluntarily agreed to stay those actions
          pending the outcome of the Company’s motion to dismiss the class actions
          described above.
 
 The
          Company believes that all of the claims described above are without merit
          and
          intends to defend the actions vigorously. Due to the inherent uncertainties
          of
          litigation and because these actions are at a preliminary stage, the Company
          cannot accurately predict the ultimate outcome of these matters.
 In
            May
            2005, Digeo, Inc. commenced an action against Audible for patent infringement
            in
            Federal District Court in the State of Washington. The Company has filed
            an
            answer asserting the patent is invalid and unenforceable and that its
            services
            do not fall within the scope of the claims of the Digeo patent. In June
            2006,
            the Company filed a motion to dismiss, asserting, among other things,
            that Digeo
            does not have standing to sue. The Company believes the case is without
            merit
            and will not have a material adverse impact on its financial position
            or results
            of operations.
 -26-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
  **(11)
          Supplemental Disclosure of Cash Flow Information**
  **Cash
          Paid for Interest and Taxes**
 
 The
          Company paid interest of $0 and $1 during the six month periods ended June
          30,
          2006 and 2005, respectively.
  No
          income
          taxes were paid in the six month periods ended June 30, 2006 and
          2005.
 
 **(12)   Customer
          Concentration**
  For
          the
          six month periods ended June 30, 2006 and 2005, Apple Computer accounted
          for
          22.0% and 13.2% of total revenue, respectively.
 
 As
          of
          June 30, 2006 and December 31, 2005, Apple Computer accounted for 72.6%
          and
          62.1%, respectively, of the Company's accounts receivable.
  **(13)
          Financial Information by Geographic Area**
 
 Revenues
          and long-lived assets for the Company's United States and United Kingdom
          operations are as follows:
  **Revenues**
                    
                    **United
                        States**
                    
                    **United
                        Kingdom**
                    
                    **Consolidated**Three
                        months ended June 30, 2006
                    
                    $
                    18,447
                    
                    $
                    694
                    
                    $
                    19,141Three
                        months ended June 30, 2005
                    
                    $
                    15,288
                    
                    $
                    10
                    
                    $
                    15,298Six
                        months ended June 30, 2006
                    
                    $
                    37,596,
                    
                    $
                    1,260
                    
                    $
                    38,856Six
                        months ended June 30, 2005
                    
                    $
                    28,193
                    
                    $
                    9
                    
                    $
                    28,202**June
                        30, 2006**Long-lived
                        assets
                    
                    $
                    10,887
                    
                    $
                    49
                    
                    $
                    10,936**June
                        30, 2005**Long-lived
                        assets
                    
                    $
                    2,254
                    
                    $
                    35
                    
                    $
                    2,289
  **(14)
          Subsequent Events**
 
 In
          July
          2006, the Company entered into a global master agreement with Apple Computer,
          Inc. Pursuant to the agreement, the Company will continue to be the exclusive
          source of audiobooks and other book-related spoken-word material to Apple’s
          iTunes music stores worldwide and will continue to provide the iTunes music
          store with comedy, lectures, speeches, periodicals, educational programs,
          Audible originals, spiritual programming, paid podcasts, and other spoken-word
          programs. All Audible content will continue to receive branding within
          the audio
          stream and in the iTunes music store. Under the terms of the agreement,
          Apple
          and the Company intend to pursue co-marketing and promotion programs. The
          term
          of the agreement expires on September 30, 2010.
  -27-
 Table
                of Contents
  **ITEM
          2** **.
          Management's Discussion and Analysis of Financial Condition and Results
          of
          Operations**
 (dollars
          in thousands except per share data)
 
 *The
          following discussion and analysis of our financial condition and results
          of
          operations should be read in conjunction with our audited consolidated
          financial
          statements and notes thereto appearing in our 2005 Annual Report on Form
          10-K.
          This discussion and analysis contains forward-looking statements that involve
          risks and uncertainties. Our actual results may differ materially from
          those
          anticipated in these forward-looking statements as a result of a number
          of
          factors.*
 
 *This
          Quarterly Report on Form 10-Q contains forward-looking statements and
          information relating to our Company. We generally identify forward-looking
          statements using words like “believe,” “intend,” “will,” “expect,” “may,”
“should,” “plan,” “project,” “contemplate,” “anticipate,” “seek” or similar
          terminology. These statements are based on our beliefs as well as assumptions
          we
          made using information currently available to us. Because these statements
          reflect our current views concerning future events, these statements involve
          risks, uncertainties and assumptions. Actual results may differ significantly
          from the results discussed in these forward-looking
          statements.*
  **Overview**
  Our
          Business
 
 Our
          goal
          is to be the preeminent supplier of spoken-word digital audio on the Internet.
          At our Web sites, our customers can select, purchase, and download spoken
          audio
          of their choice of over 106,000 hours and over 32,000 different programs
          amongst
          a wide range of categories. Our AudibleListener membership plans provide
          our
          customers a wide variety of monthly and annual membership options, depending
          upon their listening preferences. Customers can access our content at our
          Web
          sites, www.audible.com (United States) and www.audible.co.uk (United Kingdom),
          or at our related parties Web sites, www.audible.de (Germany) and www.audible.fr
          (France), or at Amazon.com and at the Apple iTunes music store.
 
 Key
          Business Metrics
 
 For
          the
          six month period ended June 30, 2006, we generated total revenue of $38,856
          and
          a net loss of $5,222. During this period, total number of new AudibleListener
          members added was approximately 144,000, compared to approximately 106,000
          total
          acquired in the first six months of 2005. This increase in new AudibleListeners
          acquired resulted in total AudibleListeners of approximately 309,000 as
          of June
          30, 2006, compared to approximately 245,000 as of December 31, 2005 and
          approximately 205,000 at June 30, 2005.
 
 Churn,
            a
            measure of AudibleListener member cancellation rate, decreased for the
            first
            half of 2006 over 2005, due primarily to the increase in new AudibleListeners
            that have joined one of our annual membership programs, and a sharp decline
            in
            members acquired through free trial programs. Monthly churn is defined
            as member
            cancellations in the period divided by the sum of members at the beginning
            of
            the period plus gross member adds, divided by three months.  Members that
            are financially delinquent are counted as churn.
  The
            average monthly churn in AudibleListener Members for the three month
            period
            ended June 30, 2006 was 3.4% compared to 4.6% in the first quarter of
            2006 and
            4.7% in the second quarter of 2005.
 
 For
            2006,
            our major goals include increasing the number of new AudibleListeners
            we
            acquire, continuing to increase the breadth and depth of content that
            we offer
            to our customers, further reducing our churn rate and increasing customer
            satisfaction.
  We
          expect
          that our net revenues during 2006 will grow over 2005 levels, primarily
          from
          continuing to increase the number of AudibleListeners we acquire, improving
          the
          merchandising of our content to our customers, reducing the monthly churn
          rate
          and increasing customer satisfaction.
 
 Members
          of our senior leadership team regularly review key operating metrics such
          as new
          AudibleListeners acquired, customer purchase patterns, customer satisfaction,
          churn rate, Web site performance and effectiveness of our marketing programs.
          We
          believe that an understanding of these key metrics as well as financial
          measures
          and how they change over time is important to us as well as to other parties
          analyzing our business results and future market opportunities.
 
 The
          discussion of our condensed consolidated financial results contained herein
          is
          intended to assist investors, analysts and other parties reading this report
          to
          better understand the key operating and financial measures as well as the
          changes in our consolidated results of operations, and the primary factors
          that
          accounted for these changes.
 
 -28-
 Table
                of Contents
  **Recent
          Developments**
 
 In
            July
            2006, we entered into a global master agreement with Apple Computer,
            Inc.
            Pursuant to the agreement, we will continue to be the exclusive source
            of
            audiobooks and other book-related spoken-word material to Apple’s iTunes music
            stores worldwide and will continue to provide the iTunes music store
            with
            comedy, lectures, speeches, periodicals, educational programs, Audible
            originals, spiritual programming, paid podcasts, and other spoken-word
            programs.
            All Audible content will continue to receive branding within the audio
            stream
            and in the iTunes music store. All Apple iPods and iTunes applications
            will
            continue to be AudibleReady® and will work with the Audible service. Under the
            terms of the agreement, we and Apple intend to pursue co-marketing and
            promotion
            programs. The agreement contains provisions pursuant to which Apple and
            Audible
            will share revenues generated by the arrangement. The term of the agreement
            expires on September 30, 2010.
  **Critical
          Accounting Policies**
 
 The
          Securities and Exchange Commission defines “critical accounting policies” as
          those accounting policies that require application of management's most
          difficult, subjective and complex judgments, often as a result of the need
          to
          make estimates about the effect of matters that are inherently uncertain
          and may
          change in subsequent periods. Based on this definition, we have identified
          the
          critical accounting policies and judgments addressed below. We have other
          significant accounting policies, which involve the use of estimates, judgments,
          and assumptions that are significant to understanding our results. For
          additional information, see Note 2, *Summary of Significant Accounting Policies,* of our
          condensed consolidated financial statements. Although we believe that our
          estimates, judgments and assumptions are reasonable, they are based upon
          information presently available. Actual results may differ significantly
          from
          these estimates under different assumptions, judgments or
          conditions.
  Our
          critical accounting policies are as follows:
  ***Revenue
          Recognition***
  We
          derive
          our revenue from four main categories:
 
 ·
                Content
                    and services revenue, which includes consumer content and corporate
                    services;·
                Hardware
                    revenue;·
                Related
                    party revenue; and·
                Other
                    revenue.
  *Content
          and Services.* Consumer
          content revenue consists primarily of content sales made from our Web sites
          and
          content sold through our agreement with the Apple iTunes Music Store. At
          our Web
          site, customers purchase content either through an AudibleListener membership
          plan or on an a la carte basis. When purchased on an a la carte basis,
          we
          recognize revenue from the sale of individual content titles in the period
          when
          the content is purchased and delivered. We generally recognize revenue
          from the
          sale of a la carte content subscriptions pro rata over the term of the
          subscription period.
 
 Our
          “legacy” AudibleListener monthly membership plans generally provide customers
          two audio credits for a fixed monthly fee. Customers may use these audio
          credits
          to select content of their choice from our Web site. “Legacy” AudibleListener
          audio credits provided under a monthly membership program have a life of
          30
          days, after which they expire. We recognize revenue from the sale of legacy
          AudibleListener memberships ratably over the AudibleListener's monthly
          membership period. This results in approximately 50% of the AudibleListener
          membership fees received during each calendar month being deferred at month
          end
          and recognized as content revenue in the following month.
  In
          December 2005, we introduced new AudibleListener membership plans, designed
          to
          provide our customers more flexibility in using their audio credits. Depending
          upon the AudibleListener membership plan, customers can receive and “bank” or
          delay using up to a maximum number of audio credits, depending on the membership
          plan. The banking feature results in audio credits being used (delivered)
          over
          different periods for different customers. In addition, some of the new
          AudibleListener plans include new membership benefits, ranging from a
          complimentary daily newspaper to everyday discounts of 30% on a la carte
          purchases. The daily newspaper and 30% discount benefits are “serial” elements
          that are delivered continuously over the membership period, whereas the
          content
          selections underlying the audio credits are discrete elements that are
          delivered
          at different times based on individual customer behavior. As a result of
          the
          characteristics of the new AudibleListener memberships, they are considered
          revenue arrangements with multiple deliverables, however under Emerging
          Issues
          Task Force, or EITF No. 00-21, *Revenue Arrangements with Multiple Deliverables* ,
          because
          the deliverables are not eligible for separation, they are accounted for
          as a
          single unit of accounting. As a result, we recognize revenue for these
          new
          AudibleListener plans using the lesser of straight-line or proportional
          performance (based on content delivery) over the maximum membership period.
          This
          may result in a decrease in revenue or slower revenue growth than we experienced
          in prior periods because the customer has a longer period of time to use
          their
          audio credits. For example, a customer may pre-pay an annual membership
          for
          twelve audio credits and not use any credits for six months. Due to the
          revenue
          recognition model described above, this revenue will be deferred until
          the
          customer uses the audio credits.
 
 Upon
          launch of the new AudibleListener plans in December 2005, the legacy
          AudibleListener programs were no longer available to new customers. Customers
          who have legacy memberships have the option of either converting to one
          of the
          new AudibleListener membership plans or continuing their legacy
          membership.
 
 -29-
 Table
                of Contents
  *Provision
          for Refunds and Chargebacks*
 
 In
          the
          normal course of business, customers may contact us or contact their credit
          card
          company to request an adjustment for a purchase the customer paid us for
          in the
          past. Customers may contact us to request a refund for various reasons.
          We
          record a provision for expected refunds and chargebacks relating to revenue
          that
          was recognized in a previous period. The calculation of the provision for
          estimated refunds and chargebacks is based on historical refund rates and
          sales
          patterns. The provision is recorded as a reduction of revenue. A portion
          of the
          resulting reserve is classified as a reduction of accounts receivable based
          on
          an estimate of refunds and chargebacks that will be made related to sales
          that
          were collected by the credit card processor but not remitted to us at
          period-end. The remaining portion of the reserve is reflected as an accrued
          liability at period-end. Actual results could differ from our
          estimates.
 
 *Customer
          Concessions*
 
 In
          the
          normal course of business, customers may contact us to request a concession
          for
          a purchase the customer paid us for in the past, which they are unsatisfied
          with. Depending on the specific customer facts and circumstances, we will
          provide the customer a replacement or complimentary credit or a coupon.
          With our
          legacy AudibleListener plans, customers on occasion request that we replace
          an
          audio credit that expired before the customer had an opportunity to use
          it.
          Other customers may request an audio credit or coupon because they have
          had a
          specific problem with content downloading or audio quality. We defer revenue
          for
          expected replacement audio credits based on historical experience of the
          credits
          issued. We defer revenue for other audio credits and coupons when they
          are
          delivered to the customers based on estimated values. The concessions are
          recorded as a reduction of revenue and an increase to deferred revenue.
          Actual
          customer credit and coupon issuance and usage patterns could differ from
          our
          estimates.
 
 ***Royalty
          Expense***
  Royalty
          expense is the largest component of cost of content and services revenue,
          and
          includes amortization of guaranteed royalty obligations to various content
          providers, royalties incurred on sales of content, and net realizable value
          adjustments to royalty advances. Many of our early content provider agreements
          contained a requirement to pay guaranteed amounts to the provider. Anticipating
          that sales from these agreements would not be sufficient to recoup the
          amount of
          the guarantees, we adopted a policy of amortizing royalty guarantees
          straight-line over the term of the royalty agreement, or expensing the
          royalty
          guarantees as incurred, whichever was sooner. In addition, each quarter
          we
          review and compare any remaining unamortized guarantee balance with current
          and
          projected sales by provider to determine if any additional net realizable
          value
          adjustments are required. Royalty expense for sales of content is incurred
          based upon either a percentage of revenue or a fixed price per title in
          accordance with the terms of the applicable royalty agreement. The royalty
          cost
          per title may differ depending upon whether the title is sold as part of
          an
          AudibleListener membership or sold as an a la carte sale. Actual sales
          could
          differ from our estimates of projected sales.
 
 ***Internal-Use
          Software***
 
 In
          accordance with Statement of Position 98-1, *Accounting for the Costs of Computer Software Developed or Obtained for
          Internal
          Use* ,
          all
          costs incurred for the development of internal use software that relate
          to the
          planning and post implementation phases of the development are expensed.
          Direct
          costs incurred in the development phase are capitalized and recognized
          over the
          software's estimated useful life, generally two years, commencing at the
          time the software is ready for its intended use. Research and development
          costs
          and other computer software maintenance costs related to software development
          are expensed as incurred. We review the capitalized software costs for
          impairment when events or circumstances indicate that the carrying amount
          of an
          asset may not be recoverable. If the sum of the expected cash flows,
          undiscounted and without interest, is less than the carrying amount of
          the
          related asset, an impairment loss is recognized as the amount by which
          the
          carrying amount of the asset exceeds its fair value. There has been no
          impairment loss recognized as of June 30, 2006. Actual cash flows could
          differ
          from our expectations.
 
 ***Warrants
          Issued To Non Employees In Exchange For Goods and
          Services***
  We
          occasionally issue warrants to purchase shares of common stock to non-employees
          as part of their compensation for providing goods and services. We account
          for
          these warrants in accordance with EITF Issue No. 96-18, *Accounting for Equity Instruments that are Issued to Other than Employees
          for
          Acquiring, or in Conjunction with Selling, Goods or Services* ,
          or EITF
          96-18. The exercise price of the warrants is determined by the closing
          price of
          our common stock on the day of the agreement. The fair value of the warrant
          issued is estimated using the Black-Scholes model. Application of management's
          judgment is required in determining the assumptions concerning risk free
          interest rate, expected term of the warrant, dividend yield and expected
          volatility to be used in the Black-Scholes model. The fair value of the
          warrant
          is expensed on a straight-line basis over the term of the agreement and
          is
          recorded within the operating expense line item that best represents the
          nature
          of the goods and services provided. Depending on the terms of the warrant,
          we
          apply variable plan or fixed plan accounting in accordance with EITF
          96-18.
  ***Employee
          Stock-Based Compensation Arrangements***
  In
          accordance with SFAS 123(R), we measure compensation cost for stock awards
          at
          fair value and recognize compensation over the requisite service period
          for
          awards expected to vest. Estimating the portion of stock awards that will
          ultimately vest requires judgment, and to the extent actual results or
          updated
          estimates differ from our current estimates, such amounts are recorded
          in the
          period estimates are revised. We consider many factors when estimating
          expected
          forfeitures, including types of awards, employee class, and historical
          experience. We also consider many factors when estimating expected volatility
          and expected life of the option. Actual results, and future changes in
          estimates, may differ substantially from our current estimates.
 
 
 -30-
 Table
                of Contents
  **Results
          of Operations**
 
 The
          following table sets forth certain financial data for the periods indicated
          as a
          percentage of total revenue for the three and six month periods ended June
          30,
          2006 and 2005:
 
 **Three
                    months ended**
                  **June
                    30,**
                
                **Six
                    months ended**
                  **June
                    30,****2006**
                
                **2005**
                
                **2006**
                
                **2005**Revenue,
                    net:Content
                    and services revenue:Consumer
                    content
                
                
                98.5
                %
                
                99.1
                %
                
                98.1
                %
                
                99.3
                %Point
                    of sale rebates
                
                
                (0.7
                )
                
                (1.5
                )
                
                (0.8
                )
                
                (2.1
                )Services
                
                
                0.1
                
                
                0.1
                
                
                0.2
                
                
                0.1Total
                    content and services revenue
                
                
                97.9
                
                
                97.7
                
                
                97.5
                
                
                97.3Hardware
                    revenue
                
                
                0.4
                
                
                0.6
                
                
                0.6
                
                
                0.7Related
                    party revenue
                
                
                1.4
                
                
                1.7
                
                
                1.6
                
                
                1.9Other
                    revenue
                
                
                0.3
                
                
                0.0
                
                
                0.3
                
                
                0.1Total
                    revenue, net
                
                
                100.0
                
                
                100.0
                
                
                100.0
                
                
                100.0Operating
                    expenses:Cost
                    of content and services revenue:Royalties
                    and other content charges
                
                
                40.3
                
                
                35.4
                
                
                40.4
                
                
                33.9Discount
                    certificate rebates
                
                
                1.6
                
                
                2.4
                
                
                1.6
                
                
                3.4Total
                    cost of content and services revenue
                
                
                41.9
                
                
                37.8
                
                
                42.0
                
                
                37.3Cost
                    of hardware revenue
                
                
                1.1
                
                
                2.0
                
                
                2.3
                
                
                2.1Cost
                    of related party revenue
                
                
                0.2
                
                
                0.3
                
                
                0.5
                
                
                0.3Operations
                
                
                15.0
                
                
                14.9
                
                
                15.3
                
                
                14.6Technology
                    and development
                
                
                23.4
                
                
                12.0
                
                
                21.1
                
                
                12.3Marketing
                
                
                18.7
                
                
                19.2
                
                
                20.3
                
                
                18.4General
                    and administrative
                
                
                14.8
                
                
                11.0
                
                
                15.5
                
                
                11.4Total
                    operating expenses
                
                
                115.1
                
                
                97.2
                
                
                117.0
                
                
                96.4(Loss)
                    income from operations
                
                
                (15.1
                )
                
                2.8
                
                
                (17.0
                )
                
                3.6Other
                    income, net
                
                
                3.7
                
                
                3.0
                
                
                3.6
                
                
                3.1(Loss)
                    income before income taxes
                
                
                (11.4
                )
                
                5.8
                
                
                (13.4
                )
                
                6.7Income
                    tax expense
                
                
                (0.0
                )
                
                (0.4
                )
                
                (0.0
                )
                
                (0.5
                )Net
                    (loss) income
                
                
                (11.4
                )%
                
                5.4
                %
                
                (13.4
                )%
                
                6.2
                %
 
 
 -31-
 Table
                of Contents
  ***Three
          month period ended June 30, 2006 compared to three month period ended June
          30,
          2005***
  **Three
                    months ended**
                  **June
                    30,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Content
                    and service revenue:**$
                18,735
                
                $
                14,949
                
                $
                3,786
                
                
                25.3
                %
  *Content
          and services revenue* consists
          of AudibleListener membership revenue, revenue from single (a la carte)
          title
          sales, revenue from subscriptions, revenue from sales at the Apple iTunes
          Music
          Store and library revenue. We deduct the cost of point of sale rebates
          from
          content and services revenue.
 
 Content
            and services revenue grew during the three month period ended June 30,
            2006
            versus the three month period ended June 30, 2005 due to growth in
            AudibleListener memberships and sales at the Apple iTunes Music Store.
            AudibleListener membership growth was driven mainly through online marketing
            channels and our marketing partnerships with retailers and device manufacturers.
            Our AudibleListener membership count grew from approximately 205,000
            at June 30,
            2005, to approximately 309,000 at June 30, 2006. We recognized in revenue
            approximately $4,114 and $1,917 from sales of Audible content at the
            Apple
            iTunes Music Store during the three month periods ended June 30, 2006
            and 2005,
            respectively. Our customer count and AudibleListener membership count
            excludes
            customers that purchase Audible content directly from the Apple iTunes
            Music
            Store. We believe continuing consumer adoption of digital downloading,
            increased
            consumer awareness of the Audible service, customer satisfaction and
            improved
            marketing will continue to drive AudibleListener membership growth and
            growth in
            sales at the Apple iTunes Music Store. As we continue to acquire new
            AudibleListener members who may choose to roll over their audio credits,
            our
            ability to recognize revenue will be dependent upon audio credit usage
            patterns
            of individual members. This will result in an increase in deferred revenue
            and
            may result in a decrease or slower growth in our revenue as compared
            to prior
            periods.
 **Three
                    months ended**
                  **June
                    30,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Hardware
                    revenue:**$
                85
                
                $
                86
                
                $
                (1
                )
                
                (1.2
                )%
 
 *Hardware
          revenue* consists
          of revenue derived primarily from the shipping and handling charge to customers
          on devices that Audible provides for free to AudibleListeners who commit
          to a
          twelve month AudibleListener membership. Under EITF No. 00-21, *Revenue Arrangements with Multiple Deliverables* ,
          with
          these multiple-element arrangements (membership plus device), we recognize
          only shipping and handling fees as revenue for the delivery of hardware
          because
          all other consideration paid by the customer is contingent upon delivery
          of the
          content. Revenue is recognized upon shipment, assuming all other criteria
          are
          met. Also included are separate sales of digital audio players to consumers
          and
          libraries.
 
 -32-
 Table
                of Contents
 
 **Three
                    months ended**
                  **June
                    30,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Related
                    party revenue:**$
                257
                
                $
                259
                
                $
                (2
                )
                
                (0.8
                )%
  *Related
          party revenue* consists
          of revenue recognized in connection with our agreements with France Loisirs
          and
          Audible Germany, which were entered into in September 2004.
  Related
            party revenue during the three months ended June 30, 2006 and 2005, included
            $125 in fees earned from our agreement with France Loisirs, representing
            the
            straight-line recognition of $1,000 in fees we are entitled to receive
            pursuant
            to the arrangement, which is being recognized over the initial 24-month
            term of
            the agreement through September 14, 2006, as well as $42 and $13, respectively,
            in billings to France Loisirs for certain consulting services and reimbursement
            of related incremental costs. Related party revenue during the three
            month
            periods ended June 30, 2006 and 2005, also included $90 in fees earned
            under our
            agreement with Audible Germany, as well as none and $31, respectively,
            in
            billings to Audible Germany for certain consulting services and reimbursement
            of
            related incremental costs incurred by us in connection with our license
            and
            services agreement.
 **Three
                    months ended**
                  **June
                    30,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Other
                    revenue:**$
                64
                
                $
                4
                
                $
                60
                
                
                1500.0
                %
  *Other
            revenue* for the
            three month period ended June 30, 2006 included $64 of revenue earned
            under a
            product development agreement with a publishing partner, which commenced
            in May
            2005. Amounts payable to us under this agreement are being recognized
            on a
            straight-line basis over the 58 month term of the agreement. Other revenue
            for
            the three month period ended June 30, 2005 included commissions earned
            by us for
            referring customers to a retail partner to purchase a digital audio device.
            We
            recognize the commissions in the period in which the purchase is completed
            and
            the amounts of commission are known and determinable.
 **Three
                    moths ended**
                  **June
                    30,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Cost
                    of content and service revenue:**Royalties
                    and other content charges
                
                $
                7,720
                
                $
                5,414
                
                $
                2,306
                
                
                42.6
                %Discount
                    certificate rebates
                
                $
                305
                
                $
                363
                
                $
                (58
                )
                
                (16.0
                )%
  *Cost
            of content and services revenue* consists primarily of royalties incurred,
            discount certificate rebates and the amortization of publisher royalty
            advances.
            Discount certificate rebates, introduced in 2004, are electronic discount
            certificates or gift cards given to certain AudibleListeners who commit
            to
            joining an AudibleListener plan for twelve months.
 
 Royalties
            and other content charges as a percentage of total content and services
            revenue
            increased from the three month period ended June 30, 2005 to June 30,
            2006 from
            36.2% to 41.2%. This increase was primarily due to the increasing percentage
            of
            revenue from sales at the Apple iTunes Music store, which yields a higher
            royalty cost as a percentage of revenue, as well as the impact of higher
            royalty
            rates from publishers. AudibleListener customers use these when purchasing
            an
            AudibleReady digital audio player from a third-party retailer. The decrease
            in
            discount certificate rebates is primarily attributable to a decrease
            in activity
            of our retail rebate program.
 -33-
 Table
                of Contents
 
 **Three
                    months ended**
                  **June
                    30,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Cost
                    of hardware revenue:**$
                206
                
                $
                301
                
                $
                (95
                )
                
                (31.6
                )%
  *Cost
          of hardware revenue* consists
          of the cost of digital audio players that are given away or sold to
          customers.
  The
          cost
          of hardware revenue decreased in the 2006 period primarily due to a reduction
          in
          the number of digital audio players given away to customers.
 
 **Three
                    months ended**
                  **June
                    30,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Cost
                    of related party revenue:**$
                42
                
                $
                44
                
                $
                (2
                )
                
                (4.5
                )%
  *Cost
          of related party revenue* consists
          of costs we have incurred in connection with our agreements with France
          Loisirs
          and Audible Germany, which were entered into in September 2004.
 
 Cost
            of
            related party revenue for the three month periods ended June 30, 2006
            and 2005,
            included $42 and $13 respectively, for France Loisirs, and none and $31
            respectively, for Audible Germany. These costs primarily consisted of
            payroll
            costs related to services for our operations in France and Germany, performed
            by
            certain employees of our technology, development, and audio
            departments.
 **Three
                    months ended**
                  **June
                    30,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Operations
                    expense:**$
                2,861
                
                $
                2,275
                
                $
                586
                
                
                25.8
                %
  *Operations* expense
          consists of payroll and related expenses for content acquisition, education,
          editorial, audio recording and conversion, programming, customer service
          and
          credit card fees. Related expenses include outside consultants and professional
          fees.
  Operations
            expense increased in the three month period ended June 30, 2006 versus
            the three
            month period ended June 30, 2005 primarily due to $460 in higher personnel
            expenses, $40 in higher credit card fees, and $22 in higher outside service
            expenses. These increases were primarily related to the increased scale
            of our
            business and improving the quality of customer service.
 -34-
 Table
                of Contents
  **Three
                    months ended**
                  **June
                    30,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Technology
                    and development:**$
                4,484
                
                $
                1,843
                
                $
                2,641
                
                
                143.3
                %
  *Technology
          and development* expense
          consists of payroll and related expenses for information technology, systems
          and
          telecommunications infrastructure, as well as technology licensing
          fees.
 
 The
            increase in technology and development expense from the three month period
            ended
            June 30, 2005 to the three month period ended June 30, 2006 was primarily
            due to
            $938 in higher depreciation and amortization expense, $800 in higher
            outside
            services expenses, $430 in higher personnel expenses, $282 in higher
            maintenance
            and repair costs, as well as an increase in supplies purchased, and $171
            in
            higher Web site hosting fees. Many of these higher costs were related
            to the
            development of our new AudibleListener plans, enhancing the capacity
            and
            performance of our Web site, and upgrades to our internal systems and
            infrastructure.
 **Three
                    months ended**
                  **June
                    30,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Marketing:**$
                3,573
                
                $
                2,935
                
                $
                638
                
                
                21.7
                %
  *Marketing* expense
          consists of payroll and related expenses for personnel in marketing and
          business
          development, as well as advertising expenditures and other promotional
          activities. Also included are revenue sharing and bounty payments which
          we make
          to our marketing partners, and shipping and handling costs associated with
          selling digital devices.
 
 Marketing
            expenses were higher in the three month period ended June 30, 2006 versus
            the
            three month period ended June 30, 2005 primarily due to $464 in higher
            advertising and promotional expenses and $414 in higher personnel expenses.
            This
            was offset by a decrease of $119 in lower revenue sharing and bounty
            payments
            and $128 in lower public relations expenses. Most of these higher expenses
            were
            directed towards strengthening our marketing and business development
            teams and
            obtaining new AudibleListeners. As we continue to build the AudibleListener
            membership base, we expect our marketing expenses to continue to
            grow.
 **Three
                    months ended**
                  **June
                    30,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****General
                    and administrative:**$
                2,843
                
                $
                1,689
                
                $
                1,154
                
                
                68.3
                %
  *General
          and administrative* expense
          consists primarily of payroll and related expenses for executive, finance
          and
          administrative personnel. Also included are legal fees, audit fees, public
          company expenses and other general corporate expenses.
  The
            increase in general and administrative expense in the three month period
            ended
            June 30, 2006 versus the three month period ended June 30, 2005 was primarily
            due to $779 in increased personnel expenses, $180 in equity method losses
            related to Audible Germany, and $58 in increased legal and other professional
            fees.
 **Three
                    months ended**
                  **June
                    30,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Other
                    Income:**Other
                    income, net
                
                $
                714
                
                $
                456
                
                $
                258
                
                
                56.6
                %
  *Other
          Income, net* consists
          of interest income and interest expense. The increase in other income,
          net was
          mainly due to interest earned on the investment of funds in short-term
          investments, which consisted of governmental agency notes and mortgage-backed
          securities. We began to make these investments in November 2004.
 
 
 -35-
 Table
                of Contents
  ***Six
          month period ended June 30, 2006 compared to six month period ended June
          30,
          2005***
  **Six
                    months ended**
                  **June
                    30,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Content
                    and service revenue:**$
                37,882
                
                $
                27,450
                
                $
                10,432
                
                
                38.0
                %
  *Content
          and services revenue* consists
          of AudibleListener membership revenue, revenue from single (a la carte)
          title
          sales, revenue from subscriptions, revenue from sales at the Apple iTunes
          Music
          Store and library revenue. We deduct the cost of point of sale rebates
          from
          content and services revenue.
 
 Content
          and services revenue grew due to growth in AudibleListener memberships
          and sales
          at the Apple iTunes Music Store. AudibleListener membership growth was
          driven
          mainly through online marketing channels and our marketing partnerships
          with
          retailers and device manufacturers. Our AudibleListener membership count
          grew
          from approximately 205,000 at June 30, 2005, to approximately 309,000 at
          June
          30, 2006. We recognized in revenue approximately $8,535 and $3,722 from
          sales of
          Audible content at the Apple iTunes Music Store during the six month periods
          ended June 30, 2006 and 2005, respectively. Our customer count and
          AudibleListener membership count excludes customers that purchase Audible
          content directly from the Apple iTunes Music Store. We believe continuing
          consumer adoption of digital downloading, increased consumer awareness
          of the
          Audible service, customer satisfaction and improved marketing will continue
          to
          drive AudibleListener membership growth and growth in sales at the Apple
          iTunes
          Music Store. As we continue to acquire new AudibleListener members who
          may
          choose to roll over their audio credits, our ability to recognize revenue
          will
          be dependent upon audio credit usage patterns of individual members. This
          will
          result in an increase in deferred revenue and may result in a decrease
          or slower
          growth in our revenue as compared to prior periods.
 
 **Six
                    months ended**
                  **June
                    30,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Hardware
                    revenue:**$
                210
                
                $
                190
                
                $
                20
                
                
                10.5
                %
 
 *Hardware
          revenue* consists
          of revenue derived primarily from the shipping and handling charge to customers
          on devices that Audible provides for free to AudibleListeners who commit
          to a
          twelve month AudibleListener membership. Under EITF No. 00-21, *Revenue Arrangements with Multiple Deliverables* ,
          with
          these multiple-element arrangements (membership plus device), we recognize
          only shipping and handling fees as revenue for the delivery of hardware
          because
          all other consideration paid by the customer is contingent upon delivery
          of the
          content. Revenue is recognized upon shipment, assuming all other criteria
          are
          met. Also included are separate sales of digital audio players to consumers
          and
          libraries.
 
 -36-
 Table
                of Contents
  **Six
                    months ended**
                  **June
                    30,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Related
                    party revenue:**$
                630
                
                $
                533
                
                $
                97
                
                
                18.2
                %
  *Related
          party revenue* consists
          of revenue recognized in connection with our agreements with France Loisirs
          and
          Audible Germany, which were entered into in September 2004.
  Related
          party revenue during the six month periods ended June 30, 2006 and 2005,
          included $250 in fees earned from our agreement with France Loisirs,
          representing the straight-line recognition of $1,000 in fees we will receive
          pursuant to the arrangement, which is being recognized over the initial
          24-month
          term of the agreement through September 14, 2006, as well as $92 and $23,
          respectively, in billings to France Loisirs for certain consulting services
          and
          reimbursement of related incremental costs. Related party revenue during
          the six
          month periods ended June 30, 2006 and 2005, also included $180 and $210,
          respectively, in fees earned from our agreement with Audible Germany, as
          well as
          $108 and $50, respectively, in billings to Audible Germany for certain
          consulting services and reimbursement of related incremental costs incurred
          by
          us in connection with our license and services agreement.
 
 **Six
                    months ended**
                  **June
                    30,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Other
                    revenue:**$
                134
                
                $
                29
                
                $
                105
                
                
                362.1
                %
  *Other
          revenue* for the
          six month period ended June 30, 2006 primarily included $129 of revenue
          earned
          under a product development agreement with a publishing partner, which
          commenced
          in May 2005. Amounts payable to us under this agreement are being recognized
          on
          a straight-line basis over the 58 month term of the agreement. The remaining
          balance of other revenue for the six months ended June 30, 2006 and other
          revenue for the six month period ended June 30, 2005 included commissions
          earned
          by us for referring customers to a retail partner to purchase a digital
          audio
          device. We recognize the commissions in the period when the purchase is
          completed and the amounts are known and determinable.
  **Six
                    moths ended**
                  **June
                    30,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Cost
                    of content and service revenue:**Royalties
                    and other content charges
                
                $
                15,703
                
                $
                9,567
                
                $
                6,136
                
                
                64.1
                %Discount
                    certificate rebates
                
                $
                603
                
                $
                964
                
                $
                (361
                )
                
                (37.4
                )%
  Cost
          of
          content and services revenue consists primarily of royalties incurred,
          discount
          certificate rebates, and the amortization of publisher royalty advances.
          Discount certificate rebates, introduced in 2004, are electronic discount
          certificates or gift cards given to certain AudibleListeners who commit
          to
          joining an AudibleListener plan for twelve months. AudibleListener customers
          use
          these when purchasing an AudibleReady digital audio player from a third-party
          retailer. The decrease in discount certificate rebates is primarily attributable
          to a decrease in activity of our retail rebate program.
 
 Royalties
          and other content charges as a percentage of total content and services
          revenue
          increased from the six month period ended June 30, 2005 to June 30, 2006
          from
          34.9% to 41.5%. This increase was primarily due to the increasing percentage
          of
          revenue from sales at the Apple iTunes Music store, which yields a higher
          royalty cost as a percentage of revenue, as well as the impact of higher
          royalty
          rates from publishers.
  -37-
 Table
                of Contents
  **Six
                    months ended**
                  **June
                    30,****2006**
                
                **2****0****05****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Cost
                    of hardware revenue:**$
                881
                
                $
                596
                
                $
                285
                
                
                47.8
                %
  *Cost
          of hardware revenue* consists
          of the cost of digital audio players that are given away or sold to
          customers.
  In
          the
          third quarter of 2005, we changed the model of the digital audio player
          to an
          iPod, which we give away to certain AudibleListener members. The iPod was
          more
          expensive than the device we previously provided. As a result, although
          there
          was a reduction in the number of digital audio players given away to customers
          in the six months ended June 30, 2006 compared to the six months ended
          June 30,
          2005, cost of hardware revenue increased.
 
 **Six
                    months ended**
                  **June
                    30,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Cost
                    of related party revenue:**$
                200
                
                $
                73
                
                $
                127
                
                
                174.0
                %
  *Cost
          of related party revenue* consists
          of costs we have incurred in connection with our agreements with France
          Loisirs
          and Audible Germany, which were entered into in September 2004.
 
 Cost
          of
          related party revenue for the six month periods ended June 30, 2006 and
          2005,
          included $92 and $23 respectively, for France Loisirs, and $108 and $50
          respectively, for Audible Germany. These costs primarily consisted of payroll
          costs related to services for France and Germany operations, performed
          by
          certain employees of our technology, development, and audio
          departments.
 
 **Six
                    months ended**
                  **June
                    30,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Operations
                    expense:**$
                5,963
                
                $
                4,122
                
                $
                1,841
                
                
                44.7
                %
  *Operations* expense
          consists of payroll and related expenses for content acquisition, education,
          editorial, audio recording and conversion, programming, customer service
          and
          credit card fees. Related expenses include outside consultants and professional
          fees.
  Operations
            expense increased in the six month period ended June 30, 2006 versus
            the six
            month period ended June 30, 2005 primarily due to $1,216 in higher personnel
            expenses, $218 in higher credit card fees, and $202 in higher outside
            service
            expenses. These increases were primarily related to the increased scale
            of our
            business and improving the quality of customer service.
 -38-
 Table
                of Contents
  **Six
                    months ended**
                  **June
                    30,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Technology
                    and development:**$
                8,178
                
                $
                3,468
                
                $
                4,710
                
                
                135.8
                %
  *Technology
          and development* expense
          consists of payroll and related expenses for information technology, systems
          and
          telecommunications infrastructure, as well as technology licensing
          fees.
 
 The
            increase in technology and development expense from the six month period
            ended
            June 30, 2005 to the six month period ended June 30, 2006 was primarily
            due to
            $1,827 in higher depreciation and amortization expense, $983 in higher
            personnel
            expenses, $932 in higher outside services expenses, $640 in higher maintenance
            and repair costs, as well as an increase in supplies purchased, and $275
            in
            higher Web site hosting fees. Many of these higher costs were related
            to the
            development of our new AudibleListener plans, enhancing the capacity
            and
            performance of our Web site, and upgrades to our internal systems and
            infrastructure.
 **Six
                    months ended**
                  **June
                    30,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Marketing:**$
                7,874
                
                $
                5,195
                
                $
                2,679
                
                
                51.6
                %
  *Marketing* expense
          consists of payroll and related expenses for personnel in marketing and
          business
          development, as well as advertising expenditures and other promotional
          activities. Also included are revenue sharing and bounty payments which
          we make
          to our marketing partners, and shipping and handling costs associated with
          selling digital devices.
 
 Marketing
            expenses were higher in the six month period ended June 30, 2006 versus
            the six
            month period ended June 30, 2005 primarily due to $1,702 in higher advertising
            and promotional expenses and $1,058 in higher personnel expenses. This
            was
            partially offset by a decrease in public relations expense of $134. Most
            of
            these higher expenses were directed towards strengthening our marketing
            and
            business development teams and obtaining new AudibleListeners. As we
            continue to
            build the AudibleListener membership base, we expect our marketing expenses
            to
            continue to grow.
 **Six
                    months ended**
                  **June
                    30,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****General
                    and administrative:**$
                6,044
                
                $
                3,225
                
                $
                2,819
                
                
                87.4
                %
  *General
          and administrative* expense
          consists primarily of payroll and related expenses for executive, finance
          and
          administrative personnel. Also included are legal fees, audit fees, public
          company expenses and other general corporate expenses.
  The
            increase in general and administrative expense in the six month period
            ended
            June 30, 2006 versus the six month period ended June 30, 2005 was primarily
            due
            to $1,664 in increased personnel expenses, $509 in increased legal and
            other
            professional fees, $180 in equity method losses related to Audible Germany,
            $172
            in increased depreciation expense, $108 in increased insurance fees,
            and $109 in
            higher job search and placement fees.
  **Six
                    months ended**
                  **June
                    30,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Other
                    Income:**Other
                    income, net
                
                $
                1,374
                
                $
                869
                
                $
                505
                
                
                58.1
                %
  *Other
          Income, net* consists
          of interest income and interest expense. The increase in other income,
          net was
          mainly due to interest earned on the investment of funds in short-term
          investments, which consisted of governmental agency notes and mortgage-backed
          securities. We began to make these investments in November 2004.
 
 -39-
 Table
                of Contents
  **Factors
          Affecting Operating Results**
 
 We
          have
          only a limited operating history with which to evaluate our business and
          prospects. Our limited operating history and the emerging nature of the
          market
          for internet-delivered audio content makes predicting our future operating
          results difficult. In addition, while we commenced operations in 1997,
          our
          prospects nonetheless should be considered in light of the risks and
          uncertainties encountered by companies in the early stages of development
          in new
          and rapidly evolving markets, specifically the rapidly evolving market
          for
          delivery of audio content over the internet. These risks include our ability
          to:
 
 **·** Acquire
          and retain customers;
 **·** Sell
          Audible content through www.audible.com and
          www.audible.co.uk;
 **·** Sell
          Audible content through the Apple iTunes Music Store;
 **·** Control
          customer acquisition, cost of content, and other costs;
 **·** Minimize
          customer churn rate;
 **·** Build
          awareness and acceptance of audible.com, the AudibleReady format and
          AudibleReady devices;
 **·** Extend
          existing and acquire new content provider relationships;
 **·** Compete
          against other companies that provide services similar to ours; and
 **·** Generate
          cash from operations and/or raise additional capital.
  If
          we
          fail to manage these risks successfully, it would materially and adversely
          affect our financial performance.
  We
          believe that our success will depend largely on our ability to extend our
          leadership position as a provider of premium digital spoken audio content
          over
          the Internet. Accordingly, we plan to continue to invest in marketing,
          content
          acquisition and operations.
 
 As
          of
          June 30, 2006, we were not a party to any derivative financial instruments
          or
          other financial instruments or hedging investments that expose us to material
          market risk. We currently do not plan to enter into any derivative instruments
          or engage in any hedging activities.
 
 We
          have
          incurred significant losses since inception and as of June 30, 2006, we
          had an
          accumulated deficit of $135,936.
 
 Our
          operating results have varied on a quarterly basis during our operating
          history
          and may fluctuate significantly in the future as a result of a variety
          of
          factors, many of which are outside of our control. Factors that may affect
          our
          operating results include but are not limited to: (1) the demand for the
          Audible
          service; (2) sales of Audible content through the Apple iTunes Music Store;
          (3)
          the availability of premium audio content; (4) sales and consumer usage
          of
          AudibleReady devices; (5) our ability to acquire new customers; (6) our
          ability
          to retain existing customers; (7) the introduction of new products or services
          by a competitor; (8) the cost and availability of acquiring sufficient
          Web site
          capacity to meet our customers' needs; (9) technical difficulties with
          our
          computer system or the internet or system downtime; (10) the cost of acquiring
          audio content; (11) the amount and timing of capital expenditures and other
          costs relating to the expansion of our international operations; (12) successful
          expansion of the Audible service in the UK; (13) continuous management
          and
          compliance with Sarbanes-Oxley requirements; and (14) general economic
          conditions and economic conditions specific to electronic commerce and
          online
          media. In the past, we experienced fluctuations in demand for the Audible
          service based on the level of marketing expenditures, the occurrence of
          external
          publicity and the quality of our software and Web site. Any one of these
          factors
          could cause our revenue and operating results to vary significantly in
          the
          future. In addition, as a strategic response to changes in the competitive
          environment, we may from time to time make pricing, service or marketing
          decisions that could cause significant declines in our quarterly
          revenue.
 
 Because
          we have a number of fixed expenses, we may be unable to adjust our spending
          in a
          timely manner to compensate for unexpected revenue shortfalls. Accordingly,
          any
          significant shortfall in relation to our expectations could cause significant
          declines in our operating results. We believe that our quarterly revenue,
          expenses and operating results could vary significantly in the future,
          and that
          period-to-period comparisons should not be relied upon as indications of
          future
          performance. Due to the foregoing factors, it is likely that in some future
          quarters our operating results will fall below the expectations of securities
          analysts and investors, which could have a material adverse effect on the
          trading price of our common stock.
 
 -40-
 Table
                of Contents
  **Liquidity
          and Capital Resources**
 
 From
          inception through the date prior to our initial public offering, we financed
          our
          operations through private sales of our redeemable convertible preferred
          stock
          and warrants. Net proceeds from the sales of redeemable convertible stock
          and
          warrants prior to our initial public offering were $28,719. In July 1999,
          we
          completed our initial public offering and received net proceeds of $36,856.
          From
          the time of our IPO we have raised $15,860 in net proceeds through the
          private
          sale of shares of our convertible preferred stock (all of which were
          subsequently converted into common stock), $4,186 in net proceeds through
          the
          private sales of our common stock, $3,383 in net proceeds through the exercise
          of common stock options, and $2,338 in net proceeds through the exercise
          of
          common stock warrants. In November 2004, we completed a public offering
          of our
          common stock resulting in net proceeds to us of approximately
          $46,457.
 
 As
          of
          June 30, 2006, our cash and cash equivalents balance was $10,707. In addition,
          as of June 30, 2006 we had $49,834 in short-term investments which we intend
          to
          hold until maturity. Based on our currently proposed business plans and
          related
          assumptions, we believe that our cash and cash equivalents balance and
          short-term investment balance as of June 30, 2006 will enable us to meet
          our
          anticipated cash requirements for operations and capital expenditures for
          the
          foreseeable future. Beyond that, we may need additional cash to fund our
          business and finance our continued growth. We cannot assure you that such
          additional financing, if needed, will be available on terms favorable to
          us or
          our stockholders, if at all.
  ***Cash
          Requirements***
  At
          June
          30, 2006 our principal source of liquidity was $10,707 in cash and cash
          equivalents and $49,834 in short-term investments.
  The
          following table shows future cash payments due under our commitments and
          obligations as of June 30, 2006:
 
 **Year**
                
                **Operating
                    Leases**
                
                **Royalty
                    Obligations**
                  **(1)**
                
                **Service
                    Agreements**
                
                **Committed
                    Purchases**
                
                **Total**2006
                
                $
                438
                
                $
                511
                
                $
                1,284
                
                $
                496
                
                $
                2,7292007
                
                
                742
                
                
                265
                
                
                1,286
                
                
                --
                
                
                2,2932008
                
                
                607
                
                
                1
                
                
                868
                
                
                --
                
                
                1,4762009
                
                
                --
                
                
                --
                
                
                15
                
                
                --
                
                
                152010
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --2011
                    and thereafter
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --Total
                
                $
                1,787
                
                $
                777
                
                $
                3,453
                
                $
                496
                
                $
                6,513
 
 (1)
          Of
          the $777 in total royalty obligations, $275 is recorded in accrued expenses
          and
          $172 is recorded as royalty obligations, non-current, in the accompanying
          condensed consolidated Balance Sheet as of June 30, 2006. The remaining
          obligation of $330 relates to content that has not yet been delivered as
          of June
          30, 2006.
 
 -41-
 Table
                of Contents
  ***Sources
          and Uses of Cash***
 
 Net
          cash
          used in operating activities for the six months ended June 30, 2006 was
          $1,651.
          This was primarily attributable to our net loss, an increase in prepaid
          expenses
          and other current assets, inventory, other non-current assets and a decrease
          in
          accounts payable and accrued expenses, partially offset by an increase
          in
          accrued compensation, deferred revenue, depreciation and amortization and
          share-based compensation expense. The increase in deferred revenue was
          due to
          the increase in the number of memberships in our AudibleListener plans,
          where
          revenue is recognized based on the content delivery using the lesser of
          straight
          line or proportional performance revenues. Net cash provided by operating
          activities for the six months ended June 30, 2005 was $5,179. This was
          primarily
          attributable to our net income, and increases in accounts payable, accrued
          expenses, accrued compensation, accrued royalties, and deferred revenue,
          offset
          in part by an increase in accounts receivable, royalty advances, prepaid
          expenses and other current assets and accretion of discounts on short-term
          investments.
 
 Net
          cash
          provided by investing activities for the six months ended June 30, 2006
          was
          $2,004, attributable to net proceeds from short-term investing activity
          of
          $6,231, partially offset by purchases of property and equipment of $3,973.
          Net
          cash used in investing activities for the six months ended June 30, 2005
          was
          $8,366. This was attributable to purchases of property and equipment of
          $1,717
          and net short-term investing activity of ($6,649).
  Net
          cash
          used in financing activities for the six months ended June 30, 2006, was
          $1,183,
          resulting primarily from purchases of treasury stock, offset by proceeds
          from
          exercise of common stock options and common stock warrants. Net cash provided
          by
          financing activities for the six months ended June 30, 2005 was $764, resulting
          primarily from proceeds from the exercise of common stock options and common
          stock warrants, partially offset by principal payments made on capital
          lease
          obligations.
 
 ***New
          Accounting Standards***
 
 *SFAS
          No. 123R*
 
 Effective
            January 1, 2006, we adopted Statement of Financial Accounting Standards
            (“SFAS”)
            No. 123R, “Share-Based Payment” using the Modified Prospective Approach. See
            Note 2 for further detail regarding the adoption of this standard.
  *SFAS
          No. 155*
 
 In
            February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
            155, “Accounting for Certain Hybrid Financial Instruments—an Amendment of FASB
            Statements No. 133 and 140”. SFAS No. 155 allows financial instruments that
            contain an embedded derivative and that otherwise would require bifurcation
            to
            be accounted for as a whole on a fair value basis, at the holders’ election.
            SFAS No. 155 also clarifies and amends certain other provisions of SFAS
            No. 133
            and SFAS No. 140. This statement is effective for all financial instruments
            acquired or issued in fiscal years beginning after September 15, 2006.
            We do not
            expect that the adoption of SFAS No. 155 will have a material impact
            on our
            consolidated financial statements.
  *SFAS
          No. 156*
 
 In
            March
            2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
            Assets—an Amendment of FASB Statement No. 140”. SFAS No. 156 provides guidance
            on the accounting for servicing assets and liabilities when an entity
            undertakes
            an obligation to service a financial asset by entering into a servicing
            contract. This statement is effective for all transactions in fiscal
            years
            beginning after September 15, 2006. We do not expect that the adoption
            of SFAS
            No. 156 will have a material impact on our consolidated financial
            statements.
 
 *FIN
            No. 48*
 
 In
            June
            2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes”.
            FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized
            in accordance with SFAS No. 109, *Accounting
            for Income Taxes* .
            This
            interpretation prescribes a recognition threshold and measurement attribute
            for
            the financial statement recognition and measurement of a tax position
            taken or
            expected to be taken in a tax return. This interpretation is effective
            for
            fiscal years beginning after December 15, 2006. We do not expect that
            the
            adoption of FIN No. 48 will have a material impact on our consolidated
            financial
            statements.
 -42-
 Table
                of Contents
  **ITEM
          3. Qualitative and Quantitative Disclosures about Market
          Risk**
  We
          are
          exposed to fluctuations in foreign currency exchange rates as the financial
          results of our foreign subsidiary are translated into U.S. dollars in
          consolidation. We do not use derivative instruments or hedging to manage
          our
          exposures and do not hold any market risk sensitive instruments for trading
          purposes.
 
 **ITEM
          4****.
          Controls and Procedures**
  **Changes
            in Internal Control Over Financial Reporting**
  As
            previously disclosed in our annual report on Form 10-K for the fiscal
            year ended
            December 31, 2005, we identified the following material weaknesses in
            our
            internal control over financial reporting: (i) insufficient accounting
            personnel; (ii) inadequate information and communication; (iii) inadequate
            risk
            assessment; (iv) ineffective contract management; (v) ineffective control
            and
            retail promotions.
  The
            material weaknesses identified by us could result in a material misstatement
            to
            the annual or interim financial statements that would not be prevented
            or
            detected. As a result, we have determined these control deficiencies
            each
            constituted a material weakness as of December 31, 2005. Because of the
            material
            weaknesses noted above, we have concluded that we did not maintain effective
            internal control over financial reporting as of December 31, 2005, based
            on
            criteria in *Internal
            Control — Integrated Framework* issued
            by
            the Committee of Sponsoring Organizations of the Treadway Commission
            (COSO). We
            have communicated its conclusions to the Audit Committee of our Board
            of
            Directors.
  Changes
            in our internal control over financial reporting, as such term is defined
            in
            Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the three
            months
            ended June 30, 2006 that have materially affected, or are reasonably
            likely to
            materially affect, our internal control over financial reporting, include
            the
            items described below.
  We
            have
            taken various corrective actions to remediate the material weaknesses
            noted
            above. By their nature, such actions require a period of time to become
            fully
            effective. The remedial actions associated with these material weaknesses
            include the following:
 *Inadequate
              information and communication, specifically as they related to the
              gift center
              and customer concessions.*
 ·
                  We
                      have temporarily discontinued accepting new sales in the gift
                      center until
                      adequate financial controls for processing new gift transactions
                      are
                      formally implemented into supporting business processes and
                      information
                      systems. ·
                  We
                      have hired an experienced Director of Customer Care to oversee
                      customer
                      service and assume operational accountability for defining
                      and
                      implementing financial controls. ·
                  New
                      procedures were developed, communicated, and implemented regarding
                      policies and procedures relative to customer
                      concessions. ·
                  A
                      review and analysis of customer concession activity is being
                      performed. ·
                  We
                      have formalized financial close procedures to include adequate
                      scheduling
                      allowing for review of reports, calculations, analysis, and
                      reconciliations. 
 *Ineffective
              contract management*
 ·
                  We
                      have begun to build a database which will maintain and track
                      all
                      contracts, with the relative information, including key provisions
                      (operational and financial) and unusual specifications. Once
                      this database
                      is completed, management will ensure that the financial terms
                      and
                      conditions of contracts match the business rules in our other
                      financial
                      information systems (i.e. royalty system). We expect the database
                      to be
                      completed by the beginning of fourth quarter
                      2006. 
 *Ineffective
              control and retail promotions*
 ·
                  A
                      new process has been implemented for recording and reporting
                      activity
                      related to the retail promotion programs. ·
                  We
                      now perform timely retail program roll forward procedures including
                      obtaining third party verifications on period-end
                      balances. 
 We
              have
              made the remediation of the material weaknesses that have been identified
              a
              significant priority for us and will continue to take steps to address
              them by
              the end of 2006. We believe that the remediation efforts, taken as
              a whole,
              mitigated the risk of error with respect to our preparation of this
              quarterly
              report on Form 10-Q for the period ended June 30, 2006, and that these
              measures
              have been effective to ensure that information required to be disclosed
              in this
              quarterly report has been recorded, processed, summarized and reported
              correctly. We believe that its controls and procedures will continue
              to improve
              as a result of the further implementation of these
              measures.
 
 **Evaluation
          of Disclosure Controls and Procedures**
  We
          maintain disclosure controls and procedures that are designed to ensure
          that
          information required to be disclosed in our reports filed or submitted
          pursuant
          to the Securities Exchange Act of 1934 is recorded, processed, summarized
          and
          reported within the time periods specified in the Securities and Exchange
          Commission’s rules and forms, and that information required to be disclosed in
          our Exchange Act reports is accumulated and communicated to our management,
          including the our Chief Executive Officer and Chief Financial Officer,
          to allow
          timely decisions regarding required disclosure.
  Under
          the
          supervision and with the participation of our management, including our
          Chief
          Executive Officer and Chief Financial Officer, we carried out an evaluation
          of
          the effectiveness of the design and operation of our disclosure controls
          and
          procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) as of
          June 30,
          2006.  Based upon that evaluation, our Chief Executive Officer and Chief
          Financial Officer concluded that our disclosure controls and procedures
          were not
          effective as of such date due to the fact that the material weaknesses
          described
          in the December 31, 2005 Form 10-K had not been remediated as of June 30,
          2006.
 
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  **PART
          II--OTHER INFORMATION**
 
 **ITEM
          1. Legal Proceedings**
 
 Various
            legal actions, claims, assessments and other contingencies arising in
            the normal
            course of business, in addition to the matters described below, are pending
            against us. All of these matters are subject to many uncertainties, and
            it is
            possible that some of these matters could be ultimately decided, resolved
            or
            settled adversely. We have recorded accruals for losses related to those
            matters
            which we consider to be probable and that can be reasonably estimated.
            Although
            the ultimate amount of liability at June 30, 2006 that may result from
            those
            matters for which accruals have been recorded may differ, we believe
            that any
            amounts exceeding the recorded accruals would not be material to the
            consolidated financial position or results of operations.
  In
          June
          2001, we and certain of our officers were named as defendants in a securities
          class action filed in United States District Court for the Southern District
          of
          New York related to our initial public offering in July 1999. The lawsuits
          also
          named certain of the underwriters of the IPO as well as certain of our
          officers
          and directors and former directors as defendants. Approximately 300 other
          issuers and their underwriters have had similar suits filed against them,
          all of
          which are included in a single coordinated proceeding in the Southern District
          of New York (the “IPO Litigations”). An amended complaint was filed on April 19,
          2002. The complaints allege that the prospectus and the registration statement
          for our IPO failed to disclose that the underwriters allegedly solicited
          and
          received “excessive” commissions from investors and that some investors in our
          IPO allegedly agreed with the underwriters to buy additional shares in
          the
          aftermarket in order to inflate the price of our stock. We and certain
          of our
          officers, directors, and former directors were named in the suits pursuant
          to
          Section 11 of the Securities Act of 1933, Section 10(b) of the Exchange
          Act of
          1934, and other related provisions. The complaints seek unspecified damages,
          attorneys' and expert fees, and other unspecified litigation costs.
  On
          July
          1, 2002, the underwriter defendants in the consolidated actions moved to
          dismiss
          all of the IPO Litigations, including the action involving us. On July
          15, 2002
          we, along with other nonunderwriter defendants in the coordinated cases,
          also
          moved to dismiss the IPO Litigations. On February 19, 2003, the court ruled
          on
          the motions. The court granted our motion to dismiss the claims against
          us under
          Rule 10b-5, due to the insufficiency of the allegations against us. The
          motions
          to dismiss the claims under Section 11 of the Securities Act were denied
          as to
          virtually all of the defendants in the consolidated cases, including ours.
          Our
          individual officers, directors and former director defendants in the IPO
          Litigation signed a tolling agreement and were dismissed from the action
          without
          prejudice on October 9, 2002.
  In
          June
          2003, a proposed settlement of this litigation was reached among the plaintiffs,
          the issuer defendants in the consolidated actions, the issuer officers
          and
          directors named as defendants, and the issuers' insurance companies. The
          settlement would provide, among other things, a release for us and for
          the
          individual defendants for the conduct alleged to be wrongful in the amended
          complaint. We would agree to undertake other responsibilities under the
          partial
          settlement, including agreeing to assign away, not assert, or release certain
          potential claims that we may have against the underwriters. Any direct
          financial
          impact of the proposed settlement is expected to be borne by our insurance
          carriers.
 
 In
          June
          2004, the proposed settlement was submitted to the court for preliminary
          approval. The court requested that any objections to preliminary approval
          of the
          settlement be submitted by July 14, 2004, and the underwriter defendants
          formally objected to the settlement. The plaintiff and issuer defendants
          separately filed replies to the underwriter defendants' objections to the
          settlement on August 4, 2004. The court granted preliminary approval on
          February
          15, 2005, subject to certain modifications. On August 31, 2005, the court
          issued
          a preliminary order further approving the modifications to the settlement
          and
          certifying the settlement cases. The court also appointed the Notice
          Administrator for the settlement and ordered that notice of the settlement
          be
          distributed to all settlement class members beginning on November 15, 2005.
          The
          settlement fairness hearing was held on April 26, 2006, and the court reserved
          decision. If the court determines that the settlement is fair to the class
          members, the settlement will be approved. There can be no assurance that
          this
          proposed settlement would be approved and implemented in its current form,
          or at
          all.
  Due
          to
          the inherent uncertainties of litigation and because the settlement approval
          process is not complete, we cannot accurately predict the ultimate outcome
          of
          the matter.
 
 Starting
            on or about February 22, 2005, several class actions were filed against
            us and
            two of our executives in the United States District Court for the District
            of
            New Jersey.  The plaintiffs purport to represent a class consisting of all
            persons (other than our officers and directors and their affiliates)
            who
            purchased our securities between November 2, 2004 and February 15, 2005
            (the
            "Class Period").  The plaintiffs allege that the defendants violated
            Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 there
            under
            by failing to make complete and accurate disclosures concerning the our
            future
            plans and prospects.  The individual defendants are also alleged to be
            liable under Section 20(a) of the Exchange Act.  All of the defendants are
            alleged to have sold stock at inflated prices during the Class Period. In
            December 2005, the United States District Court for the District of New
            Jersey
            consolidated the class action, appointed a group of lead plaintiffs and
            appointed lead plaintiff’s counsel. By prior agreement, the plaintiff’s
            consolidated amended complaint was filed on February 14, 2006.
 
 On
            April
            20, 2006, we provided the plaintiffs’ counsel in the consolidated securities
            class actions with a memorandum in support of a motion to dismiss the
            consolidated amended class action complaint. On June 26, 2006, the plaintiffs’
counsel provided us with a memorandum in opposition to the motion. On
            or about
            August 11, 2006, we will provide the plaintiffs’ counsel with a reply brief in
            further support of the motion to dismiss. At the suggestion of the Court,
            we
            have agreed with the plaintiffs’ counsel not to file the motion to dismiss and
            the supporting papers until the briefing has been completed.
  In
          April
          2005, a derivative action was filed in the state court of New Jersey against
          us,
          the two executives named as individual defendants in the class actions
          described
          above, six of the our outside directors, and three of our stockholders. 
The derivative action makes the same factual allegations as the class actions
          described above and adds allegations that the six outside directors named
          as
          defendants and/or the stockholders who nominated them sold stock at inflated
          prices at or about the time of the secondary offering of securities that
          we made
          in November 2004. The plaintiff in this derivative action purports to seek
          a
          recovery of the damages allegedly sustained by us rather than by investors
          who
          allegedly purchased securities at inflated prices.
 
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  In
          May
          2005, we learned of a second derivative action which was filed during April
          2005
          in the United States District Court for the District of New Jersey against
          us,
          the two executives named as individual defendants in the class actions
          described
          above, and all seven of our outside directors. The derivative action makes
          the
          same allegations as the class actions described above and adds allegations
          that
          all of the individual defendants are responsible for an alleged failure
          of
          internal controls that resulted in the 45-day delay in the filing of our
          Form
          10-K for 2004. The plaintiff in this derivative action purports to seek
          a
          recovery of the damages allegedly sustained by us rather than by investors
          who
          allegedly purchased securities at inflated prices.
 
 The
          plaintiffs in the derivative actions voluntarily agreed to stay those actions
          pending the outcome of our motion to dismiss the class actions described
          above.
 We
            believe that all of the claims described above are without merit and
            we intend
            to defend the actions vigorously. Due to the inherent uncertainties of
            litigation and because these actions are at a preliminary stage, we cannot
            accurately predict the ultimate outcome of these matters.
 
 In
            May
            2005, Digeo, Inc. commenced an action against us for patent infringement
            in
            Federal District Court in the State of Washington. We have filed an answer
            asserting the patent is invalid and unenforceable and that its services
            do not
            fall within the scope of the claims of the Digeo patent. In June 2006,
            we filed
            a motion to dismiss, asserting, among other things, that Digeo does not
            have
            standing to sue. We believe the case is without merit and will not have
            a
            material adverse impact on our financial position or results of
            operations.
 **ITEM
          1A.****Risk
          Factors**
 
 For
          a
          more detailed explanation of the factors affecting our businesses, please
          refer
          to the Risk Factors section in Item 1A of our 2005 Form 10-K. There
          have been no material changes to our risk factors as of June 30,
          2006.
 
 **ITEM
          2.****Unregistered
          Sales of Equity Securities and Use of Proceeds**
 
 None
 
 **ITEM
          3.****Defaults
          Upon Senior Securities**
  None
 
 **ITEM
          4.****Submission
          of Matters to a Vote of Security Holders**
  The
          Company held its Annual Meeting of Stockholders on June 16, 2006 (the “Annual
          Meeting”). The following matters were voted upon at the Annual
          Meeting:
 
 (i)
            The
            election of two directors to serve until the 2009 annual meeting of stockholders
            and until their successors are elected and duly qualified, by 98.8% of
            the
            common stock present and voting at the meeting for Messrs Ginsberg and
            Mohn as
            follows:
 **Nominee**
                **For**
                **Against
                    or Withheld**
                **Serve
                    Until**Gary
                    L. Ginsberg
                20,961,206
                257,406
                2009Johannes
                    Mohn
                20,959,954
                258,658
                2009
 
 (ii)
          The
          appointment of KPMG LLP as our independent registered public accounting
          firm for
          the year ending December 31, 2006 was ratified by 99.4% of the shares of
          common
          stock present and voting at the meeting (votes for: 21,086,881; votes against:
          118,514; abstentions: 13,216).
 
 **ITEM
          5.****Other
          Information**
  None
  **ITEM
          6.****Exhibits**
 
 **Exhibit
                    Number**
                **Description**31.1
                Certification
                    of the Chief Executive Officer
                    pursuant to Section 302 of the Sarbanes-Oxley Act of
                    2002.31.2
                Certification
                    of the Chief Financial Officer
                    pursuant to Section 302 of the Sarbanes-Oxley Act of
                    2002.32.1
                Certification
                    of the Chief Executive Officer
                    pursuant to Section 906 of the Sarbanes-Oxley Act of
                    2002.32.2
                Certification
                    of the Chief Financial Officer
                    pursuant to Section 906 of the Sarbanes-Oxley Act of
                    2002.
 
 
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 Pursuant
          tothe
          requirements of the Securities Exchange Act of 1934, the Registrant has
          duly
          caused this Report to be signed on its behalf by the undersigned, thereunto
          duly
          authorized.****
 ****
 ****
   **AUDIBLE,
                    INC.**By:
                /s/ Andrew P. KaplanName:
                Andrew P. KaplanTitle:
                Executive Vice president and Chief Financial Officer
                  (Principal
                    Financial and Accounting Officer)Date:
                August 4, 2006
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