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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

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

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

       As of August 13, 2002, 31,627,869 shares of common stock (“Common Stock”) of the Registrant were outstanding.

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AUDIBLE, INC.

INDEX

FORM 10-Q

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PART I - FINANCIAL INFORMATION

ITEM 1.      Financial Statements

See accompanying notes to condensed financial statements.

3

AUDIBLE, INC.
CONDENSED STATEMENTS OF OPERATIONS

See accompanying notes to condensed financial statements.

4

AUDIBLE, INC.
CONDENSED STATEMENTS OF CASH FLOWS

See accompanying notes to condensed financial statements.

5

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

6

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

7

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

8

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

9

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

10

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

11

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

12

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

13

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

 

(9)	Contingencies
	In September 2001, the Company and certain of its officers, directors and former directors, were named as defendants in several putative class actions filed in the United States District Court for the Southern District of New York. The investment banking firms that were involved in the Company’s 1999 initial public offering (the “IPO”) have also been named as defendants. The gist of the plaintiffs’ claims is that the underwriter defendants allegedly allocated the opportunity to participate in the IPO by requiring their customers to pay “kickbacks” in excess of the normal commissions and to make subsequent purchases in the after market at prices in excess of the IPO price. Allegedly, the amounts of the “kickbacks” were sometimes calculated as a percentage of the customer’s paper profits over some specified period of time after the IPO. It is alleged that these practices were not disclosed in the registration statement and prospectus for the IPO and that, as a result, the defendants violated various provisions of the federal securities laws. Certain of the complaints purport to set forth claims on behalf of persons who acquired the Company’s common stock from July 16, 1999 to September 11, 2001. One other complaint purports to represent a class of persons who acquired the Company’s common stock between July 16, 1999 and December 6, 2000. The complaints do not specify the amount of the compensatory damages the plaintiffs are seeking, but the market loss at issue was in excess of $50 million.
	The cases have been consolidated and have been assigned to the same judge who is handling virtually identical cases filed against hundreds of other companies that completed initial public offerings between 1998 and 2000. The Company and the individual defendants have been given an indefinite extension of time to respond to the complaints while the plaintiffs focus on pursuing their claims against the underwriters. The Company believes that the claims against it have no merit and, more specifically, contends that it and the individual defendants were not aware of the alleged practices, if they occurred. The Company and the individual defendants have notified the underwriters who were involved in the Company’s IPO that they expect those underwriters to indemnify them pursuant to the terms of the underwriting agreement between the Company and the underwriters. In July 2002, the Company and certain of its officers, directors and former directors, as well as the investment banking firms involved in the Company’s 1999 initial public offering moved to dismiss the litigation. Regardless of the ultimate outcome of the motions, the Company intends to vigorously defend itself and the individual defendants.
(10)	Special Situation Funds Investment
	On February 15, 2002, Special Situations Funds purchased 4,069,768 shares of common stock for $3,500,000 at a per share price of $0.86. Net proceeds received by the Company was $3,159,000 after deducting direct costs of $331,000 in finders fees and $10,000 in legal fees. In connection with this transaction, the Company issued warrants to purchase an additional 1,220,930 shares of common stock. The warrants are exercisable at a price of $1.15 per share anytime prior to the fifth anniversary of the issue date. The Company may demand the warrantholder exercise its rights in the event that closing bid price of a share of the Company’s common stock exceeds $2.30 for twenty consecutive trading sessions.

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

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

       The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited financial statements and notes thereto appearing in our 2001 Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors.

Overview

       We are the leading provider of premium spoken audio content, such as audio versions of books and newspapers and radio programs, that is delivered over the Internet and can be streamed, burned to CD or played back on personal computers and hand-held electronic devices that have digital audio capabilities. The Audible service allows consumers to purchase and download our content from our Web site at www.audible.com(TM). We offer customers the opportunity to subscribe to AudibleListener, a monthly audio service. For a fixed monthly fee, AudibleListener customers may download their choice of programs from our Web site. More than 32,000 hours of audio content, much of which is only available in digital audio format at www.audible.com, is currently available on our Web site. We also sell at our web site our own digital audio player under the brand name of Otis, which is manufactured to our specifications in Korea. Customers can also access content products sold by Audible through www.amazon.com. Several manufacturers, including Apple, Hewlett-Packard, Compaq Computer Corporation, Sony Electronics, Handspring, Casio Inc., Franklin Electronic Publishers, Digisette, LLC., and SONICblue Incorporated’s Rio Audio Group, have agreed to support and promote the playback of our content on their hand-held electronic devices by including our Audible software on their devices.

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

       Revenue from the sale of consumer content has increased in each of the last four quarters. We expect this trend to continue as we expand our customer base. As of June 30, 2002, more than 161,000 customers in over 100 countries had purchased content from our Web site.

       Hardware revenue represents revenue from the sale of AudibleReady hand-held electronic devices, primarily the Audible Otis. During the three months ended June 30, 2002, hardware revenue accounted for 9% of our total revenue. Hand-held electronic devices are sold from www.audible.com at a deep discount from normal retail price, when a customer enrolls in AudibleListener for at least a 12-month period.

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

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

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

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

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

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

        Hardware revenue consists of sales of AudibleReady digital audio players sold primarily at a discount when a customer signs up for a one year commitment to our AudibleListener Membership. The discounted selling price of the hardware device reflects the subsidy that we incur to acquire a customer with a one year commitment to AudibleListener. Hardware revenue is recognized upon shipment of the device, pursuant to a customer order and credit card authorization and includes amounts received for shipping and handling.

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

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

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       In January 2000, the Company entered into two agreements with Amazon.com. The Company is the exclusive provider of digital spoken audio to Amazon.com, as defined in the Co-Branding, Marketing and Distribution Agreement, as amended. During the three-year term of this agreement, in consideration for certain services, Amazon is entitled to $22,500,000 plus a specified percentage of revenue earned over a threshold amount in addition to common stock warrants. Under the Securities Purchase Agreement dated January 30, 2000, Amazon.com purchased 1,340,033 shares of common stock from the Company for $20,000,000. The first $20,000,000 in payments due to Amazon.com under the amended Co-Branding, Marketing and Distribution Agreement, were offset against the $20,000,000 in consideration due to Audible for the purchase of common stock and no cash was exchanged. Of the remaining $2,500,000 due in cash to Amazon.com under the agreement, $1,000,000 has been paid through June 30, 2002 with the remaining $1,500,000 due in 2002, which includes a $375,000 unpaid payment which was due on January 30, 2002 as well as a $375,000 unpaid payment which was due on April 30, 2002.

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

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

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

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Results of Operations

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

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

       Total revenue, net.     Total revenue, net for the three months ended June 30, 2002 was $2,743,000, as compared to $1,979,000 for the three months ended June 30, 2001, an increase of $764,000, or 39%.

       Total content and services revenue.     Total content and services revenue for the three months ended June 30, 2002 was $2,490,000, as compared to $1,670,000 for the three months ended June 30, 2001, an increase of $820,000, or 49%.

       Consumer content.     Consumer content revenue for the three months ended June 30, 2002 was $2,429,000, as compared to $1,143,000 for the three months ended June 30, 2001, an increase of $1,286,000, or 112%. This increase was primarily the result of our customer base growing from 87,000 to over 161,000 customers.

       Services.     Services revenue for the three months ended June 30, 2002 was $61,000, as compared to $226,000 for the three months ended June 30, 2001, a decrease of $165,000, or 73%. This decrease was primarily the result of fewer corporate customers subscribing to the Audible service.

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       Bulk content.     Bulk content revenue for the three months ended June 30, 2001 consisted of a bartered bulk content sale of $300,000. There were no bulk content sales during the three months ended June 30, 2002.

       Hardware.     Hardware revenue for the three months ended June 30, 2002 was $237,000, as compared to $235,000 for the three months ended June 30, 2001, an increase of $2,000, or 1%. Hardware revenue remained virtually flat as the impact of selling more AudibleReady hand-held electronic devices in the period, primarily the Audible Otis, was offset by these additional devices being sold at a deeper discount when the customer signed up for at least a one year commitment to AudibleListener Membership.

       Other.     Other revenue for the three months ended June 30, 2002, was $16,000, as compared to $74,000 for the three months ended June 30, 2001. Other revenue decreased as a result of the end of the amortization in April 2001 of the advance from Microsoft relating to granting Microsoft the right to distribute software platforms to enable users to access and use Audible content. Other revenue for the three months ended June 30, 2002 consisted of royalties earned from a license granted for certain technology rights to a device manufacturer.

       Operating expenses.

       Cost of content and services revenue.     Cost of content and services revenue was $1,153,000, or 46% of content and services revenue, for the three months ended June 30, 2002, as compared to $1,293,000, or 78% of content and services revenue, for the three months ended June 30, 2001. Included in cost of content and services revenue for the three month period ended June 30, 2001, was a charge of $199,000 to reflect the net realizable value of royalty advances. There was no such adjustment necessary in the three month period ended June 30, 2002. Cost of content and services revenue as a percentage of content and services revenue decreased in the 2002 period due to the reduction in the fixed content and services revenue costs such as amortization of royalty advances as the advances become fully expensed.

       Cost of hardware revenue.     Cost of hardware revenue was $785,000, or 331% of hardware revenue, for the three months ended June 30, 2002, as compared to $779,000, or 331% of hardware revenue, for the three months ended June 30, 2001. This cost remained virtually flat even though we sold more hand-held electronic devices in the 2002 period versus the 2001 period. This was primarily due to reduced costs in acquiring hand-held electronic devices, particularly the Audible Otis, in the 2002 period.

       Production expenses.     Production expenses were $889,000 for the three months ended June 30, 2002, as compared to $1,684,000 for the three months ended June 30, 2001, a decrease of $795,000, or 47%. This decrease was primarily due to a reduction in personnel costs and reduced outside services as a result of our streamlining initiative of July 23, 2001.

       Development.     Development costs were $554,000 for the three months ended June 30, 2002, as compared to $1,236,000 for the three months ended June 30, 2001, a decrease of $682,000, or 55%. This decrease was primarily due to reduction in outside consultants as well as reduced personnel cost as a result of our streamlining initiative of July 23, 2001.

       Sales and marketing.     Sales and marketing expenses were $3,209,000 for the three months ended June 30, 2002, as compared to $3,902,000 for the three months ended June 30, 2001, a decrease of $693,000, or 18%. This decrease was primarily due to reduction in certain marketing expenses, such as tradeshow expenses as well as reduced personnel cost.

       General and administrative.     General and administrative expense was $893,000 for the three months ended June 30, 2002, as compared to $1,367,000 for the three months ended June 30, 2001, a decrease of $474,000, or 35%. This decrease was primarily due to a reduction in personnel costs and reduced professional fees as a result of our streamlining initiative of July 23, 2001.

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       Other income, net.     Other income, net in both periods consisted of interest income offset by interest expense. Interest income was $30,000 for the three months ended June 30, 2002, as compared to $192,000 for the three months ended June 30, 2001, a decrease of $162,000. This decrease was primarily due to less interest income being earned from lower cash and cash equivalent and short-term investment balances available. No interest expense was recognized for the three months ended June 30, 2002, as compared to $9,000 for the three months ended June 30, 2001. This decrease was the result of the expiration of the capital leases entered into for capital equipment.

       Accrued dividends on redeemable preferred stock.     Accrued dividends on redeemable preferred stock was $334,000 for the three months ended June 30, 2002 as compared to $299,000 for the three months ended June 30, 2001. This increase was due to the additional shares of Audible Series A Redeemable Convertible Preferred Stock outstanding in the 2002 period.

Six months ended June 30, 2002 compared to six months ended June 30, 2001.

       Total revenue, net.     Total revenue, net for the six months ended June 30, 2002 was $5,291,000, as compared to $4,109,000 for the six months ended June 30, 2001, an increase of $1,182,000, or 29%.

       Total content and services revenue.     Total content and services revenue for the six months ended June 30, 2002 was $4,676,000, as compared to $2,990,000 for the six months ended June 30, 2001, an increase of $1,686,000, or 56%.

       Consumer content.     Consumer content revenue for the six months ended June 30, 2002 was $4,440,000, as compared to $2,025,000 for the six months ended June 30, 2001, an increase of $2,415,000, or 119%. This increase was primarily the result of our increased customer base.

       Services.     Services revenue for the six months ended June 30, 2002 was $236,000, as compared to $515,000 for the six months ended June 30, 2001, a decrease of $279,000, or 54%. This decrease was primarily the result of fewer corporate customers subscribing to the Audible service.

       Bulk content.     Bulk content revenue for the six months ended June 30, 2001 consisted of one cash bulk content sale of $150,000 and one bartered bulk content sale of $300,000. There were no bulk content sales during the six months ended June 30, 2002.

       Hardware.     Hardware revenue for the six months ended June 30, 2002 was $583,000, as compared to $837,000 for the six months ended June 30, 2001, a decrease of $254,000, or 30%. Hardware revenue decreased as a result of selling more AudibleReady hand-held electronic devices in the period, primarily the Audible Otis, at a deeper discount when the customer signed up for at least a one year commitment to AudibleListener Membership.

       Other.     Other revenue for the six months ended June 30, 2002, was $32,000, as compared to $282,000 for the six months ended June 30, 2001. Other revenue decreased as a result of the end of the amortization in April 2001 of the advance from Microsoft relating to granting Microsoft the right to distribute software platforms to enable users to access and use Audible content. Other revenue for the six months ended June 30, 2002 consisted of royalties earned from a license granted for certain technology rights to a device manufacturer.

       Operating expenses.

       Cost of content and services revenue.     Cost of content and services revenue was $2,120,000, or 45% of content and services revenue, for the six months ended June 30, 2002, as compared to $2,597,000, or 87% of content and services revenue, for the six months ended June 30, 2001. Included in cost of content and services revenue for the six month period ended June 30, 2001, was a charge of $405,000 to reflect the net realizable value of royalty advances. There was no such adjustment necessary in the six month period ended June 30, 2002. Cost of content and services revenue as a percentage of content and services revenue decreased in the 2002 period due to the reduction in the fixed content and services revenue costs such as amortization of royalty advances as the advances become fully expensed.

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       Cost of hardware revenue.     Cost of hardware revenue was $1,449,000, or 249% of hardware revenue, for the six months ended June 30, 2002, as compared to $1,742,000, or 208% of hardware revenue, for the six months ended June 30, 2001. This decrease was primarily due to reduced costs in acquiring hand-held electronic devices in the 2002 versus the 2001 period. Cost of hardware revenue as a percentage of hardware revenue increased as we sold these hand-held electronic devices at a deeper discount from normal retail price in the 2002 period than in the 2001 period, when a customer enrolled in AudibleListener for at least a 12-month period.

       Production expenses.     Production expenses were $1,917,000 for the six months ended June 30, 2002, as compared to $3,342,000 for the six months ended June 30, 2001, a decrease of $1,425,000, or 43%. This decrease was primarily due to a reduction in personnel costs and reduced outside services as a result of our streamlining initiative of July 23, 2001.

       Development.     Development costs were $1,076,000 for the six months ended June 30, 2002, as compared to $2,116,000 for the six months ended June 30, 2001, a decrease of $1,040,000, or 49%. This decrease was primarily due to reduction in outside consultants as well as reduced personnel cost as a result of our streamlining initiative of July 23, 2001.

       Sales and marketing.     Sales and marketing expenses were $6,249,000 for the six months ended June 30, 2002, as compared to $7,598,000 for the six months ended June 30, 2001, a decrease of $1,349,000, or 18%. This decrease was due to a reduction in certain advertising costs such as tradeshow expenses, warrant charges in connection with a services agreement, reduced personnel costs as well as expenses recognized in connection with our Co-Branding, Marketing and Distribution Agreement with Amazon.com.

       General and administrative.     General and administrative expense was $1,845,000 for the six months ended June 30, 2002, as compared to $2,706,000 for the six months ended June 30, 2001, a decrease of $861,000, or 32%. This decrease was primarily due to a reduction in personnel costs and reduced professional fees as a result of our streamlining initiative of July 23, 2001.

       Other income, net.     Other income, net in both periods consisted of interest income and interest expense. Interest income was $59,000 for the six months ended June 30, 2002, as compared to $428,000 for the six months ended June 30, 2001, a decrease of $369,000. This decrease was primarily due to less interest income being earned from lower cash and cash equivalent and short-term investment balances available. No interest expense was recognized for the six months ended June 30, 2002, as compared to $10,000 for the six months ended June 30, 2001. This decrease was the result of the expiration of the capital leases entered into for capital equipment.

       Accrued dividends on redeemable preferred stock.     Accrued dividends on redeemable preferred stock was $661,000 for the six months ended June 30, 2002 as compared to $470,000 for the six months ended June 30, 2001. This increase was due to the 12% dividends payable to Microsoft as a result of Microsoft’s purchase of 2,666,666 shares of Audible Series A Redeemable Convertible Preferred Stock in February 2002 as well as additional shares being outstanding in the 2002 period as the Company had elected to pay dividends due by issuing additional stock rather than by cash.

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Factors Affecting Operating Results

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

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

       We have incurred significant losses since inception, and as of June 30, 2002, we had an accumulated deficit of approximately $103,161,000. We believe that our success will depend largely on our ability to extend our leadership position as a provider of premium digital spoken audio content over the Internet. Accordingly, we plan to continue to invest in sales and marketing, content acquisition and production over the next several quarters to the extent available cash allows.

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

       Our limited operating history and the emerging nature of our market make prediction of future revenue difficult. We have no assurance that we will be able to predict our future revenue accurately. Because we have a number of fixed expenses, we may be unable to adjust our spending in a timely manner to compensate for unexpected revenue shortfalls. Accordingly, any significant shortfall in relation to our expectations could cause significant declines in our operating results. We believe that our quarterly revenue, expenses and operating results could vary significantly in the future, and that period-to-period comparisons should not be relied upon as indications of future performance. Due to the foregoing factors, it is likely that in some future quarters our operating results will fall below the expectations of securities analysts and investors, which could have a material adverse effect on the trading price of our common stock.

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       Liquidity and Capital Resources

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

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

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

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

       At June 30, 2002, our principal source of liquidity was approximately $6,788,000 in cash and cash equivalents.

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

       Net cash used in operating activities for the six months ended June 30, 2002 was $3,892,000. Net cash used during the period was primarily attributable to our net loss and a decrease in advances, offset in part by services rendered for common stock and warrants, services rendered for preferred stock, depreciation and amortization and a decrease in inventory. Net cash used in operating activities for the six months ended June 30, 2001 was $10,220,000. Net cash used during the period was primarily attributable to our net loss and a decrease in royalty obligations and advances, offset in part by services rendered for common stock and warrants, depreciation and amortization and a decrease in inventory.

       Net cash used in investing activities for the six months ended June 30, 2002 was $118,000. Net cash used during the period was related to purchases of property and equipment. Net cash provided by investing activities for the six months ended June 30, 2001 was $1,275,000. Net cash provided during the period was primarily related to redemptions of short-term investments offset in part by cash used to purchase property and equipment.

       Net cash provided by financing activities for the six months ended June 30, 2002 was $3,170,000 resulting primarily from the investment in the Company by Special Situations Funds of $3,159,000, net of direct costs, and the exercise of common stock options by an employee. Net cash provided by financing activities for the six months ended June 30, 2001 was $10,012,000 resulting primarily from the sale of Series A Redeemable Convertible Preferred Stock to Microsoft and payments received on notes due from shareholders for common stock, offset in part by capital lease payments.

       Based on our currently proposed business plans and related assumptions, we believe that our cash and cash equivalents balance, as well as the waiver of cash payments of $1,250,000 due to Random House in exchange for preferred stock, will enable us to meet our anticipated cash requirements for operations and capital expenditures through 2002. In the first quarter of 2003, we expect that additional cash will be required to fund the business and finance our continued growth. However, any projection of future revenues is subject to a level of uncertainty. If planned revenues are insufficient to satisfy our liquidity requirements in 2002, we will need to raise additional funds through public or private financing or other arrangements earlier than expected. No assurance can be given that such additional financing, when needed, will be available on terms favorable to us or to our stockholders, if at all, and that such financing would not be antidilutive to our stockholders.

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New Accounting Standards

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

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

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

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

ITEM 3.    Qualitative and Quantitative Disclosure about Market Risk

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

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PART II - OTHER INFORMATION

ITEM 1.    Legal Proceedings.

           In September 2001, the Company and certain of its officers, directors and former directors, were named as defendants in several putative class actions filed in the United States District Court for the Southern District of New York. The investment banking firms that were involved in the Company’s 1999 initial public offering (the “IPO”) have also been named as defendants. The gist of the plaintiffs’ claims is that the underwriter defendants allegedly allocated the opportunity to participate in the IPO by requiring their customers to pay “kickbacks” in excess of the normal commissions and to make subsequent purchases in the after market at prices in excess of the IPO price. Allegedly, the amounts of the “kickbacks” were sometimes calculated as a percentage of the customer’s paper profits over some specified period of time after the IPO. It is alleged that these practices were not disclosed in the registration statement and prospectus for the IPO and that, as a result, the defendants violated various provisions of the federal securities laws. Certain of the complaints purport to set forth claims on behalf of persons who acquired the Company’s common stock from July 16, 1999 to September 11, 2001. One other complaint purports to represent a class of persons who acquired the Company’s common stock between July 16, 1999 and December 6, 2000. The complaints do not specify the amount of the compensatory damages the plaintiffs are seeking, but the market loss at issue was in excess of $50 million.

           The cases have been consolidated and have been assigned to the same judge who is handling virtually identical cases filed against hundreds of other companies that completed initial public offerings between 1998 and 2000. The Company and the individual defendants have been given an indefinite extension of time to respond to the complaints while the plaintiffs focus on pursuing their claims against the underwriters. The Company believes that the claims against it have no merit and, more specifically, contends that it and the individual defendants were not aware of the alleged practices, if they occurred. The Company and the individual defendants have notified the underwriters who were involved in the Company’s IPO that they expect those underwriters to indemnify them pursuant to the terms of the underwriting agreement between the Company and the underwriters. In July 2002, the Company and certain of its officers, directors and former directors, as well as the investment banking firms involved in the Company’s 1999 initial public offering moved to dismiss the litigation. Regardless of the ultimate outcome of the motions, the Company intends to vigorously defend itself and the individual defendants.

ITEM 2.    Changes in Securities and Use of Proceeds

       Recent Sales of Unregistered Securities

           On April 11, 2002, the Company issued 1,250,000 shares of Series B Convertible Preferred Stock to Random House in exchange for the $1,250,000 cash payment due in 2002. The Series B shares automatically convert to common shares at the then effective conversion price on or after March 26, 2004. The securities were offered and sold by the Company in reliance upon an exemption from registration pursuant to Section 4(2) of the Securities Act as transactions not involving any public offering.

       Report of Offering of Securities and Use of Proceeds Therefrom

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

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       During the three months ended June 30, 2002, we invested $1,700,000 of our funds in accordance with the use of proceeds in our Registration Statement Form S-1. As of June 30, 2002, we have $6,788,000 in remaining funds, which includes in part the $10,000,000 received from Microsoft in February 2001 related to the sale of Series A Redeemable Convertible Preferred Stock, and the $3,159,000 net of direct costs received from the Special Situations Funs investment in our Company. These remaining fund are currently in cash or cash equivalents. None of the net proceeds of the offering were paid directly or indirectly to any of our directors or officers, or their associates, or persons owning 10 percent or more of any class of our equity securities.

ITEM 3.        Defaults Upon Senior Securities

      Inapplicable

ITEM 4.        Submission of Matters to Vote of Security Holders

            (a)  The Company held its Annual Meeting of Stockholders on May 30, 2002 (the “Annual Meeting”).

            (b)  n/a

            (c)  The following matters were voted upon at the Annual Meeting:

(i) To elect three directors to serve until the 2005 annual meeting of stockholders, and until their successors are elected and duly qualified, with 71.9% of the Common Stock present and voting at the meeting voting for Messrs. Brass and Knowlton as follows:

                       (ii) To ratify the appointment of KPMG LLP as our independent auditors for the year ending December 31, 2002 was ratified by 71.9% of the shares of Common Stock present and voting at the meeting. (Votes for: 22,149,056; votes against or withheld: 19,505; abstain 85,730.)

ITEM 5.        Other Information

           On April 29, 2002, the Company received a Nasdaq Listing Qualifications letter advising the Company that its stock had closed below the $1.00 per share requirement for the last 30 consecutive trading days. Accordingly, the Company was granted a 90 calendar day grace period to regain compliance with the $1.00 per share minimum price.

           Effective August 6, 2002, the Company stock has been approved by Nasdaq to move from the National Market to the Small Cap Market. The immediate impact of the move will be that the 90 calendar day $1.00 per share price minimum grace period will be automatically extended an additional 90 days or though October 28, 2002. Furthermore, if the Company is in compliance with the Small Cap initial listing criteria under Marketplace Rule 4310(c)(2)(A) as of October 28, 2002, the Company will be afforded an additional 180-day grace period to demonstrate compliance with the $1.00 minimum bid price. If the Company fails to demonstrate compliance with the $1.00 per share minimum bid price, its shares will be subject to delisting.

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

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

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

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

ITEM 6.        Exhibits and Reports on Form 8-K

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		and Audible, as borrower, for a revolving line of credit of up to $1,000,000
	10.10*	Security and Loan Agreement dated November 20, 1996, between Audible, as borrower, and Imperial Bank, as lender, for up to $500,000
	10.14*	Amended and Restated Registration Rights Agreement dated February 26, 1998, by and among Audible and certain stockholders named therein
	10.14.1*	Amendment No. 1 to Amended and Restated Registration Rights Agreement dated December 18, 1998 (relating to Exhibit 10.14)
	10.14.2*	Amendment No. 2 to Amended and Restated Registration Rights Agreement dated June 17, 1999 (relating to Exhibit 10.14)
	10.15*	1999 Stock Incentive Plan
	10.16*	Form of Common Stock Warrants issued June 30, 1997 by Audible to various investors in connection with the Series C preferred stock financing
	10.17*	Form of Stock Restriction Agreement by and between Audible and the Named Executive Officers made in connection with various purchases and sales of shares of restricted common stock
	10.18*	Form of Promissory Note made by the Named Executive Officers in favor of Audible in connection with various purchases and sales of shares of restricted common stock
	10.19*	Office Lease dated September 20, 1997, by and between Audible, as tenant, and Passaic Investment LLC, Sixty-Five Willowbrook Investment LLC and Wayne Investment LLC, as tenants-in-common, as landlord
	10.20*	Sublease Agreement dated July 19, 1996, by and between Audible, as sublessee, and Painewebber Incorporated, as sublessor
	10.21+*	Agreement dated April 3, 1999 by and between Audible and Diamond Multimedia Systems, Inc.
	10.22*	Common Stock Purchase Warrant, issued April 22, 1999, to Microsoft Corporation
	10.23*	Employment Offer Letter from Audible to Guy Story dated September 10, 1996
	10.24*	Employment Offer Letter from Audible to Brian Fielding dated April 25, 1997
	10.25	Omitted.
	10.26*	Employment Offer Letter from Audible to Andrew Kaplan dated May 25, 1999
	10.27	Omitted.
	10.28**	Warrant Agreement to purchase 10,000 shares of Common Stock at a price of $7.65 per share, dated October 8, 1999, issued by Audible to National Public Radio, Inc.
	10.29*	Common Stock Purchase Warrant, W-1, issued June 17, 1999, to Robin Williams
	10.30*	Common Stock Purchase Warrant, W-2, issued June 17, 1999, to Robin Williams
	10.30.1##	Amendment No. 1 to Common Stock Purchase Warrant, W-2, issued January 25, 2001, to Robin Williams (relating to Exhibit 10.30)
	10.31++#	Securities Purchase Agreement dated January 30, 2001, by and between Audible and Amazon.com Commerce Services, Inc.
	10.32++#	Co-Branding, Marketing and Distribution Agreement dated January 30, 2001, by and between Audible and Amazon.com Commerce Services, Inc.
	10.33***	Series A Convertible Preferred Stock Purchase Agreement by and between Audible Inc. and Microsoft Corporation dated as of February 8, 2001.
	10.34++!	Amendment No. 1 to Co-Branding, Marketing and Distribution Agreement dated as of January 24, 2001 by and between Amazon.com Commerce Services, Inc. and Audible (relating to Exhibit 10.32)
	10.35!	Securities Purchase Agreement dated January 25, 2002 by and between Audible Inc., and Special Situations Fund III, L.P., Special Situations Cayman Fund, L.P., Special Situations Private Equity Fund, L.P. and Special Situations Technology Fund, L.P.
	10.36!	Registration Rights Agreement dated January 25, 2002 by and between Audible Inc., and Special Situations Fund III, L.P., Special Situations Cayman Fund, L.P., Special Situations Private Equity Fund, L.P. and Special Situations Technology Fund, L.P.
	10.37!	Form of Common Stock Warrant issued in connection with the sale of common stock to Special Situation Funds.

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	*	Incorporated by reference from the Company’s Registration Statement on Form S-1 (No. 333-76985)
	**	Incorporated by reference from the Company’s Form 10K/A for the fiscal year ended December 31, 1999
	***	Incorporated by reference from the Company’s Form 10-K for the fiscal year ended December 31, 2000.
	#	Incorporated by reference from the Company’s Form 10-Q for the quarterly period ended September 30, 2000
	##	Incorporated by reference from the Company’s Form 10-Q for the quarterly period ended June 30, 2001
	###	Incorporated by reference from the Company’s Form 10-Q for the quarterly period ended September 30, 2001
	!	Incorporated by reference from the Company’s Form 10-K for the fiscal year ended December 31, 2001.
	+	Portions of these Exhibits were omitted and have been filed separately with the Secretary of the Commission pursuant to the Company’s Application requesting Confidential Treatment under Rule 406 of the Securities Act of 1933.
	++	Portions of these Exhibits were omitted and have been filed separately with the Secretary of the Commission pursuant to the Company’s Application requesting Confidential Treatment under Rule 24b-2 of the Securities Exchange Act of 1934.
(b)	Reports on Form 8-K
	None.

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SIGNATURES

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

Dated:   August 13, 2002

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