**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





**(Mark
                One)****S**
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**For
                the quarterly period ended June 30, 2005o
            **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** **S** **No** o





Indicate
      by checkmark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act).


**Yes** **S** **No** o




As
      of
      August 5, 2005, 24,285,827 shares
      of
      the registrant’s common stock were outstanding.





1
 AUDIBLE, INC.
 TABLE
        OF CONTENTS


**PART
                I**
            **FINANCIAL
                INFORMATION**
            **PAGE**Item
                1.
            Financial
                Statements:Condensed
                Consolidated Balance Sheets as of June 30, 2005 (unaudited) and December
                31, 2004
            3Condensed
                Consolidated Statements of Operations for the threeand
                six months ended June 30, 2005 and 2004 (unaudited)
            4Condensed
                Consolidated Statements of Cash Flows for the sixmonths
                ended June 30, 2005 and 2004 (unaudited)
            5Notes
                to Condensed Consolidated Financial Statements (unaudited)
            6Item
                2.
            Management's
                Discussion and Analysis ofFinancial
                Condition and Results of Operations
            26Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risks
            41Item
                4.
            Controls
                and Procedures
            41**PART
                II**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            42Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            43Item
                3.
            Defaults
                Upon Senior Securities
            43Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            43Item
                5.
            Other
                Information
            43Item
                6.
            Exhibits
            44**Signatures**
            
            45











2
 PART
            I - FINANCIAL INFORMATION
 ITEM 1. Financial
            Statements
 AUDIBLE,
            INC. AND SUBSIDIARY
 CONDENSED
            CONSOLIDATED BALANCE
            SHEETS





**June
                30,**
              **2005**
            
            **December
                31,**
              **2004****Assets**
            
            **(unaudited)**Current
                assets:Cash
                and cash equivalents
            
            $
            10,887,470
            
            $
            13,296,006Short-term
                investments
            
            
            55,661,433
            
            
            48,386,399Interest
                receivable on short-term investments
            
            
            152,385
            
            
            76,151Accounts
                receivable, net of allowance for returns and chargebacks of $22,500
                and
                $14,600 at June 30, 2005
              and
                December 31, 2004, respectively
            
            
            1,476,983
            
            
            786,987Accounts
                receivable - related parties
            
            
            45,928
            
            
            87,625Royalty
                advances
            
            
            396,284
            
            
            140,634Prepaid
                expenses and other current assets
            
            
            929,531
            
            
            665,984Inventory
            
            
            150,724
            
            
            394,109Total
                current assets
            
            
            69,700,738
            
            
            63,833,895Property
                and
                equipment, net
            
            
            2,258,280
            
            
            919,090Other
                assets
            
            
            30,965
            
            
            20,805Total
                assets
            
            $
            71,989,983
            
            $
            64,773,790**Liabilities
                and Stockholders' Equity**Current
                liabilities:Accounts
                payable
            
            $
            1,474,335
            
            $
            850,906Accrued
                expenses
            
            
            6,391,187
            
            
            3,628,556Royalty
                obligations
            
            
            262,400
            
            
            150,800Accrued
                compensation
            
            
            721,379
            
            
            448,156Capital
                lease obligations
            
            
            --
            
            
            120,795Deferred
                revenue
            
            
            2,758,624
            
            
            2,445,868Total
                current liabilities
            
            
            11,607,925
            
            
            7,645,081Royalty
                obligations - non-current
            
            
            156,230
            
            
            38,000Deferred
                revenue - non-current
            
            
            200,000
            
            
            --Commitments
                and contingenciesStockholders'
                equity:Common
                stock, par value $.01, 40,000,000 shares authorized, 24,280,161 and
                24,169,775 shares issued at June 30, 2005
              and
                December 31, 2004, respectively
            
            
            242,802
            
            
            241,697Additional
                paid-in capital
            
            
            190,827,390
            
            
            187,248,675Deferred
                compensation
            
            
            (2,714,433
            )
            
            (154,173
            )Accumulated
                other comprehensive income
            
            
            17,559
            
            
            --Treasury
                stock at cost, none and 229,741 shares of common stock at June 30,
                2005
                and December 31, 2004, respectively
            
            
            --
            
            
            (184,740
            )Accumulated
                deficit
            
            
            (128,347,490
            )
            
            (130,060,750
            )Total
                stockholders’ equity
            
            
            60,025,828
            
            
            57,090,709Total
                liabilities and stockholders’ equity
            
            $
            71,989,983
            
            $
            64,773,790





See
      accompanying notes to condensed consolidated financial statements.








3
 AUDIBLE,
            INC. AND SUBSIDIARY
 CONDENSED
            CONSOLIDATED STATEMENTS OF
            OPERATIONS
 (Unaudited)








**Three
                Months Ended**
              **June
                30,**
            
            **Six
                Months Ended**
              **June
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Revenue,
                net:Content
                and services:Consumer
                content
            
            $
            15,158,600
            
            $
            7,938,062
            
            $
            27,996,641
            
            $
            14,613,500Point
                of sale rebates
            
            
            (231,235
            )
            
            (67,755
            )
            
            (586,810
            )
            
            (184,005
            )Services
            
            
            20,890
            
            
            12,901
            
            
            40,334
            
            
            30,003Total
                content and services
            
            
            14,948,255
            
            
            7,883,208
            
            
            27,450,165
            
            
            14,459,498Hardware
            
            
            86,239
            
            
            162,749
            
            
            189,895
            
            
            344,466Related
                party revenue
            
            
            259,095
            
            
            --
            
            
            533,531
            
            
            --Other
            
            
            3,866
            
            
            16,131
            
            
            28,734
            
            
            32,257Total
                revenue, net
            
            
            15,297,455
            
            
            8,062,088
            
            
            28,202,325
            
            
            14,836,221Operating
                expenses:Cost
                of content and services revenue:Royalties
                and other content charges
            
            
            5,481,908
            
            
            2,600,606
            
            
            9,634,794
            
            
            4,654,768Discount
                certificate rebates
            
            
            362,510
            
            
            305,235
            
            
            963,731
            
            
            344,335Total
                cost of content and services revenue
            
            
            5,844,418
            
            
            2,905,841
            
            
            10,598,525
            
            
            4,999,103Cost
                of hardware revenue
            
            
            317,954
            
            
            613,568
            
            
            619,706
            
            
            1,131,603Operations
            
            
            2,278,587
            
            
            1,196,685
            
            
            4,126,381
            
            
            2,339,932Technology
                and development
            
            
            1,830,576
            
            
            1,280,970
            
            
            3,446,757
            
            
            2,536,102Marketing
            
            
            2,905,203
            
            
            999,711
            
            
            5,194,456
            
            
            2,151,997General
                and administrative
            
            
            1,686,289
            
            
            840,537
            
            
            3,224,219
            
            
            1,407,715Total
                operating expenses
            
            
            14,863,027
            
            
            7,837,312
            
            
            27,210,044
            
            
            14,566,452Income
                from operations
            
            
            434,428
            
            
            224,776
            
            
            992,281
            
            
            269,769Other
                income (expense):Interest
                income
            
            
            456,271
            
            
            44,688
            
            
            870,324
            
            
            59,655Interest
                expense
            
            
            --
            
            
            (14,090
            )
            
            (1,495
            )
            
            (16,278
            )Other
                income, net
            
            
            456,271
            
            
            30,598
            
            
            868,829
            
            
            43,377Income
                before income tax expense
            
            
            890,699
            
            
            255,374
            
            
            1,861,110
            
            
            313,146Income
                tax expense
            
            
            (66,830
            )
            
            (18,789
            )
            
            (147,850
            )
            
            (18,789
            )Net
                income
            
            
            823,869
            
            
            236,585
            
            
            1,713,260
            
            
            294,357Dividends
                on preferred stock
            
            
            --
            
            
            --
            
            
            --
            
            
            (614,116
            )Charges
                related to conversion of convertible preferred stock
            
            
            --
            
            
            --
            
            
            --
            
            
            (9,873,394
            )Total
                preferred stock expense
            
            
            --
            
            
            --
            
            
            --
            
            
            (10,487,510
            )Net
                income (loss) applicable to common shareholders
            
            $
            823,869
            
            $
            236,585
            
            $
            1,713,260
            
            $
            (10,193,153
            )Basic
                net income (loss) applicable to common shareholders
              per
                common
                share
            
            $
            0.03
            
            $
            0.01
            
            $
            0.07
            
            $
            (0.51
            )Diluted
                net income (loss) applicable to common shareholders
              per
                common share
            
            $
            0.03
            
            $
            0.01
            
            $
            0.07
            
            $
            (0.51
            )Basic
                weighted average common shares outstanding
            
            
            24,169,396
            
            
            21,238,711
            
            
            24,089,237
            
            
            19,936,969Diluted
                weighted average common shares outstanding
            
            
            25,987,000
            
            
            23,620,502
            
            
            26,052,104
            
            
            19,936,969





See
      accompanying notes to condensed consolidated financial statements.





4
 AUDIBLE,
            INC. AND SUBSIDIARY
 CONDENSED
            CONSOLIDATED STATEMENTS OF CASH
            FLOWS
 (Unaudited)





**Six
                Months Ended****June
                30,****2005**
            
            **2004**Cash
                flows from operating activities:Net
                income
            
            $
            1,713,260
            
            $
            294,357Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            377,191
            
            
            255,426Services
                rendered for common stock and warrants
            
            
            --
            
            
            432,328Non-cash
                compensation charge
            
            
            172,433
            
            
            55,426Deferred
                cash compensation
            
            
            --
            
            
            (58,750
            )Accretion
                of discounts on short-term investments
            
            
            (626,419
            )
            
            --Income
                tax benefit from exercise of stock options
            
            
            147,301
            
            
            --Changes
                in assets and liabilities:Interest
                receivable on short-term investments
            
            
            (76,235
            )
            
            --Accounts
                receivable, net
            
            
            (690,055
            )
            
            (197,343
            )Accounts
                receivable, related parties
            
            
            41,696
            
            
            --Royalty
                advances
            
            
            (255,650
            )
            
            58,538Prepaid
                expenses and other current assets
            
            
            (264,222
            )
            
            (337,620
            )Inventory
            
            
            243,385
            
            
            (102,996
            )Other
                assets
            
            
            (10,603
            )
            
            397,719Accounts
                payable
            
            
            626,712
            
            
            (36,425
            )Accrued
                expenses
            
            
            2,762,600
            
            
            589,545Royalty
                obligations
            
            
            229,830
            
            
            (127,500
            )Accrued
                compensation
            
            
            275,101
            
            
            57,950Deferred
                revenue
            
            
            512,823
            
            
            198,318Net
                cash provided by operating activities
            
            
            5,179,148
            
            
            1,478,973Cash
                flows from investing activities:Purchases
                of property and equipment
            
            
            (1,716,955
            )
            
            (237,811
            )Purchases
                of short-term investments
            
            
            (32,648,615
            )
            
            --Proceeds
                from maturity of short-term investments
            
            
            26,000,000
            
            
            --Net
                cash used in investing activities
            
            
            (8,365,570
            )
            
            (237,811
            )Cash
                flows from financing activities:Proceeds
                from exercise of common stock warrants
            
            
            294,500
            
            
            27,500Proceeds
                from exercise of common stock options
            
            
            590,067
            
            
            328,433Principal
                payments made on obligations under capital leases
            
            
            (120,795
            )
            
            (318,565
            )Payments
                received on notes due from stockholders for common stock
            
            
            --
            
            
            58,750Net
                cash provided by financing activities
            
            
            763,772
            
            
            96,118Effect
                of exchange rate changes on cash and cash equivalents
            
            
            14,114
            
            
            --(Decrease)
                increase in cash and cash equivalents
            
            
            (2,408,536
            )
            
            1,337,280Cash
                and cash equivalents at beginning of period
            
            
            13,296,006
            
            
            9,074,987Cash
                and cash equivalents at end of period
            
            $
            10,887,470
            
            $
            10,412,267





See
      Note
      13 for supplemental disclosure of cash flow information.





See
      accompanying notes to condensed consolidated financial statements.








5
 **AUDIBLE,
            INC. AND SUBSIDIARY**
 NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL
            STATEMENTS
 (Unaudited )





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





*The
      Business*





Audible,
      Inc. and subsidiary (the “Company”) incorporated on November 3, 1995, was formed
      to create the Audible service, a solution delivering premium digital spoken
      audio content from its website, audible.com, over the internet 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, 2005, the Company reported net income
      of $823,869 and $1,713,260, respectively. However due to prior losses since
      its
      inception, the Company has an accumulated deficit of $128,347,490 as of June
      30,
      2005. The Company’s cash and cash equivalent balance as of June 30, 2005 is
      $10,887,470. In addition, the Company has short-term investments of $55,661,433.
      The Company believes that its cash and cash equivalents and short-term
      investments will enable it to meet its anticipated future cash requirements
      for operations and capital expenditures for the foreseeable future.





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 is therefore consolidated as of
      the
      end of each reporting period. The accompanying unaudited condensed consolidated
      financial statements as of and for the three and six month periods ended June
      30, 2005 include the accounts of Audible, Inc. and Audible UK. All inter-company
      transactions and balances have been eliminated.





The
      accompanying condensed consolidated financial statements as of June 30, 2005
      and
      for the three and six months ended June 30, 2005 and 2004, 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 months ended June 30, 2005
      are not necessarily indicative of the results that may be expected for the
      year
      ending December 31, 2005. These condensed consolidated financial statements
      should be read in conjunction with the audited financial statements and notes
      thereto for the year ended December 31, 2004, from the Company’s Annual Report
      on Form 10-K, as amended.





*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 consisted primarily of money market funds and notes due from
      governmental agencies. Cash consists of funds held in the Company’s checking
      account.








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







*Restricted
      Cash*





The
      Company had restricted cash deposits being held as a reserve by the Company’s
      credit card processors. The Company has switched credit card processors and
      has
      since been refunded the full amount in the second quarter of 2005. These
      restricted cash deposits at June 30, 2005 and December 31, 2004 were $0 and
      $5,000, respectively, and are included in Other Assets on the accompanying
      condensed consolidated Balance Sheets.





*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, 2005 and December 31, 2004, of $55,661,433 and
      $48,386,399, 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
      year-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, 2005 was $55,661,433, $50,224
      and
      $55,611,209, respectively.





All
      of
      the debt securities classified as held-to-maturity mature before June
      30, 2006.





*Allowance
      for Returns and Chargebacks*





The
      allowance for returns 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 allowance is recorded as a reduction of accounts
      receivable based on an estimate of returns that will be made related to sales
      that were unpaid at period-end. The remaining portion of the allowance is
      reflected as an accrued liability at period-end.




The
      amount of the allowance that was recorded as a reduction of accounts receivable
      as of June 30, 2005 and December 31, 2004 was $22,500 and $14,600, respectively.
      The amount of the allowance reflected in the accrued liability was $285,745
      and
      $168,584 at June 30, 2005 and December 31, 2004, 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.








7
 **AUDIBLE,
            INC. AND SUBSIDIARY**
 NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL
            STATEMENTS
 (Unaudited)







*Property
      and Equipment*




Property
      and equipment 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 are three years for computer server, website equipment,
      and software license, and two years for office furniture and equipment, 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. Leasehold improvements are
      amortized on a straight-line basis over the lease term or the estimated useful
      life of the asset, whichever is shorter. The amortization is included within
      depreciation expense.




Maintenance
      and repairs are expensed as incurred.




*Impairment
      of Long-Lived Assets*




The
      Company reviews its long-lived assets (property and equipment) 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.




*Royalty
      Advances and Royalty Obligations*




Royalty
      advances and the corresponding royalty obligations represent payments made
      and
      payments to be made to various content providers pursuant to minimum guarantees
      under their royalty agreements, net of royalties expensed. These agreements
      give
      the Company the right to sell digital audio content over the internet. The
      royalty obligations recorded in the accompanying balance sheets are classified
      between current 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. 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,
      accounts payable from related parties and accrued expenses. At June 30, 2005
      and
      December 31, 2004, the fair values of these financial instruments
      approximated their carrying values due to the short-term nature of these
      instruments.





*Foreign
      Currency Translation*





In
      accordance with the provision of Statement of Financial Accounting Standard
      No.
      52, *Foreign
      Currency Translation* , ** the
      Company’s UK subsidiary, 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 income,
      a
      component of stockholders’ equity.








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







*Revenue
      Recognition*




*Consumer
      Content Revenue*




Consumer
      content revenue consists of content sales made from the Company’s website and
      content sold through the Company’s agreement with the Apple iTunes Music Store.
      Revenue from the sale of individual content titles from both the Company’s
      website and the Apple iTunes Music Store is recognized in the period when the
      content is purchased. Revenue from the sale of content subscriptions is
      recognized pro rata over the term of the subscription period. Revenue from
      the
      sale of monthly AudibleListener memberships is recognized 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. Revenue from the sale of UltimateListener,
      a
      prepaid discounted content package, and gift programs are recognized when the
      content is downloaded.




*Point
      of Sale Rebates and Discount Certificate Rebates*




Part
      of
      the Company’s marketing strategy to acquire new AudibleListeners includes retail
      promotions. These retail promotions consist of offering rebates to consumers
      on
      their purchase of digital audio players from certain retailers if the customer
      commits to a twelve month AudibleListener membership. These rebates take one
      of
      two forms. The first type, reflected as point of sale rebates on the condensed
      consolidated Statement of Operations, relates to a discount 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. The cost of these rebates is accounted
      for as a reduction in content revenue in the period the discount is given.
      The
      second type, reflected as discount certificate rebates on the statement of
      operations, relates to retailer promotional codes or retailer gift cards that
      are given to a customer by Audible at the time the customer purchases the
      Audible membership. These promotional codes are honored by third party retailers
      and allow the customer to purchase a digital audio player at a discounted price
      from the third party retailer. The gift cards are honored by third party
      retailers on a future purchase. The cost of these promotional codes and gift
      cards is accounted for as a cost of content revenue when the customer commits
      to
      a twelve-month AudibleListener membership under one of the retailer promotion
      programs. The accounting for both types of customer rebates as described above
      is pursuant to Emerging Issues Task Force (“EITF”) Issue No. 01-9, *Accounting
      for Consideration Given by a Vendor to a Customer (Including a Reseller of
      the
      Vendor’s Products)* .





*Services
      Revenue*





Services
      revenue consists of library sales and audio production services. Service revenue
      is recognized as services are performed after the agreement has been finalized,
      the price is fixed and collectibility is reasonably assured. Collectibility
      is
      based on past transaction history and credit-worthiness of the customer.








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







*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 commits to an AudibleListener membership. For
      multiple-element arrangements in which a customer signs up for a one year
      membership and receives an audio player for free, revenue is recognized using
      the relative fair value method under EITF Issue No. 00-21, *Revenue
      Arrangements with Multiple Deliverables* .
      Each
      separate unit of accounting is recognized as revenue at its relative fair value,
      where the delivered item (hardware) is limited to the non-contingent
      consideration, which consists of shipping and handling. The free hardware device
      reflects the subsidy incurred to acquire an AudibleListener member. For players
      sold separately, hardware revenue is recognized upon shipment of the device,
      pursuant to a customer order and credit card authorization and includes amounts
      received for shipping and handling.




*Related
      Party Revenue*


Related
          party revenue consists of revenue earned under agreements with Audible
          Germany
          (see Note 8) and France Loisirs (see Note 9). Revenue under the Audible
          Germany
          agreement includes $30,000 earned per month over the initial 30-month term
          of
          the agreement. The Company recognizes $30,000 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 $1,000,000 technology licensing
          fee that
          is being recognized on a straight-line basis over the initial 24-month
          term of
          the agreement. Revenue earned under each of these agreements also includes
          reimbursement of certain incremental out-of-pocket costs incurred by the
          Company
          that are billed to France Loisirs and Audible Germany 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 months ended June 30, 2004, included revenue
      from
      a license granted for certain technology rights to a device manufacturer which
      was recognized on a straight-line basis over the term of the agreement which
      expired in June 2004. Other revenue for the three and six months ended June
      30,
      2005 included 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.





*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 $75,133 and $111,354, for the three months
      ended
      June 30, 2005 and 2004, respectively, and $161,650 and $209,797 for the six
      months ended June 30, 2005 and 2004, respectively.




*Cost
      of Content and Services Revenue*




Cost
      of
      content and services revenue includes earned royalties on sales of content
      as
      specified by the terms of the content agreements, periodic net realizable value
      adjustments to royalty advances, amortization of warrants issued to content
      providers in connection with content agreements, other non-recoupable content
      costs, and discount certificate rebates. Royalty expense for sales of content
      is
      either paid based upon a percentage of revenue or as a fixed price per title
      as
      per the royalty agreement. In certain cases, the 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. Cost
      of
      content and services revenue also includes the amounts due to Audible Germany
      and France Loisirs for the gross margin on sales made through the Apple iTunes
      Music Store in each respective country.







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





*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
      $808,627 and $277,019 for the three months ended June 30, 2005 and 2004,
      respectively, and $1,401,397 and $545,568 for the six months ended June 30,
      2005
      and 2004, respectively.





*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, the allowance for returns and chargebacks, recoverability of royalty
      advances, valuation of deferred tax assets and fair value of equity 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 bases 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.




*Basic
      and Diluted Net Income (Loss) Applicable to Common Shareholders Per Common
      Share*





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





For
      the
      three and six month periods ended June 30, 2005, diluted net income applicable
      to common shareholders per common share is computed by dividing net income
      applicable to common stockholders by the diluted weighted average common shares
      outstanding. For the three month period ended June 30, 2004, diluted net income
      applicable to common shareholders per common share is computed by dividing
      net
      income applicable to common shareholders by the diluted weighted average common
      shares outstanding. For the six month period ended June 30, 2004, diluted net
      loss applicable to common shareholders per common share is equal to basic net
      loss applicable to common shareholders per common share, since all potential
      common stock was anti-dilutive.








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





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
                30,2005
            
            2004
            
            2005
            
            2004Basic
                weighted average common shares outstanding
            24,169,396
            
            21,238,711
            
            24,089,237
            
            19,936,969Effect
                of dilutive potential common shares:Stock
                options
            1,600,944
            
            2,063,465
            
            1,698,009
            
            --Warrants
            210,549
            
            318,326
            
            260,945
            
            --Restricted
                stock
            6,111
            
            --
            
            3,913
            
            --Diluted
                weighted average common shares outstanding
            25,987,000
            
            23,620,502
            
            26,052,104
            
            19,936,969





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. For the three month period ended June 30, 2004, 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. For the six month period ended June
      30,
      2004, all potential common shares have been excluded from the diluted
      calculation because the Company was in a net loss position, and their inclusion
      would have been anti-dilutive.





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





Three
                Months ended
              June
                30,
            
            Six
                Months ended
              June
                30,2005
            
            2004
            
            2005
            
            2004Stock
                options
            
            553,092
            
            420,431
            
            455,518
            
            3,152,883Warrants
            
            627,110
            
            636,952
            
            528,822
            
            1,055,439





*Stock-Based
      Compensation*





SFAS
      No.
      148, *Accounting
      for Stock Based Compensation-Transition and Disclosure, an Amendment of FASB
      Statement No. 123* ,
      (“SFAS
      No. 148”), amended FASB Statement No. 123, *Accounting
      for Stock-based Compensation* ,
      (“SFAS
      No. 123”), to provide alternative methods of transition for a voluntary change
      to the fair value method of accounting for stock-based compensation. However,
      it
      allows an entity to continue to measure compensation cost for those instruments
      using the intrinsic value method of accounting prescribed by Accounting
      Principles Board Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      (“APB
      No. 25”), provided it discloses the effect of SFAS No. 123, as amended by SFAS
      No. 148, in the footnotes to the financial statements. Until the adoption of
      SFAS No. 123(R), Share-Based Payment, which becomes effective for the Company
      in
      January 2006, the Company has chosen to continue to account for stock-based
      compensation using the intrinsic value method.







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





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.




The
      Plan originally permitted up
      to 3,000,000 common stock shares to be issued under the plan. In September
      2003,
      at the annual meeting of stockholders, the stockholders approved an amendment
      to
      the plan increasing the number of authorized common shares available for
      issuance under the plan to 4,200,000 shares. In June 2005, at the annual
      stockholders meeting, the stockholders approved an amendment to the plan
      increasing the number of authorized common shares available for issuance under
      the plan to 5,700,000 shares. As of June 30, 2005 and 2004, options to purchase
      2,660,781 and 3,152,883, respectively, shares of common stock were outstanding.
      As of June 30, 2005 and 2004, 146,500 and zero, respectively, of restricted
      share awards had been granted.





Compensation
      expense, if any, based on the intrinsic value method is recognized on a
      straight-line basis over the vesting term. Had the Company elected to recognize
      compensation cost based on fair value of the stock options at the date of grant
      under SFAS No. 148, such costs would have been recognized ratably over the
      vesting period of the underlying instruments and the Company’s net income (loss)
      applicable to common shareholders and net income (loss) applicable to common
      shareholders per common share would have changed to the pro forma amounts
      indicated in the table below.


Three
                  Months Ended
                June
                  30,
              
              Six
                  Months Ended
                June
                  30,2005
              
              2004
              
              2005
              
              2004Net
                  income (loss) applicable to common shareholders as
                  reported
              
              $
              823,869
              
              $
              236,585
              
              $
              1,713,260
              
              $
              (10,193,153
              )Add:
                  Total stock-based employee compensation costincluded
                  in reported net income (loss) applicable tocommon
                  shareholders (based on intrinsic value method)
              
              
              135,091
              
              
              21,313
              
              
              172,433
              
              
              55,426Deduct:
                  Total stock-based employee compensation expense determined under
                  the fair
                  value method for all awards
              
              
              (740,754
              )
              
              (908,378
              )
              
              (1,273,277
              )
              
              (1,749,428
              )Pro-forma
                  net income (loss) applicable to common shareholders
              
              $
              218,206
              
              $
              (650,480
              )
              $
              612,416
              
              $
              (11,887,155
              )Basic
                  net income (loss) applicable to common shareholders per common
                  share:As
                  reported
              
              $
              0.03
              
              $
              0.01
              
              $
              0.07
              
              $
              (0.51
              )Pro
                  forma
              
              $
              0.01
              
              $
              (0.03
              )
              $
              0.03
              
              $
              (0.60
              )Diluted
                  net income (loss) applicable to common shareholders per common
                  share:As
                  reported
              
              $
              0.03
              
              $
              0.01
              
              $
              0.07
              
              $
              (0.51
              )Pro
                  forma
              
              $
              0.01
              
              $
              (0.03
              )
              $
              0.02
              
              $
              (0.60
              )




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







The
      Company has used the Black-Scholes option pricing model in calculating the
      fair
      value of options. The assumptions used and the weighted-average information
      for
      the three and six months ended June 30, 2005 and 2004, are as
      follows:






Three
                Months Ended
              June
                30,
            
            Six
                Months Ended
              June
                30,2005
            
            2004
            
            2005
            
            2004Risk-free
                interest rate
            
            3.70%
            
            3.66%
            
            3.70%
            
            3.66%Expected
                dividend yield
            
            --
            
            --
            
            --
            
            --Expected
                lives
            
            5
                years
            
            5
                years
            
            5
                years
            
            5
                yearsExpected
                volatility
            
            116.3%
            
            121%
            
            118.8%
            
            122%


*Restricted
      Stock*





During
      the three and six months ended June 30, 2005, the Company granted awards to
      receive 118,500 and 146,500 restricted shares, 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. The fair value of
      the
      restricted stock on the grant date, as determined by the closing price of
      Audible’s stock on the day immediately preceding the grant date, is recorded as
      deferred compensation, a component of stockholders’ equity, and is amortized as
      compensation expense straight-line over the vesting term of the restricted
      stock
      award. When employees who have these restricted stock awards leave the Company
      prior to vesting, the remaining un-expensed deferred compensation is reversed
      against additional paid-in-capital, and the previously recognized compensation
      expense is reversed against additional paid-in-capital since the awards are
      not
      vested. Total non-cash compensation expense relating to the amortization of
      restricted shares was $115,204 and $0 during the three month periods ended
      June
      30, 2005 and 2004, respectively, and $138,199 and $0 during the six month
      periods ended June 30, 2005 and 2004, respectively. Actual shares under these
      awards are not issued until vesting is complete.





*Stock
      and 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, life 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.





( **2)
      Reverse Stock Split**




At
      the
      annual meeting of stockholders held on June 3, 2004, the stockholders approved
      a
      proposal to amend and restate the Company’s certificate of incorporation to
      effect a reverse stock split and to decrease the authorized number of shares
      of
      common stock on a proportional basis. The proposal granted the Company’s Board
      of Directors (“Board”) authority to effect a reverse stock split of the
      Company’s common stock of between and including two and four shares to be
      combined into one share of common stock. No fractional shares were to be
      converted.








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





On
      June
      3, 2004, the Board approved a reverse stock split at a ratio of one for three
      shares effective June 17, 2004. On the effective date, each holder of record
      was
      deemed to hold one share of common stock for every three shares of common stock
      held immediately prior to the effective date. The 64,480,245 common shares
      then
      issued and outstanding were converted into 21,493,415 shares of common stock.
      Following the effective date of the reverse stock split, the par value of the
      common stock remained at $.01 per share.





All
      share
      numbers and amounts have been retroactively restated for all periods presented
      to reflect the one for three reverse stock split.





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





Property
        and equipment consists of the following:
  **June
                    30,****2005**
                
                **December
                    31, 2004**Studio
                    equipment
                
                $
                636,271
                
                $
                549,359Computer
                    server and website equipment
                
                
                5,204,067
                
                
                4,567,189Third
                    party software
                
                
                439,942
                
                
                --Office
                    furniture and equipment
                
                
                1,329,498
                
                
                850,750Leasehold
                    improvements
                
                
                929,533
                
                
                827,317Equipment
                    in process
                
                
                --
                
                
                28,384Total
                    property and equipment
                
                
                8,539,311
                
                
                6,822,999Less:
                    accumulated depreciation and amortization
                
                
                (6,281,031
                )
                
                (5,903,909
                )Total
                    property and equipment, net
                
                $
                2,258,280
                
                $
                919,090
  Depreciation
        and
        amortization expense on property and equipment totaled $237,684 and $144,900,
        during the three month periods ended June 30, 2005 and 2004, respectively
        and
        $377,191 and $255,426 during the six month periods ended June 30, 2005 and
        2004,
        respectively.
 
 At
        June
        30, 2005 and December 31, 2004, respectively, the gross amount of plant and
        equipment and related accumulated amortization recorded under capital leases
        were as follows:
  **June
                    30,****2005**
                
                **December
                    31,****2004**Computer
                    server and website equipment
                
                $
                743,302
                
                $
                743,302Less:
                    accumulated amortization
                
                
                (313,367
                )
                
                (189,483
                )Total
                    computer server and website equipment, net
                
                $
                429,935
                
                $
                553,819
 
 **(4)**  **Accrued
        Expenses**
  The
        components of the accrued expenses balance are as follows:
 
 **June
                  30, 2005**
              
              **December
                  31, 2004**Royalties
              
              $
              3,943,228
              
              $
              1,882,039Professional
                  fees
              
              
              547,700
              
              
              346,000Revenue
                  sharing and bounty payments
              
              
              540,740
              
              
              304,718Retail
                  rebates and discounts
              
              
              384,785
              
              
              461,182Refunds
                  and chargebacks
              
              
              285,745
              
              
              168,584Marketing
              
              
              281,031
              
              
              274,631Other
                  accrued expenses
              
              
              407,958
              
              
              191,402Total
                  accrued expenses
              
              $
              6,391,187
              
              $
              3,628,556
 
  15
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL
              STATEMENTS
 (Unaudited)
   **(5)**  **Stockholders'
        Equity**
 
 The
        following is a summary of the consolidated Stockholders’ Equity activity for the
        six months ended June 30, 2005:
 
 **Common
                  Stock**
              
              **Treasury
                  Stock****Shares**
              
              **Par
                  value**
              
              **Shares**
              
              **Cost**
              
              **Additional
                  paid-in capital**
              
              **Deferred
                  compensation**
              
              **Accumulated
                  other comprehensive income**
              
              **Accumulated
                  deficit**
              
              **Total
                  stockholders’ equity**Balance
                  at December 31, 2004
              
              
              24,169,775
              
              $
              241,697
              
              
              (229,741
              )
              $
              (184,740
              )
              $
              187,248,675
              
              $
              (154,173
              )
              
              -
              
              $
              (130,060,750
              )
              $
              57,090,709Cashless
                  exercise of common stock warrants
              
              
              13,790
              
              
              138
              
              
              
              
              
              
              
              
              (138
              )
              
              
              
              
              
              
              
              
              
              
              -Exercise
                  of warrants
              
              
              116,666
              
              
              1,167
              
              
              
              
              
              
              
              
              293,333
              
              
              
              
              
              
              
              
              
              
              
              294,500Exercise
                  of options
              
              
              209,672
              
              
              2,097
              
              
              
              
              
              
              
              
              587,970
              
              
              
              
              
              
              
              
              
              
              
              590,067Reversal
                  of compensation charge
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (8,492
              )
              
              8,492
              
              
              
              
              
              
              
              
              -Issuance
                  of restricted stock awards
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,471,685
              
              
              (2,471,685
              )
              
              
              
              
              
              
              
              -Issuance
                  of options below fair value
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              269,500
              
              
              (269,500
              )Non-cash
                  compensation charge - restricted stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              138,199
              
              
              
              
              
              
              
              
              138,199Non-cash
                  compensation charge - options
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              34,234
              
              
              
              
              
              
              
              
              34,234Retirement
                  of treasury stock
              
              
              (229,741
              )
              
              (2,297
              )
              
              229,741
              
              
              184,740
              
              
              (182,443
              )
              
              
              
              
              
              
              
              
              
              
              -Income
                  tax benefit from stock options exercised
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              147,300
              
              
              
              
              
              
              
              
              
              
              
              147,300Foreign
                  currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              17,559
              
              
              
              
              
              17,559Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              1,713,260
              
              
              1,713,260Balance
                  at June 30, 2005
              
              
              24,280,161
              
              $
              242,802
              
              
              -
              
              
              -
              
              $
              190,827,390
              
              $
              (2,714,433
              )
              $
              17,559
              
              $
              (128,347,490
              )
              $
              60,025,828
 
  16
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL
              STATEMENTS
 (Unaudited)
   *Common
        Stock*
 
 On
        February 6, 2004, in connection with the conversion of the outstanding Series
        A
        Preferred Stock (“Series A”), the Company issued 5,836,013 shares of common
        stock to Apax Partners (“Apax”). The Series A conversion was the result of a
        negotiated agreement under which, in addition to the 4,669,347 shares of
        common
        stock issuable upon conversion of the outstanding Series A shares in accordance
        with the terms of conversion, the Company issued to Apax 1,166,666 common
        shares
        of common stock and warrants to purchase 333,333 shares of common stock.
        Of the
        additional 1,166,666 shares issued, 389,863 shares were issued in payment
        of
        cumulative accrued dividends at the date of conversion, and 776,803 shares
        together with the warrants to purchase 333,333 shares were issued as an
        inducement to Apax to convert its Series A shares. The warrants are exercisable
        at $21.00 per share and expire on February 5, 2011. The fair value of the
        776,803 shares of common stock and the warrants to purchase 333,333 shares
        of
        $9,873,394 was recorded as a charge to the net loss applicable to common
        shareholders in the condensed consolidated Statement of Operations for the
        six
        months ended June 30, 2004.
 
 On
        February 6, 2004, the Company issued 416,666 shares of common stock to Random
        House upon conversion of its outstanding Series B Preferred Stock (“Series B”)
        in accordance with the original terms of conversion.
 
 On
        November 17, 2004 the Company issued 2,022,500 shares of common stock in
        connection with a secondary public offering at a price of $24.50 per share.
        Net
        proceeds received by the Company were $46,456,593, net of direct
        costs.
 
 As
        of
        June 30, 2005 and December 31, 2004, the Company had issued 24,280,161 and
        24,169,775 respectively, shares of common stock. As of June 30, 2005 and
        December 31, 2004, the Company had 3,706,017 and 3,635,660, respectively,
        shares
        of common stock reserved for common stock warrants, options and restricted
        stock.
 
 *Employee
        Stock-Based Compensation*
 
 The
        Company has on occasion issued options to purchase shares of common stock
        to
        employees at a price less than the fair value of the stock at the time of
        issuance. The difference between the fair value on grant date and the exercise
        price of options issued is recorded as deferred compensation, a component
        of
        stockholders’ equity, and is amortized as compensation expense straight-line
        over the vesting term of the option. When employees who have these options
        leave
        the Company, the remaining un-expensed deferred compensation is reversed
        against
        additional paid-in-capital. During the three month periods ended June 30,
        2005
        and 2004, $19,887 and $21,313, respectively, and $34,234 and $55,426 during
        the
        six month periods ended June 30, 2005 and 2004, respectively, of compensation
        expense was recognized, related to these transactions
 
 *Restricted
        Stock*
 
 During
        the three and six months ended June 30, 2005, the Company granted awards
        to
        receive 118,500 and 146,500, respectively, restricted shares 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. The fair value of
        the
        restricted stock on the grant date, as determined by the closing price of
        Audible’s stock on the day immediately preceding the grant date, is recorded as
        deferred compensation, a component of stockholders’ equity, and is amortized as
        compensation expense straight-line over the vesting term of the restricted
        stock
        award. When employees who have these restricted stock awards leave the Company
        prior to vesting, the remaining un-expensed deferred compensation is reversed
        against additional paid-in-capital, and the previously recognized compensation
        expense is reversed against additional paid-in-capital since the awards are
        not
        vested. Total non-cash compensation expense relating to the amortization
        of
        restricted shares was $115,204 and $0 during the three month periods ended
        June
        30, 2005 and 2004, respectively, and $138,199 and $0 during the six month
        periods ended June 30, 2005 and 2004, respectively. Actual shares under these
        awards are not issued until vesting is complete.
 
  17
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL
              STATEMENTS
 (Unaudited)
    *Warrants*
  The
        Company frequently issues common stock warrants to third parties in exchange
        for
        services. The fair values of warrants issued in exchange for services are
        determined in accordance with EITF Issue No. 96-18 and are recognized as
        an
        expense under fixed plan or variable accounting using the Black-Scholes pricing
        model 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, were determined using available information on the measurement
        date.
        Expected dividend yield of zero was used for all calculations. For the three
        and
        six month periods ended June 30, 2004, $0 and $267,171 was recognized
        as
        expense related to warrants. No expense related to warrants was recognized
        during the three and six months ended June 30,2005.
 
 *Treasury
        Stock*
 
 During
        the February 8, 2005 Board of Directors meeting, the Board voted that all
        229,741shares of common stock held as treasury shares by the Company were
        to be
        retired, and the Company subsequently legally retired the treasury stock.
        Consequently, as of June 30, 2005 and December 31, 2004 the Company held
        zero
        and 229,741, respectively, shares of common stock as treasury stock.
 
 *Comprehensive
        Income*
 
 The
        following table sets forth comprehensive income for the periods indicated:
 Three
                  Months Ended
                June
                  30,
              
              Six
                  Months Ended
                June
                  30,2005
              
              2004
              
              2005
              
              2004Net
                  income (loss)
              
              $
              823,869
              
              $
              236,585
              
              $
              1,713,260
              
              $
              (10,193,153
              )Other
                  comprehensive income:Foreign
                  currency translation adjustment
              
              
              17,007
              
              
              --
              
              
              17,559
              
              
              --Comprehensive
                  income (loss)
              
              $
              840,876
              
              $
              236,585
              
              $
              1,730,819
              
              $
              (10,193,153
              )
 
 **(6)**  **Random
        House Agreement**
 
 On
        May 5,
        2000, Audible and Random House entered into a 50-month Co-Publishing, Marketing,
        and Distribution Agreement to form a strategic alliance to establish Random
        House Audible, a publishing imprint, to produce spoken word content specifically
        suited for digital distribution. All titles published by the imprint are
        distributed exclusively over the internet by Audible. As part of this alliance,
        Random House, through its subsidiary Random House Ventures, LLC, purchased
        56,593 shares of Audible common stock from the Company for $1,000,000. Over
        the
        term of the agreement Audible was to contribute toward funding the acquisition
        and creation of digital audio titles through Random House Audible. On March
        26,
        2002, the agreement was amended to waive the cash payment due to Random House
        in
        2002 of $1,250,000, thereby reducing the total payments due from the Company
        under the agreement from $4,000,000 to $2,750,000. In exchange for this waiver,
        under the amendment the Company issued 1,250,000 shares of Series B stock
        to
        Random House Ventures. If they had not been converted, then on March 26,
        2004
        all outstanding shares of Series B stock would have automatically converted
        to
        shares of common stock at the then effective conversion price. Through December
        31, 2002, $1,250,000 of the $2,750,000 obligation had been paid, with the
        remaining amount of $1,500,000 due in 2003 and 2004. On February 10, 2003,
        the
        agreement was further amended so that Audible was no longer required to pay
        the
        $1,500,000 in imprint fees that were due in 2003 and 2004.
 
  18
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL
              STATEMENTS
 (Unaudited)
   The
        fair
        value of the Series B stock issued was determined in accordance with EITF
        Issue
        No. 01-1, *Accounting
        for a Convertible Instrument Granted or Issued to a Nonemployee for Goods
        or
        Services or a Combination of Goods or Services and Cash* .
        Accordingly, using the measurement date of March 26, 2002, the fair value
        of the
        Series B stock issued was determined to be $1,137,500. On April 1, 2002 when
        the
        Series B was issued, the Company recorded $547,500 (the difference between
        the
        fair value of the shares and the previously recognized accrued liability
        of
        $590,000) as deferred services, a component of stockholders’ equity. There was
        no expense related to this agreement during the three and six month periods
        ended June 30, 2005 and 2004.
  The
        original agreement further provided for Random House to be granted a warrant
        to
        purchase 292,777 shares of Audible common stock at various exercise prices
        that
        vest over the term of the agreement as well as the granting of additional
        warrants to Random House to purchase Audible common shares based on future
        performance. The fair value of these warrants was determined in accordance
        with
        EITF Issue No. 96-18 and is being amortized as an expense on a straight-line
        basis over the 50-month term of the agreement. During the three and six months
        ended June 30, 2004, $163,246 and $165,256, respectively, was recorded as
        a cost
        of content and services revenue related to these warrants with the non-cash
        credit for services to additional paid-in capital. No expense related to
        these
        warrants was recorded during the three and six months ended June 30, 2005.
 
 The
        warrants are accounted for using variable plan accounting whereby compensation
        costs vary each accounting period until the final measurement date.
  The
        Company and Random House continue to operate under the general terms of the
        agreement, which expired on June 30, 2004, with the exception that the works
        produced under the imprint are no longer exclusive to Audible.
 
 **(7)
        Audible UK**
 In
        February 2005, the Company launched Audible UK, a spoken audio website service
        mirroring Audible, Inc. services, 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 on June 15, 2005.
  **(8)
        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 website.
        Under the Joint Venture, Random House and Holtzbrinck each contributed
        approximately $16,542 in exchange for each receiving a 24.5% interest in
        Audible
        Germany. The Company was required to contribute $34,384 in exchange for a
        51%
        interest in Audible Germany. After the initial formation, Random House and
        Holtzbrinck will provide additional financing of approximately $1,490,000
        each
        in certain installments, subject to Audible Germany meeting certain milestones.
        As of June 30, 2005 approximately $1,980,000 in total has been funded by
        Random
        House and Holtzbrinck. In the event of liquidation of Audible Germany, this
        additional financing by Random House and Holtzbrinck accrues interest at
        8% per
        annum and is senior to Audible’s capital investment. The Company may, but is not
        obligated to, contribute additional capital to the entity. Any profits
        distributed by Audible Germany are to be distributed in accordance with the
        ownership interests.
   19
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL
              STATEMENTS
 (Unaudited)
   The
        Company has 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 will have
        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 have not been met. Rather, Audible
        Germany
        is a voting interest entity.
  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. 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 intends to launch 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 $30,000 each
        month for a period of 30 months, beginning in September 2004. Every 60-days
        during this agreement, the parties will 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
        $30,000 of revenue per month once Audible Germany has agreed that the services
        delivered for the prior 60-day period were satisfactory and collection of
        the
        amount is reasonably assured. Also under the License, Audible Germany will
        pay
        the Company royalties ranging from 0.5% to 3% of revenue up to an annual
        royalty
        cap of the U.S. dollar equivalent of €1.5 million, subject to Audible Germany
        achieving certain operating margins.
 
 During
        the three and six month periods ended June 30, 2005 the Company recognized
        $90,000 and $210,000 respectively, in related party revenue under the license
        agreement as the related services were delivered and accepted on or before
        June
        30, 2005. No revenue was recognized under this agreement as of June 30, 2004. In
        addition, the Company also recognized $30,629 and $50,185, in billings for
        certain incremental reimbursable costs incurred in connection with the License
        in accordance with EITF 01-14 during the three and six months ended June
        30,
        2005, respectively. These amounts are included in related party revenue on
        the
        condensed consolidated Statements of Operations.
 
 **(9)
        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.
   20
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL
              STATEMENTS
 (Unaudited)
   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 $1,000,000, payable as follows: $250,000
        in
        September 2004, $250,000 in October 2004, $250,000 in January 2005 and $20,833
        for each of the following 12 months. 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’s 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.
  FIN46R
        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 $1,000,000 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
        $1,000,000 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 one unit of accounting
        under EITF 00-21 and accordingly, the $1,000,000 in fees is recognized as
        related party revenue on a straight-line basis over the 24-month term at
        the
        rate of $41,667 per month, provided collectibility is reasonably assured.
 
 During
        the three and six month periods ended June 30, 2005, the Company recognized
        $125,000 and $250,000, respectively, in related party revenue in connection
        with
        this agreement, representing the straight-line recognition of $1,000,000
        in
        revenue being recognized over the 24-month term of the agreement. No revenue
        was
        recognized under this agreement as of June 30, 2004. In
        addition, for the three and six month periods ended June 30, 2005 the Company
        recognized $13,465 and $23,345, respectively, in billings for certain
        incremental reimbursable costs incurred in connection with the License in
        accordance with EITF 01-14. These amounts are included in related
        party
        revenue on the condensed consolidated Statements of Operations.
 
 
  21
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL
              STATEMENTS
 (Unaudited)
   **(10)
        Product Development, Licensing, Marketing and Distribution
        Agreement**
 
 On
        May
        16, 2005, the Company entered into a five-year agreement with
        a new
        publisher 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 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, 2005, $200,000 was received from the publisher in connection
        with this agreement and is recorded as deferred revenue
        - non
        current on the accompanying condensed consolidated Balance Sheet.
 
 **(11)
          Employee Benefit Plan**
  The
        Company has a 401(k) plan based on contributions from employees and
        discretionary Company contributions. As of December 31, 2004, the Company
        had
        never contributed to the 401(k) plan. Beginning January 1, 2005, the Company
        has
        adopted a policy to match up to the first two percent of salary contributions
        made from employees into the 401(k) plan. During the three and six month
        periods
        ended June 30, 2005 the Company made contributions of $28,351 and $50,587,
        respectively.
 
 **(12)
        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. The Company signed a lease for additional space in the Wayne
        office, which also expires December 2008. 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
        will
        expire in May 2006. Total future minimum lease obligations as of June 30,
        2005
        under these lease arrangements are $1,921,616.
  Rent
        expense of $143,156 and $92,776 was recorded under operating leases for the
        three months ended June 30, 2005 and 2004, respectively, and $239,086 and
        $185,551 for the six months ended June 30, 2005 and 2004.
 
 There
        are
        no future minimum lease payments due under capital leases as of June 30,
        2005,
        which were paid in full during the first quarter of 2005.
 
 *Royalty
        Obligations*
 
 Royalty
        obligations represent payments to be made to various content providers pursuant
        to minimum guarantees under their royalty agreements, net of royalties expensed.
        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.
 
 *Service
        Agreements*
 
 The
        Company has entered in operational and marketing agreements with various
        vendors
        to provide certain services. The majority of the amounts committed are for
        hosting services related to the Company’s website.
  
  22
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL
              STATEMENTS
 (Unaudited)
    **Summary
        of Cash Commitments and Obligations**
  The
        following table shows future cash payments due under the Company’s commitments
        and obligations as of June 30, 2005:
 **Year**
                
                **Operating**
                  **Leases**
                
                **Royalty
                    Obligations (1)**
                
                **Service**
                  **Agreement**s
                
                **Total**2005
                
                $
                284,943
                
                $
                262,400
                
                $
                862,624
                
                $
                1,409,9672006
                
                
                558,442
                
                
                156,230
                
                
                484,300
                
                
                1,198,9722007
                
                
                539,116
                
                
                --
                
                
                16,654
                
                
                555,7702008
                
                
                539,116
                
                
                --
                
                
                2,060
                
                
                541,1762009
                
                
                --
                
                
                --
                
                
                --
                
                
                --2010
                    and thereafter
                
                
                --
                
                
                --
                
                
                --
                
                
                --Total
                
                $
                1,921,617
                
                $
                418,630
                
                $
                1,365,638
                
                $
                3,705,885
 (1)
        Reflected in the current and non-current liabilities respectively, on the
        accompanying June 30, 2005 condensed consolidated Balance Sheet.
 
 **Contingencies**
 
 In
        June
        2001, the Company and certain of its officers were named as a defendant in
        a
        securities class action filed in United States District Court for the Southern
        District of New York related to the Company’s initial public offering (“IPO”) in
        July 1999. The lawsuits also named certain of the underwriters of the IPO
        as
        well as certain of the Company’s 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”). The complaints
        allege that the prospectus and the registration statement for the Company’s IPO
        failed to disclose that the underwriters allegedly solicited and received
        “excessive” commissions from investors and that some investors in the Company’s
        IPO allegedly agreed with the underwriters to buy additional shares in the
        aftermarket in order to inflate the price of the Company’s stock. An amended
        complaint was filed April 19, 2002. 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, attorney
        and
        expert fees, and other unspecified litigation costs.
  On
        July
        1, 2002, the underwriter defendants in the consolidated actions moved to
        dismiss
        all of the IPO Litigations, including the action involving the Company. On
        July
        15, 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 structured between 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.
 
 
  23
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL
              STATEMENTS
 (Unaudited)
   In
        June
        2004, an agreement of 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 plaintiffs and issuer defendants
        separately filed replies to the underwriter defendants’ objections to the
        settlement on August 4, 2004. The court granted the preliminary approval
        motion
        on February 15, 2005, subject to certain modifications. The parties are directed
        to report back to the court regarding the modifications. If the parties are
        able
        to agree upon the required modifications, and such modifications are acceptable
        to the court, notice will be given to all class members of settlement, a
        “fairness” hearing will be held and 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 will 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 at a preliminary stage, 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 thereunder 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
        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 in 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 recent 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
        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. It is possible that additional complaints may be filed in
        the
        future.
 
 In
        May
        2005, Digeo, Inc. has filed and served a complaint 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. The Company maintains
        the position that its services do not fall within the scope of the claims
        of the
        Digeo patent, giving them their broadest possible scope. The Company believes
        the claims made in the complaint are without merit and will not have a material
        adverse impact on its financial position or results of operations.
 
  24
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL
              STATEMENTS
 (Unaudited)


**(13)
          Supplemental Disclosure of Cash Flow Information**
 **Cash
        Paid for Interest and Taxes**
 
 Interest
        paid was $1,495 and $14,090 during the six month periods ended June 30, 2005
        and
        2004, respectively.
  No
        income taxes were paid in the six month periods
        ended June 30, 2005 and 2004.
  **(14)   Customer
        Concentration**
  For
        the
        six months ended June 30, 2005 and 2004, Apple Computer accounted for 13.2%
        and
        9.3% of total revenue, respectively.
 
 As
        of
        June 30, 2005 and December 31, 2004, Apple Computer accounted for 48.9% and
        77.7%, respectively, of the Company’s accounts receivable.
  25
  
 **ITEM
        2. Management’s Discussion and Analysis of Financial Condition and Results of
        Operations**
 
 *The
        following discussion and analysis of our financial condition and results
        of
        operations should be read in conjunction with our audited financial statements
        and notes thereto appearing in our 2004 Annual Report on Form 10-K, as amended.
        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**
  Audible,
          Inc. is the internet’s largest, most diverse provider of premium spoken audio
          services for content download and playback on personal computers, CD or
          AudibleReady mobile listening devices. Our customers purchase and download
          their
          choice of content, and generally listen during their daily commute or while
          exercising, when “their eyes are busy but their minds are free.” We believe that
          the Audible service allows our customers to make better use of their time,
          allowing them to listen to books, newspapers and magazines that, due to
          their
          busy lives, they would not have the time to read, as well as to listen
          to time
          shifted radio programs on their own schedules. Our online store is located
          at
          audible.com and our main location of operations is in Wayne, New Jersey.
          Under
          the September 2003 agreement, Audible.com is also the Apple iTunes Music
          Store’s
          exclusive provider of spoken word content for digital distribution.
 Audible
        has more than 70,000 hours of
        audio programs and over 250 content providers that include leading audiobook
        publishers, broadcasters, entertainers, magazine and newspaper publishers
        and
        business information providers. Most of our customers join the AudibleListener
        program, where for a monthly fee of either $14.95 or $21.95, they may download
        and listen to a prescribed number of audio titles of their choice.
        AudibleListeners provide us with their credit card information and are billed
        monthly in advance for the AudibleListener service. Customers may also purchase
        individual audio titles from us on an á la carte basis.
  Since
        launching the service in 1997, over 611,000 customers in 120 countries have
        purchased content at audible.com. We believe our growth has been driven
        primarily by our strong collection of content, value to our customers by
        the
        growing trends of downloading and listening to audio on-the-go, and by the
        growing market for digital audio devices that securely play content from
        audible.com. We promote the Audible service through advertising and promotion
        programs, co-marketing partnerships with device manufacturers, online
        promotions, promotions with retailers and our customer-get-customer referral
        program. In addition, customers at the Apple iTunes Music Store and Amazon.com
        can purchase and download Audible content of their choice.
  The
        key
        drivers of our business include new customer growth, the cost of acquiring
        a
        customer, our customer cancellation rate, controlling our costs and sales
        of
        Audible content through the Apple iTunes Music Store. Our new customer growth
        is
        a function of developing compelling advertising and promotion programs to
        encourage people to try the Audible service for the first time, as well as
        the
        creation of marketing partnerships that similarly encourage consumers to
        try our
        service. One of our growing sources of new AudibleListeners is via our device
        rebate program. Under this program, AudibleListeners that subscribe to our
        AudibleListener service for twelve months qualify for a $100 rebate or discount
        on the purchase of certain AudibleReady devices, such as an Apple iPod. Other
        sources of new AudibleListeners include our “tell a friend”
        customer-get-customer program and our marketing efforts directed at converting
á
        la carte purchasers to AudibleListener members. We manage customer acquisition
        costs by entering primarily into co-marketing deals where we pay for results,
        rather than advertising impressions. We believe that providing our customers
        with a wide range of high value content, a compelling value proposition and
        solid customer service minimizes our customer cancellation rate. Another
        significant source of new AudibleListeners is our “free month trial”program,
        where the customers first month of the AudibleListener membership is
        free.
   26
   We
        plan to
        continue to focus on new customer growth, expanding our content selection,
        improving the Audible service, broadening the range of AudibleReady listening
        devices, broadening our range of marketing and sales partnerships, providing
        solid customer service, controlling our costs, pursuing our strategic
        initiatives of international expansion, entering the consumer and institutional
        learning markets, as well as facilitating wireless delivery of content to
        our
        customers.
  Although
        we have experienced revenue growth in our content sales in recent periods,
        we
        cannot assure you that such growth rates are sustainable, and therefore such
        growth rates should not be considered indicative of future operating results.
        We
        cannot assure you that we will be able to continue to increase our revenue,
        or
        that increases in revenue and profitability can be sustained. We believe
        that
        period-to-period comparisons of our historical operating results are not
        meaningful and should not be relied upon as an indication of future performance.
  Our
        revenue is derived from four main categories: (1) content and services revenue,
        which includes consumer content and corporate services, (2) hardware revenue,
        (3) related party revenue, and (4) other revenue.
  Consumer
        content revenue consists of content sales made from our website and content
        sold
        through our agreement with the Apple iTunes Music Store. We recognize revenue
        from the sale of individual content titles in the period when the content
        is
        purchased. We recognize revenue from the sale of content subscriptions pro
        rata
        over the term of the subscription period. We recognize revenue from the sale
        of
        monthly 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. We recognize revenue
        from the sale of UltimateListener, our prepaid discounted content package,
        and
        gift programs when the content is downloaded.
  Part
        of
        our marketing strategy to acquire new AudibleListeners includes retail
        promotions in which we pay retailers to offer discounts to consumers on their
        purchase of AudibleReady devices if they become AudibleListeners for twelve
        months. We also have retail promotions in which we purchase electronic discount
        certificates or gift cards from retailers and give them away to our 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. As a result, these costs, which we consider marketing, are not included
        in
        marketing expense but instead are recorded either as a reduction of revenue
        or
        as part of cost of content and services revenue as described above. Customer
        returns and chargebacks are also recorded as a reduction in revenue. Estimates
        for future returns and chargebacks are made and recorded as an allowance
        for
        returns and chargebacks at each period end.
  Corporate
        service revenue consists of library sales and audio production services.
        Where
        applicable, we recognize corporate service revenue as services are performed
        after the agreement has been finalized, the price is fixed, and collectibility
        is reasonably assured. Collectibility is based on past transaction history
        and
        credit-worthiness of the customer.
  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 one-year commitment to an AudibleListener
        membership. For multiple-element arrangements in which a customer signs up
        for a
        one year membership and receives an audio player for free, revenue is recognized
        using the relative fair value method under EITF Issue No. 00-21, *Revenue
        Arrangements with Multiple Deliverables* .
        Each
        separate unit of accounting is recognized as revenue at its relative fair
        value,
        where the delivered item (hardware) is limited to the non-contingent
        consideration, which consists of shipping and handling. The free hardware
        device
        reflects the subsidy incurred to acquire a customer with a one-year 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.
   27
   Related
        party
        revenue consists of revenue recognized in connection with our agreements
        with
        Audible Germany, France Loisirs S.A.S. and Audio Direct S.A.S., which we
        entered
        into during 2004.
  Other
        revenue consists of revenue from a license for certain technology rights
        granted
        to a device manufacturer recognized on a straight-line basis over the term
        of
        the agreement, and commissions earned from a retail partner related to our
        referral of customers to purchase their digital mobile players. Such commissions
        are based on a percentage of the purchase price of the players and are
        recognized when customer purchases are made.
  We
        have
        marketing agreements with device manufacturers such as Apple Corp., Creative
        Labs, Hewlett-Packard, Kenwood, Motorola, palmOne, Rio Audio, and Toshiba.
        Under
        these agreements, the device manufacturer will receive a portion of the content
        revenue generated over a specified period of time from each new Audible customer
        referred by them or using their hand-held electronic device. For example,
        when a
        purchaser of an Apple iPod accesses audible.com to download content, Apple
        Corp.
        receives a percentage of the revenue related to content downloaded by this
        purchaser. These revenue sharing arrangements typically last one or more
        years
        from the date the device user becomes an Audible customer. We have also entered
        into marketing agreements with Cox Communications, Cablevision System’s Optimum
        Online broadband service, Time Warner Cable’s Roadrunner broadband service,
        Amazon.com, Microsoft, The New York Times Company, Dow Jones ( *The
        Wall Street Journal* )
        and
        others to promote our content to their customers, either directly or indirectly
        under which these marketing partners will receive payments from us. The payments
        to these marketing partners are generally based upon driving potential customers
        to the Audible website who then become customers.
 
 We
        have
        also established relationships with electronics retailers such as Crutchfield,
        J&R ComputerWorld, Micro Center, MobilePlanet.com, and Tweeter to promote
        our AudibleListener membership plan at the point of purchase, offering consumers
        a discount against the cost of an AudibleReady device.
  In
          February
          2005, the Company launched Audible UK, a spoken audio website service mirroring
          Audible, Inc. services, 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 on June 15, 2005.
 On
        August
        30, 2004, Audible Inc., Verlagsgruppe Random House GmbH, and Holtzbrinck
        networXs AG entered into a joint venture agreement to form Audible GmbH,
        or
        Audible Germany. Audible Germany has the exclusive rights to operate a German
        language Audible website. Under the joint venture, Random House and Holtzbrinck
        each contributed approximately $16,000 in exchange for each receiving a 24.5%
        interest in Audible Germany.
        We contributed approximately $34,000 in exchange for a 51% interest in Audible
        Germany. Following initial formation, Random House and Holtzbrinck are obligated
        to provide additional financing of approximately $1,490,000 each in certain
        installments subject to Audible Germany meeting certain milestones. As of
        June
        30, 2005, approximately $1,980,000 in total has been funded by Random House
        and
        Holtzbrinck. In the event of liquidation of Audible Germany, this additional
        financing by Random House and Holtzbrinck, which accrues interest at 8% per
        annum, is senior in right of payment to our investment. We may, but we are
        not
        obligated to, contribute additional capital to the entity. Pursuant to a
        license
        agreement, beginning in September 2004, Audible Germany is required to pay
        us
        $30,000 per month for thirty months subject to certain conditions. The agreement
        also requires Audible Germany to pay us a royalty ranging from 0.5% to 3%
        of
        Audible Germany’s 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. Audible Germany is a related party to Audible.
  On
        September 15, 2004, Audible Inc., France Loisirs S.A.S. and Audio Direct
        S.A.S.,
        a wholly-owned subsidiary of France Loisirs entered into a 24-month service
        and
        license agreement, under which France Loisirs launched in the first quarter
        of
        2005 a French language spoken word audio service through Audio Direct. Under
        the
        agreement, we provide intellectual property and substantially all of the
        technological infrastructure for the operation of the service. In return,
        France
        Loisirs is required to pay us a total of $1,000,000 over the term of the
        agreement. Commencing the first fiscal year after the business achieves positive
        net income, we will receive a royalty of 5% of the business’s net paid revenue.
        Net paid revenue means 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’s net paid revenue exceeds €20 million. Once net paid
        revenue exceeds €20 million, we will receive a flat fee of €1 million. If net
        paid revenue exceeds €33.3 million, we will receive a royalty payment of €1
        million, plus 3% of net paid revenue in excess of €33.3 million. An additional
        royalty is payable equal to one-half of the distributable pre-tax profits
        of the
        business. Audio Direct S.A.S. is a related party to Audible Inc.
  In
        September 2003, we entered into a four year agreement with Apple Computer,
        Inc.
        under which Audible is the Apple iTunes Music Store’s exclusive
        provider of
        spoken word content for digital distribution. Under the agreement, Apple
        is
        required to incorporate into the Apple iTunes jukebox software AudibleReady
        features to enable owners of personal computers and the Apple iPod to download
        and listen to spoken audio from audible.com. The iTunes Music Store is the
        only
        digital download music service through which we are permitted to distribute
        our
        content. We began selling content at the Apple iTunes Music Store in October
        2003. Apple may convert the agreement to a non-exclusive arrangement for
        both us
        and Apple upon 120 days prior written notice, although Apple will have a
        continuing obligation to incorporate AudibleReady features into the Apple
        iPod
        and Apple iTunes jukebox software. Under the agreement, when the Apple iTunes
        Music Store sells Audible content, we receive from Apple a fixed price per
        content title.
 
 As
        of
        February 6, 2004, following the conversion of all of our preferred stock,
        we no
        longer have any capital stock outstanding having special preferences or
        privileges.
  
 
 
  28
 **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 months ended June 30, 2005
        and
        2004.
 
 **Three
                  Months Ended**
                **June
                  30,**
              
              **Six
                  Months Ended**
                **June
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **(unaudited)**
              
              **(unaudited)**Revenue,
                  net:Content
                  and services:Consumer
                  content
              
              
              99.1
              %
              
              98.4
              %
              
              99.3
              %
              
              98.5
              %Point
                  of sale rebates
              
              
              -1.5
              
              
              -0.8
              
              
              -2.1
              
              
              -1.2Services
              
              
              0.1
              
              
              0.2
              
              
              0.1
              
              
              0.2Total
                  content and services
              
              
              97.7
              
              
              97.8
              
              
              97.3
              
              
              97.5Hardware
              
              
              0.6
              
              
              2.0
              
              
              0.7
              
              
              2.3Related
                  party revenue
              
              
              1.7
              
              
              0.0
              
              
              1.9
              
              
              0.0Other
              
              
              0.0
              
              
              0.2
              
              
              0.1
              
              
              0.2Total
                  revenue, net
              
              
              100.0
              
              
              100.0
              
              
              100.0
              
              
              100.00Operating
                  expenses:Cost
                  of content and services revenue:Royalties
                  and other content charges
              
              
              35.8
              
              
              32.3
              
              
              34.2
              
              
              31.4Discount
                  certificate rebates
              
              
              2.4
              
              
              3.8
              
              
              3.4
              
              
              2.3Total
                  cost of content and services revenue
              
              
              38.2
              
              
              36.0
              
              
              37.6
              
              
              33.7Cost
                  of hardware revenue
              
              
              2.1
              
              
              7.6
              
              
              2.2
              
              
              7.6Operations
              
              
              14.9
              
              
              14.8
              
              
              14.6
              
              
              15.8Technology
                  and development
              
              
              12.0
              
              
              15.9
              
              
              12.3
              
              
              17.1Marketing
              
              
              19.0
              
              
              12.4
              
              
              18.4
              
              
              14.5General
                  and administrative
              
              
              11.0
              
              
              10.4
              
              
              11.4
              
              
              9.5Total
                  operating expenses
              
              
              97.2
              
              
              97.2
              
              
              96.5
              
              
              98.2Income
                  from operations
              
              
              2.8
              
              
              2.8
              
              
              3.5
              
              
              1.8Other
                  income (expense):Interest
                  income
              
              
              3.0
              
              
              0.6
              
              
              3.1
              
              
              0.4Interest
                  expense
              
              
              0.0
              
              
              -0.2
              
              
              0.0
              
              
              -0.1Other
                  income, net
              
              
              3.0
              
              
              0.4
              
              
              3.1
              
              
              0.3Income
                  before income tax expense and preferred dividends
              
              
              5.8
              
              
              3.2
              
              
              6.6
              
              
              2.1Preferred
                  dividends
              
              
              0.0
              
              
              0.0
              
              
              0.0
              
              
              -70.7Income
                  tax expense
              
              
              -0.4
              
              
              -0.2
              
              
              -0.5
              
              
              -0.1Net
                  income (loss)
              
              
              5.4
              %
              
              2.9
              %
              
              6.1
              %
              
              -68.7
              %
 
  29
   **Three
        months ended June 30, 2005 compared to three months ended June 30,
        2004.**
  **Content
                  and service revenue:**
              
              **Three
                  months ended**
                **June
                  30,****2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **$
                  Change**
              
              **%
                  Change**$
              14,948,255
              
              $
              7,883,208
              
              $
              7,065,047
              
              
              89.6
              %
 
  *Content
        and services revenue* consists
        of AudibleListener membership revenue, revenue from single 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 months ended June 30, 2005 compared
        to the three months ended June 30, 2004 due primarily to the growth in our
        customer count as well as sales at the Apple iTunes Music Store. We recognized
        approximately $1,917,000 in revenue during the three months ended June 30,
        2005
        from sales of Audible content at the Apple iTunes Music Store, compared to
        approximately $749,000 in the same period in 2004. Our customer count grew
        from
        approximately 379,000 as of June 30, 2004 to approximately 611,000 as of
        June
        30, 2005. Included in these numbers are new AudibleListener memberships added
        during the period, which increased to approximately 54,000 new members in
        the
        2005 period from approximately 23,000 new members in the 2004 period. The
        revenue growth was mainly due to new AudibleListener members, which was due
        to
        increases in marketing spending and our continued development of the various
        channels we use to recruit new customers. Our customer count includes all
        customers who have purchased Audible content at www.audible.com. Our customer
        count does not include customers who purchased our content at 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 drove the increase in our customer count.
  **Hardware
                  revenue:**
              
              **Three
                  months ended**
                **June
                  30,****2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **$
                  Change**
              
              **%
                  Change**$
              86,239
              
              $
              162,749
              
              $
              (76,510
              )
              
              (47.0)
              %
 
 
 *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. Also included are separate sales
        of
        digital audio players to consumers and libraries.
  Hardware
        revenue decreased during the 2005 period primarily as a result of a reduction
        in
        shipments of digital audio devices we give away, which resulted in lower
        shipping and handling revenues. Under EITF No. 00-21, with these
        multiple-element arrangements, 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.
   30
   **Related
                  party revenue:**
              
              **Three
                  months ended**
                **June
                  30,****2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **$
                  Change**
              
              **%
                  Change**$
              259,095
              
              
              --
              
              $
              259,095
              
              
              --
 
 *Related
        Party revenue* consists
        of revenue recognized in connection with our agreements with France Loisirs
        and
        Audible Germany which were entered into during the third quarter of
        2004.
 
 Related
        party revenue for the three months ended June 30, 2005 included approximately
        $125,000 in fees earned from our agreement with France Loisirs representing
        the
        prorated amount of the straight-line recognition of $1,000,000 in fees being
        recognized over the 24-month term of the agreement and $13,465 in billings
        to
        France Loisirs for reimbursement of certain incremental costs incurred by
        us in
        connection with the joint venture in accordance with EITF 01-14. Also included
        in related party revenues were $90,000 in fees earned from our agreement
        with
        Audible Germany and $30,629 in billings to Audible Germany for reimbursement
        of
        certain incremental costs incurred by us in connection with the joint venture
        in
        accordance with EITF 01-14. There was no related party revenue in the three
        months ended June 30, 2004.
 
 
 **Other
                  revenue:**
              
              **Three
                  months ended**
                **June
                  30,****2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **$
                  Change**
              
              **%
                  Change**$
              3,866
              
              $
              16,131
              
              $
              (12,265)
              
              
              (76.0)
              %
 
 *Other
        revenue* for the
        three month period ended June 30, 2005 primarily consisted of commissions
        earned
        by us for referring customers to a retail partner to purchase a digital audio
        device, which is recognized in the period when the purchase is completed.
        For
        the three months ended June 30, 2004, other revenue consisted of the
        straight-line amortization of revenue derived from technology licensing
        fees.
 
 
 **Cost
                  of content and service revenue:**
              
              **Three
                  months ended**
                **June
                  30,****2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **$
                  Change**
              
              **%
                  Change**Royalties
                  and other content charges
              
              $
              5,481,908
              
              $
              2,600,606
              
              $
              2,881,302
              
              
              110.8
              %Discount
                  certificate rebates
              
              $
              362,510
              
              $
              305,235
              
              $
              57,275
              
              
              18.8
              %
 
 *Cost
        of content and services revenue* consists
        primarily of royalties incurred, discount certificate rebates, and the
        amortization of publisher royalty advances.
 
 Royalties
        and other content charges increased primarily due to the product mix and
        quantity of titles sold, including sales at the Apple iTunes Music
        Store. Discount certificate rebates, introduced in 2004, are electronic
        discount certificates or gift cards given to certain AudibleListeners who
        commit
        to joining the AudibleListener program for twelve months. AudibleListener
        customers use these when purchasing an AudibleReady digital audio
        player.
 
  31
   **Cost
                  of hardware revenue:**
              
              **Three
                  months ended**
                **June
                  30,****2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **$
                  Change**
              
              **%
                  Change**$
              317,954
              
              $
              613,568
              
              $
              (295,614
              )
              
              (48.2)
              %
 
 *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 2005 period primarily due to a reduction
        in
        the number of digital audio players given away to customers.
 
 
 **Operations
                  expense:**
              
              **Three
                  months ended**
                **June
                  30,****2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **$
                  Change**
              
              **%
                  Change**$
              2,278,587
              
              $
              1,196,685
              
              $
              1,081,902
              
              
              90.4
              %
 
 *Operations* expense
        consists of payroll and related expenses for content acquisition, education,
        editorial, audio conversion and customer service and credit card
        fees.
  Operations
        expenses increased in the 2005 period primarily due to approximately $476,000
        in
        higher personnel expenses, approximately $271,000 in higher outside services
        expenses and approximately $195,000 in higher credit card fees. These increases
        were primarily related to customer and revenue growth.
 
 
 **Technology
                  and development:**
              
              **Three
                  months ended**
                **June
                  30,****2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **$
                  Change**
              
              **%
                  Change**$
              1,830,576
              
              $
              1,280,970
              
              $
              549,606
              
              
              42.9
              %
 
 *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 expenses in the 2005 period was primarily
        due to approximately $273,000 in higher personnel costs, approximately $215,000
        in higher supplies, software license and maintenance costs and approximately
        $131,000 in higher consultant expenses, offset in part by a decline of
        approximately $153,000 in web-hosting fees.
 
  32
  
 **Marketing:**
              
              **Three
                  months ended**
                **June
                  30,****2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **$
                  Change**
              
              **%
                  Change**$
              2,905,203
              
              $
              999,711
              
              $
              1,905,492
              
              
              190.6
              %
 
 
 *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 2005 period primarily due to approximately $816,000
        in higher co-marketing and bounty payments, approximately $640,000 in higher
        advertising and promotional expenses, approximately $261,000 in higher personnel
        expenses and approximately $144,000 in higher public relations fees. As we
        continue to obtain new customers through our marketing partners, these expenses
        will continue to grow.
 
 
 **General
                  and administrative:**
              
              **Three
                  months ended**
                **June
                  30,****2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **$
                  Change**
              
              **%
                  Change**$
              1,686,289
              
              $
              840,537
              
              $
              845,752
              
              
              100.6
              %
 
 *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 2005 period was primarily
        due to approximately $318,000 in increased audit and related fees, which
        included fees related to Sarbanes-Oxley compliance activities, approximately
        $324,000 in increased personnel expenses and approximately $81,000 in increased
        employee recruitment fees.
 
 
 **Other
                  Income, Expense:**
              
              **Three
                  months ended**
                **June
                  30,****2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **$
                  Change**
              
              **%
                  Change**Other
                  income, net
              
              $
              456,271
              
              $
              30,598
              
              $
              425,673
              
              
              1391.2
              %Income
                  tax expense
              
              $
              66,830
              
              $
              18,789
              
              $
              48,041
              
              
              255.7
              %
 
 *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 had no such investments as of June 30, 2004 *.*
  We
        have
        recorded a provision for current income tax expense of approximately $67,000
        for
        the three month period ended June 30, 2005. This expense is based upon our
        estimated 2005 effective tax rate of approximately 8%. The estimated effective
        rate includes both our estimated federal and state income tax expense and
        assumes the use of available net operating loss carryforwards. Future use
        of
        previous loss carryforwards may be affected by the Tax Reform Act of 1986
        which
        imposes limitations on our use of net operating loss carryforwards because
        certain changes have occurred in the ownership of our common stock over the
        years.
 
  33
   **Six
        months ended June 30, 2005 compared to six months ended June 30,
        2004.**
  **Content
                  and service revenue:**
              
              **Six
                  months ended**
                **June
                  30,****2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **$
                  Change**
              
              **%
                  Change**$
              27,450,165
              
              $
              14,459,498
              
              $
              12,990,667
              
              
              89.8
              %
 
  *Content
        and services revenue* consists
        of AudibleListener membership revenue, revenue from single 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 six months ended June 30, 2005 compared
        to
        the six months ended June 30, 2004 due primarily to the growth in our customer
        count as well as sales at the Apple iTunes Music Store. We recognized
        approximately $3,722,000 in revenue during the six months ended June 30,
        2005
        from sales of Audible content at the Apple iTunes Music Store, compared to
        approximately $1,385,000 in the same period in 2004. Our customer count grew
        from approximately 379,000 as of June 30, 2004 to approximately 611,000 as
        of
        June 30, 2005. Included in these numbers are new AudibleListener memberships
        added during the period, which increased to approximately 109,000 new members
        in
        the 2005 period from approximately 48,000 new members in the 2004 period.
        The
        revenue growth was mainly due to new AudibleListener members, which was due
        to
        increases in marketing spending and our continued development of the various
        channels we use to recruit new customers. Our customer count includes all
        customers who have purchased Audible content at www.audible.com. Our customer
        count does not include customers who purchased our content at 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 drove the increase in our customer count.
  **Hardware
                  revenue:**
              
              **Six
                  months ended**
                **June
                  30,****2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **$
                  Change**
              
              **%
                  Change**$
              189,895
              
              $
              344,466
              
              $
              (154,571
              )
              
              (44.9)
              %
 
 
 *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. Also included are separate sales
        of
        digital audio players to consumers and libraries.
  Hardware
        revenue decreased during the 2005 period primarily as a result of a reduction
        in
        the shipments of digital audio devices we give away, which resulted in lower
        shipping and handling revenues. Under EITF No. 00-21, with these
        multiple-element arrangements, 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.
  
  34
  
 **Related
                  party revenue:**
              
              **Six
                  months ended**
                **June
                  30,****2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **$
                  Change**
              
              **%
                  Change**$
              533,531
              
              
              --
              
              $
              533,531
              
              
              --
 
 *Related
        Party revenue* consists
        of revenue recognized in connection with our agreements with France Loisirs
        and
        Audible Germany which were entered into during the third quarter of
        2004.
 
 Related
        party revenue for the six months ended June 30, 2005 included approximately
        $250,000 in fees earned from our agreement with France Loisirs representing
        the
        prorated amount of the straight-line recognition of $1,000,000 in fees being
        recognized over the 24-month term of the agreement and $23,345 in billings
        to
        Audible France Loisirs for reimbursement of certain incremental costs incurred
        by us in connection with the joint venture in accordance with EITF 01-14.
        Also
        included in related party revenues were $210,000 in fees earned from our
        agreement with Audible Germany and $50,185 in billings to Audible Germany
        for
        reimbursement of certain incremental costs incurred by us in connection with
        the
        joint venture in accordance with EITF 01-14. There was no related party revenue
        in the six months ended June 30, 2004.
 
 
 **Other
                  revenue:**
              
              **Six
                  months ended**
                **June
                  30,****2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **$
                  Change**
              
              **%
                  Change**$
              28,734
              
              $
              32,257
              
              $
              (3,523)
              
              
              (10.9)
              %
 
 *Other
        revenue* for the
        six months period ended June 30, 2005 primarily consisted of commissions
        earned
        by us for referring customers to a retail partner to purchase a digital audio
        device, which is recognized in the period when the purchase is completed.
        For
        the six months ended June 30, 2004, other revenue consisted of the straight-line
        amortization of revenue derived from technology licensing fees.
 
 
 **Cost
                  of content and service revenue:**
              
              **Six
                  months ended**
                **June
                  30,****2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **$
                  Change**
              
              **%
                  Change**Royalties
                  and other content charges
              
              $
              9,634,794
              
              $
              4,654,768
              
              $
              4,980,026
              
              
              107.0
              %Discount
                  certificate rebates
              
              $
              963,731
              
              $
              344,335
              
              $
              619,396
              
              
              179.9
              %
 
 
 *Cost
        of content and services revenue* consists
        primarily of royalties incurred, discount certificate rebates, and the
        amortization of publisher royalty advances.
 
 Royalties
        and other content charges increased primarily due to the product mix and
        quantity of titles sold, including sales at the Apple iTunes Music Store.
        Discount certificate rebates, introduced in 2004, are electronic discount
        certificates or gift cards given to certain AudibleListeners who commit to
        joining the AudibleListener program for twelve months. AudibleListener customers
        use these when purchasing an AudibleReady digital audio player.
 
  35
   **Cost
                  of hardware revenue:**
              
              **Six
                  months ended**
                **June
                  30,****2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **$
                  Change**
              
              **%
                  Change**$
              619,706
              
              $
              1,131,603
              
              $
              (511,897
              )
              
              (45.2)
              %
 
 *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 2005 period primarily due to the decrease
        in the number of digital audio players given away to customers.
 
 
 **Operations
                  expense:**
              
              **Six
                  months ended**
                **June
                  30,****2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **$
                  Change**
              
              **%
                  Change**$
              4,126,381
              
              $
              2,339,932
              
              $
              1,786,449
              
              
              76.3
              %
 
 *Operations* expense
        consists of payroll and related expenses for education, content acquisition,
        editorial, audio conversion and customer service and credit card
        fees.
  Operations
        expense increased in the 2005 period primarily due to approximately $722,000
        in
        higher personnel expenses, approximately $464,000 in higher outside services
        expenses and approximately $360,000 in higher credit card fees. These increases
        were primarily related to customer and revenue growth.
 
 
 **Technology
                  and development:**
              
              **Six
                  months ended**
                **June
                  30,****2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **$
                  Change**
              
              **%
                  Change**$
              3,446,757
              
              $
              2,536,102
              
              $
              910,655
              
              
              35.9
              %
 
 *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 expenses in the 2005 period was primarily
        due to approximately $393,000 in higher personnel costs, approximately $354,000
        in higher consultant expenses and approximately $311,000 in higher supplies,
        software license and maintenance costs, offset in part by a decline of
        approximately $261,000 in web-hosting fees.
 
  36
   **Marketing:**
              
              **Six
                  months ended**
                **June
                  30,****2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **$
                  Change**
              
              **%
                  Change**$
              5,194,456
              
              $
              2,151,997
              
              $
              3,042,459
              
              
              141.4
              %
 
 *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 2005 period primarily due to approximately
        $1,562,000 in higher co-marketing and bounty payments, approximately $1,085,000
        in higher advertising and promotional expenses, approximately $188,000 in
        higher
        public relations and other promotional costs and approximately $395,000 in
        higher personnel expenses. This increase was offset in part by the absence
        during the 2005 period of approximately $267,000 in warrant charges incurred
        during the 2004 period. As we continue to obtain new customers through our
        marketing partners, these expenses will continue to grow.
 
  **General
                  and administrative:**
              
              **Six
                  months ended**
                **June
                  30,****2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **$
                  Change**
              
              **%
                  Change**$
              3,224,219
              
              $
              1,407,715
              
              $
              1,816,504
              
              
              129.0
              %
 
 *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 2005 period was primarily
        due to approximately $821,000 in increased audit and related fees, which
        included fees related to Sarbanes-Oxley compliance activities, approximately
        $374,000 in increased personnel expenses, approximately $135,000 in increased
        legal fees and other professional fees, approximately $98,000 in increased
        employee recruitment fees and approximately $51,000 in 401(k) matching
        contribution expense.
  
 **Other
                  Income, Expense:**
              
              **Six
                  months ended**
                **June
                  30,****2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **$
                  Change**
              
              **%
                  Change**Other
                  income, net
              
              $
              868,829
              
              $
              43,377
              
              $
              825,452
              
              
              1903.0
              %Income
                  tax expense
              
              $
              147,850
              
              $
              18,789
              
              $
              129,061
              
              
              686.9
              %
 
 *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 had no such investments as of June 30, 2004 *.*
  We
        have
        recorded a provision for current income tax expense of approximately $148,000
        for the six month period ended June 30, 2005. This expense is based upon
        our
        estimated 2005 effective tax rate of approximately 8%. The estimated effective
        rate includes both our estimated federal and state income tax expense and
        assumes the use of available net operating loss carryforwards. Future use
        of
        previous loss carryforwards may be affected by the Tax Reform Act of 1986
        which
        imposes limitations on our use of net operating loss carryforwards because
        certain changes have occurred in the ownership of our common stock over the
        years.
 
  37
   **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 the Apple iTunes Music Store;
 •
        Control
        customer acquisition and other costs;
 •
        Minimize customer cancellation rates;
 •
        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, 2005, 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, 2005,
        we had
        an accumulated deficit of $128,347,490.
 
 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 website
        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
        introduction 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 website. 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.
 
  38
 
 **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 approximately $28,719,000.
        In
        July 1999, we completed our initial public offering and received net proceeds
        of
        approximately $36,856,000. From the time of our IPO we have raised approximately
        $15,860,000 in net proceeds through the private sale of shares of our
        convertible preferred stock (all of which were subsequently converted into
        common stock), approximately $4,186,000 in net proceeds through the private
        sales of our common stock, approximately $2,928,000 in net proceeds through
        the
        exercise of common stock options and approximately $1,588,000 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 $46,457,000.
  As
        of
        June 30, 2005, our cash and cash equivalents balance was approximately
        $10,887,000. In addition, as of June 30, 2005 we had approximately $55,661,000
        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, 2005 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, 2005 our principal source of liquidity was approximately $10,887,000
        in cash
        and cash equivalents and $55,661,000 in short-term investments.
  The
        following table shows future cash payments due under our commitments and
        obligations as of June 30, 2005:
 **Year**
                  
                  **Operating**
                    **Leases**
                  
                  **Royalty
                      Obligations (1)**
                  
                  **Service**
                    **Agreement**s
                  
                  **Total**2005
                  
                  $
                  284,943
                  
                  $
                  262,400
                  
                  $
                  862,624
                  
                  $
                  1,409,9672006
                  
                  
                  558,442
                  
                  
                  156,230
                  
                  
                  484,300
                  
                  
                  1,198,9722007
                  
                  
                  539,116
                  
                  
                  --
                  
                  
                  16,654
                  
                  
                  555,7702008
                  
                  
                  539,116
                  
                  
                  --
                  
                  
                  2,060
                  
                  
                  541,1762009
                  
                  
                  --
                  
                  
                  --
                  
                  
                  --
                  
                  
                  --2010
                      and thereafter
                  
                  
                  --
                  
                  
                  --
                  
                  
                  --
                  
                  
                  --Total
                  
                  $
                  1,921,617
                  
                  $
                  418,630
                  
                  $
                  1,365,638
                  
                  $
                  3,705,885
 (1)
        Reflected in the current and non-current liabilities respectively, on the
        accompanying June 30, 2005 condensed consolidated Balance Sheet.
 
 
  39
   ***Sources
        and Uses of Cash***
 
 Net
        cash
        provided by operating activities for the six months ended June 30, 2005 was
        approximately $5,179,000. This was primarily attributable to our net income,
        and
        increases in accounts payable, accrued expenses, accrued compensation, royalty
        obligations 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 operating activities for the six months ended June 30, 2004 was
        approximately $1,479,000. This was primarily attributable to our net income,
        increase in accrued expenses and accrued compensation, services rendered
        for
        common stock and warrants and depreciation and amortization, offset in part
        by
        an increase in prepaid expenses and other current assets, accounts receivable
        and inventory and a decrease in royalty obligations.
 
 Net
        cash
        used in investing activities for the six months ended June 30, 2005 was
        approximately $8,365,000. This was attributable to additional purchases of
        property and equipment of approximately $1,717,000 and net purchases of
        short-term investments of approximately $6.6 million. Net cash used
        in
        investing activities for the six months ended June 30, 2004 was approximately
        $238,000, attributable to purchases of property and equipment.
 
 Net
        cash
        provided by financing activities for the six months ended June 30, 2005 and
        2004
        was approximately $764,000 and $96,000, respectively, resulting primarily
        from
        proceeds from the exercise of common stock options and common stock warrants
        offset by principal payments made on capital lease obligations.
 
 New
        Accounting Standards
 
 In
        November 2004, the Financial Accounting Standards Board, or FASB, issued
        Statement of Financial Accounting Standards No. 151, Inventory Costs, an
        amendment of ARB No. 43, Chapter 4. SFAS No. 151, amends ARB No. 43, Chapter
        4,
        to clarify that abnormal amounts of idle facility expense, freight, handling
        costs, and wasted material (spoilage) should be recognized as current period
        charges. In addition, SFAS No. 151 requires that allocation of fixed production
        overhead to the cost of conversion be based on the normal capacity of the
        production facilities. The provision of SFAS No. 151 is effective for us
        beginning on January 1, 2006 and is not expected to have a
        significant
        impact on our consolidated financial statements.
 
 In
        December 2004, the FASB issued Statement of Financial Accounting Standards
        No.
        153, Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29,
        which
        addresses the measurement of exchanges of nonmonetary assets. It eliminates
        the
        exception from fair value accounting for nonmonetary exchanges of similar
        productive assets and replaces it with an exception for exchanges that do
        not
        have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange
        has commercial substance if the future cash flows of an entity are expected
        to
        change significantly as a result of the exchange. This statement was effective
        for the Company after June 15, 2005 and did not have a significant impact
        on our
        consolidated financial statements.
 
 In
        December 2004, the FASB issued Statement of Financial Accounting Standards
        No.
        123(R), Share-Based Payment, which is a revision of SFAS No. 123, Accounting
        for
        Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25,
        Accounting For Stock Issued To Employees, and amends SFAS No. 95, Statements
        Of
        Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the
        approach described in SFAS No. 123. However, SFAS No. 123(R) requires all
        share-based payments to employees, including grants of employee stock options,
        to be recognized in the condensed consolidated Statement of operations based
        on
        their fair values. Pro forma disclosure is no longer an alternative. The
        new
        standard will be effective, for us, beginning January 1, 2006. We have not
        yet
        completed our evaluation but we expect the adoption to have a material effect
        on
        our consolidated financial statements.
 
  40
   **ITEM
        3. Qualitative and Quantitative Disclosures about Market
        Risk**
 None
 
 **ITEM
        4. Controls and Procedures**
 
 **Evaluation
        of Disclosure Controls and Procedures**
 
 The
        Company’s management, including its Chief Executive Officer and Chief Financial
        Officer, has conducted an evaluation of the effectiveness of the Company’s
        disclosure controls and procedures pursuant to Securities Exchange Act
        Rule 13a-15 and 15d-15 as of the end of the period covered by this
        quarterly report. Based on that evaluation, the Chief Executive Officer and
        Chief Financial Officer concluded that the Company has in place effective
        controls and procedures designed to ensure that information required to be
        disclosed by the Company in the report it files or submits under the Securities
        Exchange Act and the rules there under, is recorded, processed, summarized
        and
        reported within the time periods specified in the Commission’s rules and
        forms.
 
 **Changes
        in Internal Control Over Financial Reporting**
 
 Internal
        Audit Manager
 In
        continuing our long term goals of Sarbanes-Oxley 404 compliance, we have
        hired
        an internal auditor, who started in July 2005. His main
        responsibilities are to plan and execute the 2005 Sarbanes-Oxley 404
        work
        and continue to improve the control environment of our growing
        organization.
 
  41
   **PART
        II—OTHER INFORMATION**
 
 **ITEM
        1. Legal Proceedings**
 
 In
        June
        2001, we and certain of our officers were named as a defendant in a securities
        class action filed in United States District Court for the Southern District
        of
        New York related to our initial public offering (“IPO”) in July 1999. The
        lawsuits also named certain of the underwriters of the IPO as well as certain
        of
        our 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”). 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. An amended complaint was filed April 19, 2002. 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, attorney and expert fees, and other unspecified litigation
        costs.
  On
        July
        1, 2002, the underwriter defendants in the consolidated actions moved to
        dismiss
        all of the IPO Litigations, including the action involving us. On July 15,
        we
        along other non-underwriter defendants in the coordinated cases also moved
        to
        dismiss the IPO Litigations. On February 19, 2003, the court ruled on the
        motions. The court granted our motion to dismiss the claims against us under
        Rule 10b-5, due to the insufficiency of the allegations against us. The motions
        to dismiss the claims under Section 11 of the Securities Act were denied
        as to
        virtually all of the defendants in the consolidated cases, including us.
        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 structured between 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 us that may have against our underwriters. Any direct
        financial impact of the proposed settlement is expected to be borne by our
        insurance carriers.
  In
        June
        2004, an agreement of 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 plaintiffs and issuer defendants
        separately filed replies to the underwriter defendants’ objections to the
        settlement on August 4, 2004. The court granted the preliminary approval
        motion
        on February 15, 2005, subject to certain modifications. The parties are directed
        to report back to the court regarding the modifications. If the parties are
        able
        to agree upon the required modifications, and such modifications are acceptable
        to the court, notice will be given to all class members of settlement, a
        “fairness” hearing will be held and 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 at a preliminary stage, we 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 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 Audible’s 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 thereunder
        by failing to make complete and accurate disclosures concerning our future
        plans
        and prospects.  The individual defendants are also alleged to be liable
        under Section 20(a) of the Exchange Act.  All of the defendants are
        alleged
        to have sold stock at inflated prices during the Class Period.
 
  42
   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 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 during in
        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, 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
        Audible, 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 recent 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 Audible rather than by
        investors who allegedly purchased securities at inflated prices.
 
 We
        believe that all of the claims described above are without merit and 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. It is possible that additional
        complaints may be filed in the future.
 
 In
        May
        2005, Digeo, Inc. has filed and served a complaint for patent infringement
        in
        Federal District Court in the State of Washington. Audible has filed an Answer
        asserting the patent invoiced is invalid and unenforceable. Audible has also
        maintained the position that our services do not fall within the scope of
        the
        claims of the Digeo patent, giving them their broadest possible scope. We
        believe the claims made in the complaint are without merit and will not have
        a
        material adverse impact on our financial position or results of
        operations.
 
 **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 10, 2005 (the “Annual
        Meeting”). The following matters were voted upon at the Annual
        Meeting:
 
 (i)
        The
        election of three directors to serve until the 2008 annual meeting of
        stockholders and one director to serve until the 2006 annual meeting of
        stockholders, and until their successors are elected and duly qualified,
        by
        98.1% of the common stock present and voting at the meeting for Messers Katz,
        Sarnoff, Washecka and Kaplan as follows:
 
 Nominee
              For
              Against
                  or Withheld
              Serve
                  UntilDonald
                  R. Katz
              20,163,269
              2,425,295
              2008Richard
                  Sarnoff
              19,911,079
              2,677,485
              2008William
                  H. Washecka
              22,154,968
              433,596
              2008Andrew
                  P. Kaplan
              19,915,675
              2,672,889
              2006
 
 (ii)
        The
        appointment of KPMG LLP as our independent registered public accounting firm
        for
        the year ending December 31, 2005 was ratified by 99.2% of the shares of
        common
        stock present and voting at the meeting (votes for: 22,412,179; votes against:
        170,615; abstentions: 5,771).
 
 (iii)
        An
        amendment to the Company’s 1999 Stock Incentive plan to increase the authorized
        number of shares of common stock available for issuance under the plan from
        4,200,000 to 5,700,000 shares was ratified by 53.0% of the shares of common
        stock present and voting at the meeting (votes for: 8,620,062; against:
        7,621,083; abstentions: 18,248).
 
 **ITEM
        5.**  **Other
        Information**
  None
  43
   **ITEM
        6.**  **Exhibits**
  
 Exhibit
                  Number
              Description31.1
              Certification
                  of the Chief Executive Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.31.2
              Certification
                  of the Chief Financial Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.32.1
              Certification
                  of the Chief Executive Officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.32.2
              Certification
                  of the Chief Financial Officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.
 
 
  44
   Pursuant
        to
        the requirements of the Securities Exchange Act of 1934, the Registrant has
        duly
        caused this Report to be signed on its behalf by the undersigned, thereunto
        duly
        authorized. ****
 ****
 **AUDIBLE,
        INC.**
 
 By:  /s/
        Andrew P Kaplan
 Name:  Andrew
        P.
        Kaplan
 Title:  Executive
        Vice President, Chief Financial Officer
 and
        Director (Principal Financial and Accounting Officer)
  Dated:  August
        4,
        2005
       45