**UNITED
          STATES**
 **SECURITIES
          AND EXCHANGE COMMISSION**
 **Washington,
          D.C. 20549**
 
 **FORM
          10-Q**
 
  
 **(Mark
                    One)**x
                **QUARTERLY
                    REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                    ACT OF
                    1934**For
                    the quarterly period ended March 31, 2006o
                **TRANSITION
                    REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                    ACT OF
                    1934**Commission
                    File Number: 000-26529
 
 
  **AUDIBLE,
          INC.**
 (Exact
          name of registrant as specified in its charter)
 
 **DELAWARE**
                  (State
                    or other jurisdiction of
                  incorporation
                    or organization)
                
                **22-3407945**
                  (I.R.S.
                    employer
                  identification
                    number)**65
                    WILLOWBROOK BLVD. WAYNE, NEW JERSEY**
                  (Address
                    of principal executive offices)
                
                **07470**
                  (Zip
                    Code)
 
 
 **(973)
          837-2700**
 (Registrant's
          telephone number, including area code)
 
 **None**
 (Former
          name, former address and former fiscal year, if changed since last
          report)
 
 Indicate
          by check mark whether the registrant (1) has filed all reports required
          to be
          filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
          the
          preceding 12 months (or for such shorter period that the registrant was
          required
          to file such reports), and (2) has been subject to such filing requirements
          for
          the past 90 days.
 **Yes** x **No** o
 
 Indicate
          by check mark whether the registrant is a large accelerated filer, an
          accelerated filer or a non-accelerated filer. See definition of “accelerated and
          large accelerated filer” in Rule 12b-2 of the Exchange Act.
 o Large
            Accelerated Filer  x **Accelerated Filer** o **Non-accelerated filer**
 
 Indicate
          by check mark whether the registrant is a shell company (as define in Rule
          12b-2
          of the Exchange Act).
 **Yes** o **No** x
  As
          of May
          11, 2006 ,
          24,528,353 shares
          of the registrant's common stock were outstanding.
  
  **AUDIBLE, INC.
        AND SUBSIDIARY**
 **TABLE
        OF CONTENTS**
 **PART
                    I**
                **FINANCIAL
                    INFORMATION**
                **PAGE**Item
                    1.
                Financial
                    Statements:Condensed
                    Consolidated Balance Sheets as of March 31, 2006
                    (unaudited) and December 31, 2005
                3Condensed
                    Consolidated Statements of Operations for the three
                    month periods ended March 31, 2006 and 2005
                    (unaudited)
                4Condensed
                    Consolidated Statements of Cash Flows for the three
                    month periods ended March 31, 2006 and 2005
                    (unaudited)
                5Notes
                    to Condensed Consolidated Financial Statements
                    (unaudited)
                6Item
                    2.
                Management's
                    Discussion and Analysis of
                    Financial Condition and Results of Operations
                25Item
                    3.
                Quantitative
                    and Qualitative Disclosures about Market
                    Risks
                34Item
                    4.
                Controls
                    and Procedures
                34**PART
                    II**
                **OTHER
                    INFORMATION**Item
                    1.
                Legal
                    Proceedings
                35Item
                    1A.
                Risk
                    Factors
                36Item
                    2.
                Unregistered
                    Sales of Equity Securities and Use of
                    Proceeds
                36Item
                    3.
                Defaults
                    Upon Senior Securities
                36Item
                    4.
                Submission
                    of Matters to a Vote of Security
                    Holders
                36Item
                    5.
                Other
                    Information
                37Item
                    6.
                Exhibits
                37**Signatures**
                
                38
 
 
  
 
 
 -2-
 Table
            of Contents
  **PART I
        - FINANCIAL INFORMATION**
  **ITEM
        1.    Financial Statements**
  **AUDIBLE,
        INC. AND SUBSIDIARY**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 **(in
        thousands, except share and per share data)**
  **March
                  31,**
              
              
              **December
                  31,****2006**
              
              
              **2005****(unaudited)****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              14,061
              
              $
              11,549Short-term
                  investments
              
              
              46,310
              
              
              55,616Interest
                  receivable on short-term investments
              
              
              393
              
              
              428Accounts
                  receivable, net of provision for refunds and chargebacks of $31
                  at March
                  31, 2006and
                  December 31, 2005
              
              
              2,920
              
              
              2,337Accounts
                  receivable, related parties
              
              
              597
              
              
              594Royalty
                  advances
              
              
              460
              
              
              471Prepaid
                  expenses and other current assets
              
              
              1,982
              
              
              899Inventory
              
              
              275
              
              
              498Total
                  current assets
              
              
              66,998
              
              
              72,392Property
                  and equipment, net
              
              
              10,951
              
              
              8,159Other
                  assets
              
              
              888
              
              
              114Total
                  assets
              
              $
              78,837
              
              $
              80,665**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              2,337
              
              $
              4,750Accrued
                  expenses
              
              
              4,342
              
              
              4,802Accrued
                  royalties
              
              
              5,111
              
              
              5,104Accrued
                  compensation
              
              
              1,238
              
              
              868Deferred
                  revenue
              
              
              8,413
              
              
              6,459Total
                  current liabilities
              
              
              21,441
              
              
              21,983Deferred
                  revenue, noncurrent
              
              
              221
              
              
              99Royalty
                  obligations, noncurrent
              
              
              190
              
              
              188Commitments
                  and contingenciesStockholders'
                  equity:Common
                  stock, par value $.01. Authorized 40,000,000 shares at March 31,
                  2006 and
                December
                  31, 2005; 24,517,015 and 24,326,503 shares issued and outstanding
                  at
                March
                  31, 2006 and December 31, 2005, respectively
              
              
              245
              
              
              243Additional
                  paid-in capital
              
              
              190,484
              
              
              192,547Deferred
                  compensation
              
              
              --
              
              
              (3,696
              )Accumulated
                  other comprehensive income
              
              
              10
              
              
              15Accumulated
                  deficit
              
              
              (133,754
              )
              
              (130,714
              )Total
                  stockholders' equity
              
              
              56,985
              
              
              58,395Total
                  liabilities and stockholders' equity
              
              $
              78,837
              
              $
              80,665
 See
        accompanying notes to condensed consolidated financial statements.
  -3-
 Table
            of Contents
  **AUDIBLE,
        INC. AND SUBSIDIARY**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF
        OPERATIONS**
 **(in
        thousands, except share and per share data)**
 **(Unaudited)**
  **Three
                  month period ended**
                **March
                  31,****2006**
              
              **2005**Revenue,
                  net:Content
                  and services revenue:Consumer
                  content
              
              $
              19,281
              
              $
              12,838Point
                  of sale rebates
              
              
              (167
              )
              
              (356
              )Services
              
              
              33
              
              
              19Total
                  content and services revenue
              
              
              19,147
              
              
              12,501Hardware
                  revenue
              
              
              125
              
              
              104Related
                  party revenue
              
              
              373
              
              
              275Other
                  revenue
              
              
              70
              
              
              25Total
                  revenue, net
              
              
              19,715
              
              
              12,905Operating
                  expenses:Cost
                  of content and services revenue:Royalties
                  and other content charges
              
              
              7,983
              
              
              4,153Discount
                  certificate rebates
              
              
              298
              
              
              601Total
                  cost of content and services revenue
              
              
              8,281
              
              
              4,754Cost
                  of hardware revenue
              
              
              675
              
              
              294Cost
                  of related party revenue
              
              
              158
              
              
              30Operations
              
              
              3,102
              
              
              1,847Technology
                  and development
              
              
              3,694
              
              
              1,625Marketing
              
              
              4,301
              
              
              2,260General
                  and administrative
              
              
              3,201
              
              
              1,536Total
                  operating expenses
              
              
              23,412
              
              
              12,346(Loss)
                  income from operations
              
              
              (3,697
              )
              
              559Other
                  income (expense):Interest
                  income
              
              
              660
              
              
              414Interest
                  expense
              
              
              --
              
              
              (1
              )Other
                  income, net
              
              
              660
              
              
              413(Loss)
                  income before income taxes
              
              
              (3,037
              )
              
              972Income
                  tax expense
              
              
              (3
              )
              
              (81
              )Net
                  (loss) income
              
              $
              (3,040
              )
              $
              891Basic
                  net (loss) income per common share
              
              $
              (0.12
              )
              $
              0.04Basic
                  weighted average common shares outstanding
              
              
              24,481,751
              
              
              24,008,188Diluted
                  net (loss) income per common share
              
              $
              (0.12
              )
              $
              0.03Diluted
                  weighted average common shares outstanding
              
              
              24,481,751
              
              
              26,117,932
 See
          accompanying notes to condensed consolidated financial
          statements.
 
 -4-
 Table
            of Contents
 
 **AUDIBLE,
        INC. AND SUBSIDIARY**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH
        FLOWS**
 **(dollars
        in thousands)**
 **(Unaudited)**
  **Three
                  month period ended****March
                  31,****2006**
              
              
              **2005**Cash
                flows from operating activities:Net
                  (loss) income
              
              $
              (3,040
              )
              $
              891Adjustments
                  to reconcile net (loss) income to net cash (used in) provided by
                  operating
                  activities:Depreciation
                  and amortization
              
              
              1,122
              
              
              139Share-based
                  compensation expense
              
              
              1,094
              
              
              37Accretion
                  of discounts on short-term investments
              
              
              (230
              )
              
              (301
              )Income
                  tax benefit from exercise of stock options
              
              
              --
              
              
              22Changes
                  in assets and liabilities:Interest
                  receivable on short-term investments
              
              
              35
              
              
              49Accounts
                  receivable, net
              
              
              (582
              )
              
              (141
              )Accounts
                  receivable, related parties
              
              
              (3
              )
              
              (62
              )Royalty
                  advances
              
              
              11
              
              
              (64
              )Prepaid
                  expenses and other current assets
              
              
              (1,083
              )
              
              241Inventory
              
              
              223
              
              
              20Other
                  assets
              
              
              (774
              )
              
              (11
              )Accounts
                  payable
              
              
              (2,413
              )
              
              1,107Accrued
                  expenses
              
              
              (482
              )
              
              199Accrued
                  royalties
              
              
              7
              
              
              1,182Accrued
                  compensation
              
              
              393
              
              
              74Deferred
                  revenue
              
              
              2,076
              
              
              123Net
                  cash (used in) provided by operating activities
              
              
              (3,646
              )
              
              3,505Cash
                  flows from investing activities:Purchases
                  of property and equipment
              
              
              (3,716
              )
              
              (463
              )Capitalized
                  internally developed software costs
              
              
              (198
              )
              
              --Purchases
                  of short-term investments
              
              
              (14,964
              )
              
              (11,716
              )Proceeds
                  from maturity of short-term investments
              
              
              24,500
              
              
              5,000Net
                  cash provided by (used in) investing activities
              
              
              5,622
              
              
              (7,179
              )Cash
                  flows from financing activities:Proceeds
                  from exercise of common stock options
              
              
              151
              
              
              66Proceeds
                  from exercise of common stock warrants
              
              
              750
              
              
              273Purchase
                  of treasury stock at cost
              
              
              (360
              )
              
              --Principal
                  payments made on obligations under capital leases
              
              
              --
              
              
              (121
              )Net
                  cash provided by financing activities
              
              
              541
              
              
              218Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              (5
              )
              
              --Increase
                  (decrease) in cash and cash equivalents
              
              
              2,512
              
              
              (3,456
              )Cash
                  and cash equivalents at beginning of period
              
              
              11,549
              
              
              13,296Cash
                  and cash equivalents at end of period
              
              $
              14,061
              
              $
              9,840
  See
        Note
        11 for supplemental disclosure of cash flow information.
  See
            accompanying notes to condensed consolidated financial statements.
 
  -5-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
 **(1)
            Description of Business and Business Conditions**
 
 *The
            Business*
 
 Audible,
            Inc. (together with its subsidiary, the “Company”), incorporated on November 3,
            1995, was formed to create the Audible service, the Internet's leading
            provider
            of digital spoken entertainment information and educational programming
            for
            playback on personal computers and mobile devices. The Company commenced
            commercial operations in October 1997.
 
 For
            the
            three month period ended March 31, 2006, the Company reported a net loss
            of
            $3,040 and has an accumulated deficit of $133,754 as of March 31, 2006.
            The
            Company's cash and cash equivalent balance as of March 31, 2006 is $14,061.
            In
            addition, the Company has short-term investments of $46,310.
 
 The
            Company may, in the future, need to raise additional funds to finance
            its
            continued growth. No assurance can be given that such additional financing,
            if
            needed, will be available on terms favorable to the Company or to its
            stockholders, if at all.
 
 **(2)
            Summary of Significant Accounting Policies**
 
 *Basis
            of Presentation*
 
 Commencing
            in the first quarter of 2005, the Company began its international operations
            in
            the United Kingdom, as Audible Limited (“Audible UK”). Audible UK is a
            wholly-owned subsidiary of Audible, Inc. and therefore its results of
            operations
            are consolidated as of the end of each reporting period. All inter-company
            transactions and balances have been eliminated.
 
 The
            accompanying condensed consolidated financial statements as of March
            31, 2006
            and for the three month periods ended March 31, 2006 and 2005, are unaudited
            and, in the opinion of management, include all adjustments (consisting
            of normal
            recurring adjustments and accruals) necessary to present fairly the results
            for
            the periods presented in accordance with U.S. generally accepted accounting
            principles. Operating results for the three month period ended March
            31, 2006
            are not necessarily indicative of the results that may be expected for
            the year
            ending December 31, 2006. These condensed consolidated financial statements
            should be read in conjunction with the audited consolidated financial
            statements
            and notes thereto for the year ended December 31, 2005, from the Company's
            Annual Report on Form 10-K.
 
 *Cash
            and Cash Equivalents*
  The
            Company considers short-term, highly liquid investments with original
            maturities
            of three months or less at the time of purchase to be cash equivalents.
            Cash
            equivalents consist primarily of money market funds and notes due from
            governmental agencies. Cash consists of funds held in the Company's checking
            account.
 
 *Restricted
            Cash*
 
 During
            the third quarter of 2005, the Company deposited a $25 retainer in an
            interest-bearing account, which is included in Other Assets on the accompanying
            condensed consolidated Balance Sheets.
 
 *Short-Term
            Investments*
 
 Investments
            purchased with a maturity of more than three months, and less than twelve
            months, are classified as short-term investments. The Company's short-term
            investments, as of March 31, 2006 and December 31, 2005, of $46,310 and
            $55,616,
            respectively, consisted of governmental agency notes and mortgage-backed
            securities that are to be held to maturity because the Company has the
            positive
            intent and ability to hold these securities to maturity. Held to maturity
            securities are stated at amortized cost, adjusted for amortization of
            premiums
            and accretion of discounts to maturity. Dividend and interest income
            are
            recognized when earned. Premiums and discounts are amortized or accreted
            over
            the life of the related held-to-maturity security as an adjustment to
            yield
            using the effective interest method. A decline in the market value of
            held-to-maturity security below that is deemed to be other-than-temporary
            results in a reduction in carrying amount to fair value. The impairment
            is
            charged to operations and a new cost basis for the security is established.
            To
            determine whether an impairment is other-than-temporary, the Company
            considers
            whether it has the ability and intends to hold the investment until a
            market
            price recovery and considers whether evidence indicating the cost of
            the
            investment is recoverable outweighs evidence to the contrary. Evidence
            considered in this assessment includes the reasons for the impairment,
            the
            severity and duration of the impairment, changes in the value subsequent
            to
            period end, and forecasted performance of the investee.
  The
              amortized cost, gross unrealized holding losses and the fair value
              of
              held-to-maturity debt securities at March 31, 2006 was $46,310, $41
              and $46,269,
              respectively.
 
 All
              of
              the debt securities classified as held-to-maturity mature before March
              31, 2007.
 -6-
 **AUDIBLE,
                      INC. AND SUBSIDIARY**
 **NOTES
                      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                      thousands, except share and per share data)**
 **(Unaudited)**
 Table
                      of Contents
  *Provision
            for Refunds and Chargebacks*
 
 The
            provision for refunds and chargebacks is recorded as a reduction of revenue
            and
            is estimated based on a percentage of revenue, taking into account historical
            experience. A portion of the provision is recorded as a reduction of
            accounts
            receivable based on an estimate of refunds that will be made related
            to sales
            that were unpaid at period-end. The remaining portion of the provision
            is
            reflected as an accrued liability at period-end. Actual refunds and chargebacks
            could differ from the Company’s estimate.
  The
            amount of the provision that was recorded as a reduction of accounts
            receivable
            as of March 31, 2006 and December 31, 2005 was $31. The amount of the
            provision
            reflected in the accrued liability was $178 and $287 at March 31, 2006
            and
            December 31, 2005, respectively.
 
 *Inventory*
  Inventory
            is stated at the lower of cost or market using the first-in, first-out
            method.
            Inventory consists of digital audio players manufactured by third
            parties.
 
 *Audio
            Production Costs*
 
 The
            Company capitalizes audio production costs incurred in connection with
            the
            creation of the master copy of an audio title, which includes talent,
            editorial
            and other costs. These costs are included as a non-current asset on the
            condensed consolidated Balance Sheets presented. These costs are stated
            at the
            lower of cost, less accumulated amortization, or fair value. These production
            costs are amortized beginning in the month the title is released, on
            a
            straight-line basis over a two year period , and are recognized as cost
            of
            content revenue in the condensed consolidated Statement of Operations.
            The
            remaining unamortized balance is periodically reviewed, and adjusted
            if
            necessary, to reflect the net realizable value.
 
 *Property
            and Equipment*
  Property
            and equipment, which includes computer server and Web site equipment,
            office
            furniture and equipment, leasehold improvements, internally developed
            software,
            studio equipment, and software licenses, are stated at cost. Property
            and
            equipment under capital leases are stated at the present value of minimum
            lease
            payments. Depreciation is calculated using the straight-line method over
            the
            estimated useful lives of the respective assets, which is three years
            for
            computer server, Web site equipment, and software licenses, and two years
            for
            office furniture and equipment, internally developed software, and studio
            equipment. Property and equipment held under capital leases are amortized
            on a
            straight-line basis over the estimated useful life of the asset. 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 in the condensed consolidated Statements
            of
            Cash Flows.
 
 Work
            in
            process consists of expenditures for the development of various computer
            software projects incurred subsequent to the completion of the preliminary
            project stage, as well as equipment not yet put into use. In accordance
            with SOP
            98-1, *Accounting for Costs of Computer Software Developed or Obtained for Internal
            Use* ,
            the
            Company has capitalized external direct costs of material and services
            developed
            or obtained for these projects and certain payroll and payroll related
            expenses
            for employees directly associated with these projects. Amortization for
            each
            software project begins when the computer software is ready for its intended
            use.
  *Impairment
            of Long-Lived Assets*
  The
            Company reviews its long-lived assets for impairment when events or
            circumstances indicate that the carrying amount of an asset may not be
            recoverable. If the sum of the expected cash flows, undiscounted and
            without
            interest, is less than the carrying amount of the related asset, an impairment
            loss is recognized as the amount by which the carrying amount of the
            asset
            exceeds its fair value, generally based on discounted cash flow.
   -7-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
  *Royalty
            Advances and Royalty Obligations*
  Royalty
            advances represent payments made and payments to be made to various content
            providers pursuant to minimum guarantees under their royalty agreements,
            net of
            royalties expensed. The corresponding royalty obligations represent payments
            to
            be made to the content providers for audio content delivered pursuant
            to minimum
            guarantees under their royalty agreements. These agreements give the
            Company the
            right to sell digital audio content over the Internet. The royalty obligations
            recorded in the accompanying condensed consolidated Balance Sheets are
            classified between current (included in accrued expenses) and non-current
            based
            on the payment terms specified in the agreements. The Company periodically
            adjusts the balance of these advances to reflect their estimated net
            realizable
            value based on the difference, if any, between the carrying amount of
            the asset
            and the discounted future revenue stream. Royalty expense is included
            in cost of
            content and services revenue in the accompanying condensed consolidated
            Statements of Operations.
 
 *Fair
            Value of Financial Instruments*
  Financial
            instruments that potentially subject the Company to significant concentrations
            of credit risk consist of cash and cash equivalents, short-term investments,
            accounts receivable, accounts receivable from related parties, accounts
            payable
            and accrued expenses. At March 31, 2006 and December 31, 2005, the fair
            values
            of these financial instruments approximated their carrying values due
            to the
            short-term nature of these instruments.
 
 *Foreign
            Currency Translation*
 
 In
            accordance with the provision of Statement of Financial Accounting Standard
            (“SFAS”) No. 52, *Foreign Currency Translation* , ** Audible
            UK, whose functional currency is the British Pound, translates its balance
            sheet
            into U.S. dollars at the prevailing rate at the balance sheet date and
            translates its revenues, costs and expenses at the average rates prevailing
            during each reporting period. Net gains or losses resulting from the
            translation
            of Audible UK's financial statements are accumulated and charged directly
            to
            accumulated other comprehensive income, a component of stockholders'
            equity.
  Since
            the
            inception of Audible UK operations, Audible Inc. has made periodic cash
            fundings
            to Audible UK to assist with the cash flow needs of the start up subsidiary.
            Audible Inc. expects these periodic fundings to continue into the foreseeable
            future. In addition to cash fundings, Audible, Inc. has paid certain
            expenses on
            behalf of the subsidiary, such as a security deposit on office space
            and payroll
            of U.S. employees working on the UK business. All of these fundings were
            made
            with the intention of treating them as a long-term investment. In accordance
            with the provisions of SFAS No. 52, the foreign currency gain/loss at
            each
            reporting period resulting from the inter-company account is recorded to
            accumulated other comprehensive income.
 
 *Reclassifications*
 
 Certain
            prior period amounts have been reclassified to conform to current period
            presentation.
  *Revenue
            Recognition*
  Content
            and Services
 
 Consumer
            content revenue consists primarily of content sales made from the Company's
            Web
            sites and content sold through its agreement with the Apple iTunes Music
            Store.
            At the Company's Web site, customers purchase content either through
            an
            AudibleListener membership plan or on an a la carte basis. When purchased
            on an
            a la carte basis, the Company recognizes revenue from the sale of individual
            content titles in the period when the content is purchased and delivered.
            The
            Company generally recognizes revenue from the sale of a la carte content
            subscriptions pro rata over the term of the subscription period.
 
 The
            “legacy” AudibleListener monthly membership plans generally provide customers
            two audio credits for a fixed monthly fee. Customers may use these audio
            credits
            to download audio of their choice from the Web site. “Legacy” AudibleListener
            audio credits provided under a monthly membership plan have a life of
            30 days,
            after which they expire. The Company recognizes revenue from the sale
            of legacy
            AudibleListener memberships ratably over the AudibleListener's monthly
            membership period, which is 30 days. This results in approximately 50%
            of the
            AudibleListener membership fees received during each calendar month being
            deferred at month end and recognized as content revenue in the following
            month.
 
  -8-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
  In
            December 2005, the Company introduced new AudibleListener membership
            plans,
            designed to provide customers more flexibility in using their audio credits.
            Depending upon the AudibleListener membership plan, customers receive
            and can
“bank” or delay using a maximum number of audio credits, depending on the
            membership plan. The banking feature will result in audio credits being
            used
            (delivered) over different periods for different customers. This may
            result in
            slower revenue growth than the Company experienced in prior periods because
            the
            customer has a longer period of time to use their audio credits. In addition,
            some of the new AudibleListener plans include new membership benefits,
            ranging
            from a complimentary daily newspaper to everyday discounts of 30% on
            a la carte
            purchases. The daily newspaper and 30% discount benefits are “serial” elements
            that are delivered continuously over the membership period, whereas the
            content
            selections underlying the audio credits are discrete elements that are
            delivered
            at different times based on individual customer behavior. As a result
            of the
            characteristics of the new AudibleListener memberships, they are considered
            revenue arrangements with multiple deliverables; however under EITF
            00-21, *Revenue Arrangements with Multiple Deliverables,* because
            the deliverables are not eligible for separation, they are accounted
            for as a
            single unit of accounting. As a result, revenue is recognized for these
            new
            AudibleListener membership plans using the lesser of straight-line or
            proportional performance (based on content delivery) over the maximum
            membership
            period.
 
 Upon
            launch of the new AudibleListener plans in December 2005, the legacy
            AudibleListener plans were no longer available to new customers. Customers
            who
            have legacy memberships have the option of either converting to one of
            the new
            AudibleListener membership plans or continuing their legacy membership.
            Revenue
            is recognized from the sale of UltimateListener, the prepaid discounted
            content
            package, in which the customer receives twelve audio credits, and gift
            programs,
            when the content is downloaded, over the membership period or subscription
            period, as applicable.
  Point
            of Sale Rebates and Discount Certificate Rebates
 
 Part
            of
            the Company's marketing strategy to obtain new AudibleListeners includes
            retail
            promotions in which the Company pays retailers to offer discounts to
            consumers
            on their purchase of AudibleReady devices if they become AudibleListeners
            for
            twelve months. The Company also has retail promotions in which it purchases
            electronic discount certificates or gift cards from retailers and gives
            them
            away to the Company's customers when they sign up to be AudibleListeners
            for
            twelve months. Point of sale rebates, which are discounts given by a
            third party
            retailer to a customer on the purchase of a digital audio player at the
            point of
            sale of the Audible membership, are recorded as a reduction of revenue
            in the
            period the discount is given in accordance with Emerging Issues Task
            Force, or
            EITF, Issue No. 01-9, *Accounting for Consideration Given by a Vendor to a Customer (Including
            a
            Reseller of the Vendor's Products)* ,
            or EITF
            01-9. The cost of discount certificate rebates and gift cards that are
            given to
            a customer by Audible at the time the customer purchases the Audible
            membership
            are recorded as a cost of content and services revenue in accordance
            with EITF
            01-9.
 
 Services
            Revenue
  Corporate
            services revenue consists of library sales and audio production services.
            Where
            applicable, the Company recognizes corporate service revenue as services
            are
            performed after persuasive evidence of an agreement exists, the price
            is fixed,
            and collectibility is reasonably assured. Collectibility is based on
            past
            transaction history and credit-worthiness of the customer.
 
 Hardware
            Revenue
 
 Hardware
            revenue consists of sales of AudibleReady digital audio players. Most
            of the
            Company's AudibleReady digital audio devices are sold at a discount or
            given
            away when a customer signs up for a three or six-month or one-year commitment
            to
            an AudibleListener membership. For multiple-element arrangements in which
            a
            customer signs up for a membership and receives an audio player for free,
            revenue is first allocated to the two elements (device and membership)
            using the
            relative fair value method under EITF Issue No. 00-21. However, the delivered
            item (hardware) is limited to the non-contingent consideration, which,
            for a
            free device, consists of only shipping and handling fees. The free hardware
            device reflects the subsidy incurred to acquire a customer with a commitment
            to
            AudibleListener. For players sold separately, hardware revenue is recognized
            upon shipment of the device, pursuant to a customer order and credit
            card
            authorization and includes amounts received for shipping and
            handling.
 
  -9-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
  Related
            Party Revenue
 
 Related
            party revenue consists of revenue earned under agreements with Audible
            Germany
            (see Note 7) and France Loisirs (see Note 8). Revenue under the Audible
            Germany
            agreement includes $30 earned per month over the initial 30-month term
            of the
            agreement, which began on August 30, 2004. The Company recognizes $30
            per month
            only after Audible Germany has agreed that the services delivered for
            the prior
            60-day period were satisfactory and collection of the amount is reasonably
            assured. Revenue under the France Loisirs agreement includes a $1,000
            technology
            licensing fee that is being recognized on a straight-line basis over
            the initial
            24-month term of the agreement, which began on September 15, 2004. Of
            the
            $1,000, France Loisirs has paid $833 as of March 31, 2006, resulting
            in deferred
            revenue of $187 as of March 31, 2006. Revenue earned under each of these
            agreements also includes consulting services performed by certain of
            the
            Company's employees and reimbursement of certain incremental costs incurred
            by
            the Company that are billed to Audible Germany and France Loisirs in
            accordance
            with EITF Issue 01-14, *Income Statement Characterization of Reimbursement Received for ‘Out-of-Pocket’
Expenses Incurred* .
  Other
            Revenue
  Other
            revenue for the three month period ended March 31, 2005 primarily consisted
            of
            revenue from commissions earned by the Company for referring customers
            to a
            retail partner to purchase a digital audio device, which is recognized
            in the
            period when the purchase is completed. Other revenue for the three month
            period
            ended March 31, 2006 primarily included revenue from fees earned under
            a product
            development and distribution agreement, which is being amortized on a
            straight-line basis over a 58 month period.
 
 Customer
            Concessions
 
 The
            Company defers revenue for expected replacement audio credits based on
            a
            historical experience of the credits issued. The Company defers revenue
            for
            other audio credits and coupons when they are delivered to the customers
            based
            on estimated values. Actual customer credit and coupon issuance and usage
            patterns could differ from the Company's estimates. The concessions are
            recorded
            as a reduction of revenue and an increase to deferred revenue.
 
 *Shipping
            and Handling Costs*
  Shipping
            and handling costs, which consist of costs and fees associated with warehousing,
            fulfillment, and shipment of digital audio devices to customers, are
            recorded as
            a component of marketing expense in the condensed consolidated Statements
            of
            Operations. These costs totaled $79 and $87, for the three month periods
            ended
            March 31, 2006 and 2005, respectively.
  *Cost
            of Content and Services Revenue*
  Cost
            of
            content and services revenue includes royalties incurred on sales of
            content as
            specified by the terms of the content agreements, periodic net realizable
            value
            adjustments to royalty advances, discount certificate rebates, production
            costs
            incurred in connection with creation of certain audio products, and other
            non-recoupable content costs. Royalty expense for sales of content is
            incurred
            based on either a percentage of revenue or a fixed price per title as
            per the
            royalty agreement. In certain cases, the royalty cost per title may differ
            depending upon whether the title is sold as part of the AudibleListener
            membership or sold as an a la carte sale.
 
 *Advertising
            Expenses*
  The
            Company expenses the costs of advertising and promoting its products
            and
            services as incurred. These costs are included in marketing expense in
            the
            accompanying condensed consolidated Statements of Operations and totaled
            $1,831
            and $593 for the three month periods ended March 31, 2006 and 2005,
            respectively.
 
 *Legal
            Fees*
 
 The
            Company expenses legal fees, including those expenses expected to be
            incurred in
            connection with loss contingencies, as incurred.
 
  -10-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
  *Use
            of Estimates*
 
 The
            preparation of financial statements in conformity with U.S. generally
            accepted
            accounting principles requires management to make estimates and assumptions
            that
            affect the reported amounts of assets and liabilities, disclosure of
            contingent
            assets and liabilities at the date of the financial statements, and reported
            amounts of revenues and expenses during the period. Significant items
            subject to
            estimates include the recoverability of the carrying amount of property
            and
            equipment (including internally developed software), the provision for
            refunds
            and chargebacks, customer concessions, recoverability of royalty advances,
            valuation of deferred tax assets, certain accruals and fair value of
            share-based
            compensation. Actual results could differ from those estimates.
 
 *Income
            Taxes*
 
 The
            Company accounts for income taxes using the asset and liability method
            of SFAS
            No. 109, *Accounting for Income Taxes* .
            Under
            the asset and liability method, deferred tax assets and deferred tax
            liabilities
            are recognized for the future tax consequences attributable to differences
            between the financial statement carrying amounts of existing assets and
            liabilities and their respective tax basis and operating loss and tax
            credit
            carryforwards. Deferred tax assets and liabilities are measured using
            enacted
            tax rates expected to apply to taxable income in the years in which those
            temporary differences are expected to be recovered or settled. The effect
            on
            deferred tax assets and liabilities of a change in tax rates is recognized
            in
            results of operations in the period in which the tax change occurs. Deferred
            tax
            assets are reduced, if necessary, by a valuation allowance for any tax
            benefits,
            which are more likely than not, not going to be realized.
 
 *Equity
            Instruments Issued for Goods and Services*
  The
            Company issues warrants to purchase shares of common stock to non-employees
            as
            part of their compensation for providing goods and services. The Company
            accounts for these warrants in accordance with the EITF Issue No.
            96-18, *Accounting for Equity Instruments that are Issued to Other than Employees
            for
            Acquiring, or in Conjunction with Selling, Goods or Services* .
            The
            exercise price of the warrants is determined by the closing price of
            Audible's
            common stock on the day of the agreement. Fair value of the warrant issued
            is
            estimated using the Black-Scholes model with the best available assumptions
            concerning risk-free interest rate, expected term of the warrant, dividend
            yield
            and expected volatility. The fair value of the warrant is expensed on
            a
            straight-line basis over the term of the agreement and is recorded within
            the
            operating expense line item that best represents the nature of the goods
            and
            services provided. Depending on the terms of the warrant, the Company
            applies
            variable plan or fixed plan accounting in accordance with EITF No.
            96-18.
  *Basic
            and Diluted Net (Loss) Income Per Share*
 
 Basic
            net
            (loss) income per share is computed by dividing net (loss) income by
            the
            weighted average number of common shares outstanding for the period.
            Diluted net
            (loss) income per share reflects the potential dilution that could occur
            if
            securities or other contracts to issue common stock were exercised or
            converted
            into common stock and resulted in the issuance of common stock. Potential
            common
            shares consist primarily of incremental shares issuable upon the assumed
            exercise of stock options, warrants and restricted stock units using
            the
            treasury stock method.
 
 For
            the
            three month period ended March 31, 2005, diluted net income per share
            is
            computed by dividing net income by the diluted weighted average common
            shares
            outstanding. For the three month period ended March 31, 2006 diluted
            net loss
            per share is equal to basic net loss per share, since all potential common
            stock
            was anti-dilutive.
 
 The
            reconciliation of weighted average basic common shares outstanding to
            weighted
            average diluted common shares outstanding is as follows:
 
 **Three
                      months ended**
                    **March
                      31,****2006**
                  
                  **2005**Basic
                      weighted average common shares outstanding
                  
                  
                  24,481,751
                  
                  
                  24,008,188Effect
                      of dilutive potential common shares:Stock
                      options
                  
                  
                  --
                  
                  
                  1,796,152Warrants
                  
                  
                  --
                  
                  
                  311,901Restricted
                      stock
                  
                  
                  --
                  
                  
                  1,691Diluted
                      weighted average common shares outstanding
                  
                  
                  24,481,751
                  
                  
                  26,117,932
 
 
  -11-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
  For
            the
            three month period ended March 31, 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 March 31, 2006,
            all
            potential common shares have been excluded from the diluted calculation
            because
            the Company was in a net loss position, and their inclusion would have
            been
            anti-dilutive.
  The
            following table summarizes the potential common shares excluded from
            the diluted
            calculation:
 
 **Three
                      months ended**
                    **March
                      31,****2006**
                  
                  **2005**Stock
                      options
                  
                  
                  2,529,781
                  
                  
                  356,860Warrants
                  
                  
                  716,723
                  
                  
                  429,443Restricted
                      Stock
                  
                  
                  270,457
                  
                  
                  4,000
 
 *Share-Based
            Compensation*
  The
            Company's 1999 Stock Incentive Plan (the “Plan”) permits the granting of stock
            options, stock appreciation rights, restricted or unrestricted stock
            awards,
            performance rights and other stock-based awards to employees. For options
            granted to new Audible employees as part of their compensation package,
            the
            exercise price is determined by the closing price of Audible's common
            stock on
            the day immediately preceding each employee's start date. For the majority
            of
            additional option grants made to existing employees, the exercise price
            is
            determined based on the closing price of the day immediately preceding
            the grant
            date. The majority of the options granted vest over a fifty-month period
            and
            expire ten years from the date of the grant. All stock-based compensation
            is
            granted through share-based employee compensation plans maintained by
            Audible.
 
 The
            number of authorized common shares available for issuance under the Plan
            is
            5,700,000 shares. As of March 31, 2006 and December 31, 2005, options
            to
            purchase 2,529,781 and 2,629,809, respectively, shares of common stock
            were
            outstanding. As of March 31, 2006 and December 31, 2005, 270,457 and
            261,557,
            respectively, of restricted share awards had been granted, net of
            forfeitures.
 
 Effective
            January 1, 2006, the Company adopted SFAS No. 123 (revised), *“Share-Based
            Payment* ”
(“SFAS
            123R") utilizing the modified prospective approach. Prior to the adoption
            of
            SFAS 123R, stock option grants were accounted for in accordance with
            the
            intrinsic value method prescribed in Accounting Principles Board Opinion
            No. 25, *"Accounting
            for Stock Issued to Employees"* ("APB
            25") and accordingly, no compensation expense was recognized for these
            awards
            except for awards that had intrinsic value on the grant date. Restricted
            stock
            was also accounted for under APB 25 and compensation expense was recognized
            for
            restricted stock awards based on intrinsic value (which was equal to
            fair
            value).
 
 Under
            the
            modified prospective approach, SFAS 123R applies to all new awards and
            to
            previously issued awards that were unvested on January 1, 2006, and awards
            that
            are modified, repurchased or cancelled after January 1, 2006. Compensation
            expense recognized in the first quarter of 2006 includes compensation
            cost for
            all share-based payments granted prior to, but not yet vested as of January
            1,
            2006, based on the grant-date fair value estimated in accordance with
            the
            original provisions of SFAS 123, and compensation expense for all share-based
            payments granted subsequent to January 1, 2006, based on the grant-date
            fair
            value estimated in accordance with the provisions of SFAS 123R. Prior
            periods
            were not restated to reflect the impact of adopting the new standard.
            Total
            compensation expense for share-based payment arrangements recognized
            for the
            three months ended March 31, 2006 and 2005 was $1,094 and $37, respectively.
            At
            March 31, 2006, Audible had $9,002 of unrecognized compensation expense
            related
            to share-based payments which is expected to be recognized over a
            weighted-average period of 2.48 years. No compensation cost was capitalized
            in
            any asset for the three month period ended March 31, 2006.
 
 The
            unearned share-based compensation related to stock options and restricted
            stock
            awards is being amortized to compensation expense over the requisite
            service
            period. The Plan does not make a separate reference to provisions regarding
            participant retirement and the vesting terms in stock options and restricted
            stock awards relating to participants eligible for retirement; therefore,
            in
            accordance with the provisions of SFAS 123R, compensation expense, for
            stock
            options and restricted stock awards to participants that are retirement
            eligible
            on the grant date, is amortized to compensation expense over the requisite
            service period, rather than immediately at the grant date.
 
  -12-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
 
 The
            Company receives a tax deduction for certain stock option exercises,
            generally
            for the intrinsic value of the award on the exercise date and a tax deduction
            for increases in the value of restricted stock upon vesting. Prior to
            the
            adoption of SFAS 123R, all tax benefits resulting from the exercise of
            stock
            options and restricted stock were reported as operating cash flows in
            the
            condensed consolidated Statements of Cash Flows. SFAS 123R requires the
            cash
            flows resulting from tax benefits in excess of the compensation costs
            recognized
            for these options (excess tax benefits) to be classified as financing
            cash
            flows. Further, under SFAS 123R, excess tax benefits are recognized as
            a credit
            to additional paid-in capital only in the period in which the deduction
            reduces
            income taxes payable. Since the Company currently has significant net
            operating
            loss ("NOL") carryforwards that are fully reserved through the valuation
            allowance, any excess tax benefits related to the exercise of stock options
            will
            not be recorded until after the Company utilizes its NOL carryforwards to
            reduce current income taxes payable. For the three months ended March 31,
            2006 and 2005, there was none and $22, respectively, excess tax benefit
            recognized resulting from share-based compensation. The Company’s net cash
            proceeds from the exercise of stock options were $151 and $66 for the
            three
            months ended March 31, 2006 and 2005, respectively.
 
 All
            stock
            incentives (options and restricted stock) issued to employees and non-employee
            directors are awarded according to the applicable plan terms. The source
            of
            shares for exercised stock options and delivery of vested restricted
            stock are
            newly issued shares.
 
 As
            a
            result of adopting SFAS 123R on January 1, 2006, the Company’s loss from
            operations, loss before income taxes, and net loss for the three month
            period
            ended March 31, 2006 is $673 higher than if it had continued to account
            for
            share-based compensation under APB Opinion No. 25. Basic and diluted
            net loss
            per common share for the three months ended March 31, 2006 was $0.02 higher
            than if the Company had continued to account for share-based compensation
            under APB opinion No. 25.
  On
            November 10, 2005, the FASB issued FASB Staff Position 123(R)-3 (“FSP 123R-3”), *“Transition
            Election Related to Accounting For the Tax Effects of Share-Based Payment
            Awards”* ,
            that
            provides an elective alternative transition method of calculating the
            pool of
            excess tax benefits available to absorb tax deficiencies recognized subsequent
            to the adoption of SFAS 123R (the “APIC Pool”) to the method otherwise required
            by paragraph 81 of SFAS 123R. The Company may take up to one year from
            the
            effective date of this FSP to evaluate its available alternatives and
            make its
            one-time election. The Company is currently evaluating the alternative
            methods,
            however neither alternative would have an impact on the Company’s results of
            operations or financial condition for the three months ended March 31,
            2006, due
            to the fact that the Company currently has net operating loss carryforwards
            and
            has not realized any tax benefits under SFAS 123R. Until and unless the
            Company
            elects the transition method described in this FSP, the Company will
            follow the
            transition method described in paragraph 81 of SFAS 123R.
 
 The
            following table illustrates the effect on the Company’s net income and net
            income per common share had the Company accounted for share-based compensation
            in accordance with SFAS 123 for the three months ended March 31,
            2005:
 
 **Three
                      Months Ended****March
                      31, 2005**Net
                      income, as reported
                  
                  $
                  891Add:
                      Total share-based employee compensation expense included in
                      reported net
                      income
                  
                  
                  37Deduct:
                      Total share-based employee compensation expense determined
                      under the fair
                      value method for all awards
                  
                  
                  (532
                  )Pro
                      forma net income
                  
                  $
                  396Basic
                      net income per common share:As
                      reported
                  
                  $
                  0.04Pro
                      Forma
                  
                  $
                  0.02Diluted
                      net income per common share:As
                      reported
                  
                  $
                  0.03Pro
                      forma
                  
                  $
                  0.02
 
  -13-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
  The
            Company has on occasion issued options to employees to purchase shares
            of common
            stock at a price less than the fair value of the stock at the time of
            issuance.
            Prior to the adoption of SFAS 123R, the difference between the fair value
            on
            grant date and the exercise price of options issued, as well as the value
            of
            restricted stock on the grant date, was accounted under APB 25 and was
            recorded
            as deferred compensation, a component of stockholders' equity, and was
            amortized
            as compensation expense on a straight-line basis over the vesting term
            of the
            option or restricted stock, as applicable. In connection with the adoption
            of
            SFAS 123R, the unamortized deferred compensation balance of $3,696 at
            December
            31, 2005 relating to previous grants of options that had intrinsic value
            at the
            time of issuance and restricted stock was eliminated against additional
            paid-in
            capital on January 1, 2006.
 
 *Stock
            Options*
  The
            Company uses the Black-Scholes option pricing model to estimate the fair
            value
            of stock options with the following weighted-average assumptions for
            the
            indicated periods:
 
 **Three
                      Months Ended****March
                      31,****2006**
                  
                  **2005**Dividend
                      yield
                  
                  
                  --
                  
                  
                  --Expected
                      volatility
                  
                  
                  76.6
                  %
                  
                  121.0
                  %Risk-free
                      interest rate
                  
                  
                  4.50
                  %
                  
                  4.19
                  %Expected
                      life of option (years)
                  
                  
                  4.63
                  
                  
                  5.00
 
 The
            assumptions above are based on multiple factors, including historical
            exercise
            patterns of employees in relatively homogeneous groups with respect to
            exercise
            and post-vesting employment termination behaviors, expected future exercising
            patterns for these same homogeneous groups and both the implied and historical
            volatility of the Company’s stock price. The expected life of the option
            represents the period of time that the option granted is expected to
            be
            outstanding. Expected volatility is calculated based on the historical
            and
            implied volatility of the Company’s stock price. The risk free interest rate is
            based on the U.S. Treasury yield curve commensurate with the expected
            term in
            effect at the time of grant. Management monitors employee termination
            patterns
            to estimate future forfeiture rates. The estimated annual forfeiture
            rate is
            3.64% for stock options.
 
 The
            following table represents stock option activity for the three months
            ended
            March 31, 2006:
 
 **Stock
                      Options**
                  
                  **Number
                      of Shares**
                  
                  **Weighted-Average
                      Exercise Price Per Share**
                  
                  **Aggregate
                      Intrinsic Value**
                  
                  **Weighted-Average
                      Remaining Contractual Life**Balance,
                      December 31, 2005
                  
                  
                  2,629,809
                  
                  $
                  8.13
                  
                  
                  
                  
                  
                  6.98
                      YearsGranted
                  
                  
                  13,100
                  
                  $
                  10.85Exercised
                  
                  
                  (60,346
                  )
                  $
                  2.51Forfeited
                  
                  
                  (52,381
                  )
                  $
                  12.77Expired
                  
                  
                  (401
                  )
                  $
                  21.24Balance,
                      March 31, 2006
                  
                  
                  2,529,781
                  
                  $
                  8.18
                  
                  $
                  12,733
                  
                  
                  6.71
                      YearsOptions
                      exercisable at March 31, 2006
                  
                  
                  1,760,288
                  
                  $
                  8.14
                  
                  $
                  9,465
                  
                  
                  6.09
                      YearsVested
                      and expected to vest at March 31, 2006
                  
                  
                  2,497,470
                  
                  $
                  8.16
                  
                  $
                  12,622
                  
                  
                  6.69
                      Years
 
  -14-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
  The
            following table summarizes stock option activity for the three months
            ended
            March 31:
 
 **Stock
                      Options**
                  
                  **2006**
                  
                  **2005**Weighted-average
                      grant date fair value of options granted
                  
                  $
                  6.86
                  
                  $
                  19.40Total
                      fair value of options that vested during the period
                  
                  $
                  803
                  
                  $
                  525Total
                      intrinsic value of options exercised during the period
                  
                  $
                  456
                  
                  $
                  398
 
 *Restricted
            Stock*
 
 During
            the three month periods ended March 31, 2006 and 2005, the Company granted
            awards to receive 12,400 and 28,000 restricted stock, respectively, to
            employees
            under the Plan. The restricted shares either cliff-vest or vest periodically
            between three months to forty-eight months after the grant date. During
            the
            three month periods ended March 31, 2006 and 2005, 3,500 and no units
            of
            restricted stock were forfeited due to employee termination. The fair
            value of
            restricted stock on the grant date is determined by the closing price
            of
            Audible's stock on the day immediately preceding the grant date. Actual
            shares
            under these awards are not issued until vesting is complete. Under the
            terms of
            the restricted stock awards, unless different provisions are noted on
            the
            restricted stock award, the Company is required to issue to the recipient
            the
            number of whole shares of common stock that equals the number of vested
            whole
            restricted stock shares following the date on which the restricted stock
            share
            becomes vested. An estimated annual forfeiture rate of 2.35% was used
            to
            estimate expected future forfeitures of restricted stock.
 
 The
            following table summarizes nonvested restricted stock activity for the
            three
            months ended March 31, 2006:
 
 **Weighted-Average
                      Grant-Date****Nonvested
                      Restricted Stock**
                  
                  **Shares**
                  
                  **Fair
                      Value**Nonvested
                      at December 31, 2005
                  
                  
                  258,083
                  
                  $
                  16.23Granted
                  
                  
                  12,400
                  
                  $
                  11.37Vested
                  
                  
                  (1,667
                  )
                  $
                  12.82Forfeited
                  
                  
                  (3,500
                  )
                  $
                  13.71Nonvested
                      at March 31, 2006
                  
                  
                  265,316
                  
                  $
                  16.06
 
 The
            following table summarizes restricted stock activity for the three months
            ended
            March 31:
 
 **Restricted
                      Stock**
                  
                  **2006**
                  
                  **2005**Weighted-average
                      grant date fair value of shares granted
                  
                  $
                  11.37
                  
                  $
                  16.14Total
                      fair value of shares that vested during the period
                  
                  $
                  21
                  
                  $
                  --
  Total
            stock available for future stock option and restricted stock grants is
            approximately 1,545,000.
 
  -15-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
  **(3)**  **Property
            and Equipment**
 
 Property
            and equipment at March 31, 2006 and December 31, 2005 consists of the
            following:
 
 **March
                      31,**
                    **2006**
                  
                  **December
                      31, 2005**Studio
                      equipment
                  
                  $
                  660
                  
                  $
                  652Computer
                      server and Web site equipment
                  
                  
                  8,890
                  
                  
                  6,599Software
                      licenses
                  
                  
                  4,235
                  
                  
                  745Office
                      furniture and equipment
                  
                  
                  1,583
                  
                  
                  1,558Leasehold
                      improvements
                  
                  
                  983
                  
                  
                  975Internally
                      developed software
                  
                  
                  2,361
                  
                  
                  1,357Work
                      in process
                  
                  
                  371
                  
                  
                  3,283Total
                      property and equipment
                  
                  
                  19,083
                  
                  
                  15,169Less:
                      accumulated depreciation and amortization
                  
                  
                  (8,132
                  )
                  
                  (7,010
                  )Total
                      property and equipment, net
                  
                  $
                  10,951
                  
                  $
                  8,159
  Depreciation
            and amortization expense on property and equipment totaled $1,122 and
            $139,
            during the three month periods ended March 31, 2006 and 2005,
            respectively.
 
 At
            March
            31, 2006 and December 31, 2005, respectively, the gross amount of property
            and
            equipment and related accumulated amortization recorded under capital
            leases
            were as follows:
  **March
                      31,**
                    **2006**
                  
                  
                  **December
                      31, 2005**Computer
                      server and Web site equipment
                  
                  $
                  743
                  
                  $
                  743Less:
                      accumulated amortization
                  
                  
                  (499
                  )
                  
                  (437
                  )Total
                      computer server and Web site equipment, net
                  
                  $
                  244
                  
                  $
                  306
 
 **(4)**  **Accrued
            Expenses**
  The
            components of the accrued expenses balance are as follows:
 
 **March
                      31,**
                    **2006**
                  
                  
                  **December
                      31, 2005**Professional
                      fees
                  
                  $
                  933
                  
                  $
                  1,084Revenue
                      sharing and bounty payments
                  
                  
                  908
                  
                  
                  774Retail
                      rebates and discounts
                  
                  
                  589
                  
                  
                  578Refunds
                      and chargebacks
                  
                  
                  178
                  
                  
                  287Marketing
                  
                  
                  222
                  
                  
                  468Accrued
                      expense - related parties
                  
                  
                  292
                  
                  
                  333Royalty
                      obligations
                  
                  
                  315
                  
                  
                  293Other
                      accrued expenses
                  
                  
                  905
                  
                  
                  985Total
                      accrued expenses
                  
                  $
                  4,342
                  
                  $
                  4,802
 
  -16-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
  **(5)**  **Stockholders'
            Equity**
 
 The
            following is a summary of the consolidated Stockholders' Equity activity
            for the
            three month period ended March 31, 2006:
 
 **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, 2005
                  
                  
                  24,326,503
                  
                  $
                  243
                  
                  
                  --
                  
                  $
                  --
                  
                  $
                  192,547
                  
                  $
                  (3,696
                  )
                  
                  15
                  
                  $
                  (130,714
                  )
                  $
                  58,395Exercise
                      of common stock warrants
                  
                  
                  166,666
                  
                  
                  2
                  
                  
                  
                  
                  
                  
                  
                  
                  748
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  750Exercise
                      of common stock options
                  
                  
                  60,346
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  
                  151
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  151Repurchase
                      of treasury stock
                  
                  
                  
                  
                  
                  
                  
                  
                  (36,500
                  )
                  
                  (360
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (360
                  )Retirement
                      of treasury stock
                  
                  
                  (36,500
                  )
                  
                  
                  
                  
                  36,500
                  
                  
                  360
                  
                  
                  (360
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  --Share-based
                      compensation expense
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,094
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,094Elimination
                      of deferred compensation upon FAS 123R adoption
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (3,696
                  )
                  
                  3,696
                  
                  
                  
                  
                  
                  
                  
                  
                  --Foreign
                      currency translation adjustment
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (5
                  )
                  
                  
                  
                  
                  (5
                  )Net
                      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (3,040
                  )
                  
                  (3,040
                  )Balance
                      at March 31, 2006
                  
                  
                  24,517,015
                  
                  $
                  245
                  
                  
                  --
                  
                  
                  --
                  
                  $
                  190,484
                  
                  $
                  --
                  
                  $
                  10
                  
                  $
                  (133,754
                  )
                  $
                  56,985
 
  -17-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
                  thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
 
 *Common
            Stock*
  As
            of
            March 31, 2006 and December 31, 2005, the Company had issued 24,517,015
            and
            24,326,503 respectively, shares of common stock. As of March 31, 2006
            and
            December 31, 2005, the Company had 3,516,961 and 3,774,755, respectively,
            shares
            of common stock reserved for common stock warrants, options and restricted
            stock.
  *Warrants*
  The
            Company issues common stock warrants to third parties in exchange for
            services.
            The fair values of warrants issued in exchange for services are determined
            by
            the Black-Scholes model, in accordance with EITF Issue No. 96-18 and
            are
            recognized as an expense under fixed plan or variable accounting depending
            on
            the terms of the agreements over the periods in which services are being
            performed. The assumptions used in the Black-Scholes pricing model to
            calculate
            fair values, including risk-free interest rate and volatility, are determined
            using available information on the measurement date. Expected dividend
            yield of
            zero is used for all calculations. There were no warrants issued in the
            2006 or
            2005 periods. All warrants previously issued were fully vested as of
            December
            31, 2004. Accordingly, there was no expense related to warrants recognized
            during the three month periods ended March 31, 2006 or 2005.
 
 *Common
            Stock Repurchase Program and Treasury Stock*
 
 In
            February 2006, the Company's Board of Directors authorized a new common
            stock
            repurchase program, pursuant to which the Company may from time to time
            repurchase (through open market repurchases at prevailing market prices),
            up to
            an aggregate of $25,000 of the Company's outstanding common stock. During
            the
            three month period ended March 31, 2006, 36,500 shares were repurchased
            at an
            average price of $9.86. The Company subsequently legally retired the
            treasury
            stock. At the February 8, 2005 Board of Directors meeting, the Board
            voted that
            all 229,741 shares of common stock held as treasury shares by the Company
            were
            to be retired, and the Company subsequently legally retired the treasury
            stock.
            As of March 31, 2006 and December 31, 2005, the Company held no shares
            of common
            stock as treasury stock.
 
 *Comprehensive
            (Loss) Income*
 
 The
            following table sets forth comprehensive (loss) income for the periods
            indicated:
 
 **Three
                      month period ended****March
                      31,****2006**
                  
                  
                  **2005**Net
                      (loss) income
                  
                  $
                  (3,040
                  )
                  $
                  891Other
                      comprehensive income:Foreign
                      currency translation adjustment
                  
                  
                  (5
                  )
                  
                  --Comprehensive
                      (loss) income
                  
                  $
                  (3,045
                  )
                  $
                  891
 
 **(6)
            Audible UK**
 
 In
            February 2005, the Company launched Audible UK, a spoken audio Web site
            service
            mirroring the audible.com service, but focused on the UK marketplace.
            Audible,
            Inc. purchased one share of Audible UK stock on February 7, 2005, which
            at that
            date became a wholly-owned subsidiary of Audible Inc. Audible UK began
            commercial operations in June 2005.
  **(7)
            Audible Germany Agreement**
 
 On
            August
            30, 2004, the Company, Verlagsgruppe Random House GmbH (“Random House”) and
            Holtzbrinck Networxs AG (“Holtzbrinck”) entered into a joint venture agreement
            (the “Joint Venture”) to form Audible GmbH (“Audible Germany”). Random House is
            an affiliate of Bertelsmann AG. Bertelsmann AG and its affiliates own
            approximately 5.6% of Audible's common stock, inclusive of certain common
            stock
            warrants held by the entities.
   -18-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                  in thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
  Audible
            Germany has the exclusive rights to operate a German language Audible
            Web site.
            Under the Joint Venture, Random House and Holtzbrinck each contributed
            approximately $17 in exchange for each receiving a 24.5% interest in
            Audible
            Germany. The Company was required to contribute $34 in exchange for a
            51%
            interest in Audible Germany. After the initial formation, Random House
            and
            Holtzbrinck were to provide additional financing of approximately $1,490
            each in
            certain installments, subject to Audible Germany meeting certain milestones.
            The
            full amount has been funded by Random House and Holtzbrinck. In the event
            of
            liquidation of Audible Germany, this additional financing by Random House
            and
            Holtzbrinck accrues interest at 8% per annum and is senior to Audible's
            capital
            investment. The Company may, but is not obligated to, contribute additional
            capital to the entity. Any profits distributed by Audible Germany are
            to be
            distributed in accordance with the ownership interests.
  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 has sufficient
            equity to permit it to finance the activities in which it is currently
            engaged
            in without additional subordinated financial support. In addition, the
            other
            criteria within FIN 46R that would characterize Audible Germany as a
            variable
            interest entity 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. The initial investment
            was reduced
            to zero during 2004. Audible has no further obligation to fund the operations
            of
            Audible Germany. The Company will continue to monitor its portion of
            unreported
            equity losses in the event that Audible Germany subsequently generates
            income.
            The Company would resume applying the equity method after its share of
            profits
            equals the unreported equity method losses.
 
 In
            connection with the Joint Venture, on August 30, 2004, the Company entered
            into
            a license and services agreement with Audible Germany (the “License”). Under the
            License, Audible Germany has launched a German language spoken word audio
            service. The terms provide for the Company to provide intellectual property
            and
            substantially all of the technological infrastructure for the operation
            of the
            service. In return, Audible Germany is required to pay Audible $30 each
            month
            for a period of 30 months, beginning in September 2004. Every 60 days
            during
            this agreement, the parties meet to review and accept the services. The
            monthly
            payments are subject to refund if Audible Germany does not accept the
            services,
            subject to reasonable cure. Under the License, Audible recognizes $30
            of revenue
            per month once Audible Germany has agreed that the services delivered
            for the
            prior 60-day period were satisfactory and collection of the amount is
            reasonably
            assured. Also under the License, Audible Germany will pay the Company
            royalties
            ranging from 0.5% to 3% of revenue up to an annual royalty cap of the
            U.S.
            dollar equivalent of €1.5 million, subject to Audible Germany achieving certain
            operating margins. No royalties have been received by the Company under
            the
            License.
 
 During
            the three month periods ended March 31, 2006 and 2005, the Company recognized
            $90 and $120 respectively, in related party revenue under the license
            agreement
            as the related services were delivered and accepted on or before March
            31, 2006
            and 2005, respectively. In addition, the Company also recognized $108
            and $20,
            in billings for certain consulting services and related incremental reimbursable
            costs incurred in connection with the License in accordance with EITF
            01-14
            during the three month periods ended March 31, 2006 and 2005, respectively.
            These amounts are included in related party revenue on the condensed
            consolidated Statements of Operations.
 
 **(8)
            France Loisirs Agreement**
 
 On
            September 15, 2004, the Company, France Loisirs S.A.S. (“France Loisirs”) and
            Audio Direct S.A.S., a wholly owned subsidiary of France Loisirs (“Audio
            Direct”), entered into a 24-month Master Alliance Agreement (the “Agreement”).
            France Loisirs is a wholly owned subsidiary of Bertelsmann AG. Bertelsmann
            AG
            and its affiliates own 5.6% of Audible's common stock, inclusive of certain
            common stock warrants held by the entities.
 
  -19-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                  in thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
  Under
            the
            Agreement, in the first quarter of 2005, France Loisirs launched a French
            language spoken word audio service through Audio Direct. The terms provide
            for
            Audible to provide intellectual property and substantially all of the
            technological infrastructure for the operation of the service. In return,
            France
            Loisirs is required to pay Audible $1,000, payable as follows: $250 in
            September
            2004, $250 in October 2004, $250 in January 2005 and $21 for each of
            the
            following 12 months. As of March 31, 2006, the Company had received the
            three
            installments of $250 each and four monthly payments of the $21. Commencing
            the
            first fiscal year after the business achieves positive net income, the
            Company
            will receive a royalty of 5% of the business's net paid revenue. Net
            paid
            revenue refers to net revenues for digital spoken word content after
            the
            deduction of taxes but excluding certain hardware revenue. The 5% royalty
            will
            apply until the business net paid revenue exceeds €20,000,000. Once net paid
            revenue exceeds €20,000,000, the Company will receive a flat fee of €1,000,000.
            If net paid revenue exceeds €33,300,000, the Company will receive a royalty
            payment of €1,000,000, plus 3% of net paid revenue in excess of €33,300,000. An
            additional royalty is payable equal to one-half of the distributable
            pre-tax
            profits of the business.
  FIN
            46R
            addresses the consolidation by business enterprises of variable interest
            entities (VIEs) and requires that if an enterprise is the primary beneficiary
            of
            a variable interest entity, the assets, liabilities, and results of the
            activities of the variable interest entity should be consolidated in
            the
            financial statements of the enterprise.
  Audio
            Direct is considered a VIE because its equity is not sufficient to permit
            the
            entity to finance its activities without additional subordinated financial
            support. Audible and France Loisirs form a related party group, as defined
            in
            FIN 46R, as a result of the Bertelsmann affiliation and the number of
            seats that
            Bertelsmann holds on the Audible Board of Directors. Under FIN 46R, the
            entity
            within the related party group that is most closely associated with the
            variable
            interest entity is the primary beneficiary.
  Based
            upon analysis, the Company determined that France Loisirs is more closely
            associated with Audio Direct, primarily because France Loisirs is required
            to
            fund the operations of Audio Direct, including the $1,000 payment due
            to
            Audible. France Loisirs is therefore considered to be the primary beneficiary
            of
            Audio Direct. As a result, the Company does not consolidate the results
            of Audio
            Direct but rather accounts for its variable interest in Audio Direct
            under the
            cost method of accounting.
  Because
            the Company has not made and is not required to provide any funding to
            France
            Loisirs or Audio Direct, it has no exposure to loss under the
            Agreement.
 
 The
            $1,000 in fees are non-refundable and not subject to any acceptance provisions.
            Since fair values do not exist for the different services (elements)
            that
            Audible is providing, the services are considered a single unit of accounting
            under EITF 00-21 and accordingly, the $1,000 in fees is recognized as
            related
            party revenue on a straight-line basis over the 24-month term at the
            rate of $42
            per month, provided collectibility is reasonably assured.
 
 During
            the three month periods ended March 31, 2006 and 2005, the Company recognized
            $125 in related party revenue in connection with the Agreement, representing
            the
            straight-line recognition of $1,000 in revenue being recognized over
            the
            24-month term of the Agreement. As of March 31, 2006 and December 31,
            2005, $63
            and $187, respectively, was recorded as deferred revenue related to the
            Agreement. In addition, for the three month periods ended March 31, 2006
            and
            2005 the Company recognized $50 and $10, respectively, in billings for
            certain
            consulting services and related incremental reimbursable costs incurred
            in
            connection with the Agreement in accordance with EITF 01-14. These amounts
            are
            included in related party revenue on the condensed consolidated Statements
            of Operations.
 
 **(9)
            Product Development, Licensing, Marketing and Distribution
            Agreement**
 
 On
            May
            16, 2005, the Company entered into a five-year agreement with a new
            content provider to develop, license, market and distribute audio
            content. The Company will be paid an exclusivity fee, a product development
            fee and production fees for audio content produced under the
            agreement. In addition, the Company will make royalty and revenue
            sharing payments to the publisher based on sales of the products produced.
            As of March 31, 2006, the Company billed the publisher $606, of which
            $575 has
            been received as of March 31, 2006, in connection with this agreement. The
            fees associated with this agreement are being amortized over a 58 month
            period
            beginning in the month the Company commenced production of audio through
            the
            expiration of the agreement. During the three months ended March 31,
            2006 and
            2005, $65 and none, respectively, was recorded as other revenue in connection
            with this agreement. As of March 31, 2006 and December 31, 2005, the
            Company
            recorded $255 and $171 and $252 and $99 as deferred revenue current
            and non-current, respectively, on the accompanying condensed consolidated
            Balance Sheet, relating to this agreement, representing cash received
            in advance
            of being recognized as revenue.
 
  -20-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                  in thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
  **(10)
            Commitments and Contingencies**
 
 *Lease
            Obligations*
  The
            Company has an operating lease on its office space in Wayne, New Jersey
            that
            expires in December 2008. The lease contains a renewal option for a period
            of
            three years. In February 2005, Audible UK signed a one year lease for
            office
            space, which includes office amenities. This lease was subsequently amended
            in
            the second quarter of 2005 for additional space and will expire in May
            2006.
            Total future minimum lease obligations as of March 31, 2006 under these
            lease
            arrangements are $1,701.
  Rent
            expense of $126 and $100 was recorded under operating leases for the
            three month
            periods ended March 31, 2006 and 2005, respectively.
 
 There
            are
            no future minimum lease payments due under capital leases as of March
            31, 2006,
            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
            paid. The
            royalty obligations recorded in the accompanying condensed consolidated
            Balance
            Sheets are classified between current and non-current based on the payment
            terms
            specified in the agreements, and relate to audio content that has been
            delivered
            to Audible. Royalty obligations pursuant to minimum guarantees for audio
            content
            to be delivered in the future are reflected as a commitment in the table
            below.
 
 *Service
            Agreements*
 
 The
            Company has entered into operational and marketing agreements and purchase
            orders with various vendors to provide certain contracted services. The
            majority
            of the amounts committed are for hosting services related to the Company's
            Web site.
  *Committed
            Purchases*
 
 Committed
            purchases represent agreements the Company has made for future purchases
            of
            goods and service. The balance primarily consists of consulting services
            for
            technology and development projects and marketing services.
 
 **Summary
            of Cash Commitments and Obligations**
  The
            following table shows future cash payments due under the Company's commitments
            and obligations as of March 31, 2006:
 
 **Year**
                  
                  
                  **Operating
                      Leases**
                  
                  
                  
                  **Royalty
                      Obligations**
                    **(1)**
                  
                  
                  
                  **Service
                      Agreements**
                  
                  
                  
                  **Committed
                      Purchases**
                  
                  
                  
                  **Total**2006
                  
                  $
                  545
                  
                  
                  $
                  593
                  
                  
                  $
                  1,887
                  
                  
                  $
                  1,045
                  
                  
                  $
                  4,0702007
                  
                  
                  609
                  
                  
                  
                  283
                  
                  
                  
                  1,253
                  
                  
                  
                  --
                  
                  
                  
                  2,1452008
                  
                  
                  547
                  
                  
                  
                  1
                  
                  
                  
                  835
                  
                  
                  
                  --
                  
                  
                  
                  1,3832009
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  1
                  
                  
                  
                  --
                  
                  
                  
                  12010
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --2011
                      and thereafter
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --Total
                  
                  $
                  1,701
                  
                  
                  $
                  877
                  
                  
                  $
                  3,976
                  
                  
                  $
                  1,045
                  
                  
                  $
                  7,599
 
 (1)
            Of
            the $877 in total royalty obligations, $315 is recorded in accrued expenses
            and
            $190 is recorded as royalty obligations, non-current, in the accompanying
            condensed consolidated Balance Sheet as of March 31, 2006. The remaining
            obligation of $372 relates to content that has not yet been delivered
            as of
            March 31, 2006.
 
  -21-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                  in thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
 
 **Contingencies**
 
 Various
            legal actions, claims, assessments and other contingencies arising in
            the normal
            course of business, including certain matters described below, are pending
            against the Company. These matters are subject to many uncertainties,
            and it is
            possible that some of these matters could be ultimately decided, resolved
            or
            settled adversely. The Company has recorded accruals for losses related
            to those
            matters which it considers to be probable and that can be reasonably
            estimated.
            Although the ultimate amount of liability at March 31, 2006 that may
            result from
            those matters for which accruals have been recorded is not ascertainable,
            the
            Company believes that any amounts exceeding the recorded accruals would
            not
            materially affect its financial condition.
 
 In
            June
            2001, the Company and certain of its officers were named as defendants
            in a
            securities class action filed in United States District Court for the
            Southern
            District of New York related to its initial public offering in July 1999.
            The
            lawsuits also named certain of the underwriters of the IPO as well as
            certain of
            the Company's officers and directors and former directors as defendants.
            Approximately 300 other issuers and their underwriters have had similar
            suits
            filed against them, all of which are included in a single coordinated
            proceeding
            in the Southern District of New York (the “IPO Litigations”). An amendment
            complaint was filed on April 19, 2002. The complaints allege that the
            prospectus
            and the registration statement for the IPO failed to disclose that the
            underwriters allegedly solicited and received “excessive” commissions from
            investors and that some investors in the IPO allegedly agreed with the
            underwriters to buy additional shares in the aftermarket in order to
            inflate the
            price of the Company's stock. The Company and certain of its officers,
            directors, and former directors were named in the suits pursuant to Section
            11
            of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934,
            and
            other related provisions. The complaints seek unspecified damages, attorneys'
            and expert fees, and other unspecified litigation costs.
  On
            July
            1, 2002, the underwriter defendants in the consolidated actions moved
            to dismiss
            all of the IPO Litigations, including the action involving the Company.
            On July
            15, 2002 the Company along with other non-underwriter defendants in the
            coordinated cases also moved to dismiss the IPO Litigations. On February
            19,
            2003, the court ruled on the motions. The court granted the Company's
            motion to
            dismiss the claims against the Company under Rule 10b-5, due to the
            insufficiency of the allegations against the Company. The motions to
            dismiss the
            claims under Section 11 of the Securities Act were denied as to virtually
            all of
            the defendants in the consolidated cases, including the Company. The
            Company's
            individual officers, directors and former director defendants in the
            IPO
            Litigation signed a tolling agreement and were dismissed from the action
            without
            prejudice on October 9, 2002.
  In
            June
            2003, a proposed settlement of this litigation was reached among the
            plaintiffs,
            the issuer defendants in the consolidated actions, the issuer officers
            and
            directors named as defendants, and the issuers' insurance companies.
            The
            settlement would provide, among other things, a release for the Company
            and for
            the individual defendants for the conduct alleged to be wrongful in the
            amended
            complaint. The Company would agree to undertake other responsibilities
            under the
            partial settlement, including agreeing to assign away, not assert, or
            release
            certain potential claims the Company that may have against the underwriters.
            Any
            direct financial impact of the proposed settlement is expected to be
            borne by
            the Company's insurance carriers.
 
 In
            June
            2004, the proposed settlement was submitted to the court for preliminary
            approval. The court requested that any objections to preliminary approval
            of the
            settlement be submitted by July 14, 2004, and the underwriter defendants
            formally objected to the settlement. The plaintiff and issuer defendants
            separately filed replies to the underwriter defendants' objections to
            the
            settlement on August 4, 2004. The court granted preliminary approval
            on February
            15, 2005, subject to certain modifications. On August 31, 2005, the court
            issued
            a preliminary order further approving the modifications to the settlement
            and
            certifying the settlement cases. The court also appointed the Notice
            Administrator for the settlement and ordered that notice of the settlement
            be
            distributed to all settlement class members beginning on November 15,
            2005 and
            completed by January 15, 2006. The settlement fairness hearing was held
            on April
            24, 2006, and the court reserved decision. If the court determines that
            the
            settlement is fair to the class members, the settlement will be approved.
            There
            can be no assurance that this proposed settlement would be approved and
            implemented in its current form, or at all.
  Due
            to
            the inherent uncertainties of litigation and because the settlement approval
            process is not complete, the Company cannot accurately predict the ultimate
            outcome of the matter.
 
 Starting
            on or about February 22, 2005, several class actions were filed against
            Audible
            and two of the Company's executives in the United States District Court
            for the
            District of New Jersey.  The plaintiffs purport to represent a class
            consisting of all persons (other than Audible's officers and directors
            and their
            affiliates) who purchased the Company's securities between November 2,
            2004 and
            February 15, 2005 (the "Class Period").  The plaintiffs allege that the
            defendants violated Section 10(b) of the Securities Exchange Act of 1934
            and
            Rule 10b-5 there under by failing to make complete and accurate disclosures
            concerning the Company's future plans and prospects.  The individual
            defendants are also alleged to be liable under Section 20(a) of the Exchange
            Act.  All of the defendants are alleged to have sold stock at inflated
            prices during the Class Period.
  -22-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                  in thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
  On
            or
            about April 20, 2006, the Company provided the plaintiffs’ counsel in the
            consolidated securities class actions with a memorandum in support of
            a motion
            to dismiss the consolidated amended class action complaint. The plaintiffs’
counsel is scheduled to provide the Company with a memorandum in opposition
            to
            the motion on or about June 26, 2006. The Company will then have thirty
            days to
            provide the plaintiffs’ counsel with a reply memorandum. At the suggestion of
            the Court, the Company has agreed with the plaintiffs’ counsel not to file the
            motion to dismiss and the supporting papers until the briefing has been
            completed. The Company cannot predict the ultimate outcome of this
            matter.
  In
            April
            2005, a derivative action was filed in the state court of New Jersey
            against
            Audible, the two executives named as individual defendants in the class
            actions
            described above, six of the Company's outside directors, and three of
            the
            Company's stockholders.  The derivative action makes the same factual
            allegations as the class actions described above and adds allegations
            that the
            six outside directors named as defendants and/or the stockholders who
            nominated
            them sold stock at inflated prices at or about the time of the secondary
            offering of securities that the Company made in November 2004. The plaintiff
            in
            this derivative action purports to seek a recovery of the damages allegedly
            sustained by Audible rather than by investors who allegedly purchased
            securities
            at inflated prices.
 
 In
            May
            2005, the Company learned of a second derivative action which was filed
            during
            April 2005 in the United States District Court for the District of New
            Jersey
            against Audible, the two executives named as individual defendants in
            the class
            actions described above, and all seven of the Company's outside directors.
            The
            derivative action makes the same allegations as the class actions described
            above and adds allegations that all of the individual defendants are
            responsible
            for an alleged failure of internal controls that resulted in the 45-day
            delay in
            the filing of the Company's Form 10-K for 2004. The plaintiff in this
            derivative
            action purports to seek a recovery of the damages allegedly sustained
            by Audible
            rather than by investors who allegedly purchased securities at inflated
            prices.
 
 The
            plaintiffs in the derivative actions voluntarily agreed to stay those
            actions
            pending the outcome of the Company’s motion to dismiss the class actions
            described above.
 
 In
            December 2005, the United States District Court for the District of New
            Jersey
            consolidated the class action, appointed a group of lead plaintiffs and
            appointed lead plaintiff’s counsel. By prior agreement, the plaintiff’s
            consolidated amended complaint was filed on February 14, 2006.
 
 On
            or
            about April 20, 2006, the Company provided the plaintiffs’ counsel in the
            consolidated securities class actions with a memorandum in support of
            a motion
            to dismiss the consolidated amended class action complaint. The plaintiffs’
counsel is scheduled to provide the Company with a memorandum in opposition
            to
            the motion on or about June 26, 2006. The Company will then have thirty
            days to
            provide the plaintiffs’ counsel with a reply memorandum. At the suggestion of
            the Court, the Company has agreed with the plaintiffs’ counsel not to file the
            motion to dismiss and the supporting papers until the briefing has been
            completed.
 
 The
            Company believes that all of the claims described above are without merit
            and
            intends to defend the actions vigorously. Due to the inherent uncertainties
            of
            litigation and because these actions are at a preliminary stage, the
            Company
            cannot accurately predict the ultimate outcome of these matters.
 
 In
            May
            2005, Digeo, Inc. commenced an action against Audible for patent infringement
            in
            Federal District Court in the State of Washington. The Company has filed
            an
            answer asserting the patent is invalid and unenforceable and that its
            services
            do not fall within the scope of the claims of the Digeo patent. The parties
            are
            in the midst of discovery. 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.
 
 **(11)
            Supplemental Disclosure of Cash Flow Information**
  **Cash
            Paid for Interest and Taxes**
 
 The
            Company paid interest of $0 and $1 during the three month periods ended
            March
            31, 2006 and 2005, respectively.
  No
            income
            taxes were paid in the three month periods ended March 31, 2006 and
            2005.
   -23-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                  in thousands, except share and per share data)**
 **(Unaudited)**
 Table
                  of Contents
 
 **(12)   Customer
            Concentration**
  For
            the
            three month periods ended March 31, 2006 and 2005, Apple Computer accounted
            for
            22.4% and 14.0% of total revenue, respectively.
 
 As
            of
            March 31, 2006 and December 31, 2005, Apple Computer accounted for 84.7%
            and
            62.1%, respectively, of the Company's accounts receivable.
  **(13)
            Financial Information by Geographic Area**
 
 Revenues
            and long-lived assets for the Company's United States and United Kingdom
            operations are as follows:
  **March
                    31, 2006**
                  
                  
                  **United
                      States**
                  
                  
                  **United
                      Kingdom**
                  
                  
                  
                  **Consolidated**Revenues
                  
                  $
                  19,149
                  
                  $
                  566
                  
                  
                  $
                  19,715Long-lived
                      assets
                  
                  
                  11,800
                  
                  
                  39
                  
                  
                  
                  11,839**March
                      31, 2005**Revenues
                  
                  $
                  12,905
                  
                  $
                  --
                  
                  
                  $
                  12,905Long-lived
                      assets
                  
                  
                  1,274
                  
                  
                  --
                  
                  
                  
                  1,274
  
  -24-
 
 Table of
            Contents
 
 **ITEM
            2. Management's Discussion and Analysis of
            Financial Condition and Results of Operations**
 (dollars
            in thousands except share and per share data)
 
 *The
            following discussion and analysis of our financial condition and results
            of
            operations should be read in conjunction with our audited consolidated
            financial
            statements and notes thereto appearing in our 2005 Annual Report on Form
            10-K.
            This discussion and analysis contains forward-looking statements that
            involve
            risks and uncertainties. Our actual results may differ materially from
            those
            anticipated in these forward-looking statements as a result of a number
            of
            factors.*
 
 *This
            Quarterly Report on Form 10-Q contains forward-looking statements and
            information relating to our Company. We generally identify forward-looking
            statements using words like “believe,” “intend,” “will,” “expect,” “may,”
“should,” “plan,” “project,” “contemplate,” “anticipate,” “seek” or similar
            terminology. These statements are based on our beliefs as well as assumptions
            we
            made using information currently available to us. Because these statements
            reflect our current views concerning future events, these statements
            involve
            risks, uncertainties and assumptions. Actual results may differ significantly
            from the results discussed in these forward-looking
            statements.*
  **Overview**
  Our
            Business
 
 Our
            goal
            is to be the preeminent supplier of spoken-word digital audio on the
            Internet.
            At our Web sites, our customers can select, purchase, and download spoken
            audio
            of their choice of nearly 100,000 hours and over 30,000 different programs
            amongst a wide range of categories. Our AudibleListener membership plans
            provide
            our customers a wide variety of monthly and annual membership options,
            depending
            upon their listening preferences. Customers can access our content at
            our Web
            sites, www.audible.com (United States) and www.audible.co.uk (United
            Kingdom),
            or at our related parties Web sites, www.audible.de (Germany) and www.audible.fr
            (France), or at Amazon.com and at the Apple iTunes music store.
 
 Key
            Business Metrics
 
 For
            the
            three months ended March 31, 2006, we generated total revenue of $19,715
            and a
            net loss of $3,040. During this period, we acquired approximately 79,000
            new
            AudibleListeners, up from approximately 54,000 acquired in the first
            three
            months of 2005. This increase in new AudibleListeners acquired resulted
            in total
            AudibleListeners of approximately 279,000 as of March 31, 2006, compared
            to
            approximately 245,000 as of December 31, 2005 and approximately 186,000
            at March
            31, 2005.
 
 Churn,
            a
            measure of AudibleListener member cancellation rate, increased in the
            first
            three months of 2006 over 2005, due primarily to the increase in new
            AudibleListeners acquired through free trial programs, which subsequently
            paid
            for a membership after the free trial and then cancelled. Churn is defined
            as
            member cancellations in the period divided by the sum of members at the
            beginning of the period plus gross member adds, divided by three months. 
Members that are financially delinquent are counted as churn. As a result
            of
            experiencing higher churn on free trial programs, we have reduced our
            reliance
            on acquiring new AudibleListeners through trial programs.
  The
            average monthly churn in AudibleListener Members in the first quarter
            of 2006
            was 4.6% compared to 4.8% in the fourth quarter of 2005 and 4.0% in the
            first
            quarter of 2005.
 
 For
            2006,
            our major goals include increasing the number of new AudibleListeners
            we
            acquire, continuing to increase the breadth and depth of content that
            we offer
            to our customers, reducing our churn rate and increasing customer
            satisfaction.
 
 We
            expect
            that our net revenues during 2006 will grow over 2005 levels, primarily
            from
            continuing to increase the number of AudibleListeners we acquire, improving
            the
            merchandising of our content to our customers, reducing the monthly churn
            rate
            and increasing customer satisfaction.
 
 Members
            of our senior leadership team regularly review key operating metrics
            such as new
            AudibleListeners acquired, customer purchase patterns, customer satisfaction,
            churn rate, Web site performance and effectiveness of our marketing programs.
            We
            believe that an understanding of these key metrics as well as financial
            measures
            and how they change over time is important to us as well as to other
            parties
            analyzing our business results and future market opportunities.
 
 The
            discussion of our condensed consolidated financial results contained
            herein is
            intended to assist investors, analysts and other parties reading this
            report to
            better understand the key operating and financial measures as well as
            the
            changes in our consolidated results of operations, and the primary factors
            that
            accounted for these changes.
  -25-
 
 Table of
            Contents
  **Critical
            Accounting Policies**
 
 The
            Securities and Exchange Commission defines “critical accounting policies” as
            those accounting policies that require application of management's most
            difficult, subjective and complex judgments, often as a result of the
            need to
            make estimates about the effect of matters that are inherently uncertain
            and may
            change in subsequent periods. Based on this definition, we have identified
            the
            critical accounting policies and judgments addressed below. We have other
            significant accounting policies, which involve the use of estimates,
            judgments,
            and assumptions that are significant to understanding our results. For
            additional information, see Note 2, *Summary of Significant Accounting Policies,* of our
            condensed consolidated financial statements. Although we believe that
            our
            estimates, judgments and assumptions are reasonable, they are based upon
            information presently available. Actual results may differ significantly
            from
            these estimates under different assumptions, judgments or
            conditions.
  Our
            critical accounting policies are as follows:
  ***Revenue
            Recognition***
  We
            derive
            our revenue from four main categories:
 
 ·
                  Content
                      and services revenue, which includes consumer content and corporate
                      services;·
                  Hardware
                      revenue;·
                  Related
                      party revenue; and·
                  Other
                      revenue.
  *Content
            and Services.* Consumer
            content revenue consists primarily of content sales made from our Web
            sites and
            content sold through our agreement with the Apple iTunes Music Store.
            At our Web
            site, customers purchase content either through an AudibleListener membership
            plan or on an a la carte basis. When purchased on an a la carte basis,
            we
            recognize revenue from the sale of individual content titles in the period
            when
            the content is purchased and delivered. We generally recognize revenue
            from the
            sale of a la carte content subscriptions pro rata over the term of the
            subscription period.
 
 Our
            “legacy” AudibleListener monthly membership plans generally provide customers
            two audio credits for a fixed monthly fee. Customers may use these audio
            credits
            to select content of their choice from our Web site. “Legacy” AudibleListener
            audio credits provided under a monthly membership program have a life
            of 30
            days, after which they expire. We recognize revenue from the sale of
            legacy
            AudibleListener memberships ratably over the AudibleListener's monthly
            membership period. This results in approximately 50% of the AudibleListener
            membership fees received during each calendar month being deferred at
            month end
            and recognized as content revenue in the following month.
 
 In
            December 2005, we introduced new AudibleListener membership plans, designed
            to
            provide our customers more flexibility in using their audio credits.
            Depending
            upon the AudibleListener membership plan, customers can receive and “bank” or
            delay using up to a maximum number of audio credits, depending on the
            membership
            plan. The banking feature will result in audio credits being used (delivered)
            over different periods for different customers. In addition, some of
            the new
            AudibleListener plans include new membership benefits, ranging from a
            complimentary daily newspaper to everyday discounts of 30% on a la carte
            purchases. The daily newspaper and 30% discount benefits are “serial” elements
            that are delivered continuously over the membership period, whereas the
            content
            selections underlying the audio credits are discrete elements that are
            delivered
            at different times based on individual customer behavior. As a result
            of the
            characteristics of the new AudibleListener memberships, they are considered
            revenue arrangements with multiple deliverables, however under Emerging
            Issues
            Task Force, or EITF No. 00-21, *Revenue Arrangements with Multiple Deliverables* ,
            because
            the deliverables are not eligible for separation, they are accounted
            for as a
            single unit of accounting. As a result, we recognize revenue for these
            new
            AudibleListener plans using the lesser of straight-line or proportional
            performance (based on content delivery) over the maximum membership period.
            This
            may result in a decrease in revenue or slower revenue growth than we
            experienced
            in prior periods because the customer has a longer period of time to
            use their
            audio credits. For example, a customer may pre-pay an annual membership
            for
            twelve audio credits and not use any credits for six months. Due to the
            revenue
            recognition model described above, this revenue will be deferred until
            the
            customer uses the audio credits.
 
 Upon
            launch of the new AudibleListener plans in December 2005, the legacy
            AudibleListener programs were no longer available to new customers. Customers
            who have legacy memberships have the option of either converting to one
            of the
            new AudibleListener membership plans or continuing their legacy
            membership.
 
  -26-
 
 Table of
            Contents
  *Provision
            for Refunds and Chargebacks*
 
 In
            the
            normal course of business, customers may contact us or contact their
            credit card
            company to request an adjustment for a purchase the customer paid us
            for in the
            past. Customers may contact us to request a refund for various reasons.
            We
            record a provision for expected refunds and chargebacks relating to revenue
            that
            was recognized in a previous period. The calculation of the provision
            for
            estimated refunds and chargebacks is based on historical refund rates
            and sales
            patterns. The provision is recorded as a reduction of revenue. A portion
            of the
            resulting reserve is classified as a reduction of accounts receivable
            based on
            an estimate of refunds and chargebacks that will be made related to sales
            that
            were collected by the credit card processor but not remitted to us at
            period-end. The remaining portion of the reserve is reflected as an accrued
            liability at period-end. Actual results could differ from our
            estimates.
 
 *Customer
            Concessions*
 
 In
            the
            normal course of business, customers may contact us to request a concession
            for
            a purchase the customer paid us for in the past, which they are unsatisfied
            with. Depending on the specific customer facts and circumstances, we will
            provide the customer a replacement or complimentary credit or a coupon.
            With our
            legacy AudibleListener plans, customers on occasion request that we replace
            an
            audio credit that expired before the customer had an opportunity to use
            it.
            Other customers may request an audio credit or coupon because they have
            had a
            specific problem with content downloading or audio quality. We defer
            revenue for
            expected replacement audio credits based on historical experience of
            the credits
            issued. We defer revenue for other audio credits and coupons when they
            are
            delivered to the customers based on estimated values. The concessions
            are
            recorded as a reduction of revenue and an increase to deferred revenue.
            Actual
            customer credit and coupon issuance and usage patterns could differ from
            our
            estimates.
 
 ***Royalty
            Expense***
  Royalty
            expense is the largest component of cost of content and services revenue,
            and
            includes amortization of guaranteed royalty obligations to various content
            providers, royalties incurred on sales of content, and net realizable
            value
            adjustments to royalty advances. Many of our early content provider agreements
            contained a requirement to pay guaranteed amounts to the provider. Anticipating
            that sales from these agreements would not be sufficient to recoup the
            amount of
            the guarantees, we adopted a policy of amortizing royalty guarantees
            straight-line over the term of the royalty agreement, or expensing the
            royalty
            guarantees as incurred, whichever was sooner. In addition, each quarter
            we
            review and compare any remaining unamortized guarantee balance with current
            and
            projected sales by provider to determine if any additional net realizable
            value
            adjustments are required. Royalty expense for sales of content is incurred
            based upon either a percentage of revenue or a fixed price per title
            in
            accordance with the terms of the applicable royalty agreement. The royalty
            cost
            per title may differ depending upon whether the title is sold as part
            of an
            AudibleListener membership or sold as an a la carte sale. Actual sales
            could
            differ from our estimates of projected sales.
 
 ***Internal-Use
            Software***
 
 In
            accordance with Statement of Position 98-1, *Accounting for the Costs of Computer Software Developed or Obtained for
            Internal
            Use* ,
            all
            costs incurred for the development of internal use software that relate
            to the
            planning and post implementation phases of the development are expensed.
            Direct
            costs incurred in the development phase are capitalized and recognized
            over the
            software's estimated useful life, generally two years, commencing at the
            time the software is ready for its intended use. Research and development
            costs
            and other computer software maintenance costs related to software development
            are expensed as incurred. We review the capitalized software costs for
            impairment when events or circumstances indicate that the carrying amount
            of an
            asset may not be recoverable. If the sum of the expected cash flows,
            undiscounted and without interest, is less than the carrying amount of
            the
            related asset, an impairment loss is recognized as the amount by which
            the
            carrying amount of the asset exceeds its fair value. There has been no
            impairment loss recognized as of March 31, 2006. Actual cash flows could
            differ
            from our expectations.
 
 ***Warrants
            Issued To Non Employees In Exchange For Goods and
            Services***
  We
            occasionally issue warrants to purchase shares of common stock to non-employees
            as part of their compensation for providing goods and services. We account
            for
            these warrants in accordance with EITF Issue No. 96-18, *Accounting for Equity Instruments that are Issued to Other than Employees
            for
            Acquiring, or in Conjunction with Selling, Goods or Services* ,
            or EITF
            96-18. The exercise price of the warrants is determined by the closing
            price of
            our common stock on the day of the agreement. The fair value of the warrant
            issued is estimated using the Black-Scholes model. Application of management's
            judgment is required in determining the assumptions concerning risk free
            interest rate, expected term of the warrant, dividend yield and expected
            volatility to be used in the Black-Scholes model. The fair value of the
            warrant
            is expensed on a straight-line basis over the term of the agreement and
            is
            recorded within the operating expense line item that best represents
            the nature
            of the goods and services provided. Depending on the terms of the warrant,
            we
            apply variable plan or fixed plan accounting in accordance with EITF
            96-18.
   -27-
 
 Table of
            Contents
  ***Employee
            Stock-Based Compensation Arrangements***
  In
            accordance with SFAS 123(R), we measure compensation cost for stock awards
            at
            fair value and recognize compensation over the service period for awards
            expected to vest. Estimating the portion of stock awards that will ultimately
            vest requires judgment, and to the extent actual results or updated estimates
            differ from our current estimates, such amounts are recorded in the period
            estimates are revised. We consider many factors when estimating expected
            forfeitures, including types of awards, employee class, and historical
            experience. We also consider many factors when estimating expected volatility
            and expected life of the option. Actual results, and future changes in
            estimates, may differ substantially from our current estimates.
 
 **Results
            of Operations**
 
 The
            following table sets forth certain financial data for the periods indicated
            as a
            percentage of total revenue for the three month periods ended March 31,
            2006 and
            2005:
 
 **Three
                      Months Ended**
                    **March
                      31,****2006**
                  
                  **2005**Revenue,
                      net:Content
                      and services revenue:Consumer
                      content
                  
                  
                  97.8
                  %
                  
                  99.5
                  %Point
                      of sale rebates
                  
                  
                  (0.9
                  )
                  
                  (2.8
                  )Services
                  
                  
                  0.2
                  
                  
                  0.2Total
                      content and services revenue
                  
                  
                  97.1
                  
                  
                  96.9Hardware
                      revenue
                  
                  
                  0.6
                  
                  
                  0.8Related
                      party revenue
                  
                  
                  1.9
                  
                  
                  2.1Other
                      revenue
                  
                  
                  0.4
                  
                  
                  0.2Total
                      revenue, net
                  
                  
                  100.0
                  
                  
                  100.0Operating
                      expenses:Cost
                      of content and services revenue:Royalties
                      and other content charges
                  
                  
                  40.5
                  
                  
                  32.2Discount
                      certificate rebates
                  
                  
                  1.5
                  
                  
                  4.7Total
                      cost of content and services revenue
                  
                  
                  42.0
                  
                  
                  36.9Cost
                      of hardware revenue
                  
                  
                  3.4
                  
                  
                  2.3Cost
                      of related party revenue
                  
                  
                  0.8
                  
                  
                  0.2Operations
                  
                  
                  15.7
                  
                  
                  14.3Technology
                      and development
                  
                  
                  18.7
                  
                  
                  12.6Marketing
                  
                  
                  21.8
                  
                  
                  17.5General
                      and administrative
                  
                  
                  16.2
                  
                  
                  11.9Total
                      operating expenses
                  
                  
                  118.6
                  
                  
                  95.7(Loss)
                      income from operations
                  
                  
                  (18.6
                  )
                  
                  4.3Other
                      income, net
                  
                  
                  3.3
                  
                  
                  3.2(Loss)
                      income before income taxes
                  
                  
                  (15.3
                  )
                  
                  7.5Income
                      tax expense
                  
                  
                  (0.0
                  )
                  
                  (0.6
                  )Net
                      (loss) income
                  
                  
                  (15.3
                  )%
                  
                  6.9
                  %
 
  -28-
 
 Table of Contents
  ***Three
            month period ended March 31, 2006 compared to three month period ended
            March 31,
            2005***
  **Three
                      Months ended**
                    **March
                      31,****2006**
                  
                  **2005****(unaudited)**
                  
                  **(unaudited)**
                  
                  **$
                      Change**
                  
                  **%
                      Change****Content
                        and service revenue:**$
                  19,147
                  
                  $
                  12,501
                  
                  $
                  6,646
                  
                  
                  53.2
                  %
  *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 due to growth in AudibleListener memberships
            and sales
            at the Apple iTunes Music Store. AudibleListener membership growth was
            driven
            mainly through online marketing channels and our marketing partnerships
            with
            retailers and device manufacturers. Our AudibleListener membership count
            grew
            from approximately 186,000 at March 31, 2005, to approximately 279,000
            at March
            31, 2006. We recognized in revenue approximately $4,421 and $1,805 from
            sales of
            Audible content at the Apple iTunes Music Store during the three months
            ended
            March 31, 2006 and 2005, respectively. Our customer count and AudibleListener
            membership count excludes customers that purchase Audible content directly
            from
            the Apple iTunes Music Store. We believe continuing consumer adoption
            of digital
            downloading, increased consumer awareness of the Audible service, customer
            satisfaction and improved marketing will continue to drive AudibleListener
            membership growth and growth in sales at the Apple iTunes Music Store.
            As we
            continue to acquire new AudibleListener members who may choose to roll
            over
            their audio credits, our ability to recognize revenue will be dependent
            upon
            audio credit usage patterns of individual members. This will result in
            an
            increase in deferred revenue and may result in a decrease or slower growth
            in
            our revenue as compared to prior periods.
 **Three
                        Months ended**
                      **March
                        31,****2006**
                    
                    **2005****(unaudited)**
                    
                    **(unaudited)**
                    
                    **$
                        Change**
                    
                    **%
                        Change****Hardware
                          revenue:**$
                    125
                    
                    $
                    104
                    
                    $
                    21
                    
                    
                    20.2
                    %
 
 *Hardware
            revenue* consists
            of revenue derived primarily from the shipping and handling charge to
            customers
            on devices that Audible provides for free to AudibleListeners who commit
            to a
            twelve month AudibleListener membership. Under EITF No. 00-21, *Revenue Arrangements with Multiple Deliverables* ,
            with
            these multiple-element arrangements (membership plus device), we recognize
            only shipping and handling fees as revenue for the delivery of hardware
            because
            all other consideration paid by the customer is contingent upon delivery
            of the
            content. Revenue is recognized upon shipment, assuming all other criteria
            are
            met. Also included are separate sales of digital audio players to consumers
            and
            libraries.
 **Three
                        Months ended**
                      **March
                        31,****2006**
                    
                    **2005****(unaudited)**
                    
                    **(unaudited)**
                    
                    **$
                        Change**
                    
                    **%
                        Change****Related
                          party revenue:**$
                    373
                    
                    $
                    275
                    
                    $
                    98
                    
                    
                    35.6
                    %
  *Related
            party revenue* consists
            of revenue recognized in connection with our agreements with France Loisirs
            and
            Audible Germany, which were entered into in September 2004.
  Related
            party revenue during the three months ended March 31, 2006 and 2005,
            included
            $125 in fees earned from our agreement with France Loisirs, representing
            the
            straight-line recognition of $1,000 in fees we will receive pursuant
            to the
            arrangement, which is being recognized over the initial 24-month term
            of the
            agreement through September 14, 2006, as well as $50 and $10, during
            the three
            months ended March 31, 2006 and 2005, respectively, in billings to France
            Loisirs for certain consulting services and reimbursement of related
            incremental
            costs. Related party revenue during the three months ended March 31,
            2006 and
            2005, also included $90 and $120, respectively, in fees earned from our
            agreement with Audible Germany, as well as $108 and $20, respectively,
            in
            billings to Audible Germany for certain consulting services and reimbursement
            of
            related incremental costs incurred by us in connection with our license
            and
            services agreement.
 
  -29-
 
 Table of
            Contents
 **Three
                        Months ended**
                      **March
                        31,****2006**
                    
                    **2005****(unaudited)**
                    
                    **(unaudited)**
                    
                    **$
                        Change**
                    
                    **%
                        Change****Other
                          revenue:**$
                    70
                    
                    $
                    25
                    
                    $
                    45
                    
                    
                    180.0
                    %
 *Other
            revenue* for the
            three months ended March 31, 2006 primarily included $65 of revenue earned
            under
            a product development agreement with a publishing partner, which commenced
            in
            May 2005. Amounts payable to us under this agreement are being recognized
            on a
            straight-line basis over the 58 month term of the agreement. The remaining
            balance of other revenue for the three months ended March 31, 2006 and
            other
            revenue for the three months ended March 31, 2005 included commissions
            earned by
            us for referring customers to a retail partner to purchase a digital
            audio
            device. We recognize the commissions in the period when the purchase
            is
            completed and the amounts are known and determinable.
 
 
 **Three
                      Months ended**
                    **March
                      31,****2006**
                  
                  **2005****(unaudited)**
                  
                  **(unaudited)**
                  
                  **$
                      Change**
                  
                  **%
                      Change****Cost
                        of content and service revenue:**Royalties
                      and other content charges
                  
                  $
                  7,983
                  
                  $
                  4,153
                  
                  $
                  3,830
                  
                  
                  92.2
                  %Discount
                      certificate rebates
                  
                  $
                  298
                  
                  $
                  601
                  
                  $
                  (303
                  )
                  
                  (50.4
                  )%


consists
        primarily of royalties incurred, discount certificate rebates, and the
        amortization of publisher royalty advances.
 
 Royalties
        and other content charges as a percentage of total content and services revenue
        increased from the three months ended March 31, 2005 to March 31, 2006 from
        33.2% to 41.7%. This increase was primarily due to the increasing percentage
        of
        revenue from sales at the Apple iTunes Music store, which yields a higher
        royalty cost as a percentage of revenue, as well as the impact of higher
        royalty
        rates from publishers. Discount certificate rebates, introduced in 2004,
        are
        electronic discount certificates or gift cards given to certain AudibleListeners
        who commit to joining an AudibleListener plan for twelve months. AudibleListener
        customers use these when purchasing an AudibleReady digital audio player
        from a
        third-party retailer. The decrease in discount certificate rebates is primarily
        attributable to a decrease in activity of our retail rebate
        program.
 **Three
                    Months ended**
                  **March
                    31,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Cost
                      of hardware revenue:**$
                675
                
                $
                294
                
                $
                381
                
                
                129.6
                %
  *Cost
        of hardware revenue* consists
        of the cost of digital audio players that are given away or sold to
        customers.
  In
        the
        third quarter of 2005, we changed the model of the digital audio player to
        an
        iPod, which we give away to certain AudibleListener members. The iPod was
        more
        expensive than the device we previously provided. As a result, cost of hardware
        revenue increased.
 **Three
                    Months ended**
                  **March
                    31,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Cost
                      of related party revenue:**$
                158
                
                $
                30
                
                $
                128
                
                
                426.7
                %
  *Cost
        of related party revenue* consists
        of costs we have incurred in connection with our agreements with France Loisirs
        and Audible Germany, which were entered into in September 2004.
 
 Cost
        of
        related party revenue for the three months ended March 31, 2006 and 2005,
        included $50 and $10 respectively, for France Loisirs, and $108 and $20
        respectively, for Audible Germany. These costs primarily consisted of payroll
        costs related to services for France and Germany operations, performed by
        certain employees of our technology, development, and audio
        departments.
 
 -30-
 
 Table of
          Contents
 **Three
                    Months ended**
                  **March
                    31,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Operations
                      expense:**$
                3,102
                
                $
                1,847
                
                $
                1,255
                
                
                67.9
                %
  *Operations* expense
        consists of payroll and related expenses for content acquisition, education,
        editorial, audio recording and conversion, programming, customer service
        and
        credit card fees. Related expenses include outside consultants and professional
        fees.
  Operations
        expense increased in the 2006 period versus 2005 primarily due to $756 in
        higher
        personnel expenses, $178 in higher credit card fees, and $180 in higher outside
        service expenses. These increases were primarily related to the increased
        scale
        of our business, improving the quality of customer service, and the launch
        of
        Audible UK.
 
 **Three
                    Months ended**
                  **March
                    31,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Technology
                      and development:**$
                3,694
                
                $
                1,625
                
                $
                2,069
                
                
                127.3
                %
  *Technology
        and development* expense
        consists of payroll and related expenses for information technology, systems
        and
        telecommunications infrastructure, as well as technology licensing
        fees.
 
 The
        increase in technology and development expense from the 2005 period to the
        2006
        period was primarily due to $889 in higher depreciation and amortization
        expense, $553 in higher personnel expenses, $358 in higher maintenance and
        repair costs, as well as an increase in supplies purchased, $132 in higher
        outside services expenses, and $105 in higher Web site hosting fees. Many
        of
        these higher costs were related to the development of our new AudibleListener
        plans, enhancing the capacity and performance of our Web site, and the launch
        of
        Audible UK.
 **Three
                    Months ended**
                  **March
                    31,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Marketing:**$
                4,301
                
                $
                2,260
                
                $
                2,041
                
                
                90.3
                %
  *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 2006 period versus 2005 primarily due to increases
        of $1,238 in higher advertising and promotional expenses, $644 in higher
        personnel expenses, and $121 in higher revenue sharing and bounty payments.
        Most
        of these higher expenses were directed towards strengthening our marketing
        and
        business development teams and obtaining new AudibleListeners. As we continue
        to
        build the AudibleListener membership base, we expect our marketing expenses
        to
        continue to grow.
 **Three
                    Months ended**
                  **March
                    31,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****General
                      and administrative:**$
                3,201
                
                $
                1,536
                
                $
                1,665
                
                
                108.4
                %
  *General
        and administrative* expense
        consists primarily of payroll and related expenses for executive, finance
        and
        administrative personnel. Also included are legal fees, audit fees, public
        company expenses and other general corporate expenses.
  The
        increase in general and administrative expense in the 2006 period versus
        2005
        was primarily due to $941 in increased personnel expenses, $616 in increased
        legal and other professional fees and $151 in higher job search and placement
        fees.
  **Three
                    Months ended**
                  **March
                    31,****2006**
                
                **2005****(unaudited)**
                
                **(unaudited)**
                
                **$
                    Change**
                
                **%
                    Change****Other
                      Income:**Other
                    income, net
                
                $
                660
                
                $
                413
                
                $
                247
                
                
                59.8
                %
  *Other
        Income, net* consists
        of interest income and interest expense. The increase in other income, net
        was
        mainly due to interest earned on the investment of funds in short-term
        investments, which consisted of governmental agency notes and mortgage-backed
        securities. We began to make these investments in November 2004.
  
 -31-
 
 Table of
          Contents
 
 **Factors
        Affecting Operating Results**
 
 We
        have
        only a limited operating history with which to evaluate our business and
        prospects. Our limited operating history and the emerging nature of the market
        for internet-delivered audio content makes predicting our future operating
        results difficult. In addition, while we commenced operations in 1997, our
        prospects nonetheless should be considered in light of the risks and
        uncertainties encountered by companies in the early stages of development
        in new
        and rapidly evolving markets, specifically the rapidly evolving market for
        delivery of audio content over the internet. These risks include our ability
        to:
 
 **·** Acquire
        and retain customers;
 **·** Sell
        Audible content through www.audible.com and
        www.audible.co.uk;
 **·** Sell
        Audible content through the Apple iTunes Music Store;
 **·** Control
        customer acquisition, cost of content, and other costs;
 **·** Minimize
        customer churn rate;
 **·** Build
        awareness and acceptance of audible.com, the AudibleReady format and
        AudibleReady devices;
 **·** Extend
        existing and acquire new content provider relationships;
 **·** Compete
        against other companies that provide services similar to ours; and
 **·** Generate
        cash from operations and/or raise additional capital.
  If
        we
        fail to manage these risks successfully, it would materially and adversely
        affect our financial performance.
  We
        believe that our success will depend largely on our ability to extend our
        leadership position as a provider of premium digital spoken audio content
        over
        the Internet. Accordingly, we plan to continue to invest in marketing, content
        acquisition and operations.
 
 As
        of
        March 31, 2006, we were not a party to any derivative financial instruments
        or
        other financial instruments or hedging investments that expose us to material
        market risk. We currently do not plan to enter into any derivative instruments
        or engage in any hedging activities.
 
 We
        have
        incurred significant losses since inception and as of March 31, 2006, we
        had an
        accumulated deficit of $133,754.
 
 Our
        operating results have varied on a quarterly basis during our operating history
        and may fluctuate significantly in the future as a result of a variety of
        factors, many of which are outside of our control. Factors that may affect
        our
        operating results include but are not limited to: (1) the demand for the
        Audible
        service; (2) sales of Audible content through the Apple iTunes Music Store;
        (3)
        the availability of premium audio content; (4) sales and consumer usage of
        AudibleReady devices; (5) our ability to acquire new customers; (6) our ability
        to retain existing customers; (7) the introduction of new products or services
        by a competitor; (8) the cost and availability of acquiring sufficient Web
        site
        capacity to meet our customers' needs; (9) technical difficulties with our
        computer system or the internet or system downtime; (10) the cost of acquiring
        audio content; (11) the amount and timing of capital expenditures and other
        costs relating to the expansion of our international operations; (12) successful
        expansion of the Audible service in the UK; (13) continuous management and
        compliance with Sarbanes-Oxley requirements; and (14) general economic
        conditions and economic conditions specific to electronic commerce and online
        media. In the past, we experienced fluctuations in demand for the Audible
        service based on the level of marketing expenditures, the occurrence of external
        publicity and the quality of our software and Web site. Any one of these
        factors
        could cause our revenue and operating results to vary significantly in the
        future. In addition, as a strategic response to changes in the competitive
        environment, we may from time to time make pricing, service or marketing
        decisions that could cause significant declines in our quarterly
        revenue.
 
 Because
        we have a number of fixed expenses, we may be unable to adjust our spending
        in a
        timely manner to compensate for unexpected revenue shortfalls. Accordingly,
        any
        significant shortfall in relation to our expectations could cause significant
        declines in our operating results. We believe that our quarterly revenue,
        expenses and operating results could vary significantly in the future, and
        that
        period-to-period comparisons should not be relied upon as indications of
        future
        performance. Due to the foregoing factors, it is likely that in some future
        quarters our operating results will fall below the expectations of securities
        analysts and investors, which could have a material adverse effect on the
        trading price of our common stock.
 
 **Liquidity
        and Capital Resources**
 
 From
        inception through the date prior to our initial public offering, we financed
        our
        operations through private sales of our redeemable convertible preferred
        stock
        and warrants. Net proceeds from the sales of redeemable convertible stock
        and
        warrants prior to our initial public offering were $28,719. In July 1999,
        we
        completed our initial public offering and received net proceeds of $36,856.
        From
        the time of our IPO we have raised $15,860 in net proceeds through the private
        sale of shares of our convertible preferred stock (all of which were
        subsequently converted into common stock), $4,186 in net proceeds through
        the
        private sales of our common stock, $3,180 in net proceeds through the exercise
        of common stock options, and $2,338 in net proceeds through the exercise
        of
        common stock warrants. In November 2004, we completed a public offering of
        our
        common stock resulting in net proceeds to us of approximately
        $46,457.
 
 -32-
 
 Table of
          Contents
 
 As
        of
        March 31, 2006, our cash and cash equivalents balance was $14,061. In addition,
        as of March 31, 2006 we had $46,310 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 March 31, 2006 will enable us to meet
        our
        anticipated cash requirements for operations and capital expenditures for
        the
        foreseeable future. Beyond that, we may need additional cash to fund our
        business and finance our continued growth. We cannot assure you that such
        additional financing, if needed, will be available on terms favorable to
        us or
        our stockholders, if at all.
  ***Cash
        Requirements***
  At
        March
        31, 2006 our principal source of liquidity was $14,061 in cash and cash
        equivalents and $46,310 in short-term investments.
  The
        following table shows future cash payments due under our commitments and
        obligations as of March 31, 2006:
 
 **Year**
              
              **Operating
                  Leases**
              
              **Royalty
                  Obligations**
                **(1)**
              
              **Service
                  Agreements**
              
              **Committed
                  Purchases**
              
              **Total**2006
              
              $
              545
              
              $
              593
              
              $
              1,887
              
              $
              1,045
              
              $
              4,0702007
              
              
              609
              
              
              283
              
              
              1,253
              
              
              --
              
              
              2,1452008
              
              
              547
              
              
              1
              
              
              835
              
              
              --
              
              
              1,3832009
              
              
              --
              
              
              --
              
              
              1
              
              
              --
              
              
              12010
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --2011
                  and thereafter
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Total
              
              $
              1,701
              
              $
              877
              
              $
              3,976
              
              $
              1,045
              
              $
              7,599


***Sources
        and Uses of Cash***
 
 Net
        cash
        used in operating activities for the three months ended March 31, 2006 was
        $3,646. This was primarily attributable to our net loss, an increase in accounts
        receivable, prepaid expenses and other current assets, and a decrease in
        accounts payable and accrued expenses, partially offset by an increase in
        accrued compensation, deferred revenue, depreciation and amortization and
        share-based compensation expense. The increase in deferred revenue in the
        first
        quarter of 2006 was due to the increase in the number of memberships in our
        AudibleListener plans, where revenue is recognized based on the content delivery
        using the lesser of straight line or proportional performance revenues. Net
        cash
        provided by operating activities for the three months ended March 31, 2005
        was
        $3,505. This was primarily attributable to our net income, and increases
        in
        accounts payable, accrued expenses, accrued royalties, and deferred revenue,
        offset in part by an increase in accounts receivable and accretion of discounts
        on short-term investments.
 
 Net
        cash
        provided by investing activities for the three months ended March 31, 2006
        was
        $5,622, attributable to net proceeds from short-term investing activity of
        $9,536, partially offset by purchases of property and equipment of $3,716.
        Net
        cash used in investing activities for the three months ended March 31, 2005
        was
        $7,179. This was attributable to purchases of property and equipment of
        approximately $463 and net short-term investing activity of $6,716.
  Net
        cash
        provided by financing activities for the three months ended March 31, 2006,
        was
        $541, resulting primarily from proceeds from exercise of common stock options
        and common stock warrants, partially offset by purchases of treasury stock.
        Net
        cash provided by financing activities for the three months ended March 31,
        2005
        was $218, resulting primarily from proceeds from the exercise of common stock
        options and common stock warrants, partially offset by principal payments
        made
        on capital lease obligations.
 
 ***New
        Accounting Standards***
 
 *SFAS
        No. 123R*
 
 Effective
        January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”)
        No. 123R, “Share-Based Payment” (“SFAS No. 123R”) using the Modified Prospective
        Approach. See Note 2 for further detail regarding the adoption of this standard.
 
 
 -33-
 
 Table of
          Contents
 
 *SFAS
        No. 155*
 
 In
        February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
        155, “Accounting for Certain Hybrid Financial Instruments—an Amendment of FASB
        Statements No. 133 and 140” (“SFAS No. 155”). SFAS No. 155 allows financial
        instruments that contain an embedded derivative and that otherwise would
        require
        bifurcation to be accounted for as a whole on a fair value basis, at the
        holders’ election. SFAS No. 155 also clarifies and amends certain other
        provisions of SFAS No. 133 and SFAS No. 140. This statement is effective
        for all
        financial instruments acquired or issued in fiscal years beginning after
        September 15, 2006. We do not expect that the adoption of SFAS No. 155 will
        have
        a material impact on our consolidated financial statements.
 
 *SFAS
        No. 156*
 
 In
        March
        2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
        Assets—an Amendment of FASB Statement No. 140” (“SFAS No. 156”). SFAS No. 156
        provides guidance on the accounting for servicing assets and liabilities
        when an
        entity undertakes an obligation to service a financial asset by entering
        into a
        servicing contract. This statement is effective for all transactions in fiscal
        years beginning after September 15, 2006. We do not expect that the adoption
        of
        SFAS No. 156 will have a material impact on our consolidated financial
        statements.
 
 **ITEM
        3. Qualitative and Quantitative Disclosures about Market
        Risk**
  We
        are
        exposed to fluctuations in foreign currency exchange rates as the financial
        results of our foreign subsidiary are translated into U.S. dollars in
        consolidation. We do not use derivative instruments or hedging to manage
        our
        exposures and do not hold any market risk sensitive instruments for trading
        purposes.
 
 **ITEM
        4. Controls and Procedures**
 
 **Evaluation
        of Disclosure Controls and Procedures**
  We
        maintain disclosure controls and procedures that are designed to ensure that
        information required to be disclosed in our reports filed or submitted pursuant
        to the Securities Exchange Act of 1934 is recorded, processed, summarized
        and
        reported within the time periods specified in the Securities and Exchange
        Commission’s rules and forms, and that information required to be disclosed in
        our Exchange Act reports is accumulated and communicated to our management,
        including the our Chief Executive Officer and Chief Financial Officer, to
        allow
        timely decisions regarding required disclosure.
  Under
        the
        supervision and with the participation of our management, including our Chief
        Executive Officer and Chief Financial Officer, we carried out an evaluation
        of
        the effectiveness of the design and operation of our disclosure controls
        and
        procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) as of March
        31,
        2006.  Based upon that evaluation, our Chief Executive Officer and Chief
        Financial Officer concluded that our disclosure controls and procedures were
        not
        effective as of such date due to the fact that the material weaknesses described
        in the December 31, 2005 Form 10-K had not been remediated as of March 31,
        2006.
  **Changes
        in Internal Control Over Financial Reporting**
 
 There
        were no changes in our internal controls over financial reporting identified
        in
        connection with the evaluation required by paragraph (d) of Exchange Act
        Rules
        13a-15 or 15d-15 that occurred during our last fiscal quarter that have
        materially affected, or are reasonable likely to materially affect our internal
        control over financial reporting.
 
 
 -34-
 
 Table of
          Contents
 
 **PART
        II--OTHER INFORMATION**
 
 **ITEM
        1. Legal Proceedings**
 
 Various
        legal actions, claims, assessments and other contingencies arising in the
        normal
        course of business, in addition to the matters described below, are pending
        against us. All of these matters are subject to many uncertainties, and it
        is
        possible that some of these matters could be ultimately decided, resolved
        or
        settled adversely. We have recorded accruals for losses related to those
        matters
        which we consider to be probable and that can be reasonably estimated. Although
        the ultimate amount of liability at March 31, 2006 that may result from those
        matters for which accruals have been recorded is not ascertainable, we believe
        that any amounts exceeding the recorded accruals would not materially affect
        our
        financial condition.
 
 In
        June
        2001, we and certain of our officers were named as defendants in a securities
        class action filed in United States District Court for the Southern District
        of
        New York related to our initial public offering in July 1999. The lawsuits
        also
        named certain of the underwriters of the IPO as well as certain of our officers
        and directors and former directors as defendants. Approximately 300 other
        issuers and their underwriters have had similar suits filed against them,
        all of
        which are included in a single coordinated proceeding in the Southern District
        of New York (the “IPO Litigations”). An amended complaint was filed on April 19,
        2002. The complaints allege that the prospectus and the registration statement
        for our IPO failed to disclose that the underwriters allegedly solicited
        and
        received “excessive” commissions from investors and that some investors in our
        IPO allegedly agreed with the underwriters to buy additional shares in the
        aftermarket in order to inflate the price of our stock. We and certain of
        our
        officers, directors, and former directors were named in the suits pursuant
        to
        Section 11 of the Securities Act of 1933, Section 10(b) of the Exchange Act
        of
        1934, and other related provisions. The complaints seek unspecified damages,
        attorneys' and expert fees, and other unspecified litigation costs.
  On
        July
        1, 2002, the underwriter defendants in the consolidated actions moved to
        dismiss
        all of the IPO Litigations, including the action involving us. On July 15,
        2002
        we, along with other nonunderwriter defendants in the coordinated cases,
        also
        moved to dismiss the IPO Litigations. On February 19, 2003, the court ruled
        on
        the motions. The court granted our motion to dismiss the claims against us
        under
        Rule 10b-5, due to the insufficiency of the allegations against us. The motions
        to dismiss the claims under Section 11 of the Securities Act were denied
        as to
        virtually all of the defendants in the consolidated cases, including ours.
        Our
        individual officers, directors and former director defendants in the IPO
        Litigation signed a tolling agreement and were dismissed from the action
        without
        prejudice on October 9, 2002.
  In
        June
        2003, a proposed settlement of this litigation was reached among the plaintiffs,
        the issuer defendants in the consolidated actions, the issuer officers and
        directors named as defendants, and the issuers' insurance companies. The
        settlement would provide, among other things, a release for us and for the
        individual defendants for the conduct alleged to be wrongful in the amended
        complaint. We would agree to undertake other responsibilities under the partial
        settlement, including agreeing to assign away, not assert, or release certain
        potential claims that we may have against the underwriters. Any direct financial
        impact of the proposed settlement is expected to be borne by our insurance
        carriers.
 
 In
        June
        2004, the proposed settlement was submitted to the court for preliminary
        approval. The court requested that any objections to preliminary approval
        of the
        settlement be submitted by July 14, 2004, and the underwriter defendants
        formally objected to the settlement. The plaintiff and issuer defendants
        separately filed replies to the underwriter defendants' objections to the
        settlement on August 4, 2004. The court granted preliminary approval on February
        15, 2005, subject to certain modifications. On August 31, 2005, the court
        issued
        a preliminary order further approving the modifications to the settlement
        and
        certifying the settlement cases. The court also appointed the Notice
        Administrator for the settlement and ordered that notice of the settlement
        be
        distributed to all settlement class members beginning on November 15, 2005.
        The
        settlement fairness hearing was held on April 26, 2006, and the court reserved
        decision. If the court determines that the settlement is fair to the class
        members, the settlement will be approved. There can be no assurance that
        this
        proposed settlement would be approved and implemented in its current form,
        or at
        all.
  Due
        to
        the inherent uncertainties of litigation and because the settlement approval
        process is not complete, we cannot accurately predict the ultimate outcome
        of
        the matter.
 
 Starting
        on or about February 22, 2005, several class actions were filed against us
        and
        two of our executives in the United States District Court for the District
        of
        New Jersey.  The plaintiffs purport to represent a class consisting of all
        persons (other than our officers and directors and their affiliates) who
        purchased our securities between November 2, 2004 and February 15, 2005 (the
        "Class Period").  The plaintiffs allege that the defendants violated
        Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 there
        under
        by failing to make complete and accurate disclosures concerning the our future
        plans and prospects.  The individual defendants are also alleged to be
        liable under Section 20(a) of the Exchange Act.  All of the defendants are
        alleged to have sold stock at inflated prices during the Class
        Period.
 
 
 -35-
 
 Table of
          Contents
 
 On
        or
        about April 20, 2006, we provided the plaintiffs’ counsel in the consolidated
        securities class actions with a memorandum in support of a motion to dismiss
        the
        consolidated amended class action complaint. The plaintiffs’ counsel is
        scheduled to provide us with a memorandum in opposition to the motion on
        or
        about June 26, 2006. We will then have thirty days to provide the plaintiffs’
counsel with a reply memorandum. At the suggestion of the Court, we have
        agreed
        with the plaintiffs’ counsel not to file the motion to dismiss and the
        supporting papers until the briefing has been completed. We cannot predict
        the
        ultimate outcome of this matter.
  In
        April
        2005, a derivative action was filed in the state court of New Jersey against
        us,
        the two executives named as individual defendants in the class actions described
        above, six of the our outside directors, and three of our stockholders. 
The derivative action makes the same factual allegations as the class actions
        described above and adds allegations that the six outside directors named
        as
        defendants and/or the stockholders who nominated them sold stock at inflated
        prices at or about the time of the secondary offering of securities that
        we made
        in November 2004. The plaintiff in this derivative action purports to seek
        a
        recovery of the damages allegedly sustained by us rather than by investors
        who
        allegedly purchased securities at inflated prices.
 
 In
        May
        2005, we learned of a second derivative action which was filed during April
        2005
        in the United States District Court for the District of New Jersey against
        us,
        the two executives named as individual defendants in the class actions described
        above, and all seven of our outside directors. The derivative action makes
        the
        same allegations as the class actions described above and adds allegations
        that
        all of the individual defendants are responsible for an alleged failure of
        internal controls that resulted in the 45-day delay in the filing of our
        Form
        10-K for 2004. The plaintiff in this derivative action purports to seek a
        recovery of the damages allegedly sustained by us rather than by investors
        who
        allegedly purchased securities at inflated prices.
 
 The
        plaintiffs in the derivative actions voluntarily agreed to stay those actions
        pending the outcome of our motion to dismiss the class actions described
        above.
 
 In
        December 2005, the United States District Court for the District of New Jersey
        consolidated the class action, appointed a group of lead plaintiffs and
        appointed lead plaintiff’s counsel. By prior agreement, the plaintiff’s
        consolidated amended complaint was filed on February 14, 2006.
 
 On
        or
        about April 20, 2006, we provided the plaintiffs’ counsel in the consolidated
        securities class actions with a memorandum in support of a motion to dismiss
        the
        consolidated amended class action complaint. The plaintiffs’ counsel is
        scheduled to provide us with a memorandum in opposition to the motion on
        or
        about June 26, 2006. We will then have thirty days to provide the plaintiffs’
counsel with a reply memorandum. At the suggestion of the Court, we have
        agreed
        with the plaintiffs’ counsel not to file the motion to dismiss and the
        supporting papers until the briefing has been completed.
 
 We
        believe that all of the claims described above are without merit and we intend
        to defend the actions vigorously. Due to the inherent uncertainties of
        litigation and because these actions are at a preliminary stage, we cannot
        accurately predict the ultimate outcome of these matters.
 
 In
        May
        2005, Digeo, Inc. commenced an action against us for patent infringement
        in
        Federal District Court in the State of Washington. We have filed an answer
        asserting the patent is invalid and unenforceable and that its services do
        not
        fall within the scope of the claims of the Digeo patent. Discovery is scheduled
        to be completed by June 2, 2006, and the trial is currently scheduled for
        mid-November 2006. 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
        1A.**  **Risk
        Factors**
 
 For
        a
        more detailed explanation of the factors affecting our businesses, please
        refer
        to the Risk Factors section in Item 1A of our 2005 Form 10-K. There
        have been no material changes to our risk factors as of March 31,
        2006.
 
 **ITEM
        2.**  **Unregistered
        Sales of Equity Securities and Use of Proceeds**
 
 None
 
 **ITEM
        3.**  **Defaults
        Upon Senior Securities**
  None
 
 **ITEM
        4.**  **Submission
        of Matters to a Vote of Security Holders**
  None
 
 -36-
 
 Table of
          Contents
 
 **ITEM
        5.****Other
        Information**
  None
 
 **ITEM
        6.**  **Exhibits**
 **Exhibit
                    Number**
                **Description**10.1
                Fifth
                    modification, dated December 18, 2003, to the office
                    lease.10.2
                Sixth
                    modification, dated March 23, 2005, to the office
                    lease.31.1
                Certification
                    of the Chief Executive Officer pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 2002.31.2
                Certification
                    of the Chief Financial Officer pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 2002.32.1
                Certification
                    of the Chief Executive Officer pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 2002.32.2
                Certification
                    of the Chief Financial Officer pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 2002.
 
 
 -37-
 
 Table of
          Contents
 
 Pursuant
        tothe requirements of the Securities Exchange Act
        of 1934, the Registrant has duly caused this Report to be signed on its behalf
        by the undersigned, thereunto duly authorized. ****
 ****
 ****
   **AUDIBLE,
                  INC.**By:
              /s/
                  Andrew P. KaplanName:
              Andrew P. KaplanTitle:
              Executive
                  Vice president, Chief Financial Officer and Director
                (Principal Financial and Accounting Officer)Date:
              May
                  12, 2006
 
  
 -38-