AMAZON COM INC, 10-Q, 1999-08-16

AMAZON COM INC
10-Q, 1999-08-16
CATALOG & MAIL-ORDER HOUSES

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

------------------------

FORM 10-Q

------------------------

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED JUNE 30, 1999 COMMISSION FILE NO. 000-22513

AMAZON.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
DELAWARE 91-1646860
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>

1200 12TH AVENUE SOUTH, SUITE 1200, SEATTLE, WASHINGTON 98144-2734
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 266-1000

------------------------

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 [ ]

168,602,175 shares of $0.01 par value common stock outstanding as of July
31, 1999 (after adjusting for the three-for-one stock split payable on January
4, 1999)

Page 1 of 30
Exhibit Index on Page 30

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AMAZON.COM, INC.

FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999

INDEX

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.............................. 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................ 25

PART II -- OTHER INFORMATION
Item 1. Legal Proceedings................................. 27
Item 2. Changes in Securities and Use of Proceeds......... 27
Item 3. Defaults Upon Senior Securities................... 27
Item 4. Submission of Matters to a Vote of Security
Holders................................................ 27
Item 5. Other Information................................. 27
Item 6. Exhibits and Reports on Form 8-K.................. 27

Signatures.................................................. 29
Exhibit Index............................................... 30
</TABLE>

2
<PAGE> 3

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMAZON.COM, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash...................................................... $ 42,539 $ 25,561
Marketable securities..................................... 1,101,698 347,884
Inventories............................................... 59,387 29,501
Prepaid expenses and other................................ 53,334 21,308
---------- ---------
Total current assets.............................. 1,256,958 424,254
Fixed assets, net........................................... 156,333 29,791
Other investments........................................... 106,020 7,740
Intangibles and other, net.................................. 741,865 179,263
Deferred charges............................................ 37,038 7,412
---------- ---------
Total assets...................................... $2,298,214 $ 648,460
========== =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 165,983 $ 113,273
Accrued advertising....................................... 22,364 13,071
Interest payable.......................................... 23,960 10
Other liabilities and accrued expenses.................... 55,764 34,413
Current portion of long-term debt and other............... 9,873 808
---------- ---------
Total current liabilities......................... 277,944 161,575
Long-term debt and other.................................... 1,449,224 348,140
Stockholders' equity:
Preferred stock, $0.01 par value:
Authorized shares -- 150,000
Issued and outstanding shares -- none.................. -- --
Common stock, $0.01 par value:
Authorized shares -- 1,500,000
Issued and outstanding shares -- 168,153 and 159,267
shares at June 30, 1999 and December 31, 1998,
respectively.......................................... 1,682 1,593
Additional paid-in capital................................ 979,424 300,130
Note receivable from officer for common stock............. (1,171) (1,099)
Stock-based compensation.................................. (37,743) (1,625)
Accumulated other comprehensive income (loss)............. (9,411) 1,806
Accumulated deficit....................................... (361,735) (162,060)
---------- ---------
Total stockholders' equity........................ 571,046 138,745
---------- ---------
Total liabilities and stockholders' equity........ $2,298,214 $ 648,460
========== =========
</TABLE>

See accompanying notes to consolidated financial statements.
3
<PAGE> 4

AMAZON.COM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
QUARTER ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1999 1998 1999 1998
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales..................................... $ 314,377 $115,982 $ 608,019 $203,343
Cost of sales................................. 246,846 89,794 475,696 157,857
--------- -------- --------- --------
Gross profit.................................. 67,531 26,188 132,323 45,486
Operating expenses:
Marketing and sales......................... 85,949 26,968 146,667 46,873
Product development......................... 34,288 8,745 57,690 15,942
General and administrative.................. 14,546 3,273 25,790 5,268
Merger, acquisition and investment related
costs, including amortization of
intangibles and equity in losses of
affiliates............................... 50,553 5,410 75,773 5,411
Stock-based compensation.................... 4,669 192 4,782 377
--------- -------- --------- --------
Total operating expenses............ 190,005 44,588 310,702 73,871
Loss from operations.......................... (122,474) (18,400) (178,379) (28,385)

Interest income............................... 12,901 3,390 23,827 5,035
Interest expense.............................. (28,435) (7,569) (45,123) (9,598)
--------- -------- --------- --------
Net interest expense........................ (15,534) (4,179) (21,296) (4,563)
Net loss...................................... $(138,008) $(22,579) $(199,675) $(32,948)
========= ======== ========= ========
Basic and diluted loss per share.............. $ (0.86) $ (0.15) $ (1.26) $ (0.23)
========= ======== ========= ========
Shares used in computation of basic and
diluted loss per share...................... 161,170 146,277 159,053 143,802
========= ======== ========= ========
</TABLE>

See accompanying notes to consolidated financial statements.
4
<PAGE> 5

AMAZON.COM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
SIX-MONTHS ENDED
JUNE 30,
-----------------------
1999 1998
----------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $ (199,675) $(32,948)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 13,325 3,492
Amortization of deferred compensation related to stock
options............................................... 4,782 377
Non-cash merger, acquisition, and investment related
costs, including amortization of intangibles and
equity in losses of affiliates........................ 75,773 5,411
Loss on sale of marketable securities.................. 7,440 --
Non-cash interest expense.............................. 20,526 7,085
----------- --------
Net cash used in operating activities before changes
in operating assets and liabilities................. (77,829) (16,583)
Changes in operating assets and liabilities:
Inventories............................................ (29,886) (8,047)
Prepaid expenses and other............................. (31,513) (8,291)
Accounts payable....................................... 51,539 13,571
Accrued advertising.................................... 8,854 6,517
Interest payable....................................... 23,950 (177)
Other liabilities and accrued expenses................. 8,077 5,919
----------- --------
Net cash provided by changes in operating assets and
liabilities......................................... 31,021 9,492
Net cash used in operating activities............. (46,808) (7,091)
INVESTING ACTIVITIES:
Sales and maturities of marketable securities............. 2,849,132 55,136
Purchases of marketable securities........................ (3,621,234) (269,068)
Purchases of fixed assets................................. (111,097) (8,956)
Acquisitions, dispositions, and investments in
businesses............................................. (107,362) (14,993)
----------- --------
Net cash used in investing activities............. (990,561) (237,881)
FINANCING ACTIVITIES:
Proceeds from issuance of capital stock and exercise of
stock options.......................................... 21,626 9,635
Proceeds from long-term debt.............................. 1,250,000 325,987
Repayment of long-term debt............................... (182,479) (77,246)
Financing costs........................................... (34,937) (7,783)
----------- --------
Net cash provided by financing activities......... 1,054,210 250,593
Effect of exchange rate changes............................. 137 (35)
----------- --------
Net increase in cash........................................ 16,978 5,586
Cash at beginning of period................................. 25,561 1,876
----------- --------
Cash at end of period....................................... $ 42,539 $ 7,462
=========== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Fixed assets acquired under capital leases.................. $ 22,637 $ --
Fixed assets acquired under financing agreements............ 5,608 --
Stock issued in connection with business acquisitions....... 617,007 39,812
</TABLE>

See accompanying notes to consolidated financial statements.
5
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AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 -- ACCOUNTING POLICIES

Unaudited Interim Financial Information

The interim consolidated financial statements as of June 30, 1999 have been
prepared by Amazon.com, Inc. ("Amazon.com" or the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC") for
interim financial reporting. These consolidated statements are unaudited and, in
the opinion of management, include all adjustments (consisting of normal
recurring adjustments and accruals) necessary to present fairly the consolidated
balance sheets, consolidated operating results, and consolidated cash flows for
the periods presented in accordance with generally accepted accounting
principles. The consolidated balance sheet at December 31, 1998 has been derived
from the audited consolidated financial statements at that date. Operating
results for the quarter and six-month periods ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted in accordance with the rules and
regulations of the SEC. These consolidated financial statements should be read
in conjunction with the audited consolidated financial statements, and
accompanying notes, included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998. Certain prior period amounts have been
reclassified to conform to the current period presentation.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

Comprehensive Loss

Comprehensive loss is comprised of net loss, unrealized gains and losses on
marketable securities and foreign currency translation adjustments.
Comprehensive loss was $143.0 million and $22.6 million for the quarters ended
June 30, 1999 and 1998, and $210.9 million and $32.9 million for the six-month
periods ended June 30, 1999 and 1998, respectively.

NOTE 2 -- BUSINESS COMBINATIONS AND INVESTMENTS

The Company completed three significant acquisitions during the second
quarter of 1999: e-Niche Incorporated ("Exchange.com"), Accept.com Financial
Services Corporation ("Accept.com"), and Alexa Internet ("Alexa"). Each
acquisition was recorded using the purchase method of accounting under APB
Opinion No. 16. The Company issued an aggregate of approximately 4.0 million
shares of common stock to effect the transactions. The aggregate purchase price
of the acquired companies, plus related charges, was approximately $579.7
million, and was comprised of common stock and cash. Results of operations for
each acquired company have been included in the financial results of the Company
from the closing date of each transaction forward.

In accordance with APB Opinion No. 16, all identifiable assets were
assigned a portion of the cost of the acquired companies (purchase price) on the
basis of their respective fair values. Identifiable intangible assets and
goodwill are included in "Intangibles and other" on the accompanying
consolidated balance sheets and are amortized over their average useful lives of
3 years. Intangible assets were identified and valued by considering the
Company's intended use of acquired assets, and analysis of data concerning
products, technologies, markets, historical financial performance, and
underlying assumptions of future performance. The economic

6
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AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

and competitive environment in which the Company and the acquired companies
operate was also considered in the valuation analysis.

An immaterial portion of the purchase price of the Accept.com and Alexa
transactions attributable to in-process research and development efforts has
been expensed because, at the time of acquisition, technological feasibility had
not been established and no alternative future uses existed. Purchased
in-process research and development was identified and valued through
discussions with the acquired companies' management and the analysis of data
concerning developmental products, their respective stage of development, the
time and resources needed to complete them, their expected income generating
ability, target markets, and associated risks.

On May 14, 1999, the Company completed its acquisition of Exchange.com,
which has developed Internet marketplaces and related online communities that
bring together buyers and sellers of rare and hard-to-find items. In connection
with the acquisition, the Company assumed all outstanding Exchange.com stock
options and issued 946,972 shares of Amazon.com common stock to acquire all of
the outstanding common shares of Exchange.com. Pursuant to the terms of the
agreement, the purchase price may increase by up to $27.5 million based on the
tenure of certain employees.

On June 9, 1999, the Company completed its acquisition of Accept.com, which
is an e-commerce company currently developing technology to simplify
person-to-person and business-to-consumer transactions on the Internet. In
connection with the acquisition, the Company assumed all outstanding Accept.com
stock options and issued 877,657 shares of Amazon.com common stock to acquire
all of the outstanding common shares of Accept.com.

On June 10, 1999, the Company completed its acquisition of Alexa, which has
developed a web navigation service that works with Internet browsers to provide
useful information about the sites being viewed and suggests related sites. In
connection with the acquisition, the Company assumed all outstanding Alexa stock
options and issued 2,184,942 shares of Amazon.com common stock to acquire all of
the outstanding common shares of Alexa.

The Company made an additional immaterial acquisition and other investments
during the quarter ended June 30, 1999 totaling $152.6 million. Equity
investments are reflected in "Other investments" in the consolidated balance
sheets and are accounted for under the equity method. The Company's share of
affiliates' losses has been recognized in income from the closing date of the
related transactions forward.

In connection with certain acquisitions, the Company has conditioned a
portion of the acquisition consideration on the continued tenure of key
employees. Under generally accepted accounting principles, a portion of this
amount is accounted for as compensation rather than as a component of purchase
price. Consequently, a maximum of $47.8 million in additional consideration
relating to the Company's second quarter acquisitions, may be recorded as
stock-based compensation expense. Amounts will be "earned" based on tenure of
certain employees and will be recognized as stock-based compensation expense
over a period of 12-36 months.

The pro forma consolidated financial information for the six months ended June
30, 1999 and 1998, determined as if all acquisitions had occurred on January 1
of each year, would have resulted in net sales of $608.9 million and $203.6
million, net loss of $313.6 million and $155.7 million, and basic and diluted
loss per share of $1.93 and $1.05, respectively. This unaudited pro forma
information is presented for illustrative purposes only and is not necessarily
indicative of the results of operations in future periods or results that would
have been achieved had Amazon.com and the acquired companies been combined
during the specified periods.

7
<PAGE> 8
AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

NOTE 3 -- MARKETABLE SECURITIES

Marketable securities available for sale, at fair value, consist of the
following:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
Asset-backed and agency securities................. $ 428,011 $ 83,569
Commercial paper and short-term obligations........ 230,168 114,180
Treasury notes and bonds........................... 222,099 89,013
Corporate notes and bonds.......................... 214,655 51,351
Equity securities.................................. 6,765 9,771
---------- --------
Total marketable securities.............. $1,101,698 $347,884
========== ========
</TABLE>

The Company's marketable securities consist primarily of high quality
short- to intermediate-term fixed income securities and money market mutual
funds. The Company classifies all investments of cash as marketable securities,
including highly liquid investments with maturities of three months or less and
reflects the related cash flows as investing cash flows in the Consolidated
Statements of Cash Flows. As a result of the classification of highly liquid
investments within marketable securities, a significant portion of the Company's
gross marketable securities purchases and maturities disclosed as investing cash
flows is related to highly liquid investments.

At June 30, 1999 and December 31, 1998 the cost of the Company's marketable
securities approximated fair value.

NOTE 4 -- FIXED ASSETS

Fixed assets, at cost, consist of the following:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Computers and equipment.............................. $ 56,691 $33,061
Leasehold improvements............................... 23,544 5,535
Leased assets........................................ 22,927 442
Purchased software................................... 4,468 2,787
Construction/installation in progress................ 75,598 1,760
-------- -------
183,228 43,585
Less accumulated depreciation and amortization....... 26,895 13,794
-------- -------
Fixed assets, net.................................. $156,333 $29,791
======== =======
</TABLE>

NOTE 5 -- INTANGIBLES AND OTHER

Intangibles and other, arising primarily from business acquisitions,
consists of $657.1 million in goodwill and $185.4 million in purchased
intangibles and other assets, net of accumulated amortization of $100.6 million
as of June 30, 1999. Total net intangibles and other assets were $179.3 million
as of December 31, 1998 and were comprised primarily of goodwill.

NOTE 6 -- DEFERRED CHARGES

Deferred charges relate to fees and charges resulting from the issuance of
Company debt. The net increase in deferred charges relates to the February 1999
issuance of Convertible Notes, offset by amortization
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AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

charges and periodic repurchases of the Senior Discount Notes (see Note 7). Net
deferred charges are amortized into interest expense over the life of the
underlying debt.

NOTE 7 -- LONG-TERM DEBT

Convertible Subordinated Notes

On February 3, 1999, the Company completed an offering of $1.25 billion of
4 3/4% Convertible Subordinated Notes due 2009 (the "Convertible Notes"). The
Convertible Notes are convertible into the Company's common stock at the
holders' option at an initial conversion price of $156.055 per share, subject to
adjustment in certain events. Interest on the Convertible Notes is payable
semi-annually in arrears on February 1 and August 1 of each year, and commenced
August 1, 1999. The Convertible Notes are unsecured and are subordinated to the
prior payment in full of all of Amazon.com's senior debt and are also
effectively subordinated to all indebtedness and other liabilities of the
Company. Subject to certain conditions, the Convertible Notes may be redeemed at
the option of the Company prior to February 6, 2002, in whole or in part, at the
redemption price of $1,000 per note, plus accrued and unpaid interest, if the
closing price for the Company's common stock has exceeded 150% of the conversion
price for at least 20 trading days within a period of 30 consecutive trading
days ending on the trading day prior to the date of mailing of the notice of
redemption. Upon any redemption made prior to February 6, 2002, the Company will
also make an additional cash payment with respect to the Convertible Notes
called for redemption in an amount equal to $212.60 per $1,000 note redeemed,
less the amount of any interest actually paid on such Convertible Note prior to
the call for redemption. At any time on and after February 6, 2002, the Company
may redeem the Notes, in whole or in part, at the redemption prices set forth in
the Convertible Notes indenture.

Upon the occurrence of a "fundamental change" (as defined in the
Convertible Notes indenture) prior to the maturity of the notes, each holder
thereof shall have the right to require Amazon.com to redeem all or any part of
such holder's Convertible Notes at a price equal to 100% of the principal amount
of the notes being redeemed, together with accrued interest.

Senior Discount Notes

In May 1998, the Company completed the offering of approximately $530
million aggregate principal amount of 10% Senior Discount Notes due 2003 (the
"Senior Discount Notes") for aggregate gross proceeds of approximately $326
million. The Senior Discount Notes were sold at a substantial discount from
their principal amount at maturity of $530 million. Prior to November 1, 2003,
no cash interest payments are required; instead, interest will accrete during
this period to the principal amount at maturity. From and after May 1, 2003, the
Senior Discount Notes will bear interest of a rate of 10% per annum payable in
cash on each May 1 and November 1.

During the six months ended June 30, 1999 the Company repurchased $266.0
million (face amount) of the Senior Discount Notes, representing accreted value
of $178.4 million. As of June 30, 1999, the remaining face amount outstanding
was $264.1 million.

NOTE 8 -- STOCKHOLDERS' EQUITY

On June 1, 1998, the Company effected a two-for-one stock split to
stockholders of record on May 20, 1998, and on January 4, 1999, effected a
three-for-one stock split to stockholders of record on December 18, 1998. Both
stock splits were effected in the form of a stock dividend. The accompanying
consolidated financial statements have been restated to reflect the splits.

The Convertible Notes (see Note 7) initially may be converted into an
aggregate of 8,009,996 shares of Amazon.com common stock.

9
<PAGE> 10
AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

On July 21, 1999, the Company's Board of Directors approved a 2-for-1 split
of the Company's common stock. Stockholders will receive one additional share
for every share held on the record date of August 12, 1999. The split will take
effect on September 1, 1999; accordingly, the stock split has not been reflected
in the accompanying consolidated financial statements.

NOTE 9 -- EARNINGS (LOSS) PER SHARE

The following represents the calculations for net loss per share:

<TABLE>
<CAPTION>
QUARTER ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net loss -- as reported......................... $138,008 $ 22,579 $199,675 $ 32,948
======== ======== ======== ========
Weighted average shares outstanding............. 163,981 150,248 162,676 148,072
Less weighted average common shares issued
subject to repurchase agreements.............. (2,811) (3,971) (3,623) (4,270)
-------- -------- -------- --------
Shares used in computation of basic and diluted
loss per share................................ 161,170 146,277 159,053 143,802
======== ======== ======== ========
Basic and diluted loss per share................ $ (0.86) $ (0.15) $ (1.26) $ (0.23)
======== ======== ======== ========
</TABLE>

All of the Company's stock options are excluded from diluted loss per share
since their effect is antidilutive.

NOTE 10 -- STOCK-BASED COMPENSATION

The following table shows the amounts of stock-based compensation that
would have been recorded under the following income statement categories had
stock-based compensation not been separately stated in the Consolidated
Statements of Operations:

<TABLE>
<CAPTION>
QUARTER ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
-------------- ----------------
1999 1998 1999 1998
------ ---- ------- -----
<S> <C> <C> <C> <C>
Marketing and sales................................ $ 81 $ 62 $ 178 $ 71
Product development................................ 4,386 88 4,462 210
General and administrative......................... 202 42 142 96
------ ---- ------ ----
$4,669 $192 $4,782 $377
====== ==== ====== ====
</TABLE>

NOTE 11 -- COMMITMENTS AND CONTINGENCIES

Legal Proceedings

In October 1998, Wal-Mart Stores, Inc. ("Wal-Mart") filed a lawsuit in
Bentonville, Arkansas against the Company and other defendants alleging actual
and threatened misappropriation of trade secrets and ancillary common-law
claims. In January 1999, Wal-Mart filed an identical action in Seattle,
Washington, and the Arkansas action was dismissed. The parties settled the
pending action without payment by either party on April 2, 1999.

10
<PAGE> 11
AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

On April 7, 1999, Amazon Bookstore Cooperative, Inc. ("ABC") filed a
lawsuit in Minneapolis, Minnesota against the Company alleging trademark
infringement and unfair competition under state and federal law. ABC does not
have a federal or state registration for any mark and is attempting to obtain
cancellation of the Company's registration of the marks Amazon.com, Amazon.com
Books and Amazon Books, injunctive relief precluding the Company's use of these
marks, damages, the Company's profits, treble damages, costs and attorneys'
fees. ABC filed for preliminary injunctive relief and, on August 2, 1999, the
court denied such relief. The Company is vigorously defending against the
lawsuit.

From time to time, the Company is subject to other legal proceedings and
claims in the ordinary course of business. The Company currently is not aware of
any such legal proceedings or claims that it believes will have, individually or
in the aggregate, a material adverse effect on its business, prospects,
financial condition and operating results.

11
<PAGE> 12

ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations" includes "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. This Act
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about themselves so long as they identify
these statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact we
make in this Form 10-Q are forward-looking. In particular, the statements herein
regarding industry prospects and our future results of operations or financial
position are forward-looking statements. Forward-looking statements reflect our
current expectations and are inherently uncertain. Our actual results may differ
significantly from our expectations. The section entitled "Additional Factors
That May Affect Future Results" describes some, but not all, of the factors that
could cause these differences.

OVERVIEW

Amazon.com, Inc. ("Amazon.com" or "the Company") is the Internet's number
one book, music and video retailer. Amazon.com, one of the most widely known,
used and cited commerce sites on the Web, offers more than 4.7 million book,
music CD, video, DVD, computer game and other titles, toys and electronics and a
free electronic greeting card service. Amazon.com also provides a community of
online shoppers an easy and safe way to purchase and sell a large selection of
products through Amazon.com Auctions. Amazon.com is a proven technology leader;
the Company developed electronic commerce innovations such as 1-Click ordering,
personalized shopping services and easy-to-use search and browse features.

Amazon.com was incorporated in 1994 in the state of Washington and
reincorporated in 1996 in the state of Delaware. The Company's principal
corporate offices are located at 1200 12th Avenue South, Suite 1200, Seattle,
Washington 98144-2734. Our mailing address and telephone number are P.O. Box
81226, Seattle, Washington, 98108-1226, (206) 266-1000.

Amazon.com, Amazon.com Auctions, Amazon.co.uk, Amazon.de, Internet Movie
Database, PlanetAll, Earth's Biggest Selection, Bid-Click and 1-Click are either
registered trademarks or trademarks of Amazon.com or its affiliates. All other
names mentioned in this document may be trademarks of their respective owners.

RECENT EVENTS

In March 1999, the Company launched Amazon.com Auctions, an on-line
auctions service that is designed to help people find, discover, buy -- and now
sell -- a large selection of products online. In April 1999, the Company
launched Amazon.com Cards, a free electronic greeting card service, and in July
1999, the Company launched two new stores: Amazon.com Electronics and Amazon.com
Toys & Games. New product offerings and other lines of business generally result
in incremental increases in headcount and related costs, as well as technology
and related infrastructure costs. Such costs are incurred in preparation for new
product launches, as well as in connection with ongoing store operations.

On May 19, 1999, the Company filed a universal shelf registration statement
on Form S-3 with the SEC which will permit the Company, from time to time, to
offer and sell various types of securities, up to a total value of $2 billion.
The registration statement was declared effective by the SEC on June 11, 1999.

The Company announced several strategic acquisitions and investments in the
six-month period ended June 30, 1999, including Exchange.com, Alexa and
Accept.com.

In late June 1999 Amazon.com named Joseph Galli as its president and chief
operating officer. Mr. Galli reports to Amazon.com's founder and CEO, Jeff
Bezos, and has been elected to the Company's Board of Directors.

During the six months ended June 30, 1999 the Company opened a new
distribution center in Nevada and announced additional new distribution centers
to be located in Kansas, Georgia, Kentucky, Germany and

12
<PAGE> 13

the UK. Expansion of the Company's network of highly automated distribution
centers has and will continue to require the Company to enter into lease
obligations, stock inventories, purchase fixed assets and install leasehold
improvements. Distribution center expenditures will continue to increase as the
Company brings the new facilities into service.

RESULTS OF OPERATIONS

Net Sales

<TABLE>
<CAPTION>
QUARTER ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ----------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales............ $314,377 $115,982 171% $608,019 $203,343 199%
</TABLE>

Net sales include the selling price of books, music, video and other
products sold by the Company, net of returns, as well as outbound shipping and
handling charges. Net sales also include auctions revenue, which is comprised of
placement fees and sales commissions on closed auctions. Growth in net sales
reflects a significant increase in units sold due to the growth of the Company's
customer base, repeat purchases from existing customers, and the introduction of
music and video product offerings during the second half of 1998. The Company
launched Amazon.co.uk in the United Kingdom, and Amazon.de in Germany in the
fourth quarter of 1998.

At June 30, 1999 the Company's cumulative customer accounts (inclusive of
Auctions) reached 10.7 million, compared with 8.4 million at March 31, 1999, and
6.2 million and 3.3 million at December 31, and June 30, 1998, respectively.

Net foreign sales, including domestic export and foreign-domicile sales,
represented 23.9% and 21.3% of net sales for the quarters ended June 30, 1999
and 1998, and 23.2% and 21.1% of net sales for the six-month periods ended June
30, 1999 and 1998, respectively.

Gross Profit

<TABLE>
<CAPTION>
QUARTER ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ---------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
------- ------- -------- -------- ------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Gross Profit......... $67,531 $26,188 158% $132,323 $45,486 191%
Gross Margin......... 21.5% 22.6% 21.8% 22.4%
</TABLE>

Gross profit is calculated as net sales less the cost of sales, which
consists of the cost of merchandise sold to customers and inbound and outbound
shipping costs. For the quarter and six-month periods ended June 30, 1999, gross
profit increased in absolute dollars over the same periods in 1998, primarily
reflecting the Company's increased sales volume. Gross margin percentages
declined slightly over the same periods due to the introduction of lower-margin
products such as music and video and the Company's newly-introduced 50% discount
on every book on the New York Times bestseller list, which more than offset the
benefit of improved product sourcing.

The Company believes that offering its customers attractive prices is an
essential component of its business strategy. Accordingly, in addition to the
50% discount on every book on the New York Times bestseller list, the Company
continues to offer up to 40% off on hundreds of thousands of other titles. The
Company may in the future expand or increase the discounts it offers to its
customers and may otherwise alter its pricing structure and policies.

The Company over time intends to expand its operations by promoting new or
complementary products or sales formats and by expanding the breadth and depth
of its product or service offerings. Gross margins attributable to new business
areas may be lower than those associated with the Company's existing business
activities. In particular, the Company anticipates that the introduction of toys
and electronics will result in lower overall gross margins in upcoming quarters.

13
<PAGE> 14

Marketing and Sales

<TABLE>
<CAPTION>
QUARTER ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
------- ------- -------- -------- ------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Marketing and
sales.............. $85,949 $26,968 219% $146,667 $46,873 213%
Percentage of
sales.............. 27.3% 23.3% 24.1% 23.1%
</TABLE>

Marketing and sales expenses consist primarily of fulfillment costs,
advertising, public relations and promotional expenditures, and all related
payroll and related expenses for personnel engaged in marketing, selling and
fulfillment activities. Fulfillment costs include the cost of operating and
staffing distribution and customer service centers. Marketing and sales expenses
increased during the quarter and six-month periods ended June 30, 1999 due to
several factors including increases in the Company's advertising and promotional
expenditures, increases in payroll and related costs associated with fulfilling
customer demand, costs associated with new product offerings, the opening of new
distribution centers, and increases in credit card merchant fees resulting from
higher sales. The Company intends to continue pursuing its branding and
marketing campaign and will incur significant incremental costs as its announced
distribution center expansion plan is effected. Increases in sales will drive
increases in fulfillment costs. As a result, the Company continues to expect
marketing and sales expenses to increase significantly in absolute dollars.

Product Development

<TABLE>
<CAPTION>
QUARTER ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
----------------- ------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
------- ------ -------- ------- ------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Product development.... $34,288 $8,745 292% $57,690 $15,942 262%
Percentage of sales.... 10.9% 7.5% 9.5% 7.8%
</TABLE>

Product development expenses consist principally of payroll and related
expenses for development, editorial, systems and telecommunications operations
personnel and consultants, systems and telecommunications infrastructure, and
costs of acquired content. The increase in product development expenses was
primarily attributable to increased staffing and associated costs related to
enhancing the features, content and functionality of the Company's Web sites and
transaction-processing systems, as well as increased investment in systems and
telecommunications infrastructure and new product offerings. All product
development costs are expensed as incurred. The Company believes that continued
investment in product development is critical to attaining its strategic
objectives. In addition to ongoing investments in its Web stores and
infrastructure, the Company intends to increase investments in product, service
and international expansion. As a result, the Company expects product
development expenses to increase significantly in absolute dollars.

General and Administrative

<TABLE>
<CAPTION>
QUARTER ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ---------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
------- ------ -------- ------- ------ --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
General and
administrative......... $14,546 $3,273 344% $25,790 $5,268 390%
Percentage of sales...... 4.6% 2.8% 4.2% 2.6%
</TABLE>

General and administrative ("G&A") expenses consist of payroll and related
expenses for executive, finance and administrative personnel, recruiting,
professional fees and other general corporate expenses. Increases in G&A costs
are largely attributable to increased payroll-related and infrastructure costs
associated with the Company's expansion efforts, legal and other professional
fees, and recruiting costs. The company expects G&A costs to continue to
increase commensurate with its expansion plans.

14
<PAGE> 15

Merger, Acquisition and Investment Related Costs, Including Amortization of
Intangibles and Equity in Losses of Affiliates

<TABLE>
<CAPTION>
QUARTER ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ---------------------
1999 1998 1999 1998
------- ------ ------- ------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Merger, acquisition and investment
related costs including amortization of
intangibles and equity in losses of
affiliates............................. $50,553 $5,410 $75,773 $5,411
</TABLE>

Merger, acquisition and investment related costs ("M&A Costs") consist of
amortization of goodwill and other purchased intangibles, equity in the losses
of affiliates, and certain merger, acquisition and investment related charges.
The Company expects M&A Costs to increase in the third quarter of 1999, because
the Company will record a full quarter of amortization expense and equity in
losses of affiliates relating to the acquisitions and investments made during
the second quarter. It is likely that the Company will continue to expand its
business through acquisitions and investments which would cause M&A Costs to
increase.

Stock-Based Compensation

<TABLE>
<CAPTION>
QUARTER ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
------------------ --------------------
1999 1998 1999 1998
------ ---- ------ ----
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Stock-based compensation................. $4,669 $192 $4,782 $377
</TABLE>

Stock-based compensation is comprised of the portion of acquisition related
consideration conditioned on the continued tenure of key employees, which must
be classified as compensation expense under generally accepted accounting
principles. Stock-based compensation also includes stock-based charges such
option related deferred compensation recorded at the Company's initial public
offering. The increase in stock-based compensation results primarily from the
1999 acquisition activity. Stock-based compensation for the 3-month and 6-month
periods ended June 30, 1998 relates primarily to option related deferred
compensation recorded at time of the Company's initial public offering.

Interest Income and Expense

<TABLE>
<CAPTION>
QUARTER ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- ------- -------- -------- ------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income...... $ 12,901 $ 3,390 281% $ 23,827 $ 5,035 373%
Interest expense..... (28,435) (7,569) 276% (45,123) (9,598) 370%
</TABLE>

Interest income on cash and marketable securities increased due to higher
balances resulting from the Company's financing activities, principally the
February 1999 issuance of $1.25 billion aggregate principal amount of 4 3/4%
Convertible Subordinated Notes due 2009 ("Convertible Notes"). Interest expense
for the quarter and six-months ended June 30, 1999 consists primarily of
interest on the Convertible Notes and the 10% Senior Discount Notes due 2003
("Senior Discount Notes"), the amortization of deferred charges and interest on
asset acquisitions financed through loans and capital leases.

Income Taxes

The Company has not generated any taxable income to date and therefore has
not paid any federal income taxes since inception. Utilization of the Company's
net operating loss carryforwards, which begin to expire in 2011, may be subject
to certain limitations under Section 382 of the Internal Revenue Code of 1986,
as amended. Due to uncertainties regarding realizability of the deferred tax
assets, the Company has provided a valuation allowance on the deferred tax asset
in an amount necessary to reduce the net deferred tax asset to zero.

15
<PAGE> 16

Pro Forma Results of Operations

Pro forma information regarding the Company's results, excluding merger,
acquisition, investment related costs, and stock-based compensation (discussed
above) are presented for informational purposes and are not in accordance with
generally accepted accounting principles.

<TABLE>
<CAPTION>
QUARTER ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ---------------------
1999 1998 1999 1998
-------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Pro forma loss from operations, excluding
merger and acquisition, investment and
stock-based compensation costs............... $(67,252) $(12,798) $ (97,824) $(22,597)
======== ======== ========= ========
Pro forma net loss, excluding merger and
acquisition, investment and stock-based
compensation costs........................... $(82,786) $(16,977) $(119,120) $(27,160)
======== ======== ========= ========
Pro forma basic and diluted loss per share,
excluding merger and acquisition, investment
and stock-based compensation costs........... $ (0.51) $ (0.12) $ (0.75) $ (0.19)
======== ======== ========= ========
Shares used in computation of pro forma basic
and diluted loss per share................... 161,170 146,277 159,053 143,802
======== ======== ========= ========
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1999 the Company's principal sources of liquidity consisted of
$42.5 million of cash and $1.1 billion of marketable securities compared to
$25.6 million of cash and $347.9 million of marketable securities at December
31, 1998.

Net cash used in operating activities was $46.8 million and $7.1 million
for the six-month periods ended June 30, 1999 and 1998, respectively. Net
operating cash flows were primarily attributable to quarterly net losses and
increases in inventories and prepaid expenses and other, partially offset by
non-cash charges for depreciation and amortization and merger and acquisition
related costs, as well as increases in accounts payable and interest payable.

Net cash used in investing activities was $990.6 million and $237.9 million
for the six-month periods ended June 30, 1999 and 1998, respectively, and
consisted of net purchases of marketable securities, purchases of fixed assets,
and cash paid for acquisitions and equity investments. Cash available for
investment purposes increased substantially in 1999 as a result of the issuance
of the Convertible Notes.

Net cash provided by financing activities of $1.1 billion for the six-month
period ended June 30, 1999 resulted from proceeds relating to the issuance of
the Convertible Notes, net of financing costs, and proceeds from issuance of
capital stock and exercise of stock options, offset by cash payments of $182.5
million for repurchases of the Senior Discount Notes.

As of June 30, 1999, the Company's principal commitments consisted of
obligations outstanding under its Convertible Notes (including interest
payments) and Senior Discount Notes, obligations in connection with the
acquisition of fixed assets and leases, and commitments for advertising and
promotional arrangements. Expansion of the Company's distribution center network
has and will require it to continue to commit to lease obligations, stock
inventories, purchase fixed assets and install leasehold improvements. As of
June 30, 1999, a majority of the planned fixed asset and inventory expenditures
relating to the completion of the newly identified distribution centers had yet
to be incurred. Failure to achieve favorable financing for asset acquisitions
could negatively impact the Company's cash flows. In addition, the Company plans
to continue to increase its merchandise inventory in order to provide broader
product offerings and better availability to customers and to support the
recently introduced toys and electronic product lines. Geographic expansion and
continued acquisitions and investments will also require future capital
expenditures.

The Company believes that current cash and marketable securities balances
will be sufficient to meet its anticipated cash needs for at least the next 12
months. However, any projections of future cash needs and cash

16
<PAGE> 17

flows are subject to substantial uncertainty. If current cash, marketable
securities and cash that may be generated from operations are insufficient to
satisfy the Company's liquidity requirements, the Company may seek to sell
additional equity or debt securities or to obtain a line of credit. On May 19,
1999, the Company filed a universal shelf registration statement on Form S-3
with the SEC which will permit the Company, from time to time, to offer and sell
various types of securities, up to a total value of $2 billion. The registration
statement was declared effective by the SEC on June 11, 1999. The sale of
additional equity or convertible debt securities could result in additional
dilution to the Company's stockholders. In addition, the company will, from time
to time, consider the acquisition of or investment in complementary businesses,
products, services and technologies, and the repurchase and retirement of debt,
which might impact the Company's liquidity requirements or cause the Company to
issue additional equity or debt securities. There can be no assurance that
financing will be available in amounts or on terms acceptable to the Company, if
at all.

YEAR 2000 IMPLICATIONS

Many currently installed computer systems, software programs, and embedded
data chips are programmed using a 2-digit date field and are therefore unable to
distinguish dates beyond the 20th century (collectively, the "Year 2000" issue).
A failure to identify and correct any mission-critical internal or third party
Year 2000 processing problem could have a material adverse operational or
financial consequence to the Company.

State of Readiness

The Company has established a Year 2000 Project Team that, together with
external consultants, has developed a process for addressing the Year 2000 issue
including performing an inventory, an assessment, remediation procedures (to the
extent necessary) and testing procedures of all mission-critical information
systems and equipment and machinery that contain embedded technology, as well as
obtaining assurances from all mission-critical third-parties as to their own
Year 2000 preparedness. The Company assesses as "mission-critical" any
information systems, equipment and machinery and third-parties that
substantially affect the Company's ability to take, process and fulfill orders,
impact the Company's ability to gather and process financial information, or
otherwise significantly impact the customer experience.

Many of the steps to addressing the Year 2000 issue are performed
concurrently. A description of each phase of the process is as follows:

Inventory -- this phase includes the identification of all internal
information systems, machinery and equipment of the Company and third-party
relationships. The inventory phase is greater than 75% complete and is expected
to be substantially complete by the end of the third quarter of 1999.

Assessment -- this phase includes the application of a structured
code-release process/routine to evaluate the Year 2000 compliance status of all
mission-critical internal information systems. This phase also includes formal
communications with mission-critical third parties regarding their own Year 2000
preparedness and with manufacturers as to whether mission-critical equipment and
machinery are Year 2000 compliant. The assessment phase, as it relates to
internal information systems is greater than 60% complete with an estimated
completion in the third quarter of 1999. The assessment of mission critical
third parties, including manufacturers of mission-critical equipment and
machinery, is underway and is expected to be completed in the fourth quarter of
1999.

Remediation -- this phase includes all measures necessary to correct Year
2000 non-compliance in mission-critical internal information systems. Such
measures primarily include the re-programming of internal code or replacement of
non-compliant mission-critical information systems, equipment and machinery.
Remediation of mission-critical internal information systems is underway and is
expected to be substantially complete in the third quarter of 1999. Remediation
of mission-critical equipment and machinery (to the extent necessary) is
expected to be completed in the fourth quarter of 1999. Remediation of
mission-critical third parties will be addressed through contingency planning.

17
<PAGE> 18

Testing -- this phase includes the application of a structured code-release
process/routine to re-evaluate the Year 2000 compliance status of previously
non-compliant mission-critical information systems, date-forward testing of
mission-critical equipment and machinery and electronic data interchange testing
with mission-critical third parties. A significant amount of testing has yet to
occur and is expected to continue into the fourth quarter of 1999.

Year 2000 Costs

The Company has not incurred to date and does not expect to incur material
costs in its efforts to address the Year 2000 issue. A Year 2000 budget of
approximately $1 million has been established for external costs (costs of
consultants and purchases of hardware and software) associated with the project.
The Company has not tracked the costs of Company employees working on the Year
2000 issue. No significant information technology projects have been deferred
due to the Year 2000 issue, and all costs related to the Year 2000 issue have
been funded from operations. Budgeted amounts used to date have not been
significant, however, the remaining budgeted amount is expected to be utilized
during the remainder of 1999, primarily for costs relating to third-party
consultants.

Year 2000 Risks

There can be no assurance that the Company will be completely successful in
its efforts to address the Year 2000 issue or that problems arising from the
Year 2000 issue will not cause a material adverse effect on the operating
results or financial condition of the Company. The Company believes, however,
that its most reasonably likely worst-case scenario would relate to problems
with the systems of third parties rather than with the Company's internal
systems, including temporary power outages at distribution centers, delayed
transportation of products by third parties, temporary building management
issues (e.g. false fire alarms, malfunction of elevators, etc.), and delayed
customer purchases due to non-compliant personal computers. The Company is
limited in its efforts to address the Year 2000 issue as it relates to third
parties and is relying solely on the assurances of these third parties as to
their Year 2000 preparedness.

Contingency Planning

The Company views contingency planning as broader than the Year 2000 issue
and believes that a comprehensive contingency plan should address any known
circumstance that may cause a disruption of operations or an adverse customer
experience. The Company has engaged a third-party consulting firm to assist with
its contingency planning and expects to complete its contingency planning in the
fourth quarter of 1999. The Company cannot guarantee that the contingency plan
will adequately address all circumstances that may disrupt operations or that
such planning will prevent circumstances that may cause a material adverse
effect on the operating results or financial condition of the Company.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

In addition to the factors discussed in the "Overview" and "Liquidity and
Capital Resources" sections of this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, the following
additional factors may affect the Company's future results:

We Have a Limited Operating History

We incorporated in July 1994 and began offering products for sale on our
Web site in July 1995. Accordingly, we have a relatively short operating history
upon which you can evaluate our business and prospects. You should consider our
prospects in light of the risks, expenses and difficulties frequently
encountered by early-stage online commerce companies. As an early-stage online
commerce company, we have an evolving and unpredictable business model, we face
intense competition, we must effectively manage our growth and we must respond
quickly to rapid changes in customer demands and industry standards. We may not
succeed in addressing these challenges and risks.

18
<PAGE> 19

We Have an Accumulated Deficit and Anticipate Further Losses

We have incurred significant losses since we began doing business. As of
June 30, 1999, we had an accumulated deficit of $361.7 million. To succeed we
must invest heavily in marketing and promotion and in developing our product,
technology and operating infrastructure. In addition, the expenses associated
with our recent acquisitions, and interest expense related to our outstanding
notes, will adversely affect our operating results. Our aggressive pricing
programs have resulted in relatively low product gross margins, so we need to
generate and sustain substantially higher revenues in order to become
profitable. Although our revenues have grown, we cannot sustain our current rate
of growth. Our percentage growth rate will decrease in the future. For these
reasons we believe that we will continue to incur substantial operating losses
for the foreseeable future, and these losses may be significantly higher than
our current losses.

Unpredictability of Future Revenues; Potential Fluctuations in Quarterly
Operating Results; Seasonality; Consumer Trends

Due to our limited operating history and the unpredictability of our
industry, we cannot accurately forecast our revenues. We base our current and
future expense levels on our investment plans and estimates of future revenues.
Our expenses are to a large extent fixed. We may not be able to adjust our
spending quickly if our revenues fall short of our expectations. Further, we may
make pricing, purchasing, service, marketing, acquisition or financing decisions
that could adversely affect our business results.

Our quarterly operating results will fluctuate for many reasons, including:

- our ability to retain existing customers, attract new customers and
satisfy our customers' demands,

- our ability to acquire merchandise, manage our inventory and fulfill
orders,

- changes in gross margins of our current and future products, services and
markets,

- purchases of large quantities of toys and electronics products,
particularly in advance of the holidays for which demand may not
materialize,

- introduction of our new sites, services and products or those of
competitors,

- changes in usage of the Internet and online services and consumer
acceptance of the Internet and online commerce,

- timing of upgrades and developments in our systems and infrastructure,

- the level of traffic on our Web sites,

- the effects of acquisitions and other business combinations, and related
integration,

- technical difficulties, system downtime or Internet brownouts,

- introductions of popular books, music selections, videos, toys,
electronic products and other products or services, and our ability to
properly anticipate demand,

- the mix of books, music, videos, toys, electronics products and other
products sold by us,

- our level of merchandise returns, and

- disruptions in service by common shipping carriers due to strikes or
otherwise.

The popularity of our auction services and certain items offered through
our auction services may vary over time due to perceived scarcity, subjective
value, "fads" and consumer trends in general. If the popularity of our auction
services or the items that are listed for sale declines, our revenues from our
auction services will fall.

Both seasonal fluctuations in Internet usage and traditional retail
seasonality may affect our business. Internet usage generally declines during
the summer. Sales in the traditional retail book, music, toy and

19
<PAGE> 20

electronics industries usually increase significantly in the fourth calendar
quarter of each year. The fourth quarter seasonal impact may be even more
pronounced in our toys and consumer electronics businesses.

For these reasons, you should not rely on period-to-period comparisons of
our financial results to forecast our future performance. Our future operating
results may fall below the expectations of securities analysts or investors,
which would likely cause the trading price of our common stock to decline.

Intense Competition

The online commerce market is new, rapidly evolving and intensely
competitive. In addition, the retail book, music, video, toy and consumer
electronics industries are intensely competitive. Our current or potential
competitors include:

- online vendors of books, CDs, videotapes, DVDs, toys and electronics,

- a number of indirect competitors, including Web portals and Web search
engines, such as Yahoo! Inc. and America Online, Inc., that are involved
in online commerce, either directly or in collaboration with other
retailers,

- online auction services, including eBay, Inc. and Yahoo! Auctions run by
Yahoo!,

- publishers, distributors and retail vendors of books, music, video and
other products, including Barnes & Noble, Inc., Bertelsmann AG and other
large specialty booksellers and media corporations, many of which possess
significant brand awareness, sales volume and customer bases,

- major store-based retailers of toys, other children's products and
electronics, and

- traditional retailers and manufacturers who currently sell, or who may
sell, products or services through the Internet, mail order or direct
marketing.

We believe that the principal competitive factors in our market are brand
recognition, selection, personalized services, convenience, price,
accessibility, customer service, quality of search tools, quality of editorial
and other site content, and reliability and speed of fulfillment.

Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than we have. They may be able
to secure merchandise from vendors on more favorable terms and may be able to
adopt more aggressive pricing or inventory policies. They also can devote more
resources to technology development and marketing than we can. We also expect to
experience increased competition from online commerce sites that provide goods
and services at or near cost, relying on advertising revenues to achieve
profitability.

As the online commerce market continues to grow, other companies may enter
into business combinations or alliances that strengthen their competitive
positions. For example, (1) Bertelsmann purchased a significant interest in
Barnes & Noble's online venture, barnesandnoble.com inc., and has launched
online stores in several countries, and (2) CDNow, Inc. agreed to merge with
Columbia House, the jointly owned music retail arm of Sony and Time Warner. We
may not be able to compete successfully against these and future competitors.

Competition in the Internet and online commerce markets probably will
intensify. As various Internet market segments obtain large, loyal customer
bases, participants in those segments may use their market power to expand into
the markets in which we operate. In addition, new and expanded Web technologies
may increase the competitive pressures on online retailers. For example,
"shopping agent" technologies permit customers to quickly compare our prices
with those of our competitors. This increased competition may reduce our
operating margins, diminish our market share or impair the value of our brand.

Risks of System Interruption

Customer access to our Web sites directly affects the volume of orders we
fulfill and thus affects our revenues. We experience occasional system
interruptions that make our Web sites unavailable or prevent us

20
<PAGE> 21

from efficiently fulfilling orders, which may reduce the volume of goods we sell
and the attractiveness of our products and services. These interruptions will
continue. We need to add additional software and hardware and upgrade our
systems and network infrastructure to accommodate increased traffic on our Web
sites and increased sales volume. Without these upgrades, we may face additional
system interruptions, slower response times, diminished customer service,
impaired quality and speed of order fulfillment, and delays in our financial
reporting. We cannot accurately project the rate or timing of any increases in
traffic or sales volume on our Web sites and, therefore, the integration and
timing of these upgrades are uncertain.

We maintain substantially all of our computer and communications hardware
at a single leased facility in Seattle, Washington. Our systems and operations
could be damaged or interrupted by fire, flood, power loss, telecommunications
failure, break-ins, earthquake and similar events. We do not have backup systems
or a formal disaster recovery plan and we may not have sufficient business
interruption insurance to compensate us for losses from a major interruption.
Computer viruses, physical or electronic break-ins and similar disruptions could
cause system interruptions, delays, and loss of critical data and could prevent
us from providing services and accepting and fulfilling customer orders.

We May Have Difficulty Managing Our Growth

We have rapidly and significantly expanded our operations and will further
expand our operations to address potential growth of our product and service
offerings and customer base. We will expand our product and service offerings
and our international operations and will pursue other market opportunities. We
need to successfully execute our announced distribution center expansion plan
and continue to improve our transaction-processing, operational and financial
systems, procedures and controls. This expansion will continue to place a
significant strain on our management, operational and financial resources.
Because it is difficult to predict sales increases and lead times for developing
distribution centers are long, we may over-expand our facilities, which may
result in excess inventory, warehousing, fulfillment and distribution capacity.
We will also need to retain flexibility within our distribution and logistics
network, including the ability to manage the operational challenges of shipping
non-uniform and sometimes heavy products as part of the fulfillment of toy and
electronics orders. We also need to expand, train and manage our employee base.
Our current and planned personnel, systems, procedures and controls may not be
adequate to support and effectively manage our future operations. We may not be
able to hire, train, retain, motivate and manage required personnel or to
successfully identify, manage and exploit market opportunities, which may limit
our growth.

Risk of Entering New Business Areas

We intend to expand our operations by promoting new or complementary
products, services or sales formats and by expanding our product or service
offerings. This will require significant additional expense and could strain our
management, financial and operational resources. We cannot expect to benefit in
these new markets from the first-to-market advantage that we experienced in the
online book market. Our gross margins in these new business areas may be lower
than our existing business activities. We may not be able to expand our
operations in a cost-effective or timely manner. Any new business that our
customers do not receive favorably could damage our reputation and the Amazon
brand.

Risk of International Expansion

We plan to expand our presence in foreign markets. We have relatively
little experience in purchasing, marketing and distributing products or services
for these markets and may not benefit from any first-to-market advantages. It
will be costly to establish international facilities and operations, promote our
brand internationally, and develop localized Web sites and stores and other
systems. We may not succeed in our efforts in these countries. If revenues from
international activities do not offset the expense of establishing and
maintaining foreign operations, our business, prospects, financial condition and
operating results will suffer.

As the international online commerce market continues to grow, competition
in this market will likely intensify. In addition, governments in foreign
jurisdictions may regulate Internet or other online services in

21
<PAGE> 22

such areas as content, privacy, network security, encryption or distribution.
This may affect our ability to conduct business internationally.

Risks of Business Combinations and Strategic Alliances

We plan to continue to expand our operations and market presence by
entering into business combinations, investments, joint ventures or other
strategic alliances with other companies. These transactions create risks such
as:

- difficulty assimilating the operations, technology and personnel of the
combined companies,

- disruption of our ongoing business,

- problems retaining key technical and managerial personnel,

- expenses associated with amortization of goodwill and other purchased
intangible assets,

- additional operating losses and expenses of acquired businesses, and

- impairment of relationships with existing employees, customers and
business partners.

We may not succeed in addressing these risks. In addition, the businesses
we have acquired, and in the future may acquire, may incur operating losses.

Rapid Technological Change

Technology in the online commerce industry changes rapidly. Customer
functionality requirements and preferences also change. Competitors often
introduce new products and services with new technologies. These changes and the
emergence of new industry standards and practices could render our existing Web
sites and proprietary technology obsolete. To succeed we must enhance our Web
site responsiveness, functionality and features, acquire and license leading
technologies, enhance our existing services, develop new services and technology
and respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis. We may not be able to adapt
quickly enough to changing customer requirements and industry standards.

We Depend on Key Personnel

We depend on the continued services and performance of our senior
management and other key personnel, particularly Jeffrey P. Bezos, our chief
executive officer and chairman of the board. We do not have long-term employment
agreements with any of our key personnel, and we do not have "key person" life
insurance policies. The loss of any of our executive officers or other key
employees could harm our business.

We Rely on a Small Number of Suppliers

We purchase a majority of our book, music, and video titles from three
major vendors, Ingram Book Group, Baker & Taylor, Inc. and Valley Media, Inc.
Although we increased our direct purchasing from manufacturers during 1998, we
continue to purchase a majority of our book, music, and video titles from these
three suppliers. We do not have long-term contracts or arrangements with most of
our vendors to guarantee the availability of merchandise, particular payment
terms or the extension of credit limits. Our current vendors may stop selling
merchandise to us on acceptable terms. We may not be able to acquire merchandise
from other suppliers in a timely and efficient manner and on acceptable terms.

We Face Inventory and Forecasting Risk with our Toy and Electronics Businesses

The toy and electronics businesses are difficult to manage and have
inherent complexities that differ from those encountered in the book, music, and
video businesses. Because we are a new participant in these markets, we do not
yet have a basis to forecast product demand. Further, the acquisition of many of
the toy and electronics products that we offer involves a significant lead-time
and up-front financial commitment.

22
<PAGE> 23

We will be exposed to significant inventory risks as a result of
seasonality and rapid changes in product cycles, consumer tastes and "fads" in
the market for such products. In order to achieve success in our toy and
electronics sales categories, we must seek to predict these trends and attempt
neither to overstock unpopular nor understock popular products. The demand for
products can change between the time they are ordered and the date of eventual
sale. We will be particularly exposed to this risk in the first year of
operations in our toy and consumer electronics businesses, particularly in
anticipation of the holiday selling season.

Our ability to negotiate satisfactory terms with manufacturers or suppliers
so that we might stock certain "preferred" products or brands in the toy and
consumer electronics businesses may be affected by our time of entry in such
lines of business and the competitive positions of other physical stores and
catalog and online retailers.

In order to provide customers with a high quality experience and minimize
the risk of stocking-out, we will carry a broad selection and significant
inventory levels of toy and electronics products. In the event that one or more
of these products do not sell through in sufficient quantities to consumers at
anticipated prices or during anticipated selling seasons, we may be required to
markdown some of our prices or write down inventory, which will reduce our
revenues and gross margins.

We Are Highly Leveraged

We have significant indebtedness. As of June 30, 1999, we had indebtedness
under senior discount notes, convertible subordinated notes, capitalized lease
obligations and other asset financing totaling approximately $1.5 billion. We
may incur substantial additional debt in the future. Our indebtedness could:

- make it difficult to make principal and interest payments on the
convertible subordinated notes and the senior discount notes,

- make it difficult to obtain necessary financing for working capital,
capital expenditures, debt service requirements or other purposes,

- limit our flexibility in planning for, or reacting to, changes in our
business and competition, and

- make it more difficult for us to react in the event of an economic
downturn.

We may not be able to meet our debt service obligations. If our cash flow
is inadequate to meet our obligations, we may face substantial liquidity
problems. If we are unable to generate sufficient cash flow or obtain funds for
required payments, or if we fail to comply with other covenants in our
indebtedness, we will be in default. This would permit our creditors to
accelerate the maturity of our indebtedness.

Risks Associated With Domain Names

We hold rights to various Web domain names, including "Amazon.com,"
"Amazon.co.uk" and "Amazon.de." Governmental agencies typically regulate domain
names. These regulations are subject to change. We may not be able to acquire or
maintain appropriate domain names in all countries in which we do business.
Furthermore, regulations governing domain names may not protect our trademarks
and similar proprietary rights. We may be unable to prevent third parties from
acquiring domain names that are similar to, infringe upon or diminish the value
of our trademarks and other proprietary rights.

Governmental Regulation and Legal Uncertainties

At this time, we face general business regulations and laws or regulations
regarding taxation and access to online commerce. For example, expanding our
distribution center network or other aspects of our business may result in
additional sales and other tax obligations. Regulatory authorities may adopt
specific laws and regulations governing the Internet or online commerce. These
regulations may cover taxation, user privacy, pricing, content, copyrights,
distribution, electronic contracts and characteristics and quality of products
and services. Changes in consumer protection laws also may impose additional
burdens on companies conducting business online. In addition, many states
currently regulate "auctions" and "auctioneers" in conducting auctions and may
regulate online auction services. These laws or regulations may impede the
growth of the
23
<PAGE> 24

Internet or other online services. This could, in turn, diminish the demand for
our products and services and increase our cost of doing business. Moreover, it
is not clear how existing laws governing issues such as property ownership,
sales and other taxes, libel and personal privacy apply to the Internet and
online commerce. Unfavorable resolution of these issues may harm our business.

Risks Related to Auction Services

We may be unable to prevent users of our auction services from selling
unlawful goods, or from selling goods in an unlawful manner. We may face civil
or criminal liability for unlawful activities by our online auction users. Any
costs we incur as a result of liability relating to the sale of unlawful goods
or the unlawful sale of goods could harm our business.

In running our auction services, we rely on sellers of goods to make
accurate representations and provide reliable delivery and on buyers to pay the
agreed purchase price. We do not take responsibility for delivery of payment or
goods to any users of our services. While we can suspend or terminate the
accounts of users who fail to fulfill their delivery obligations to other users,
we cannot require users to make payments or deliver goods. We do not compensate
users who believe they have been defrauded by other users except through our
limited guarantee program.

Risk of Uncertain Protection of Intellectual Property

Third parties that license our proprietary rights, such as trademarks,
patented technology or copyrighted material, may take actions that diminish the
value of our proprietary rights or reputation. In addition, the steps we take to
protect our proprietary rights may not be adequate and third parties may
infringe or misappropriate our copyrights, trademarks, trade dress, patents and
similar proprietary rights. Other parties may claim that we infringed their
proprietary rights. We have been subject to claims, and expect to continue to be
subject to legal proceedings and claims, regarding alleged infringement by us
and our licensees of the trademarks and other intellectual property rights of
third parties. Such claims, whether or not meritorious, may result in the
expenditure of significant financial and managerial resources. Most recently,
Amazon Bookstore Cooperative, Inc. filed suit against us alleging trademark
infringement and unfair competition under state and federal law. Amazon
Bookstore Cooperative, Inc. is seeking injunctive relief against our use of the
marks Amazon.com, Amazon.com Books and Amazon Books, the cancellation of our
federal trademark registrations, damages, profits, treble damages, costs and
attorneys' fees.

Risks of Year 2000 Noncompliance

We are in the process of assessing and remediating the year 2000 issues
associated with the computer systems, software, other property and equipment we
use. Our year 2000 readiness plan includes a multi-phased analysis of key
information technology and non-information technology-related components of our
business, operations and infrastructure. We expect that many aspects of this
phased approach will not be complete until the fourth quarter of 1999. As part
of the implementation of our year 2000 readiness plan, we will continue to
inventory and identify all significant internal and external hardware, software
and data chips to assess and evaluate the year 2000 preparedness of these
systems, correct or convert our critical data-processing systems and information
technology to recognize the year 2000, and test and evaluate the year 2000
compliance of previously non-compliant hardware, software and data chips. We
cannot guarantee that we will be successful in our efforts to make our critical
systems year 2000 compliant or that the year 2000 problem will not adversely
affect our business.

As part of our year 2000 readiness plan, we have engaged in formal
communications with our significant suppliers and service providers to determine
the extent to which our systems may be vulnerable if such third parties fail to
address and correct their own year 2000 issues. We cannot guarantee that the
systems of suppliers or other companies on which we rely will be year 2000
compliant. In addition, the computer systems necessary to maintain the viability
of the Internet or any of the Web sites that direct consumers to our online
stores may not be year 2000 compliant. Another area of vulnerability that is
beyond our control is the year 2000 integrity of the computers and software used
by our customers to access our online stores. We are limited

24
<PAGE> 25

in our efforts to address the year 2000 problem as it relates to third parties
and must rely solely on the assurances of these third parties as to their year
2000 preparedness.

We have engaged a third-party consulting firm to assist in the development
of a formal contingency plan. We believe that such contingency plan will be
completed in the fourth quarter of 1999. We cannot guarantee that the
contingency plan will adequately address all circumstances that may disrupt our
operations or that such planning will prevent circumstances that may cause a
material adverse effect on our operating results or financial condition.

Our Stock Price Is Highly Volatile

The trading price of our common stock fluctuates significantly. For
example, during the 52-week period ended July 30, 1999 (as adjusted for the
2-for-1 split of our common stock on June 1, 1998 and the 3-for-1 split of our
common stock on January 4, 1999), the reported closing price of our common stock
on the Nasdaq National Market was as high as $210.125 and as low as $14.563 per
share. Trading prices of our common stock may fluctuate in response to a number
of events and factors, such as:

- quarterly variations in operating results,

- announcements of innovations,

- new products, services and strategic developments by us or our
competitors, or business combinations and investments by us or our
competitors,

- changes in our operating expense levels or losses,

- changes in financial estimates and recommendations by securities
analysts,

- performance by other online commerce companies, and

- news reports relating to trends in the Internet, book, music, video,
auctions, toys, electronics or other product or service industries.

Any of these events may cause our stock price to fall, which may adversely
affect our business and financing opportunities. In addition, the stock market
in general and the market prices for Internet-related companies in particular
have experienced significant volatility that often has been unrelated to such
companies' operating performance. These broad market and industry fluctuations
may adversely affect the trading price of our common stock regardless of our
operating performance.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk for the impact of interest rate
changes and changes in the market values of its investments.

The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio and its long-term debt. The
Company's entire investment portfolio is designated as available-for sale, and
accordingly is presented at fair value on the consolidated balance sheets. The
Company has not utilized derivative financial instruments in its investment
portfolio. The Company's long-term debt includes the Senior Discount Notes and
the Convertible Notes. Long-term debt is stated at amortized cost on the
consolidated balance sheets.

The Company employs established investment policies and procedures to
manage the market risk of its marketable securities. The Company's Senior
Discount Notes, Convertible Notes and other long-term debt have fixed interest
rates and the fair value of these instruments is affected by changes in market
interest rates. The Company believes that the market risk arising from holdings
of its financial instruments is not material.

Information relating to quantitative and qualitative disclosure about
market risk is set forth below and in "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

25
<PAGE> 26

The table below provides information about the Company's marketable
securities, including principal cash flows for 1999 through 2003 and thereafter
and the related weighted average interest rates.

Principal (notional) amounts by contractural maturity, unless otherwise
stated, in U.S. dollars (thousands):

<TABLE>
<CAPTION>
AFTER FAIR VALUE AT
1999 2000 2001 2002 2003 2003 OTHER TOTAL JUNE 30, 1999
-------- -------- -------- ------- -------- ------- ------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Asset-backed and agency
securities(1).......... $ 43,518 $104,306 $161,932 $47,079 $ 25,059 $59,886 -- $ 441,780 $ 428,011
Weighted average
interest rate........ 6.78% 6.19% 6.16% 6.82% 6.71% 7.35% -- 6.49%

Commercial paper and
short-term
obligations............ 142,671 65,791 17,292 3,504 300 337 -- 229,895 230,168
Weighted average
interest rate........ 6.19% 6.64% 6.96% 7.24% 6.53% 6.38% -- 6.40%

Treasury notes and
bonds.................. -- 12,400 46,786 20,000 141,750 -- -- 220,936 222,099
Weighted average
interest rate........ -- 5.21% 6.78% 5.63% 5.83% -- -- 5.98%

Corporate notes and
bonds.................. 3,500 78,100 134,850 -- -- -- -- 216,450 214,655
Weighted average
interest rate........ 5.92% 5.69% 5.98% -- -- -- -- 5.87%

Equity securities........ -- -- -- -- -- 6,765 6,765 6,765
-------- -------- -------- ------- -------- ------- ------ ---------- ----------
Total
portfolio...... $189,689 $260,597 $360,860 $70,583 $167,109 $60,223 6,765 $1,115,826 $1,101,698
======== ======== ======== ======= ======== ======= ====== ========== ==========
</TABLE>

- ---------------
(1) Asset-backed and agency securities reflect current market prepayment
assumptions.

26
<PAGE> 27

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 11 -- Commitments and Contingencies in Part I, Item 1. Financial
Statements

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company's annual meeting of stockholders was held on May 20, 1999.

The following nominees were elected as directors, each to hold office until
his or her successor is elected and qualified, by the vote set forth below:

<TABLE>
<CAPTION>
NOMINEE FOR WITHHELD
------- ----------- --------
<S> <C> <C>
Jeffrey P. Bezos................................. 144,819,686 83,613
Tom A. Alberg.................................... 144,818,093 85,206
Scott D. Cook.................................... 144,807,020 96,276
L. John Doerr.................................... 144,816,629 86,670
Patricia Q. Stonesifer........................... 144,805,592 97,707
</TABLE>

The proposal to approve an amendment to the Company's Restated Certificate
of Incorporation to increase the number of authorized shares of common stock
from 300,000,000 shares to 1,500,000,000 shares and increase the number of
authorized shares of the preferred stock from 10,000,000 shares to 150,000,000
shares was approved by the vote set forth below:

<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- --------- -------
<S> <C> <C>
105,222,087 9,499,925 459,270
</TABLE>

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
- -------- -----
<S> <C>
10.1+ Offer Letter of Employment to Joseph Galli, dated June 23,
1999
27.1 Financial Data Schedule
</TABLE>

- ---------------

+ Executive Compensation Plan or Agreement

(b) Reports on Form 8-K

On April 27, 1999, the Company filed a Form 8-K under Item 5 announcing the
acquisitions of Exchange.com, Accept.com and Alexa.

On April 29, 1999, the Company filed a Form 8-K under Item 5 announcing the
Company's financial results for the first quarter of 1999.

On May 12, 1999, the Company filed a Form 8-K under Item 5 providing
historical and pro forma financial information relating to the acquisitions of
Alexa and Exchange.com.

27
<PAGE> 28

On May 19, 1999, the Company filed a Form 8-K under Items 2 and 7
announcing the terms of the Exchange.com acquisition and incorporating by
reference historical and pro forma financial information.

On June 10, 1999, the Company filed a Form 8-K under Items 2 and 7
announcing the terms of the Accept.com acquisition and providing historical and
pro forma financial information.

On June 11, 1999, the Company filed a Form 8-K under Items 2 and 7
announcing the terms of the Alexa acquisition and incorporating by reference
historical and pro forma financial information.

28
<PAGE> 29

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.

AMAZON.COM, INC. (Registrant)

DATED: August 16, 1999

By: /s/ KELYN J. BRANNON
------------------------------------
Kelyn J. Brannon
Vice President of Finance,
and Chief Accounting Officer

29
<PAGE> 30

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
- ------- -----
<S> <C>
10.1+ Offer Letter of Employment to Joseph Galli, dated June 23,
1999.
27.1 Financial Data Schedule
</TABLE>

- ---------------
+ Executive Compensation Plan or Agreement

<PAGE> 1
Exhibit 10.1

June 23, 1999

Mr. Joseph Galli
2809 Boston Street, Apt. 110
Baltimore, MD 21224

RE: OFFER OF EMPLOYMENT

Dear Joe:

On behalf of Amazon.com, Inc. (the "Company"), I am very pleased to offer
you the position of President and Chief Operating Officer. This letter clarifies
and confirms the terms of your employment with the Company.

1. START DATE

Unless we mutually agree otherwise, you will commence employment on June
24, 1999 (the "Start Date").

2. SALARY

Your starting salary will be $16,666.70 per month, ($200,000 annualized),
payable monthly in accordance with the Company's standard payroll practice and
subject to applicable withholding taxes. Because your position is exempt from
overtime pay, your salary will compensate you for all hours worked. Your base
salary will be reviewed annually by the Board of Directors or its Compensation
Committee, and any increases will be effective as of the date determined by the
Board or its Compensation Committee.

3. BONUS

In addition to your base salary, you will be entitled to a $5,000,000
signing bonus. The signing bonus will be payable in two installments: $3,000,000
on the first anniversary of the Start Date, and $2,000,000 on the second
anniversary of the Start Date.

4. BENEFITS

You will also be entitled, during the term of your employment, to such
vacation, medical and other employee benefits as the Company may offer from time
to time, subject to applicable eligibility requirements. The Company does
reserve the right to make any modifications in this benefits package that it
deems appropriate. The Company's current vacation policy is to provide you with
two weeks paid vacation per year in the first year of your employment and three
weeks per year thereafter during the term of your employment. You are also
eligible to participate in Amazon.com's 401(k) retirement plan the first quarter
after 90 days of employment and to enroll in our major medical plan on the first
entry date following the commencement of your employment.

5. STOCK OPTIONS

As we discussed, the Company takes a long-term approach to investment, and
its employees are its most important investment. Our compensation structure is
weighted towards equity ownership because we believe we will create the most
value for the Company and its shareholders over time by having employees think
and act like, and therefore be, owners. To this end, and subject to Board of
Directors' approval, you will be granted a 20-year option to purchase 735,000
shares of Amazon.com

<PAGE> 2

common stock, which will vest at the rate of 73,500 shares at the end of each
year of employment during the first 10 years of employment. In addition, you
will be granted a 20-year option to purchase 1,225,000 shares of Amazon.com
common stock, which will vest at the rate of 122,500 shares at the end of each
year of employment after the first 10 years of employment. The strike price on
your stock option grants will be the fair market value per share of such stock
on the Start Date.

If you are an employee of the Company on the fourth anniversary of the
Start Date, the Company commits to pay you a bonus or bonuses (the "Bonus
Commitment"), over a period of seven years (i.e., beginning on the fourth
anniversary and ending on the eleventh anniversary of the Start Date) so long as
you continue to be employed by the Company (the "Bonus Period"), equal to a
maximum of $20 million (the "Maximum Bonus Value") less the amount that the
aggregate fair market value of the shares of stock issued upon exercise of the
options vesting during the first 10 years of your employment (the "Covered
Stock") exceeds the aggregate exercise price of such options. The terms of the
Bonus Commitment will be as follows:

(a) When you sell shares of Covered Stock during the Bonus Period, the
Company will pay to you the excess, if any, of (i) the product obtained by
multiplying (x) the Maximum Bonus Value by (y) the Applicable Percentage
(as defined below) over (ii) the aggregate Net Sales Price of the Covered
Stock sold by you; provided, however, that in no event shall the Company be
obligated to make a payment to you if the sum of (1) the aggregate Net
Sales Price of all shares of Covered Stock sold by you since the Start Date
and (2) the aggregate payments made to you by the Company pursuant to the
Bonus Commitment equals or exceeds the Maximum Bonus Value multiplied by a
fraction, the numerator of which is the number of shares of Covered Stock
sold by you since the Start Date and the denominator is 735,000
(proportionately adjusted for stock splits and similar events).

(b) The Applicable Percentage shall be equal to the number of shares of
Covered Stock sold by you in the applicable transaction divided by 735,000
(proportionally adjusted for stock splits and similar events).

(c) The Net Sales Price shall be the sales price of the applicable Covered
Stock without deduction of selling expenses or commissions less the
exercise price for the applicable Covered Stock.

(d) Notwithstanding whether the Bonus Period has expired, the Bonus
Commitment shall terminate with respect to sales of Covered Stock after the
earlier of (i) termination of your employment by you or termination of your
employment by the Company with Cause (as defined below) and (ii) 90 days
after termination of your employment by the Company without Cause.

(e) Notwithstanding anything to the contrary in the foregoing provisions,
if your employment terminates due to your death or because you become
unable to perform your duties on account of a permanent disability (as
defined from time to time in the Company's long-term disability income
plan) or if the Company terminates your employment without Cause, and such
termination occurs during the four years between the Start Date and the
beginning of the Bonus Period, then you shall be entitled to the Bonus
Commitment (and the Bonus Period shall be deemed to have been effective)
for any sales of Covered Stock on or before the date that is 90 days after
the effective date of the termination of your employment.

Your option will be documented by delivery to you of a Stock Option Letter
Agreement specifying the terms and conditions of the option. All share amounts
will be proportionately adjusted for stock splits and similar events.

<PAGE> 3

6. TERMINATION OF EMPLOYMENT

Your employment may be terminated at any time by you with 30 days' prior
written notice to the Company's Board of Directors or by the Company with or
without Cause. The following matters will provide the Company with justification
for termination of your employment with "Cause":

(a) any act of fraud or embezzlement,

(b) any material breach by you of your Confidentiality, Noncompetition and
Invention Assignment Agreement with the Company,

(d) any act of dishonesty or misconduct (whether in connection with your
responsibilities as an employee of the Company or otherwise) that either
materially impairs the Company's business, goodwill or reputation or
materially compromises your ability to represent the Company with the
public, or

(e) your material failure to perform your lawful duties to the Company
after receiving written notice from the Company's Board of Directors
describing such failure in reasonable detail.

7. PAYMENTS UPON TERMINATION OF EMPLOYMENT

The payments to which you will be entitled to receive from the Company and
amounts, if any, of the signing bonus that you will be obligated to repay to the
Company upon termination of your employment will be as follows:

(a) If before the second anniversary of the Start Date you terminate your
employment or if the Company terminates your employment with Cause, the
Company will not be obligated to pay you the second installment of the
signing bonus and you must repay the Company a proportionate amount of the
first installment of the signing bonus based on the number of days elapsed
from the first anniversary of the Start Date to the effective date of
termination of your employment divided by 365.

(b) If before the third anniversary of the Start Date you terminate your
employment or if the Company terminates your employment with Cause, you
must repay the Company a proportionate amount of the second installment of
the signing bonus based on the number of days elapsed from the second
anniversary of the Start Date to the effective date of termination of your
employment divided by 365.

(c) If you terminate your employment or if the Company terminates your
employment with or without Cause, the Company will pay you any accrued and
unpaid base salary (subject to normal withholding and other deductions) to
the effective date of termination of your employment. The Company may
offset against its payment of accrued and unpaid base salary any amount you
owe the Company under clause (a) or (b) above.

8. CONFIDENTIALITY, NONCOMPETITION AND INVENTION ASSIGNMENT AGREEMENT

As a condition of your employment pursuant to this offer letter, we require
that you sign the enclosed Confidentiality, Noncompetition and Invention
Assignment Agreement. The Company's willingness to grant you the stock options
referred to above is based in significant part on your commitment to fulfill the
obligations specified in that agreement. As further compensation for
satisfaction of your obligations under the that agreement, the Company will pay
you $3,000,000 on the Start Date.

<PAGE> 4

You should know that the agreement will significantly restrict your future
flexibility in many ways. For example, you will be unable to seek or accept
certain employment opportunities for a period of three years after you leave the
Company. Please review the agreement carefully and, if appropriate, have your
attorney review it as well.

9. ADDITIONAL PROVISIONS

Your employment pursuant to this letter is also contingent upon your
submitting the legally required proof of your identity and authorization to work
in the United States. On your first day of employment you must provide the
required identification.

If you accept this offer, the terms described in this letter will be the
terms of your employment, and this letter supersedes any previous discussions or
offers. Any additions or modifications of these terms would have to be in
writing and signed by you and an officer of the Company.

If you wish to accept employment with the Company, please indicate so by
signing both copies of this letter and both copies of the enclosed
Confidentiality, Noncompetition and Invention Assignment Agreement, retaining
one of each for your files. This offer and all terms of employment stated in
this letter will expire if you have not returned a signed copy to me on or prior
to June 24, 1999.

We are very excited about the possibility of your joining us. I hope that
you will accept this offer and look forward to a productive and mutually
beneficial working relationship. Please let me know if I can answer any
questions for you about any of the matters outlined in this letter.

Sincerely,

/s/ JEFFREY P. BEZOS

Jeffrey P. Bezos
Chairman and Chief Executive Officer
Amazon.com, Inc.

ACCEPTANCE

I accept employment with Amazon.com, Inc. under the terms set forth in this
letter:

/s/ JOSEPH GALLI
- -------------------------------------
Signature

Printed Name: JOSEPH GALLI
-----------------------

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AMAZON.COM, INC. FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 42,539
<SECURITIES> 1,101,698
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 59,387
<CURRENT-ASSETS> 1,256,958
<PP&E> 183,228
<DEPRECIATION> 26,895
<TOTAL-ASSETS> 2,298,214
<CURRENT-LIABILITIES> 277,944
<BONDS> 1,449,224
0
0
<COMMON> 1,682
<OTHER-SE> 569,364
<TOTAL-LIABILITY-AND-EQUITY> 2,298,214
<SALES> 608,019
<TOTAL-REVENUES> 608,019
<CGS> 475,696
<TOTAL-COSTS> 475,696
<OTHER-EXPENSES> 310,702
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,123
<INCOME-PRETAX> (199,675)
<INCOME-TAX> 0
<INCOME-CONTINUING> (199,675)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (199,675)
<EPS-BASIC> (1.26)
<EPS-DILUTED> (1.26)

</TABLE>