Edgar Filing: AMAZON COM INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2008

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File No. 000-22513

Amazon.com, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware

91-1646860

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

1200 12th Avenue South, Suite 1200, Seattle, Washington 98144-2734

(206) 266-1000

(Address and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

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 ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

428,832,397 shares of common stock, par value $0.01 per share, outstanding as of October 16, 2008

AMAZON.COM, INC.

FORM 10-Q

For the Quarterly Period Ended September 30, 2008

INDEX


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Consolidated Statements of Cash Flows	3

	Consolidated Statements of Operations	4

	Consolidated Balance Sheets	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39

Item 4.	Controls and Procedures	41

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51

Item 3.	Defaults Upon Senior Securities	52

Item 4.	Submission of Matters to a Vote of Security Holders	52

Item 5.	Other Information	52

Item 6.	Exhibits	52

Signatures		53

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AMAZON.COM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Twelve Months Ended September 30,
	2008			2007			2008			2007			2008			2007
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	$	1,548		$	1,004		$	2,539		$	1,022		$	1,366		$	693
OPERATING ACTIVITIES:
Net income		118			80			420			269			627			367
Adjustments to reconcile net income to net cash from operating activities:
Depreciation of fixed assets, including internal-use software and website development, and other amortization		76			61			210			183			273			242
Stock-based compensation		70			51			197			130			251			161
Other operating expense (income), net		7			3			(32	)		6			(29	)		8
Losses (gains) on sales of marketable securities, net		1			—			(2	)		1			(2	)		1
Other expense (income), net		(24	)		3			(17	)		12			(18	)		12
Deferred income taxes		(17	)		(2	)		(47	)		(1	)		(144	)		6
Excess tax benefits from stock-based compensation		(53	)		(34	)		(160	)		(93	)		(323	)		(157	)
Changes in operating assets and liabilities:
Inventories		(243	)		(223	)		(130	)		(72	)		(361	)		(199	)
Accounts receivable, net and other		(9	)		(73	)		106			(17	)		(131	)		(134	)
Accounts payable		362			304			(524	)		(216	)		620			372
Accrued expenses and other		101			58			39			29			437			276
Additions to unearned revenue		121			56			286			165			366			240
Amortization of previously unearned revenue		(86	)		(47	)		(220	)		(139	)		(291	)		(194	)

Net cash provided by operating activities		424			237			126			257			1,275			1,001
INVESTING ACTIVITIES:
Purchases of fixed assets, including internal-use software and website development		(102	)		(69	)		(231	)		(151	)		(305	)		(201	)
Acquisitions, net of cash acquired, and other		(8	)		(24	)		(408	)		(47	)		(436	)		(48	)
Sales and maturities of marketable securities and other investments		582			210			1,033			1,156			1,149			2,025
Purchases of marketable securities and other investments		(478	)		(83	)		(1,229	)		(777	)		(1,382	)		(2,118	)

Net cash provided by (used in) investing activities		(6	)		34			(835	)		181			(974	)		(342	)
FINANCING ACTIVITIES:
Proceeds from exercises of stock options		2			35			10			79			23			97
Excess tax benefits from stock-based compensation		53			34			160			93			323			157
Common stock repurchased		—			—			—			(248	)		—			(248	)
Proceeds from long-term debt and other		—			33			52			21			68			31
Repayments of long-term debt and capital lease obligations		(295	)		(29	)		(355	)		(63	)		(380	)		(63	)

Net cash provided by (used in) financing activities		(240	)		73			(133	)		(118	)		34			(26	)
Foreign-currency effect on cash and cash equivalents		(76	)		18			(47	)		24			(51	)		40

Net increase (decrease) in cash and cash equivalents		102			362			(889	)		344			284			673

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	1,650		$	1,366		$	1,650		$	1,366		$	1,650		$	1,366

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest	$	14		$	22		$	61		$	67		$	62		$	67
Cash paid for income taxes		5			4			28			14			38			15
Fixed assets acquired under capital leases and other financing arrangements		37			22			104			43			136			50
Fixed assets acquired under build-to-suit leases		19			—			35			—			50			—
Conversion of debt		132			1			605			1			605			1

See accompanying notes to consolidated financial statements.

AMAZON.COM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Net sales	$	4,264		$	3,262		$	12,463		$	9,163
Cost of sales		3,265			2,500			9,541			6,980

Gross profit		999			762			2,922			2,183
Operating expenses (1):
Fulfillment		393			296			1,109			815
Marketing		108			74			313			211
Technology and content		264			209			755			596
General and administrative		73			57			208			171
Other operating expense (income), net		7			3			(32	)		6

Total operating expenses		845			639			2,353			1,799

Income from operations		154			123			569			384
Interest income		21			23			67			62
Interest expense		(17	)		(19	)		(60	)		(57	)
Other income (expense), net		24			(3	)		22			(10	)

Total non-operating income (expense)		28			1			29			(5	)

Income before income taxes		182			124			598			379
Provision for income taxes		59			44			167			110
Equity-method investment activity, net of tax		5			—			11			—

Net income	$	118		$	80		$	420		$	269

Basic earnings per share	$	0.28		$	0.19		$	1.00		$	0.65

Diluted earnings per share	$	0.27		$	0.19		$	0.97		$	0.64

Weighted average shares used in computation of earnings per share:
Basic		427			414			421			412

Diluted		436			425			431			423


(1) Includes stock-based compensation as follows:
Fulfillment	$	15		$	11		$	42		$	27
Marketing		4			2			10			6
Technology and content		38			28			109			72
General and administrative		13			10			36			25

See accompanying notes to consolidated financial statements.

AMAZON.COM, INC.

CONSOLIDATED BALANCE SHEETS

(in millions, except per share data)


	September 30, 2008			December 31, 2007
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,650		$	2,539
Marketable securities		674			573
Inventories		1,315			1,200
Accounts receivable, net and other		597			705
Deferred tax assets		194			147

Total current assets		4,430			5,164
Fixed assets, net		731			543
Deferred tax assets		278			260
Goodwill		405			222
Other assets		722			296

Total assets	$	6,566		$	6,485

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,242		$	2,795
Accrued expenses and other		860			902
Current portion of long-term debt		42			17

Total current liabilities		3,144			3,714
Long-term debt		393			1,282
Other long-term liabilities		502			292
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value:
Authorized shares — 500
Issued and outstanding shares — none		—			—
Common stock, $0.01 par value:
Authorized shares — 5,000
Issued shares — 443 and 431
Outstanding shares — 429 and 416		4			4
Treasury stock, at cost		(500	)		(500	)
Additional paid-in capital		4,051			3,063
Accumulated other comprehensive income (loss)		(73	)		5
Accumulated deficit		(955	)		(1,375	)

Total stockholders’ equity		2,527			1,197

Total liabilities and stockholders’ equity	$	6,566		$	6,485

See accompanying notes to consolidated financial statements.

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1 — Accounting Policies

Unaudited Interim Financial Information

We have prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated financial statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of our consolidated balance sheets, operating results, and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for 2008 due to seasonal and other factors. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) 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 our 2007 Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform to the current period presentation.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and those entities (relating primarily to the Joyo Amazon websites) in which we have a variable interest. Intercompany balances and transactions have been eliminated.

Use of Estimates

Business Combinations

We acquired certain companies during the nine months ended September 30, 2008 for an aggregate purchase price of $329 million. The assets and liabilities of these acquisitions have been included in our consolidated financial statements at fair value, including acquired intangible assets of $138 million with estimated useful lives between two and ten years. The excess of purchase price over the fair value of the net assets acquired was $178 million and is classified as “Goodwill” on our consolidated balance sheets.

The purchase price allocation for each acquisition is preliminary and subject to revision, and any change to the fair value of net assets acquired will lead to a corresponding change to the purchase price allocable to goodwill. The results of operations of the acquired companies have been included in our consolidated results from each closing date forward. The effect of these acquisitions on consolidated net sales and operating income for Q3 2008 and the nine months ended September 30, 2008 was not significant.

Earnings per Share

Basic earnings per share is calculated using our weighted-average outstanding common shares. Diluted earnings per share is calculated using our weighted-average outstanding common shares including the dilutive effect of stock awards as determined under the treasury stock method.

Our convertible debt instrument is excluded from the calculation of diluted earnings per share as its effect under the if-converted method is anti-dilutive. See “Note 3 — Long-Term Debt.”

Treasury Stock

We account for treasury stock under the cost method and include treasury stock as a component of stockholders’ equity.

Internal-use Software and Website Development

Costs incurred to develop software for internal use are required to be capitalized and amortized over the estimated useful life of the software in accordance with Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Costs related to design or maintenance of internal-use software are expensed as incurred. During Q3 2008 and Q3 2007, we capitalized $41 million (including $7 million of stock-based compensation) and $35 million (including $6 million of stock-based compensation) of costs associated with internal-use software and website development. For the nine months ended September 30, 2008 and 2007, we capitalized $139 million (including $20 million of stock-based compensation) and $97 million (including $15 million of stock-based compensation) of costs associated with internal-use software and website development. Amortization of previously capitalized amounts was $37 million and $30 million for Q3 2008 and Q3 2007, and $105 million and $85 million for the nine months ended September 30, 2008 and 2007.

Depreciation of Fixed Assets

Fixed assets include assets such as furniture and fixtures, heavy equipment, technology infrastructure, internal-use software and website development. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets (generally two years or less for assets such as internal-use software, two or three years for our technology infrastructure, five years for furniture and fixtures, and ten years for heavy equipment). Depreciation expense is generally classified within the corresponding operating expense categories on our consolidated statements of operations, and certain assets are amortized as “Cost of sales.” Depreciation expense for fixed assets was $80 million and $65 million for Q3 2008 and Q3 2007, and $225 million and $189 million for the nine months ended September 30, 2008 and 2007.

Other Assets

Included in “Other assets” on our consolidated balance sheets are amounts primarily related to marketable securities restricted for longer than one year, primarily attributable to collateralization of bank guarantees and debt related to our international operations; certain equity investments; intangible assets, net of amortization; and intellectual property rights, net of amortization. At September 30, 2008 and December 31, 2007, the cost basis which equaled the fair value of marketable securities restricted for longer than one year was $248 million and $197 million. At September 30, 2008 and December 31, 2007, equity investments were $247 million and $17 million, intangible assets, net, were $143 million and $26 million, and intellectual property rights, net were $44 million and $28 million.

Equity-method Investment Activity

Investments are accounted for using the equity method of accounting if the investment gives us the ability to exercise significant influence, but not control, over an investee. We classify our investments in equity-method investees on our consolidated balance sheets as “Other assets” and our share of the investees’ earnings or losses along with amortization of the related intangible assets, if any, as “Equity-method investment activity, net of tax” on our consolidated statements of operations.

We periodically evaluate whether declines in fair values of our equity-method investments below their book value are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of such declines. To the extent any impairment is considered other-than-temporary, the investment is written down to its fair value.

In Q2 2008, we sold our European DVD rental assets in exchange for a partial ownership in the acquiring company’s business. Our investment was recorded based on the fair value of the assets received and is accounted for under the equity method of accounting. As a result of this transaction, we recorded a $53 million non-cash gain included in “Other operating expense (income), net” on our consolidated statements of operations.

Accrued Expenses and Other

Included in “Accrued expenses and other” at September 30, 2008 and December 31, 2007 were liabilities of $216 million and $230 million for unredeemed gift certificates. We recognize revenue from a gift certificate when a customer redeems it. If a gift certificate is not redeemed, we recognize revenue when it expires or, for a certificate without an expiration date, when the likelihood of its redemption becomes remote, generally two years from date of issuance.

Unearned Revenue

Unearned revenue is recorded when payments are received in advance of performing our service obligations and is recognized over the service period. Current unearned revenue is included in “Accrued expenses and other” and non-current unearned revenue is included in “Other long-term liabilities” on our consolidated balance sheets. Current unearned revenue was $158 million and $91 million at September 30, 2008 and December 31, 2007. Non-current unearned revenue was $41 million and $19 million at September 30, 2008 and December 31, 2007.

Income Taxes

Income tax expense includes U.S. and international income taxes. We do not provide for U.S. taxes on our undistributed earnings of foreign subsidiaries since we intend to invest such undistributed earnings indefinitely outside of the U.S. If such amounts were repatriated, determination of the amount of U.S. income taxes that would be incurred is not practicable due to the complexities associated with this calculation.

Under the Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered.

SFAS No. 109 requires that deferred tax assets be evaluated for future realization and be reduced by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent cumulative earnings experience and expectations of future taxable income by taxing jurisdiction, the carry-forward periods available to us for tax reporting purposes, and other relevant factors. In accordance with SFAS No. 109, we allocate our valuation allowance to current and long-term deferred tax assets on a pro-rata basis.

Effective January 1, 2007, we adopted the provisions of the Financial Accounting Standards Board Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions (tax contingencies) accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate

settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. Our policy is to include interest and penalties related to our tax contingencies in income tax expense.

Shipping Activities

Outbound shipping charges to customers are included in “Net sales” and were $191 million and $171 million for Q3 2008 and Q3 2007, and $569 million and $475 million for the nine months ended September 30, 2008 and 2007. Outbound shipping-related costs are included in “Cost of sales” and totaled $323 million and $260 million for Q3 2008 and Q3 2007, and $957 million and $725 million for the nine months ended September 30, 2008 and 2007. The net cost to us of shipping activities was $132 million and $89 million for Q3 2008 and Q3 2007, and $388 million and $250 million for the nine months ended September 30, 2008 and 2007.

Stock-Based Compensation

We account for stock-based awards under SFAS No. 123(R), which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of restricted stock and restricted stock units is determined based on the number of shares granted and the quoted price of our common stock. Such value is recognized as expense over the service period, net of estimated forfeitures, using the accelerated method. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results and future estimates may differ substantially from our current estimates.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. For financial assets and liabilities, SFAS No. 157 was effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. See “Note 2 — Cash, Cash Equivalents, and Marketable Securities” for further discussion. In February 2008, the FASB issued Staff Position (FSP) No. 157-2 which delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those recognized or disclosed at fair value in the financial statements on a recurring basis. FSP 157-2 is effective for us beginning January 1, 2009.

Those assets and liabilities measured at fair value under SFAS No. 157 in Q1 2008 did not have a material impact on our consolidated financial statements. In accordance with FSP 157-2, we will measure the remaining assets and liabilities no later than Q1 2009, and are currently evaluating this impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations, and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 141 (R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquired entity at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No. 141 (R) and SFAS No. 160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. We are currently evaluating the impact of the pending adoption of SFAS No. 141 (R) and SFAS No. 160 on our consolidated financial statements.

In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets. FSP No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP No. 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. We are currently evaluating the impact of the pending adoption of FSP No. 142-3 on our consolidated financial statements.

In June 2008, the FASB ratified the consensus reached on EITF Issue No. 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock. EITF Issue No. 07-05 clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which would qualify as a scope exception under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. EITF Issue No. 07-05 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption for an existing instrument is not permitted. We are currently evaluating the impact of the pending adoption of EITF Issue No. 07-05 on our consolidated financial statements.

Note 2 — Cash, Cash Equivalents, and Marketable Securities

As of September 30, 2008 and December 31, 2007 our cash, cash equivalents, and marketable securities primarily consisted of cash, government and government agency securities, AAA-rated money market funds and other investment grade securities. Such amounts are recorded at fair value.

The following table summarizes, by major security type, our cash, cash equivalents, and marketable securities (in millions):


	September 30, 2008
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses (1)			Total Estimated Fair Value
Cash	$	414	$	—	$	—		$	414
Money market funds		1,029		—		—			1,029
Foreign government and agency securities		568		1		(1	)		568
Corporate debt securities (2)		206		—		(8	)		198
U.S. government and agency securities		277		2		—			279
Asset-backed securities		62		—		(2	)		60
Other fixed income securities		23		—		—			23
Equity securities		2		—		(1	)		1

	$	2,581	$	3	$	(12	)	$	2,572

Less: Long-term marketable securities									(248	)

Total cash, cash equivalents, and marketable securities								$	2,324

(1)

The cost and fair value of investments with loss positions was $523 million and $511 million. We evaluated the nature of these investments, credit worthiness of the issuer, and the duration of these impairments to determine if an other-than-temporary decline in fair value has occurred and concluded that these losses were temporary. Investments that have continuously been in loss positions for more than twelve months have gross unrealized losses of $4 million.

(2)	Corporate debt securities include investments in financial, insurance, and corporate institutions. No single issuer represents a significant portion of the total corporate debt securities portfolio.

Effective January 1, 2008, we adopted SFAS No. 157, which clarifies the definition of fair value, prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value, and expands disclosures about fair value measurements. The three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is:

Level 1 - Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2 - Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 - Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

The following table summarizes, by major security type, our assets that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in millions):


	September 30, 2008
	Cash		Level 1 Estimated Fair Value		Level 2 Estimated Fair Value		Level 3 Estimated Fair Value		Total Estimated Fair Value
Cash	$	414	$	—	$	—	$	—	$	414
Money market funds		—		1,029		—		—		1,029
Foreign government and agency securities		—		—		568		—		568
Corporate debt securities		—		—		198		—		198
U.S. government and agency securities		—		—		279		—		279
Asset-backed securities		—		—		60		—		60
Other fixed income securities		—		—		23		—		23
Equity securities		—		1		—		—		1

	$	414	$	1,030	$	1,128	$	—	$	2,572

We are required to pledge or otherwise restrict a portion of our marketable securities as collateral for standby letters of credit, guarantees, debt, and real estate lease agreements. See “Note 4 — Commitments and Contingencies.”

Note 3 — Long-Term Debt

Our long-term debt is summarized as follows:


	September 30, 2008			December 31, 2007
	(in millions)
6.875% PEACS due February 2010 (1)	$	338		$	350
4.75% Convertible Subordinated Notes		—			899
Other long-term debt		97			50

		435			1,299
Less current portion of long-term debt		(42	)		(17	)

	$	393		$	1,282

Fair value of long-term debt (2)	$	431		$	1,466

(1)

The 6.875% Premium Adjustable Convertible Securities (“6.875% PEACS”) are convertible into our common stock at the holders’ option at a conversion price of €84.883 per share ($119.62 per share, based on the exchange rate as of September 30, 2008). Total common stock issuable upon conversion of our outstanding 6.875% PEACS is 2.8 million shares, which is excluded from our calculation of earnings per share as its effect is currently anti-dilutive. The U.S. Dollar equivalent principal, interest, and conversion price fluctuate based on the Euro/U.S. Dollar exchange ratio. We have the right to redeem the 6.875% PEACS, in whole or in part, by paying the principal plus any accrued and unpaid interest.

(2)

The fair value of our 6.875% PEACS was $334 million and $358 million at September 30, 2008 and December 31, 2007. The fair value of our 4.75% Convertible Subordinated Notes was $1.1 billion at December 31, 2007. Such amounts are determined based on quoted prices in active markets for similar instruments (Level 2 as defined under SFAS No. 157).

In February 2008 our Board of Directors authorized a debt repurchase program, replacing our previous debt repurchase authorization in its entirety, pursuant to which we could from time to time repurchase (through open market repurchases or private transactions), redeem, or otherwise retire up to an aggregate of all of our outstanding 4.75% Convertible Subordinated Notes and 6.875% PEACS.

In Q3 2008 and Q2 2008, we called for redemption principal amounts of $399 million and $500 million of our outstanding 4.75% Convertible Subordinated Notes. For our Q3 2008 redemption, holders elected to convert $132 million in principal amount of the 4.75% Convertible Subordinated Notes, and we issued 1.7 million shares of our common stock as a result; we redeemed the remaining $266 million of the called principal amount for cash. For our Q2 2008 redemption, holders elected to convert $473 million in principal amount of the 4.75% Convertible Subordinated Notes, and we issued 6.1 million shares of our common stock as a result; we redeemed the remaining $27 million of the called principal amount for cash.

Note 4 — Commitments and Contingencies

Commitments

We enter into leases for office and fulfillment center facilities and fixed assets under non-cancelable operating and capital leases and build-to-suit arrangements. Rental expense under operating lease agreements was $38 million and $35 million for Q3 2008 and Q3 2007, and $117 million and $102 million for the nine months ended September 30, 2008 and 2007.

In December 2007, we entered into a series of leases and other agreements for the lease of corporate office space to be developed in Seattle, Washington with initial terms of up to 16 years commencing on completion of development in 2010 and 2011, and options to extend for two five year periods. Under the agreements we committed to occupy approximately 820,000 square feet of office space. During the nine months ended September 30, 2008, we committed to occupy an additional approximately 540,000 square feet. In Q3 2008, we made an election to occupy up to an additional approximately 330,000 square feet, subject to a termination fee, estimated to be up to approximately $10 million, if we elect not to occupy the additional space. We also have options to lease up to an additional approximately 500,000 square feet at rates based on fair market values at the time the options are exercised, subject to certain conditions. If interest rates exceed a certain threshold, we have the option to provide financing for some of the buildings.

The following summarizes our principal contractual commitments, excluding open orders for inventory purchases that support normal operations, as of September 30, 2008:


	Three Months Ended December 31, 2008		Year Ended December 31,								Thereafter		Total
	Three Months Ended December 31, 2008		2009		2010		2011		2012		Thereafter		Total
	(in millions)
Operating and capital commitments:
Debt principal (1)	$	7	$	35	$	338	$	22	$	33	$	—	$	435
Debt interest (1)		2		29		28		3		1		—		63
Capital leases, including interest		19		66		60		27		6		5		183
Operating leases		42		132		113		88		76		301		752
Other commitments (2)(3)		22		44		96		131		81		1,120		1,494

Total commitments	$	92	$	306	$	635	$	271	$	197	$	1,426	$	2,927

(1)

Under our 6.875% PEACS, the principal payment due in 2010 and the annual interest payments fluctuate based on the Euro/U.S. Dollar exchange ratio. At September 30, 2008, the Euro to U.S. Dollar exchange rate was 1.4092. Due to changes in the Euro/U.S. Dollar exchange ratio, our remaining principal debt obligation under this instrument since issuance in February 2000 has increased by $102 million as of September 30, 2008. The principal and interest commitments reflect the partial redemption of the 6.875% PEACS and full redemption of the 4.75% Convertible Subordinated Notes.

(2)

Includes the estimated timing and amounts of payments for rent, operating expenses, and tenant improvements associated with approximately 1,360,000 square feet of corporate office space being developed in Seattle, Washington with initial terms of up to 16 years commencing on completion of development in 2010 and 2011, and also includes the $10 million termination fee related to our election to occupy an additional approximately 330,000 square feet. The amount of space available and our financial and other obligations under the lease agreements are affected by various factors, including government approvals and permits, interest rates, development costs and other expenses and our exercise of certain rights under the lease agreements.

(3)	Includes commitments to acquire intellectual property and tax contingencies under FIN 48, but excludes $114 million of such tax contingencies for which we cannot make a reasonably reliable estimate of the amount and period of payment. See “Note 1 — Accounting Policies — Income Taxes.”

Additionally, we entered into an agreement in Q3 2008, subject to regulatory conditions and other approvals, to acquire a company, and closed an acquisition for an additional company in October 2008. These acquisitions result in aggregate commitments of approximately $110 million.

Pledged Securities

We are required to pledge or otherwise restrict a portion of our cash and marketable securities as collateral for standby letters of credit, guarantees, debt, and real estate leases. We classify cash and marketable securities with use restrictions of twelve months or longer as non-current “Other assets” on our consolidated balance sheets. The balance of pledged securities at September 30, 2008 consisted of $38 million in “Cash and cash equivalents” and “Marketable securities,” and $248 million in “Other assets.” The amount required to be pledged for certain real estate lease agreements changes over the life of our leases based on our credit rating and changes in our market capitalization (common shares outstanding multiplied by the closing price of our common stock). Information about collateral required to be pledged under these agreements is as follows:


	Standby and Trade Letters of Credit and Guarantees		Debt (1)		Real Estate Leases (2)			Total
	(in millions)
Balance at December 31, 2007	$	138	$	60	$	13		$	211
Net change in collateral pledged		20		57		(2	)		75

Balance at September 30, 2008	$	158	$	117	$	11		$	286

(1)	Represents collateral for certain debt related to our international operations.

(2)

At September 30, 2008, our market capitalization was $31.2 billion. The required amount of collateral to be pledged will increase by $5 million if our market capitalization is equal to or below $18 billion and by an additional $6 million if our market capitalization is equal to or below $13 billion.

Legal Proceedings

The Company is involved from time to time in claims, proceedings and litigation, including the following:

In June 2001, Audible, Inc., our subsidiary acquired in March 2008, was named as a defendant in a securities class-action filed in United States District Court for the Southern District of New York related to its initial public offering in July 1999. The lawsuit also named certain of the offering’s underwriters, as well as Audible’s officers and directors as defendants. Approximately 300 other issuers and their underwriters have had similar suits filed against them, all of which are included in a single coordinated proceeding in the Southern District of New York. The complaints allege that the prospectus and the registration statement for Audible’s offering failed to disclose that the underwriters allegedly solicited and received “excessive” commissions from investors and that some investors allegedly agreed with the underwriters to buy additional shares in the aftermarket in order to inflate the price of the Company’s stock. Audible and its officers and directors were named in the suits pursuant to Section 11 of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and other related provisions. The complaints seek unspecified damages, attorney and expert fees, and other unspecified litigation costs. The Court has directed that the litigation proceed with a number of “focus cases” rather than all of the consolidated cases at once. Audible’s case is not one of these focus cases. We dispute the allegations of wrongdoing in the complaint against Audible and its officers and directors and intend to vigorously defend ourselves in this matter.

Beginning in March 2003, we were served with complaints filed in several different states, including Illinois, by a private litigant, Beeler, Schad & Diamond, P.C., purportedly on behalf of the state governments under various state False Claims Acts. The complaints allege that we (along with other companies with which we have commercial agreements) wrongfully failed to collect and remit sales and use taxes for sales of personal property to customers in those states and knowingly created records and statements falsely stating we were not required to collect or remit such taxes. In December 2006, we learned that one additional complaint was filed in the state of Illinois by a different private litigant, Matthew T. Hurst, alleging similar violations of the Illinois state law. All of the complaints seek injunctive relief, unpaid taxes, interest, attorneys’ fees, civil penalties of up

to $10,000 per violation, and treble or punitive damages under the various state False Claims Acts. It is possible that we have been or will be named in similar cases in other states as well. We dispute the allegations of wrongdoing in these complaints and intend to vigorously defend ourselves in these matters.

In May 2004, Toysrus.com LLC filed a complaint against us for breach of contract in the Superior Court of New Jersey. The complaint alleged that we breached our commercial agreement with Toysrus.com LLC by selling, and by permitting other third parties to sell, products that Toysrus.com LLC alleged it has an exclusive right to sell on our website. We disputed the allegations in the complaint and brought counterclaims alleging breach of contract and seeking damages and declaratory relief. The trial of both parties’ claims concluded in November 2005. In March 2006, the Court entered a judgment in favor of Toysrus.com LLC, terminating the contract but declining to award damages to either party. We are pursuing an appeal of the lower court’s rulings terminating the contract, declining to award us damages, and denying our motion to compel Toysrus.com to pay certain fees incurred during the wind-down period.

In December 2005, Registrar Systems LLC filed a complaint against us and Target Corporation for patent infringement in the United States District Court for the District of Colorado. The complaint alleges that our website technology, including the method by which Amazon.com enables customers to use Amazon.com account information on websites that Amazon.com operates for third parties, such as Target.com, infringes two patents obtained by Registrar Systems purporting to cover methods and apparatuses for a “World Wide Web Registration Information Processing System” (U.S. Patent Nos. 5,790,785 and 6,823,327) and seeks injunctive relief, monetary damages in an amount no less than a reasonable royalty, prejudgment interest, costs, and attorneys’ fees. We dispute the allegations of wrongdoing in this complaint and intend to vigorously defend ourselves in this matter. In September 2006, the Court entered an order staying the lawsuit pending the outcome of the Patent and Trademark Office’s re-examination of the patents in suit.

In August 2006, Cordance Corporation filed a complaint against us for patent infringement in the United States District Court for the District of Delaware. The complaint alleges that our website technology, including our 1-Click ordering system, infringes a patent obtained by Cordance purporting to cover an “Object-Based Online Transaction Infrastructure” (U.S. Patent No. 6,757,710) and seeks injunctive relief, monetary damages in an amount no less than a reasonable royalty, treble damages for alleged willful infringement, prejudgment interest, costs, and attorneys’ fees. In response, we asserted a declaratory judgment counterclaim in the same action alleging that a service that Cordance has advertised its intent to launch infringes a patent owned by us entitled “Networked Personal Contact Manager” (U.S. Patent No. 6,269,369). We dispute Cordance’s allegations of wrongdoing and intend to vigorously defend ourselves in this matter.

In April 2007, SBJ Holdings 1, LLC filed a complaint against us in the United States District Court for the Eastern District of Texas. The complaint alleges that our website technology infringes a patent obtained by SBJ Holdings 1 purporting to cover a “Method, Memory, Product, and Code for Displaying Pre-Customized Content Associated with Visitor Data” (U.S. Patent No. 6,330,592) and seeks injunctive relief, monetary damages, treble damages for alleged willful infringement, prejudgment and post-judgment interest, costs and attorneys’ fees. In September 2008, we entered into a settlement of the litigation that included, among other things, a non-exclusive license to the patent in suit.

In October 2007, Digital Reg of Texas, LLC filed a complaint against our subsidiary, Audible, Inc., and several other defendants in the United States District Court for the Eastern District of Texas. The complaint alleges that Audible’s digital rights management technology infringes a patent obtained by Digital Reg purporting to cover a system for “Regulating Access to Digital Content” (U.S. Patent No. 6,389,541) and seeks injunctive relief, monetary damages, enhanced damages for alleged willful infringement, prejudgment and post-judgment interest, costs and attorneys’ fees. We dispute the allegations of wrongdoing and intend to vigorously defend ourselves in the matter.

Depending on the amount and the timing, an unfavorable resolution of some or all of these matters could materially affect our business, results of operations, financial position, or cash flows.

See also “Note 8 — Income Taxes.”

Note 5 — Stockholders’ Equity

Stock Conversion Activity

In Q3 2008 and Q2 2008, holders of our 4.75% Convertible Subordinated Notes elected to convert a total of $132 million and $473 million in outstanding principal amount under called redemptions, and we issued 1.7 million and 6.1 million shares of common stock as a result of such elections.

Stock Repurchase Activity

We repurchased 6.3 million shares for $248 million in Q1 2007 under a 24-month program authorized by our Board of Directors in August 2006. In April 2007, our Board authorized a new 24-month program to repurchase up to $500 million of our common stock, which was replaced in February 2008 by a 24-month program to repurchase up to $1 billion of our common stock.

Stock Award Activity

We granted restricted stock units representing 0.9 million and 0.4 million shares of common stock during Q3 2008 and Q3 2007 with a per share weighted average fair value of $76.59 and $84.06. For the nine months ended September 30, 2008 and 2007, we granted restricted stock units representing 6.4 million and 7.3 million shares of common stock with a per share weighted average fair value of $75.06 and $45.85. Our annual stock awards are granted in the second quarter.

Common shares underlying outstanding stock awards were as follows:


	September 30, 2008	December 31, 2007
	(in millions)
Restricted stock units	17.9	16.3
Stock options (1)	1.3	1.9

Total outstanding stock awards	19.2	18.2

(1)	The weighted average per share exercise price was $25.06 and $17.46 at September 30, 2008 and December 31, 2007.

Common shares outstanding (which includes restricted stock), plus shares underlying outstanding stock options and restricted stock units totaled 448 million and 435 million at September 30, 2008 and December 31, 2007. These totals include all stock-based awards outstanding, without regard for estimated forfeitures, consisting of vested and unvested awards, and in-the-money and out-of-the-money stock options.

The following table summarizes our restricted stock unit activity for the nine months ended September 30, 2008 (in millions):


	Number of Units
Outstanding at December 31, 2007	16.3
Units granted	6.4
Units vested	(3.6	)
Units cancelled	(1.2	)

Outstanding at September 30, 2008	17.9

Scheduled vesting for outstanding restricted stock units at September 30, 2008 is as follows (in millions):


	Three Months Ended December 31, 2008	Year Ended December 31,
	Three Months Ended December 31, 2008	2009	2010	2011	2012	Thereafter	Total
Scheduled vesting — restricted stock units	1.9	6.1	5.1	2.6	1.3	0.9	17.9

As of September 30, 2008, there was $378 million of net unrecognized compensation cost related to unvested stock-based compensation arrangements. This compensation is recognized on an accelerated basis resulting in approximately half of the compensation expected to be expensed in the next twelve months and has a weighted average recognition period of 1.3 years.

Note 6 — Comprehensive Income

Comprehensive income was $40 million and $87 million for Q3 2008 and Q3 2007, and $342 million and $280 million for the nine months ended September 30, 2008 and 2007. The primary differences between net income as reported and comprehensive income are foreign currency translation adjustments, net of tax, and changes in unrealized gains and losses on available-for-sale securities, net of tax.

Note 7 — Other Income (Expense), Net

Other income (expense), net, consisted of the following:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008		2007
	(in millions)						(in millions)
Foreign-currency gain (loss) on remeasurement of 6.875% PEACS	$	40		$	(17	)	$	12	$	(25	)
Foreign-currency gain (loss) on intercompany balances		(16	)		16			9		22
Other		—			(2	)		1		(7	)

Total other income (expense), net	$	24		$	(3	)	$	22	$	(10	)

Note 8 — Income Taxes

Our tax provision for interim periods is determined using an estimate of our annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes we make a cumulative adjustment. The 2008 annual effective tax rate is estimated to be lower than the 35% U.S. federal statutory rate primarily due to anticipated earnings of our subsidiaries outside of the U.S. in jurisdictions where our effective tax rate is lower than in the U.S. Included in the total tax provision as a discrete item recognized in Q2 2008 is the impact related to the $53 million non-cash gain associated with the sale of our European DVD rental assets. This gain will be taxed at rates substantially below the 35% U.S. federal statutory rate. Cash paid for income taxes was $5 million and $4 million in Q3 2008 and Q3 2007, and $28 million and $14 million for the nine months ended September 30, 2008 and 2007.

As of September 30, 2008 and December 31, 2007, tax contingencies were $120 million and $112 million. Changes to these tax contingencies that are reasonably possible in the next 12 months are not significant.

We are under examination, or may be subject to examination, by the Internal Revenue Service (“IRS”) for calendar years 2004 through 2007. Additionally, any net operating losses that were generated in prior years and utilized in these years may also be subject to examination by the IRS. We are under examination, or may be subject to examination, in the following major jurisdictions for the years specified: Kentucky for 2003 through 2007, France for 2005 through 2007, Germany for 2003 through 2007, Luxembourg for 2003 through 2007, and the United Kingdom for 2003 through 2007. In addition, in 2007, Japanese tax authorities assessed income tax, including penalties and interest, of approximately $101 million against one of our U.S. subsidiaries for the years 2003 through 2005. We believe that these claims are without merit and are disputing the assessment. Further proceedings on the assessment will be stayed during negotiations between U.S. and Japanese authorities over the double taxation issues the assessment raises, and we have provided bank guarantees to suspend enforcement of the assessment. We also may be subject to income tax examination by Japanese tax authorities for 2006 and 2007.

Note 9 — Segment Information

We have organized our operations into two principal segments: North America and International. We present our segment information along the same lines that our chief executive reviews our operating results in assessing performance and allocating resources.

We allocate to segment results the operating expenses “Fulfillment,” “Marketing,” “Technology and content,” and “General and administrative,” but exclude from our allocations the portions of these expense lines attributable to stock-based compensation. Additionally, we do not allocate the line item “Other operating expense (income), net” to our segment operating results. A significant majority of our costs for “Technology and content” are incurred in the United States and most of these costs are allocated to our North America segment. There are no internal revenue transactions between our reporting segments.

Information on reportable segments and reconciliation to consolidated net income is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	(in millions)						(in millions)
North America
Net sales	$	2,302		$	1,788		$	6,597		$	5,012
Cost of sales		1,716			1,328			4,883			3,679

Gross profit		586			460			1,714			1,333
Direct segment operating expenses		498			381			1,400			1,087

Segment operating income	$	88		$	79		$	314		$	246


International
Net sales	$	1,962		$	1,474		$	5,866		$	4,151
Cost of sales		1,549			1,172			4,658			3,301

Gross profit		413			302			1,208			850
Direct segment operating expenses		270			204			788			576

Segment operating income	$	143		$	98		$	420		$	274


Consolidated
Net sales	$	4,264		$	3,262		$	12,463		$	9,163
Cost of sales		3,265			2,500			9,541			6,980

Gross profit		999			762			2,922			2,183
Direct segment operating expenses		768			585			2,188			1,663

Segment operating income		231			177			734			520
Stock-based compensation		(70	)		(51	)		(197	)		(130	)
Other operating income (expense), net		(7	)		(3	)		32			(6	)

Income from operations		154			123			569			384
Total non-operating expense, net		28			1			29			(5	)
Provision for income taxes		(59	)		(44	)		(167	)		(110	)
Equity-method investment activity, net of tax		(5	)		—			(11	)		—

Net income	$	118		$	80		$	420		$	269

Note 10 — Subsequent Event

In October 2008, a third party announced the acquisition of a company in which we held an equity-method investment. Subject to the closing of the acquisition, which is expected to occur in Q4 2008, we will receive approximately $150 million in cash for our equity ownership.

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding guidance, industry prospects or future results of operations or financial position, made in this Quarterly Report on Form 10-Q are forward-looking. We use words such as anticipates, believes, expects, future, intends, and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Actual results could differ materially for a variety of reasons, including, among others, fluctuations in foreign exchange rates, changes in global economic conditions and consumer spending, world events, the rate of growth of the Internet and online commerce, the amount that Amazon.com invests in new business opportunities and the timing of those investments, the mix of products sold to customers, the mix of net sales derived from products as compared with services, the extent to which we owe income taxes, competition, management of growth, potential fluctuations in operating results, international growth and expansion, the outcomes of legal proceedings and claims, fulfillment center optimization, risks of inventory management, seasonality, the degree to which the Company enters into, maintains, and develops commercial agreements, acquisitions, and strategic transactions, payments risks, and risks of fulfillment throughput and productivity. In addition, the recent disruptions in the global financial markets amplify many of these risks. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ significantly from management’s expectations, are described in greater detail in Item 1A of Part II, “Risk Factors.”

Overview

Our primary source of revenue is the sale of a wide range of products and services to customers. The products offered on our customer-facing websites primarily include merchandise and content we have purchased for resale from vendors and products offered by marketplace sellers. Generally, we recognize gross revenue from items we sell from our inventory and recognize our net share of revenue of items sold by other sellers. We also offer services such as Amazon Web Services, Amazon Enterprise Solutions, co-branded credit cards, fulfillment, and miscellaneous marketing and promotional offers.

Our financial focus is on long-term, sustainable growth in free cash flow¹ per share. Free cash flow is driven primarily by increasing operating income and efficiently managing working capital and capital expenditures. Increases in operating income primarily result from increases in sales through our websites and efficiently managing our operating costs, offset by investments we make in longer-term strategic initiatives, which generally require us to hire additional software engineers, computer scientists, and merchandisers. To increase product sales, we focus on improving all aspects of the customer experience, including lowering prices, improving availability, offering faster delivery times, increasing selection, increasing product categories, expanding product information, improving ease of use, and earning customer trust. We generally focus on growing gross profit and operating profit dollars rather than maximizing margin percentages.

We also seek to efficiently manage shareholder dilution while maintaining the flexibility to issue shares for strategic purposes, such as financings and aligning employee compensation with shareholders’ interests. We utilize restricted stock units as our primary vehicle for equity compensation because we believe they align the interests of our shareholders and employees. In managing shareholder dilution, we include all stock awards outstanding, without regard to estimated forfeitures, consisting of vested and unvested awards and in-the-money

Free cash flow, a non-GAAP financial measure, is defined as net cash provided by operating activities less purchases of fixed assets, including capitalized internal-use software and website development, both of which are presented on our consolidated statements of cash flows. See Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Non-GAAP Financial Measures.”

and out-of-the-money stock options. Total shares outstanding plus outstanding stock awards were 448 million and 435 million at September 30, 2008 and December 31, 2007. These amounts exclude 2.8 million and 14 million shares issuable upon conversion of our long-term debt at September 30, 2008 and December 31, 2007.

We seek to reduce our variable costs per unit and work to leverage our fixed costs. Our variable costs include product and content costs, payment processing and related transaction costs, picking, packaging, and preparing orders for shipment, transportation, customer service support, and most aspects of our marketing costs. Our customer experience fixed costs include the costs necessary to run our technology infrastructure, build, enhance, and add features to our websites and build and optimize our fulfillment centers. Variable costs generally change directly with sales volume, while fixed costs generally increase depending on the timing of capacity needs, geographic expansion, category expansion, and other factors. To decrease our variable costs on a per unit basis and enable us to lower prices for customers, we seek to increase our direct to publisher and manufacturer sourcing, maximize discounts available to us from suppliers and reduce defects in our processes. To minimize growth in fixed costs, we seek to improve process efficiencies and maintain a lean culture.

Because of our model we are able to turn our inventory quickly and have a cash-generating operating cycle². On average, our high inventory velocity means we generally collect from our customers before our payments to suppliers come due. Inventory turnover³ was 12 for both Q3 2008 and Q3 2007. We expect some variability in inventory turnover over time since it is affected by several factors, including our product mix, the mix of sales by us and by other sellers, our continuing focus on in-stock inventory availability, our investment in new geographies and product lines, and the extent to which we choose to utilize outsource fulfillment providers. Accounts payable days⁴ were 63 and 62 for Q3 2008 and Q3 2007. We expect some variability in accounts payable days over time since they are affected by several factors, including the mix of product sales, the mix of sales by other sellers, the mix of suppliers, seasonality, and changes in payment terms over time, including the effect of balancing pricing and timing of payment terms with suppliers.

We expect spending in technology and content will increase over time as we add computer scientists, software engineers, and employees involved in category expansion, editorial content, buying, merchandising selection, and systems support. We seek to efficiently invest in several areas of technology and content, including seller platforms, web services, digital initiatives, and expansion of new and existing product categories, as well as in technology infrastructure to enhance the customer experience, improve our process efficiencies and support our infrastructure web services. We believe that advances in technology, specifically the speed and reduced cost of processing power, the improved consumer experience of the Internet outside of the workplace through lower-cost broadband service to the home, and the advances of wireless connectivity, will continue to improve the consumer experience on the Internet and increase its ubiquity in people’s lives. We are investing in Amazon Web Services, which provides technology services that give developers access to technology infrastructure that they can use to enable virtually any type of business. A continuing challenge will be to continue to build and deploy innovative and efficient software that will best take advantage of continued advances in technology.

Our financial reporting currency is the U.S. Dollar and changes in exchange rates significantly affect our reported results and consolidated trends. For example, if the U.S. Dollar weakens year-over-year relative to currencies in our international locations, our consolidated net sales, gross profit, and operating expenses will be higher than if currencies had remained constant. Likewise, if the U.S. Dollar strengthens year-over-year relative to currencies in our international locations, our consolidated net sales, gross profit, and operating expenses will be lower than if currencies had remained constant. We believe that our increasing diversification beyond the U.S.

²	The operating cycle is number of days of sales in inventory plus number of days of sales in trade accounts receivable minus accounts payable days.

³	Inventory turnover is the quotient of trailing-twelve-month cost of sales to average inventory over five quarter ends.

⁴	Accounts payable days, calculated as the quotient of accounts payable to cost of sales, multiplied by the number of days in the period.

economy through our growing international businesses benefits our shareholders over the long term. We also believe it is important to evaluate our operating results and growth rates before and after the effect of currency changes.

In addition, the remeasurement of our 6.875% PEACS and intercompany balances can result in significant gains and charges associated with the effect of movements in currency exchange rates. Currency volatilities may continue, which may significantly impact (either positively or negatively) our reported results and consolidated trends and comparisons.

Critical Accounting Judgments

The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see Item 8 of Part II, “Financial Statements and Supplementary Data — Note 1 — Description of Business and Accounting Policies,” of our 2007 Annual Report on Form 10-K. Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.

Revenue Recognition

We recognize revenue from product sales or services rendered when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectability is reasonably assured. Additionally, revenue arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the arrangement meet the following criteria: the delivered item has value to the customer on a standalone basis; there is objective and reliable evidence of the fair value of undelivered items; and delivery of any undelivered item is probable.

We evaluate the criteria of EITF Issue No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent, in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. Generally, when we are the primary party obligated in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators, revenue is recorded gross. If we are not primarily obligated and amounts earned are determined using a percentage, a fixed-payment schedule, or a combination of the two, we generally record the net amounts as commissions earned.

Product sales and shipping revenues, net of promotional discounts, rebates, and return allowances, are recorded when the products are shipped and title passes to customers. Retail items sold to customers are made pursuant to sales contracts that generally provide for transfer of both title and risk of loss upon our delivery to the carrier. Return allowances, which reduce product revenue by our best estimate of expected product returns, are estimated using historical experience. Revenue from product sales and services rendered is recorded net of sales taxes. Amounts paid in advance for subscription services, including amounts received for Amazon Prime, and other membership programs, are deferred and recognized as revenue over the subscription term. For our products with multiple elements, where a standalone value for each element cannot be established, we recognize the revenue and related cost over the estimated economic life of the product.

We periodically provide incentive offers to our customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off current purchases, inducement offers, such as offers for future discounts subject to a minimum current purchase, and other similar offers. Current discount offers, when accepted by our customers, are treated as a reduction to the purchase price of the related transaction, while inducement offers, when accepted by our customers, are treated as a reduction to purchase price based on estimated future redemption rates. Redemption rates are estimated using our historical experience for similar inducement offers. Current discount offers and inducement offers are classified as an offsetting amount in “Net sales.”

Commissions and per-unit fees received from sellers and similar amounts earned through Amazon Enterprise Solutions are recognized when the item is sold by the seller and our collectability is reasonably assured. When we are responsible for fulfillment-related services, commissions are recognized when risk of loss and title transfer to the customer. We record an allowance for estimated refunds on such commissions using historical experience.

Inventories

Inventories, consisting of products available for sale, are accounted for using the first-in first-out (“FIFO”) method, and are valued at the lower of cost or market value. This valuation requires us to make judgments, based on currently-available information, about the likely method of disposition, such as through sales to individual customers, returns to product vendors, or liquidations, and expected recoverable values of each disposition category. Based on this evaluation, we adjust the carrying amount of our inventories to lower of cost or market value.

We provide fulfillment-related services in connection with certain of our agreements. In those arrangements, as well as other product sales by other sellers, the seller maintains ownership of the related products. As such, these amounts are not included in our consolidated balance sheets.

Investments

We generally invest our excess cash in investment grade short- to intermediate-term fixed income securities and AAA-rated money market funds. We also have equity-method investments in private companies where we can exercise significant influence, but not control, over the entity. We periodically evaluate whether declines in fair values of our investments are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss as well as our ability and intent to hold the investment. Factors considered include, if applicable, quoted market prices; recent financial results and operating trends; other publicly available information; implied values from any recent purchase/sales offers of investee securities; or other conditions that may affect the value of our investments.

Goodwill and Long-Lived Assets

Goodwill is tested for impairment annually and when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist. Our annual testing date is October 1. We test goodwill for impairment by first comparing the book value of net assets to the fair value of the related operations. If the fair value is determined to be less than book value, a second step is performed to compute the amount of impairment. In this process, a fair value for goodwill is estimated, based in part on the fair value of the operations, and is compared to its carrying value. The shortfall of the fair value below carrying value represents the amount of goodwill impairment.

Internal-Use Software and Website Development

Included in fixed assets is the capitalized cost of internal-use software and website development, including software used to upgrade and enhance our websites and processes supporting our business. As required by SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, we capitalize costs incurred during the application development stage of internal-use software and amortize these costs over the estimated useful life of two years. Costs incurred related to design or maintenance of internal-use software are expensed as incurred.

Currency Effect on Intercompany Balances

Gains and losses arising from intercompany foreign currency transactions are included in net income.

Stock-Based Compensation

We measure compensation cost for stock awards at fair value and recognize compensation over the service period for awards expected to vest. The fair value of restricted stock and restricted stock units is determined based on the number of shares granted and the quoted price of our common stock. Since we primarily issue restricted stock units to our employees, the complexity of valuation issues for stock compensation is greatly reduced. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results and future estimates may differ substantially from our current estimates.

We utilize the accelerated method, rather than a straight-line method, for recognizing compensation expense. Under this method, over 50% of the compensation cost would be expensed in the first year of a four-year vesting term. The accelerated method also adds a level of complexity in estimating forfeitures. If forfeited early in the life of an award, the forfeited amount is much greater under an accelerated method than under a straight-line method.

Income Taxes

We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves for tax contingencies are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audit. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. The majority of our gross deferred tax assets relate to net operating loss carryforwards attributable to differences in stock-based compensation between the financial statements and our tax returns.

SFAS No. 109, Accounting for Income Taxes, requires that deferred tax assets be evaluated for future realization and reduced by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent cumulative earnings experience and expectations of future taxable income by taxing jurisdiction, the

carry-forward periods available to us for tax reporting purposes, and other relevant factors. In accordance with the provisions of SFAS No. 109, we allocate our valuation allowance to current and long-term deferred tax assets on a pro-rata basis.

If we determine that additional portions of our deferred tax assets are realizable, the majority of the benefit will come from the assets associated with the stock-based compensation that was not recognized in the financial statements, but was claimed on the tax return. Since this compensation did not originally run through our consolidated statements of operations, the benefit generated will be recorded to stockholders’ equity.

Effective January 1, 2007, we adopted the provisions of FIN No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109. FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. For financial assets and liabilities, SFAS No. 157 was effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. See “Financial Statements — Note 2 — Cash, Cash Equivalents, and Marketable Securities” for further discussion. In February 2008, the FASB issued FSP No. 157-2 which delays the effective date of SFAS No. 157 one year for all nonfinancial assets and nonfinancial liabilities, except those recognized or disclosed at fair value in the financial statements on a recurring basis. FSP 157-2 is effective for us beginning January 1, 2009.

Liquidity and Capital Resources

Cash flow information is as follows:


	Three Months Ended September 30,					Nine Months Ended September 30,						Twelve Months Ended September 30,
	2008			2007		2008			2007			2008			2007
	(in millions)					(in millions)						(in millions)
Operating activities	$	424		$	237	$	126		$	257		$	1,275		$	1,001
Investing activities		(6	)		34		(835	)		181			(974	)		(342	)
Financing activities		(240	)		73		(133	)		(118	)		34			(26	)

Our financial focus is on long-term, sustainable growth in free cash flow. Free cash flow, a non-GAAP financial measure, was $970 million for the trailing twelve months ended September 30, 2008, compared to $800 million for the trailing twelve months ended September 30, 2007, an increase of 21%. See Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Non-GAAP Financial Measures” for a reconciliation of free cash flow to net cash provided by operating activities. Operating cash flows and free cash flows can be volatile and are sensitive to many factors, including changes in working capital and the timing and magnitude of capital expenditures. Working capital at any specific point in time is subject to many variables, including seasonality, inventory management and category expansion, the timing of cash receipts and payments, vendor payment terms, valuation of cash equivalents and marketable securities, and fluctuations in foreign exchange rates.

Our principal sources of liquidity are cash flows generated from operations and our cash, cash equivalents, and marketable securities balances, which, at fair value, were $2.3 billion and $3.1 billion at September 30, 2008 and December 31, 2007. Amounts held in foreign currencies were $1.2 billion at both September 30, 2008 and December 31, 2007, and were primarily Euros, British Pounds, and Japanese Yen. See Item 1 of Part I, “Financial Statements — Note 1 — Accounting Policies — Income Taxes.”

Cash provided by operating activities was $424 million and $237 million for Q3 2008 and Q3 2007. Cash provided by operating activities was $126 million and $257 million for the nine months ended September 30, 2008 and 2007. Our operating cash flows result primarily from cash received from our customers, from sellers, and from non-retail activities such as through our co-branded credit card agreements, Amazon Enterprise Solutions, and miscellaneous marketing and promotional agreements, offset by cash payments we make for products and services, employee compensation (less amounts capitalized pursuant to SOP 98-1 that are reflected as cash used in investing activities), payment processing and related transaction costs, operating leases, and interest payments on our long-term debt obligations. Cash received from customers, sellers, developers, and other activities generally corresponds to our net sales. Because our customers primarily use credit cards to buy from us, our receivables from customers settle quickly.

Cash provided by (used in) investing activities corresponds with purchases, sales, and maturities of marketable securities, cash outlays for acquisitions, equity-method investments and intellectual property rights, and purchases of fixed assets, including internal-use software and website development costs. Cash provided by (used in) investing activities was $(6) million and $34 million for Q3 2008 and Q3 2007. Cash provided by (used

in) investing activities was $(835) million and $181 million for the nine months ended September 30, 2008 and 2007. Capital expenditures were $102 million and $69 million during Q3 2008 and Q3 2007, and $231 million and $151 million for the nine months ended September 30, 2008 and 2007, with these increases primarily reflecting additional investments in technology infrastructure, fulfillment-related assets and the development of new features and product offerings on our websites. Capital expenditures included $34 million and $28 million for internal-use software and website development during Q3 2008 and Q3 2007, and $96 million and $81 million for the nine months ended September 30, 2008 and 2007. Stock-based compensation capitalized for internal-use software and website development costs does not affect cash flows. During the nine months ended September 30, 2008 and 2007, we made cash payments, net of acquired cash, related to acquisition and investment activity of $408 million and $47 million.

Cash provided by (used in) financing activities was $(240) million and $73 million for Q3 2008 and Q3 2007. Cash used in financing activities was $133 million and $118 million for the nine months ended September 30, 2008 and 2007. Cash outflows from financing activities result from repurchases of common stock, repayments of long-term debt, and payments on capital lease obligations. In Q1 2007, we repurchased $248 million of our common stock under the $500 million repurchase program authorized by our Board of Directors in August 2006. Repayments on long-term debt and payments on capital lease obligations were $295 million and $29 million in Q3 2008 and Q3 2007, and $355 million and $63 million for the nine months ended September 30, 2008 and 2007. Cash inflows from financing activities primarily result from proceeds from tax benefits relating to excess stock-based compensation deductions and exercises of employee stock options. SFAS No. 123(R) requires the reporting of tax benefits relating to excess stock-based compensation deductions in financing cash flows. Cash inflows from tax benefits related to stock-based compensation deductions were $53 million and $34 million for Q3 2008 and Q3 2007, and $160 million and $93 million for the nine months ended September 30, 2008 and 2007. Cash inflows from proceeds from exercise of employee stock options were $2 million and $35 million for Q3 2008 and Q3 2007, and $10 million and $79 million for the nine months ended September 30, 2008 and 2007. We expect cash proceeds from exercises of stock options will decline over time as we continue issuing restricted stock units as our primary vehicle for stock-based awards.

We recorded net tax provisions of $59 million and $44 million in Q3 2008 and Q3 2007, and $167 million and $110 million for the nine months ended September 30, 2008 and 2007. A majority of this provision is non-cash. We have current tax benefits and net operating losses relating to excess stock-based compensation deductions that are being utilized to reduce our U.S. taxable income. As such, cash taxes paid were $5 million and $4 million for Q3 2008 and Q3 2007, and $28 million and $14 million for the nine months ended September 30, 2008 and 2007. We endeavor to optimize our global taxes on a cash basis, rather than on a financial reporting basis.

In February 2008, our Board of Directors authorized a debt repurchase program, replacing our previous debt repurchase authorization in its entirety, pursuant to which we may from time to time repurchase (through open market repurchases or private transactions), redeem, or otherwise retire up to all of our outstanding 4.75% Convertible Subordinated Notes due 2009 and 6.875% PEACS.

In August 2006, our Board of Directors authorized a 24-month program to repurchase up to $500 million of our common stock, pursuant to which we repurchased $252 million and $248 million of our common stock in

2006 and 2007, respectively. In April 2007, our Board authorized a new 24-month program to repurchase up to $500 million of our common stock, which was replaced in February 2008 by a 24-month program to repurchase up to $1 billion of our common stock.

Since our 6.875% PEACS, which are due in 2010, are denominated in Euros, our U.S. Dollar equivalent interest payments and principal obligations fluctuate with the Euro to U.S. Dollar exchange rate. As a result, any fluctuations in the exchange rate will have an effect on our interest expense and, to the extent we make principal payments, the amount of U.S. Dollar equivalents necessary for principal settlement. Additionally, since our interest payable on our 6.875% PEACS is due in Euros, the balance of interest payable is subject to gains or losses on currency movements until the date of the interest payment. Gains or losses on the remeasurement of our Euro-denominated interest payable are classified as “Other expense, net” on our consolidated statements of operations.

On average, our high inventory velocity means we collect from our customers before our payments to suppliers come due. Inventory turnover was 12 for both Q3 2008 and Q3 2007. We expect some variability in inventory turnover over time as it is affected by several factors, including our product mix, the mix of sales by us and by other sellers, our continuing focus on in-stock inventory availability, our investment in new geographies and product lines, and the extent to which we choose to utilize outsource fulfillment providers.

The following summarizes our principal contractual commitments as of September 30, 2008:


	Three Months Ended December 31, 2008		Year Ended December 31,
	Three Months Ended December 31, 2008		2009		2010		2011		2012		Thereafter		Total
	(in millions)
Operating and capital commitments:
Debt principal (1)	$	7	$	35	$	338	$	22	$	33	$	—	$	435
Debt interest (1)		2		29		28		3		1		—		63
Capital leases, including interest		19		66		60		27		6		5		183
Operating leases		42		132		113		88		76		301		752
Other commitments (2)(3)		22		44		96		131		81		1,120		1,494
Purchase obligations and open purchase orders (4)		1,825		—		—		—		—		—		1,825

Total commitments	$	1,917	$	306	$	635	$	271	$	197	$	1,426	$	4,752

(1)

At September 30, 2008, the Euro to U.S. Dollar exchange rate was 1.4092. Due to changes in the Euro/U.S. Dollar exchange ratio, our remaining principal debt obligation under the 6.875% PEACS since issuance in February 2000 has increased by $102 million as of September 30, 2008. The principal and interest commitments reflect the partial redemption of the 6.875% PEACS and full redemption of the 4.75% Convertible Subordinated Notes.

(2)

(3)

Includes commitments to acquire intellectual property and tax contingencies under FIN 48, but excludes $114 million of such tax contingencies for which we cannot make a reasonably reliable estimate of the amount and period of payment. See Item 1 of Part I, “Financial Statements — Note 1 — Accounting Policies — Income Taxes.”

(4)	Consists of inventory and significant non-inventory commitments.

Pledged Securities


	Standby and Trade Letters of Credit and Guarantees		Debt (1)		Real Estate Leases (2)			Total
	(in millions)
Balance at December 31, 2007	$	138	$	60	$	13		$	211
Net change in collateral pledged		20		57		(2	)		75

Balance at September 30, 2008	$	158	$	117	$	11		$	286

(1)	Represents collateral for certain debt related to our international operations.

(2)

We believe that current cash, cash equivalents, and marketable securities balances will be sufficient to meet our anticipated operating cash needs for at least the next 12 months. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. See Item 1A of Part II, “Risk Factors.” We continually evaluate opportunities to sell additional equity or debt securities, obtain credit facilities, repurchase common stock, pay dividends, or repurchase, refinance, or otherwise restructure our long-term debt for strategic reasons or to further strengthen our financial position. The sale of additional equity or convertible debt securities would likely be dilutive to our shareholders. In addition, we will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services, and technologies, which might affect our liquidity requirements or cause us to issue additional equity or debt securities. There can be no assurance that additional lines-of-credit or financing instruments will be available in amounts or on terms acceptable to us, if at all.

Results of Operations

Net Sales and Gross Profit

Net sales information is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	(in millions)						(in millions)
Net Sales:
North America	$	2,302		$	1,788		$	6,597		$	5,012
International		1,962			1,474			5,866			4,151

Consolidated	$	4,264		$	3,262		$	12,463		$	9,163


Year-over-year Percentage Growth:
North America		29	%		42	%		32	%		37	%
International		33			40			41			35
Consolidated		31			41			36			36

Year-over-year Percentage Growth, excluding effect of exchange rates:
North America		29	%		42	%		31	%		37	%
International		28			33			31			29
Consolidated		28			38			31			33

Net Sales Mix:
North America		54	%		55	%		53	%		55	%
International		46			45			47			45

Consolidated		100	%		100	%		100	%		100	%

Revenue increased 31% in Q3 2008 and 36% for the nine months ended September 30, 2008, reflecting revenue growth in both our North America and International segments. We experienced slower rates of growth towards the end of the third quarter, coinciding with disruptions in the global financial markets. Additionally, changes in currency exchange rates positively affected net sales by $80 million in Q3 2008 and $447 million for the nine months ended September 30, 2008. For a discussion of the effect on revenue growth of exchange rates, see “Effect of Exchange Rates” below. The Q3 2007 and nine months ended September 30, 2007 growth rates include the effects of the release of Harry Potter and the Deathly Hallows. We sold 2.5 million copies during Q3 2007.

The North America revenue growth rate was 29% for Q3 2008 and 32% for the nine months ended September 30, 2008. This revenue growth primarily reflects increased unit sales driven largely by our continued efforts to reduce prices for our customers, including from our free shipping offers and Amazon Prime, and by increased in-stock inventory availability and increased selection of product offerings, as well as a larger base of sales in faster growing categories such as electronics and other general merchandise.

The International revenue growth rate was 33% for Q3 2008 and 41% for the nine months ended September 30, 2008. This revenue growth primarily reflects increased unit sales driven largely by our continued efforts to reduce prices for our customers, including from our free shipping offers, and by increased in-stock inventory availability and increased selection of product offerings, as well as a larger base of sales in faster growing categories such as electronics and other general merchandise. Additionally, changes in currency exchange rates positively affected International net sales by $80 million for Q3 2008 and $439 million for the nine months ended September 30, 2008.

We expect that, over time, our International segment will represent more than 50% of our consolidated net sales. Additionally, as we continue to offer increased selection, lower prices, and additional product lines within

our electronics and other general merchandise category, we expect to see the relative mix of sales from this category increase. See “Supplemental Information” below.

Gross profit information is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	(in millions)						(in millions)
Gross Profit:
North America	$	586		$	460		$	1,714		$	1,333
International		413			302			1,208			850

Consolidated	$	999		$	762		$	2,922		$	2,183


Gross Profit Growth Rate:
North America		28	%		34	%		29	%		34	%
International		37			47			42			39
Consolidated		31			39			34			36

Gross Margin:
North America		25.5	%		25.7	%		26.0	%		26.6	%
International		21.1			20.5			20.6			20.5
Consolidated		23.4			23.4			23.4			23.8

The increase in gross profit in absolute terms during Q3 2008 compared with the comparable prior year period corresponds with increases in sales, offset by lower prices for customers including from free shipping offers and Amazon Prime. Generally, our gross margins fluctuate based on several factors, including our product, service, and geographic mix of sales; changes in vendor pricing, including the extent to which we receive discounts and allowances; lowering prices for customers, including from competitive pricing decisions; improvements in product sourcing and inventory management; and the extent to which our customers accept our free shipping and Amazon Prime offers. Such free shipping and Amazon Prime offers reduce shipping revenue and reduce our gross margins on retail sales. We view our shipping offers as an effective worldwide marketing tool and intend to continue offering them indefinitely.

Sales of products by marketplace sellers on our websites represented 31% of unit sales for both Q3 2008 and Q3 2007, and 30% and 29% for the nine months ended September 30, 2008 and 2007. Since revenues from these sales are recorded as a net amount, they generally result in lower revenues but higher gross margin per unit. Since we focus on profit dollars rather than margins, we are largely neutral on whether an item is sold by us or by another seller.

Gross profit growth is also affected by changes in exchange rates — see “Effect of Exchange Rates” below.

North America segment gross margins in Q3 2008 and the nine months ended September 30, 2008 decreased compared to the comparable prior year periods due to our efforts to continue reducing prices for our customers, including from our free shipping offers and Amazon Prime, and a larger percent of overall sales in lower margin categories such as electronics and other general merchandise, partially offset by increases in other revenue and improvements in vendor pricing. International segment gross margins in Q3 2008 increased compared to the comparable prior year period due to increases in sales of products by other sellers and improvements in vendor pricing, partially offset by our efforts to continue reducing prices for our customers, including from our free shipping offers and Amazon Prime, and a larger percent of overall sales in lower margin categories such as electronics and other general merchandise. International segment gross margins for the nine months ended September 30, 2008 were relatively flat compared to the comparable prior year period.

Supplemental Information

Supplemental information about shipping results is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	(in millions)						(in millions)
Shipping Activity:
Shipping revenue (1)(2)	$	191		$	171		$	569		$	475
Outbound shipping costs		(323	)		(260	)		(957	)		(725	)

Net shipping cost	$	(132	)	$	(89	)	$	(388	)	$	(250	)


Year-over-year Percentage Growth:
Shipping revenue		12	%		45	%		20	%		27	%
Outbound shipping costs		24			43			32			28
Net shipping cost		48			39			55			31

Percent of Net Sales:
Shipping revenue		4.5	%		5.3	%		4.6	%		5.2	%
Outbound shipping costs		(7.6	)		(8.0	)		(7.7	)		(7.9	)

Net shipping cost		(3.1	)%		(2.7	)%		(3.1	)%		(2.7	)%

(1)	Excludes amounts earned on shipping activities by third-party sellers where we do not provide the fulfillment service.

(2)	Includes amounts earned from Amazon Prime membership and Fulfillment by Amazon programs.

We believe that offering low prices to our customers is fundamental to our future success. One way we offer lower prices is through free-shipping offers that result in a net cost to us in delivering products, as well as through membership in Amazon Prime. To the extent our customers accept and use our free shipping offers at an increasing rate, including memberships in Amazon Prime, our net cost of shipping will increase. We seek to partially mitigate the costs of lowering prices over time through achieving higher sales volumes, negotiating better terms with our suppliers, and achieving better operating efficiencies.

Supplemental information about our net sales is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	(in millions)						(in millions)
Net Sales:
North America
Media	$	1,245		$	1,081		$	3,599		$	2,995
Electronics and other general merchandise		950			631			2,697			1,801
Other (1)		107			76			301			216

Total North America	$	2,302		$	1,788		$	6,597		$	5,012

International
Media	$	1,249		$	1,010		$	3,845		$	2,919
Electronics and other general merchandise		690			448			1,955			1,195
Other (1)		23			16			66			37

Total International	$	1,962		$	1,474		$	5,866		$	4,151

Consolidated
Media	$	2,494		$	2,091		$	7,444		$	5,914
Electronics and other general merchandise		1,640			1,079			4,652			2,996
Other (1)		130			92			367			253

Total consolidated	$	4,264		$	3,262		$	12,463		$	9,163

Year-over-year Percentage Growth:
North America
Media (2)		15	%		38	%		20	%		28	%
Electronics and other general merchandise		51			54			50			57
Other		41			22			40			18
Total North America		29			42			32			37
International
Media (2)		24	%		33	%		32	%		30	%
Electronics and other general merchandise		54			54			64			47
Other		49			410			78			216
Total International		33			40			41			35
Consolidated
Media (2)		19	%		36	%		26	%		29	%
Electronics and other general merchandise		52			54			55			53
Other		42			41			45			30
Total consolidated		31			41			36			36
Year-over-year Percentage Growth:
Excluding the effect of exchange rates
International
Media (2)		18	%		27	%		22	%		25	%
Electronics and other general merchandise		48			45			52			38
Other		52			379			71			194
Total International		28			33			31			29
Consolidated
Media (2)		17	%		32	%		21	%		27	%
Electronics and other general merchandise		49			51			51			49
Other		43			39			44			29
Total consolidated		28			38			31			33
Consolidated Net Sales Mix:
Media		59	%		64	%		60	%		64	%
Electronics and other general merchandise		38			33			37			33
Other		3			3			3			3

Total consolidated		100	%		100	%		100	%		100	%

(1)	Includes non-retail activities, such as Amazon Enterprise Solutions, our co-branded credit card agreements, and miscellaneous marketing and promotional activities.

(2)	Year-over-year percentage growth rates include the effects of the release of Harry Potter and the Deathly Hallows. We sold 2.5 million copies during Q3 2007.

Operating Expenses

Information about operating expenses with and without stock-based compensation was as follows (in millions):


	Three Months Ended September 30, 2008									Three Months Ended September 30, 2007									Nine Months Ended September 30, 2008									Nine Months Ended September 30, 2007
	As Reported			Stock-Based Compensation			Net			As Reported			Stock-Based Compensation			Net			As Reported			Stock-Based Compensation			Net			As Reported		Stock-Based Compensation			Net
Operating Expenses:
Fulfillment	$	393		$	(15	)	$	378		$	296		$	(11	)	$	285		$	1,109		$	(42	)	$	1,067		$	815	$	(27	)	$	788
Marketing		108			(4	)		104			74			(2	)		72			313			(10	)		303			211		(6	)		205
Technology and content		264			(38	)		226			209			(28	)		181			755			(109	)		646			596		(72	)		524
General and administrative		73			(13	)		60			57			(10	)		47			208			(36	)		172			171		(25	)		146
Other operating expense (income), net		7			—			7			3			—			3			(32	)		—			(32	)		6		—			6

Total operating expenses	$	845		$	(70	)	$	775		$	639		$	(51	)	$	588		$	2,353		$	(197	)	$	2,156		$	1,799	$	(130	)	$	1,669


Year-over-year Percentage Growth:
Fulfillment		33	%					33	%		37	%					37	%		36	%					36	%		36					35	%
Marketing		46						45			16						15			48						48			24					23
Technology and content		26						25			22						16			27						23			23					17
General and administrative		29						28			4						(4	)		22						18			14					5

Percent of Net Sales:
Fulfillment		9.2	%					8.9	%		9.1	%					8.7	%		8.9	%					8.6	%		8.9					8.6	%
Marketing		2.5						2.5			2.3						2.2			2.5						2.4			2.3					2.2
Technology and content		6.2						5.3			6.4						5.6			6.1						5.2			6.5					5.7
General and administrative		1.7						1.4			1.7						1.4			1.7						1.4			1.9					1.6

Operating expenses without stock-based compensation are non-GAAP financial measures. See Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Non-GAAP Financial Measures” and Item 1 of Part I, “Financial Statements — Note 1 — Accounting Policies — Stock-Based Compensation.”

Fulfillment

The increase in fulfillment costs in absolute dollars in Q3 2008 and for the nine months ended September 30, 2008 compared to the comparable prior year periods relates to variable costs corresponding with sales volume and inventory levels; our mix of product sales; payment processing and related transaction costs, including mix of payment methods and costs from our guarantee for certain seller transactions; and costs from expanding fulfillment capacity.

Fulfillment costs as a percentage of net sales may vary due to several factors, such as payment processing and related transaction costs, including those from our guarantee for certain seller transactions, our level of productivity and accuracy, changes in volume, size, and weight of units received and fulfilled, the extent we utilize fulfillment services provided by third parties, and our ability to affect customer service contacts per unit by implementing improvements in our operations and enhancements to our customer self-service features. Additionally, because payment processing costs associated with seller transactions are based on the gross purchase price of underlying transactions, and payment processing and related transaction costs are higher as a percentage of revenue versus our retail sales, our sales by our sellers have higher fulfillment costs as a percent of net sales.

We expanded our fulfillment capacity during the nine months ended September 30, 2008 and throughout 2007 through gains in efficiencies and increases in leased warehouse space. This expansion is designed to accommodate greater selection and in-stock inventory levels and meet anticipated shipment volumes from sales of our own products as well as sales by third parties for which we provide fulfillment services.

Marketing

We direct customers to our websites primarily through a number of targeted online marketing channels, such as our Associates program, sponsored search, portal advertising, email campaigns, and other initiatives. Our marketing expenses are largely variable, based on growth in sales and changes in rates. To the extent there is increased or decreased competition for these traffic sources, or to the extent our mix of these channels shifts, we would expect to see a corresponding change in our marketing expense or its effect.

Marketing costs increased in absolute dollars in Q3 2008 and for the nine months ended September 30, 2008 compared to the comparable prior year periods due to increased spending in variable online marketing channels, such as our Associates program and sponsored search programs.

While costs associated with free shipping are not included in marketing expense, we view free shipping offers and Amazon Prime as effective worldwide marketing tools, and intend to continue offering them indefinitely.

Technology and Content

We seek to efficiently invest in several areas of technology and content, including seller platforms, web services, digital initiatives, and expansion of new and existing product categories, as well as technology infrastructure so that we can continue to enhance the customer experience, improve our process efficiency and support our infrastructure web services. See “Overview” above for a discussion of how management views advances in technology and the importance of innovation. We expect spending in technology and content to increase over time as we continue to add employees to our staff and add technology infrastructure.

During Q3 2008 and Q3 2007, we capitalized $41 million (including $7 million of stock-based compensation) and $35 million (including $6 million of stock-based compensation) of costs associated with internal-use software and website development. For the nine months ended September 30, 2008 and 2007, we capitalized $139 million (including $20 million of stock-based compensation) and $97 million (including $15 million of stock-based compensation) of costs associated with internal-use software and website development. Amortization of previously capitalized amounts was $37 million and $30 million for Q3 2008 and Q3 2007, and $105 million and $85 million for the nine months ended September 30, 2008 and 2007.

A significant majority of our technology costs are incurred in the U.S. and most of them are allocated to our North America segment.

General and Administrative

General and administrative costs increased in absolute dollars in Q3 2008 and for the nine months ended September 30, 2008 compared to the comparable prior year periods primarily due to increases in professional services and payroll and related expenses.

Stock-Based Compensation

Stock-based compensation was $70 million and $51 million during Q3 2008 and Q3 2007, and $197 million and $130 million for the nine months ended September 30, 2008 and 2007. The increase in stock-based compensation is primarily attributable to an increase in total stock compensation value granted to our employees.

The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results and future estimates may differ substantially from our current estimates.

Other Operating Expense (Income), Net

Other operating expense (income), net, was $7 million and $3 million during Q3 2008 and Q3 2007, and $(32) million and $6 million for the nine months ended September 30, 2008 and 2007. The increase in other operating income for the nine months ended September 30, 2008 compared to the comparable prior year period is primarily attributable to the gain recognized on the sale of our European DVD rental assets. As a result of this transaction, we recorded a $53 million non-cash gain included in “Other operating expense (income), net” on our consolidated statements of operations.

Interest Expense and Income

The primary component of our net interest expense is the interest we incur on our long-term debt instruments, including €240 million ($338 million based on the exchange rate at September 30, 2008) principal balance of our 6.875% PEACS at September 30, 2008. Interest expense was $17 million and $19 million during Q3 2008 and Q3 2007, and $60 million and $57 million for the nine months ended September 30, 2008 and 2007.

Our total debt was $435 million (including the current portion of $42 million) at September 30, 2008, and $1.3 billion at December 31, 2007. See Item 1 of Part I, “Financial Statements — Note 3 — Long-Term Debt.”

Our interest income was $21 million and $23 million during Q3 2008 and Q3 2007, and $67 million and $62 million for the nine months ended September 30, 2008 and 2007. We generally invest our excess cash in investment grade short- to intermediate-term fixed income securities and AAA-rated money market funds. Our interest income corresponds with the average balance of invested funds and the prevailing rates we are earning on them, which vary depending on the geographies and currencies in which they are invested.

Other Income (Expense), Net

Other expense, net, consisted of the following:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008		2007
	(in millions)						(in millions)
Foreign-currency gain (loss) on remeasurement of 6.875% PEACS	$	40		$	(17	)	$	12	$	(25	)
Foreign-currency gain (loss) on intercompany balances		(16	)		16			9		22
Other		—			(2	)		1		(7	)

Total other income (expense), net	$	24		$	(3	)	$	22	$	(10	)

Income Taxes

Our tax provision for interim periods is determined using an estimate of our annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. There is a potential for significant volatility of our 2008 effective tax rate due to several factors, including from variability in accurately predicting our taxable income, the taxable jurisdictions to which it relates, and business acquisitions and investments. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate

changes we make a cumulative adjustment. The 2008 annual effective tax rate is estimated to be lower than the 35% U.S. federal statutory rate primarily due to anticipated earnings of our subsidiaries outside of the U.S. in jurisdictions where our effective tax rate is lower than in the U.S. Included in the total tax provision as a discrete item during Q2 2008 is the impact related to the $53 million non-cash gain associated with the sale of our European DVD rental assets. This gain will be taxed at rates substantially below the 35% U.S. federal statutory rate. Cash paid for income taxes was $5 million and $4 million in Q3 2008 and Q3 2007, and $28 million and $14 million for the nine months ended September 30, 2008 and 2007.

Net Income

Net income was $118 million and $80 million in Q3 2008 and Q3 2007, and $420 million and $269 million for the nine months ended September 30, 2008 and 2007. Net income includes the impact of foreign currency remeasurements included in “Other income (expense), net” which fluctuate with changes in exchange rates. For Q3 2008, these remeasurements resulted in an after tax benefit of $15 million. For the nine months ended September 30, 2008, net income also includes a non-cash gain from the sale of our European DVD rental assets included in “Other operating expense (income), net,” which we do not believe is predictive of future results or trends.

Effect of Exchange Rates

The effect on our consolidated statements of operations from changes in exchange rates versus the U.S. Dollar is as follows (in millions, except per share data):


	Three Months Ended September 30,															Nine Months Ended September 30,
	2008						2007									2008						2007
	At Prior Year Rates (1)		Exchange Rate Effect (2)		As Reported		At Prior Year Rates (1)			Exchange Rate Effect (2)			As Reported			At Prior Year Rates (1)		Exchange Rate Effect (2)		As Reported		At Prior Year Rates (1)			Exchange Rate Effect (2)			As Reported
Net sales	$	4,184	$	80	$	4,264	$	3,187		$	75		$	3,262		$	12,016	$	447	$	12,463	$	8,959		$	204		$	9,163
Gross profit		984		15		999		747			15			762			2,833		89		2,922		2,140			43			2,183
Operating expenses		835		10		845		628			11			639			2,300		53		2,353		1,771			28			1,799
Income from operations		149		5		154		118			5			123			533		36		569		369			15			384
Net interest income (expense) and other (3)		3		25		28		(4	)		(1	)		(5	)		10		19		29		(6	)		(5	)		(11	)
Net income		98		20		118		78			2			80			382		38		420		261			8			269
Diluted earnings per share	$	0.22	$	0.05	$	0.27	$	0.18		$	0.01		$	0.19		$	0.88	$	0.09	$	0.97	$	0.62		$	0.02		$	0.64

(1)	Represents the outcome that would have resulted had exchange rates in the current period been the same as those in effect in the comparable prior year period for operating results, and if we did not incur the variability associated with remeasurements for our 6.875% PEACS and intercompany balances.

(2)	Represents the increase or decrease in reported amounts resulting from changes in exchange rates from those in effect in the comparable prior year period for operating results, and if we did not incur the variability associated with remeasurements for our 6.875% PEACS and intercompany balances.

(3)	Includes foreign-currency gains and losses on cross-currency investments, remeasurement of 6.875% PEACS, and intercompany balances.

Non-GAAP Financial Measures

Regulation G, Conditions for Use of Non-GAAP Financial Measures, and other SEC regulations define and prescribe the conditions for use of certain non-GAAP financial information. Our measure of “Free cash flow” meets the definition of a non-GAAP financial measure. Free cash flow is used in addition to and in conjunction with results presented in accordance with GAAP and free cash flow should not be relied upon to the exclusion of GAAP financial measures. Free cash flow reflects an additional way of viewing our liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows. Management strongly encourages shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.

Free cash flow, which we reconcile to “Net cash provided by operating activities,” is cash flow from operations reduced by “Purchases of fixed assets, including internal-use software and website development.” We use free cash flow, and ratios based on it, to conduct and evaluate our business because, although it is similar to cash flow from operations, we believe it is a more conservative measure of cash flows since purchases of fixed assets are a necessary component of ongoing operations. In limited circumstances in which proceeds from sales of fixed assets exceed purchases, free cash flow would exceed cash flow from operations. However, since we do not anticipate being a net seller of fixed assets, we expect free cash flow to be less than operating cash flows.

Free cash flow has limitations due to the fact that it does not represent the residual cash flow available for discretionary expenditures. For example, free cash flow does not incorporate payments made on capital lease obligations or cash payments for business acquisitions. Therefore, we believe it is important to view free cash flow as a complement to our entire consolidated statements of cash flows.

The following is a reconciliation of free cash flow to the most comparable GAAP measure, “Net cash provided by operating activities” for the trailing twelve months ended September 30, 2008 and 2007 (in millions):


	Twelve Months Ended September 30,
	2008			2007
Net cash provided by operating activities	$	1,275		$	1,001
Purchases of fixed assets, including internal-use software and website development		(305	)		(201	)

Free cash flow	$	970		$	800

Net cash used in investing activities	$	(974	)	$	(342	)

Net cash provided by (used in) financing activities	$	34		$	(26	)

In addition, we provide operating expenses with and without stock-based compensation. We provide this information to show the impact of stock-based compensation, which is non-cash and excluded from our internal operating plans and measurement of financial performance (although we consider the dilutive impact to our shareholders when awarding stock-based compensation and value such awards accordingly). In addition, unlike other centrally-incurred operating costs, stock-based compensation is not allocated to segment results and therefore excluding it from operating expense is consistent with our segment presentation in our footnotes to the consolidated financial statements.

Operating expenses without stock-based compensation have limitations due to the fact that they do not include all expenses primarily related to our workforce. More specifically, if we did not pay out a portion of our compensation in the form of stock-based compensation, our cash salary expense included in the “Fulfillment,” “Technology and content,” “Marketing,” and “General and administrative” line items would be higher. We compensate for this limitation by providing supplemental information about outstanding stock-based awards in

the footnotes to our financial statements. Stock-based compensation programs are an important element of our compensation structure and all forms of stock-based awards are valued and included as appropriate in results of operations.

Guidance

We provided guidance on October 22, 2008, in our earnings release furnished on Form 8-K, as follows:

Fourth Quarter 2008 Guidance

•

Net sales are expected to be between $6.0 billion and $7.0 billion, or to grow between 6% and 23% compared with fourth quarter 2007.

•

Operating income is expected to be between $145 million and $305 million, or between 46% decline and 13% growth compared with fourth quarter 2007. This guidance includes approximately $85 million for stock-based compensation and amortization of intangible assets, and it assumes, among other things, that no additional business acquisitions or investments are concluded and that there are no further revisions to stock-based compensation estimates.

Full Year 2008 Expectations

•

Net sales are expected to be between $18.46 billion and $19.46 billion, or to grow between 24% and 31% compared with 2007.

•

Operating income is expected to be between $716 million and $876 million, or to grow between 9% and 34% compared with 2007. This guidance includes approximately $300 million for stock-based compensation and amortization of intangible assets and includes the impact of the $53 million non-cash gain recognized in the second quarter 2008 on the sale of the Company’s European DVD rental assets. It assumes, among other things, that no additional business acquisitions or investments are concluded and that there are no further revisions to stock-based compensation estimates.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk for the effect of interest rate changes, foreign currency fluctuations, and changes in the market values of our investments.

Information relating to quantitative and qualitative disclosure about market risks is set forth below and in Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources.”

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and our long-term debt. All of our cash equivalent and marketable fixed income securities are designated as available-for-sale and, accordingly, are presented at fair value on our consolidated balance sheets. We generally invest our excess cash in investment grade short- to intermediate-term fixed income securities and AAA-rated money market funds. Fixed rate securities may have their fair market value adversely affected due to a rise in interest rates, and we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates.

At September 30, 2008, we had debt of $435 million, primarily associated with our 6.875% PEACS, which is due in 2010. The fair value of our debt will fluctuate with movements of interest rates, generally increasing in periods of declining rates of interest and declining in periods of increasing rates of interest. Based upon quoted market prices, the fair value of the 6.875% PEACS (outstanding principal of €240 million) was $334 million and $358 million at September 30, 2008 and December 31, 2007.

Foreign Exchange Risk

During Q3 2008, net sales from our International segment accounted for 46% of our consolidated revenues. Net sales and related expenses generated from our international websites, as well as those relating to www.amazon.ca (which is included in our North America segment), are denominated in the functional currencies of the corresponding websites and primarily include British Pounds, Euros, and Japanese Yen. The functional currency of our subsidiaries that either operate or support these websites is the same as the corresponding local currency. The results of operations of, and certain of our intercompany balances associated with, our internationally-focused websites are exposed to foreign exchange rate fluctuations. Upon consolidation, as exchange rates vary, net sales and other operating results may differ materially from expectations, and we may record significant gains or losses on the remeasurement of intercompany balances. For example, as a result of fluctuations in foreign exchange rates throughout the period compared to rates in effect the prior year, net sales in Q3 2008 increased by $80 million.

We have foreign exchange risk related to foreign-denominated cash, cash equivalents, and marketable securities (“foreign funds”). Based on the balance of foreign funds at September 30, 2008 of $1.2 billion, an assumed 5%, 10%, and 20% negative currency movement would result in fair value declines of $60 million, $120 million, or $240 million. All investments are classified as “available for sale,” as defined by SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Fluctuations in fair value are recorded in “Accumulated other comprehensive income,” a separate component of stockholders’ equity.

We have foreign exchange risk related to our intercompany balances denominated in foreign currency. Based on the intercompany balances at September 30, 2008 of $223 million, an assumed 5%, 10%, and 20% strengthening of the U.S. Dollar in relation to these foreign currencies would result in losses of $10 million, $25 million, and $45 million, recorded to “Other expense (income), net.”

We have foreign exchange risk related to our 6.875% PEACS, which have an outstanding principal balance at September 30, 2008 of €240 million ($338 million, based on the exchange rate as of September 30, 2008). Due to fluctuations in the Euro/U.S. Dollar exchange ratio, which we cannot predict, our remaining principal debt obligation under the 6.875% PEACS since issuance in February 2000 has increased by $102 million as of September 30, 2008. Based on the outstanding 6.875% PEACS’ principal balance, an assumed 5%, 10%, and 20% weakening of the U.S. Dollar in relation to the Euro would result in additional losses of approximately $15 million, $35 million, or $70 million, recorded to “Other income (expense), net.” Additionally, we have not hedged our interest payments under our 6.875% PEACS to protect against exchange rate fluctuations. Assuming the U.S. Dollar weakens against the Euro by 5%, 10%, and 20%, we would incur $1 million, $2 million, or $5 million additional annual interest expense due solely to fluctuations in foreign exchange rates.

See Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Effect of Exchange Rates” for additional information on the effect on reported results of changes in exchange rates.

Investment Risk

As of September 30, 2008, our recorded basis in equity securities was $248 million. These investments primarily relate to equity-method investments in private companies. We review our investments for impairment when events and circumstances indicate that the decline in fair value of such assets below the carrying value are other-than-temporary. Our analysis includes review of recent operating results and trends, recent sales/acquisitions of the investee securities, and other publicly available data. The recent disruption in the global financial markets provides additional uncertainty. Valuations of private companies are inherently more difficult due to the lack of readily available market data. As such, we believe that market sensitivities are not practicable.

Item 4. Controls and Procedures

We carried out an evaluation required by the Securities Exchange Act of 1934 (the “1934 Act”), under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the 1934 Act, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

During the most recent fiscal quarter, there has not occurred any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Item 1 of Part I, “Financial Statements — Note 4 — Commitments and Contingencies.”

Item 1A. Risk Factors

Please carefully consider the following risk factors. If any of the following risks occur, our business, financial condition, operating results, and cash flows could be materially adversely affected. In addition, the recent disruptions in the global financial markets amplify many of these risks.

We Face Intense Competition

Our market segments are rapidly evolving and intensely competitive, and we have many competitors in different industries, including retail, e-commerce services, digital and web services. Many of our current and potential competitors have greater resources, longer histories, more customers, and greater brand recognition. They may secure better terms from vendors, adopt more aggressive pricing and devote more resources to technology, fulfillment, and marketing.

Competition may intensify as our competitors enter into business combinations or alliances and established companies in other market segments expand into our market segments. In addition, new and enhanced technologies, including search, web services, and digital, may increase our competition. The Internet facilitates competitive entry and comparison shopping and renders e-commerce inherently more competitive than other retail. Increased competition may reduce our sales and profits.

Our Expansion Places a Significant Strain on our Management, Operational, Financial and Other Resources

We are rapidly and significantly expanding our global operations, including increasing our product and service offerings and scaling our infrastructure to support our retail and services businesses. This expansion increases the complexity of our business and places significant strain on our management, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions. We may not be able to manage growth effectively, which could damage our reputation, limit our growth and negatively affect our operating results.

Our Expansion into New Products, Services, Technologies and Geographic Regions Subjects Us to Additional Business, Legal, Financial and Competitive Risks

We may have limited or no experience in our newer market segments, and our customers may not adopt our new product or service offerings, which include seller services, digital, web services and electronic devices. These offerings may present new and difficult technology challenges, and we may be subject to claims if customers of these offerings experience service disruptions or failures or other quality issues. In addition, our gross profits in our newer activities may be lower than in our older activities, and we may not be successful enough in these newer activities to recoup our investments in them. If any of this were to occur, it could damage our reputation, limit our growth and negatively affect our operating results.

We May Experience Significant Fluctuations in Our Operating Results and Growth Rate

We may not be able to accurately forecast our growth rate. We base our expense levels and investment plans on sales estimates. A significant portion of our expenses and investments is fixed, and we may not be able to adjust our spending quickly enough if our sales are less than expected.

Our revenue growth may not be sustainable, and our percentage growth rates may decrease. Our revenue and operating profit growth depends on the continued growth of demand for the products and services offered by us or our sellers, and our business is affected by general economic and business conditions worldwide. A softening of demand, whether caused by changes in customer preferences or a weakening of the U.S. or global economies, including as a result of recent disruptions in the global financial markets, may result in decreased revenue or growth.

Our net sales and operating results will also fluctuate for many other reasons, including due to risks described elsewhere in this section and the following:

•

our ability to retain and increase sales to existing customers, attract new customers, and satisfy our customers’ demands;

•

our ability to expand our network of sellers;

•

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

•

the introduction of competitive websites, products, services, price decreases, or improvements;

•

changes in usage of the Internet and e-commerce, including in non-U.S. markets;

•

timing, effectiveness, and costs of expansion and upgrades of our systems and infrastructure;

•

the success of our geographic, service and product line expansions;

•

the outcomes of legal proceedings and claims;

•

variations in the mix of products and services we sell;

•

variations in our level of merchandise and vendor returns;

•

the extent to which we offer free shipping, continue to reduce product prices worldwide, and provide additional benefits to our customers;

•

the extent to which we invest in technology and content, fulfillment and other expense categories;

•

increases in the prices of fuel and gasoline, as well as increases in the prices of other energy products and commodities like paper and packing supplies;

•

the extent to which operators of the networks between our customers and our websites successfully charge fees to grant our customers unimpaired and unconstrained access to our online services;

•

our ability to collect amounts owed to us when they become due;

•

the extent to which use of our services is affected by spyware, viruses, “phishing” and other spam emails, “denial of service” attacks, data theft, computer intrusions and similar events; and

•

terrorist attacks and armed hostilities.

We May Not Be Successful in Our Efforts to Expand into International Market Segments

Our international activities are significant to our revenues and profits, and we plan to further expand internationally. We have relatively little experience operating in these or future market segments and may not benefit from any first-to-market advantages or otherwise succeed. It is costly to establish, develop and maintain international operations and websites and promote our brand internationally. Our international operations may not be profitable on a sustained basis.

In addition to risks described elsewhere in this section, our international sales and operations are subject to a number of risks, including:

•

local economic and political conditions;

•

government regulation of e-commerce or other online services and restrictive governmental actions (such as trade protection measures, including export duties and quotas and custom duties and tariffs), nationalization and restrictions on foreign ownership;

•

restrictions on sales or distribution of certain products or services and uncertainty regarding liability for products, services and content, including uncertainty as a result of less Internet-friendly legal systems, local laws, lack of legal precedent, and varying rules, regulations, and practices regarding the distribution of media products and enforcement of intellectual property rights;

•

import, export, or other business licensing requirements;

•

limitations on the repatriation and investment of funds and foreign currency exchange restrictions;

•

limited fulfillment and technology infrastructure;

•

shorter payable and longer receivable cycles and the resultant negative impact on cash flow;

•

laws and regulations regarding consumer and data protection, privacy, network security, encryption, and restrictions on pricing or discounts;

•

lower levels of use of the Internet;

•

lower levels of consumer spending and fewer opportunities for growth compared to the U.S.;

•

lower levels of credit card usage and increased payment risk;

•

difficulty in staffing, developing and managing foreign operations as a result of distance, language and cultural differences;

•

different employee/employer relationships and the existence of workers’ councils and labor unions;

•

laws and policies of the U.S. and other jurisdictions affecting trade, foreign investment, loans and taxes; and

•

geopolitical events, including war and terrorism.

As the international e-commerce channel grows, competition will intensify. Local companies may have a substantial competitive advantage because of their greater understanding of, and focus on, the local customer, as well as their more established local brand names. We may not be able to hire, train, retain, and manage required personnel, which may limit our international growth.

In 2004, we acquired Joyo.com Limited, which is organized under the laws of the British Virgin Islands and through a People’s Republic of China (“PRC”) entity, provides technology and services for the Joyo Amazon websites at www.joyo.cn and www.amazon.cn. The PRC regulates Joyo Amazon’s business through regulations and license requirements restricting (i) foreign investment in the Internet, retail and delivery sectors, (ii) Internet content and (iii) the sale of media products. In order to meet local ownership and regulatory licensing requirements, Joyo Amazon’s business is operated by PRC companies owned by nominee shareholders who are PRC nationals. Although we believe Joyo Amazon’s structure complies with existing PRC laws, it involves unique risks. There are substantial uncertainties regarding the interpretation of PRC laws and regulations, and it is possible that the PRC government will ultimately take a view contrary to ours. If Joyo Amazon (including its subsidiary and affiliates) were found to be in violation of any existing or future PRC laws or regulations or if interpretations of those laws and regulations were to change, the business could be subject to fines and other financial penalties, have its licenses revoked or be forced to shut down entirely. In addition, if Joyo Amazon were unable to enforce its contractual relationships with respect to management and control of its business, it might be unable to continue to operate the business.

If We Do Not Successfully Optimize and Operate Our Fulfillment Centers, Our Business Could Be Harmed

If we do not successfully operate our fulfillment centers, it could significantly limit our ability to meet customer demand. Because it is difficult to predict demand we may not manage our facilities in an optimal way, which may result in excess or insufficient inventory or warehousing, fulfillment, and distribution capacity. A failure to optimize inventory will increase our net shipping cost by requiring long-zone or partial shipments. Orders from several of our websites are fulfilled primarily from a single location, and we have only a limited ability to reroute orders to third parties for drop-shipping. We and our co-sourcers may be unable to adequately staff our fulfillment and customer service centers. As we continue to add fulfillment and warehouse capability or add new businesses with different fulfillment requirements, our fulfillment network becomes increasingly complex and operating it becomes more challenging. If the other businesses on whose behalf we perform inventory fulfillment services deliver product to our fulfillment centers in excess of forecasts, we may be unable to secure sufficient storage space and may be unable to optimize our fulfillment centers. There can be no assurance that we will be able to operate our network effectively.

We rely on a limited number of shipping companies to deliver inventory to us and completed orders to our customers. If we are not able to negotiate acceptable terms with these companies or they experience performance problems or other difficulties, it could negatively impact our operating results and customer experience. In addition, our ability to receive inbound inventory efficiently and ship completed orders to customers also may be negatively affected by inclement weather, fire, flood, power loss, earthquakes, labor disputes, acts of war or terrorism, acts of God and similar factors.

Third parties either drop-ship or otherwise fulfill an increasing portion of our customers’ orders, and we are increasingly reliant on the reliability, quality and future procurement of their services. Under some of our commercial agreements, we maintain the inventory of other companies, thereby increasing the complexity of tracking inventory and operating our fulfillment centers. Our failure to properly handle such inventory or the inability of these other companies to accurately forecast product demand would result in unexpected costs and other harm to our business and reputation.

The Seasonality of Our Business Places Increased Strain on Our Operations

We expect a disproportionate amount of our net sales to occur during our fourth quarter. If we do not stock or restock popular products in sufficient amounts such that we fail to meet customer demand, it could significantly affect our revenue and our future growth. If we overstock products, we may be required to take significant inventory markdowns or write-offs, which could reduce gross profits. We may experience an increase in our net shipping cost due to complimentary upgrades, split-shipments, and additional long-zone shipments necessary to ensure timely delivery for the holiday season. If too many customers access our websites within a short period of time due to increased holiday demand, we may experience system interruptions that make our websites unavailable or prevent us from efficiently fulfilling orders, which may reduce the volume of goods we sell and the attractiveness of our products and services. In addition, we may be unable to adequately staff our fulfillment and customer service centers during these peak periods and delivery and other fulfillment companies and customer service co-sourcers may be unable to meet the seasonal demand. We also face risks described elsewhere in this Item 1A relating to fulfillment center optimization and inventory.

We generally have payment terms with our vendors that extend beyond the amount of time necessary to collect proceeds from our customers. As a result of holiday sales, at December 31 of each year, our cash, cash equivalents, and marketable securities balances typically reach their highest level (other than as a result of cash flows provided by or used in investing and financing activities). This operating cycle results in a corresponding increase in accounts payable at December 31. Our accounts payable balance generally declines during the first three months of the year, resulting in a corresponding decline in our cash, cash equivalents, and marketable securities balances.

Our Business Could Suffer if We Are Unsuccessful in Making, Integrating, and Maintaining Commercial Agreements, Strategic Alliances, and Other Business Relationships

We provide e-commerce services to other businesses, such as through our marketplace programs, Amazon Enterprise Solutions, Website by Amazon and Fulfillment by Amazon program initiatives, as well as other commercial agreements, strategic alliances and business relationships. Under these agreements, we provide technology, fulfillment and other services, as well as enable sellers to offer products or services through our websites and power their websites. These arrangements are complex and require substantial personnel and resource commitments by us, which may limit the agreements we are able to enter into and our ability to integrate and deliver services under them. If we fail to implement, maintain, and develop the components of these commercial relationships, which may include fulfillment, customer service, inventory management, tax collection, payment processing, licensing of third-party software, hardware, and content, and engaging third parties to perform hosting and other services, these initiatives may not be viable. The amount of compensation we receive under certain of these agreements is partially dependent on the volume of the other company’s sales. Therefore, if the other company’s offering is not successful, the compensation we receive may be lower than expected or the agreement may be terminated. Moreover, we may not be able to enter into additional commercial relationships and strategic alliances on favorable terms. We also may be subject to claims from businesses to which we provide these services if we are unsuccessful in implementing, maintaining or developing these services.

As our commercial agreements terminate, we may be unable to renew or replace these agreements on comparable terms, or at all. Some of our agreements involve high margin services, such as marketing and promotional agreements, and as they expire they may be replaced, if at all, by agreements involving lower margin services. We may in the future enter into amendments on less favorable terms or encounter parties that have difficulty meeting their contractual obligations to us, which could adversely affect our operating results.

Our present and future e-commerce services agreements, other commercial agreements, and strategic alliances create additional risks such as:

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disruption of our ongoing business, including loss of management focus on existing businesses;

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impairment of other relationships;

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variability in revenue and income from entering into, amending, or terminating such agreements or relationships; and

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difficulty integrating under the commercial agreements.

Our Business Could Suffer if We Are Unsuccessful in Making, Integrating, and Maintaining Acquisitions and Investments

We have acquired and invested in a number of companies, and we may acquire or invest in or enter into joint ventures with additional companies. These transactions create risks such as:

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disruption of our ongoing business, including loss of management focus on existing businesses;

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problems retaining key personnel;

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additional operating losses and expenses of the businesses we acquired or in which we invested;

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the potential impairment of amounts capitalized as intangible assets and goodwill as part of the acquisition;

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the potential impairment of customer and other relationships of the company we acquired or in which we invested or our own customers as a result of any integration of operations;

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the difficulty of incorporating acquired technology and rights into our offerings and unanticipated expenses related to such integration;

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the difficulty of integrating a new company’s accounting, financial reporting, management, information, human resource and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not implemented;

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the difficulty of implementing at companies we acquire the controls, procedures and policies appropriate for a larger public company;

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potential unknown liabilities associated with a company we acquire or in which we invest; and

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for foreign transactions, additional risks related to the integration of operations across different cultures and languages, and the economic, political, and regulatory risks associated with specific countries.

As a result of future acquisitions or mergers, we might need to issue additional equity securities, spend our cash, or incur debt, contingent liabilities, or amortization expenses related to intangible assets, any of which could reduce our profitability and harm our business. In addition, due in part to the recent disruptions in the global financial markets, valuations supporting our acquisitions and strategic investments could change rapidly. We could determine that such valuations have experienced impairments or other-than-temporary declines in fair value which could adversely impact our financial results.

We Have Foreign Exchange Risk

The results of operations of, and certain of our intercompany balances associated with, our international websites are exposed to foreign exchange rate fluctuations. Upon translation, operating results may differ materially from expectations, and we may record significant gains or losses on the remeasurement of intercompany balances. As we have expanded our international operations, our exposure to exchange rate fluctuations has increased.

In addition, our 6.875% PEACS are denominated in Euros and increases in the Euro relative to the U.S. Dollar increase the U.S. Dollar amount we owe as interest and principal on the 6.875% PEACS. We also hold cash equivalents and/or marketable securities primarily in Euros, British Pounds, and Japanese Yen. If the U.S. Dollar strengthens compared to these currencies, cash equivalents and marketable securities balances, when translated, may be materially less than expected and vice versa.

The Loss of Key Senior Management Personnel Could Negatively Affect Our Business

We depend on our senior management and other key personnel, particularly Jeffrey P. Bezos, our President, CEO, and Chairman. 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.

System Interruption and the Lack of Integration and Redundancy in Our Systems May Affect Our Sales

Customer access to our websites and the speed with which a customer navigates and makes purchases on our websites affect our net sales, operating results and the attractiveness of our products and services. We experience occasional system interruptions and delays that make our websites unavailable or slow to respond and prevent us from efficiently fulfilling orders or providing services to third parties, which may reduce our net sales and the attractiveness of our products and services. If we are unable to continually add software and hardware, effectively upgrade our systems and network infrastructure and take other steps to improve the efficiency of our systems, it could cause system interruptions or delays and adversely affect our operating results.

Our computer and communications systems and operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, earthquakes, acts of war or terrorism, acts of God, computer viruses, physical or electronic break-ins, and similar events or disruptions. Any of these events could cause system interruption, delays, and loss of critical data, and could prevent us from accepting and fulfilling customer orders

and providing services, which would make our product and service offerings less attractive. Our systems are not fully redundant and our disaster recovery planning may not be sufficient. In addition, we may have inadequate insurance coverage to compensate us for any related losses. Any of these events could damage our reputation and be expensive to remedy.

We Have Outstanding Debt and May Incur Additional Debt in the Future

We have outstanding debt and may incur substantial additional debt in the future. As a result, a significant portion of our future cash flow from operating activities may be dedicated to the payment of interest and the repayment of principal on such indebtedness, with no guarantee that we will be able to meet our debt service obligations. If we are unable to generate sufficient cash flow or obtain funds for required payments, or if we fail to comply with our debt covenants, we will be in default. We may not be able to refinance our debt on terms acceptable to us, or at all, and there can be no assurance that additional lines-of-credit or financing instruments will be available in amounts or on terms acceptable to us, if at all. A lack or high cost of credit could limit our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions or other purposes in the future, as needed; to plan for, or react to, changes in technology and in our business and competition; and to react in the event of an economic downturn.

We Face Significant Inventory Risk

In addition to risks described elsewhere in this Item 1A relating to fulfillment center and inventory optimization by us and third parties, we are exposed to significant inventory risks that may adversely affect our operating results as a result of seasonality, new product launches, rapid changes in product cycles, changes in consumer tastes with respect to our products and other factors. We must accurately predict these trends and avoid overstocking or under-stocking products we manufacture and/or sell. Demand for products, however, can change significantly between the time inventory or components are ordered and the date of sale. In addition, when we begin selling or manufacturing a new product, it may be difficult to establish vendor relationships, determine appropriate product or component selection, and accurately forecast demand. The acquisition of certain types of inventory or components may require significant lead-time and prepayment and they may not be returnable. We carry a broad selection and significant inventory levels of certain products, such as consumer electronics, and we may be unable to sell products in sufficient quantities or during the relevant selling seasons. Any one of the inventory risk factors set forth above may adversely affect our operating results.

We May Not Be Able to Adequately Protect Our Intellectual Property Rights or May Be Accused of Infringing Intellectual Property Rights of Third Parties

We regard our trademarks, service marks, copyrights, patents, trade dress, trade secrets, proprietary technology, and similar intellectual property as critical to our success, and we rely on trademark, copyright, and patent law, trade secret protection, and confidentiality and/or license agreements with our employees, customers, and others to protect our proprietary rights. Effective intellectual property protection may not be available in every country in which our products and services are made available. We also 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.

We may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. Third parties that license our proprietary rights also may take actions that diminish the value of our proprietary rights or reputation. The protection of our intellectual property may require the expenditure of significant financial and managerial resources. Moreover, the steps we take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights. We also cannot be certain that others will not independently develop or otherwise acquire equivalent or superior technology or other intellectual property rights.

Other parties also may claim that we infringe their proprietary rights. We have been subject to, and expect to continue to be subject to, claims and legal proceedings regarding alleged infringement by us of the intellectual property rights of third parties. The ready availability of damages, royalties and the potential for injunctive relief has increased the costs associated with the litigation and settlement of patent infringement claims, especially those asserted by third parties whose sole or primary business is to assert such claims. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, injunctions against us or the payment of damages. We may need to obtain licenses from third parties who allege that we have infringed their rights, but such licenses may not be available on terms acceptable to us or at all. In addition, we may not be able to obtain or utilize on terms that are favorable to us, or at all, licenses or other rights with respect to intellectual property we do not own in providing e-commerce services to other businesses and individuals under commercial agreements.

Our digital content offerings depend in part on effective digital rights management technology to control access to digital content. If the digital rights management technology that we use is compromised or otherwise malfunctions, we could be subject to claims, and content providers may be unwilling to include their content in our service.

We Have a Rapidly Evolving Business Model and Our Stock Price Is Highly Volatile

We have a rapidly evolving business model. The trading price of our common stock fluctuates significantly in response to, among other risks, the risks described elsewhere in this Item 1A, as well as:

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changes in interest rates;

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conditions or trends in the Internet and the e-commerce industry;

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quarterly variations in operating results;

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fluctuations in the stock market in general and market prices for Internet-related companies in particular;

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changes in financial estimates by us or securities analysts and recommendations by securities analysts;

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changes in our capital structure, including issuance of additional debt or equity to the public;

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changes in the valuation methodology of, or performance by, other e-commerce companies; and

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transactions in our common stock by major investors and certain analyst reports, news, and speculation.

Volatility in our stock price could adversely affect our business and financing opportunities and force us to increase our cash compensation to employees or grant larger stock awards than we have historically, which could hurt our operating results or reduce the percentage ownership of our existing stockholders, or both.

Government Regulation of the Internet and E-commerce Is Evolving and Unfavorable Changes Could Harm Our Business

We are subject to general business regulations and laws, as well as regulations and laws specifically governing the Internet and e-commerce. Existing and future laws and regulations may impede the growth of the Internet or online services. These regulations and laws may cover taxation, privacy, data protection, pricing, content, copyrights, distribution, mobile communications, electronic contracts and other communications, consumer protection, the provision of online payment services, unencumbered Internet access to our services, the design and operation of websites, and the characteristics and quality of products and services. It is not clear how existing laws governing issues such as property ownership, libel, and personal privacy apply to the Internet and e-commerce. Jurisdictions may regulate consumer-to-consumer online businesses, including certain aspects of our seller programs. Unfavorable regulations and laws could diminish the demand for our products and services and increase our cost of doing business.

Taxation Risks Could Subject Us to Liability for Past Sales and Cause Our Future Sales to Decrease

We do not collect sales or other taxes on shipments of most of our goods into most states in the U.S. Under some of our commercial agreements, the other company is the seller of record, and we are obligated to collect sales tax in accordance with that company’s instructions. We may enter into additional agreements requiring similar tax collection obligations. Our fulfillment center and customer service center networks, and any future expansion of them, along with other aspects of our evolving business, may result in additional sales and other tax obligations. We collect consumption tax (including value added tax, goods and services tax, and provincial sales tax) as applicable on goods and services sold by us that are ordered on our international sites. One or more states or foreign countries may seek to impose sales or other tax collection obligations on out-of-jurisdiction e-commerce companies. A successful assertion by one or more states or foreign countries that we should collect sales or other taxes on the sale of merchandise or services could result in substantial tax liabilities for past sales, decrease our ability to compete with traditional retailers, and otherwise harm our business.

Currently, U.S. Supreme Court decisions restrict the imposition of obligations to collect state and local sales and use taxes with respect to sales made over the Internet. However, a number of states, as well as the U.S. Congress, have been considering initiatives that could limit or supersede the Supreme Court’s position regarding sales and use taxes on Internet sales. If any of these initiatives were successful, we could be required to collect sales and use taxes in additional states. The imposition by state and local governments of various taxes upon Internet commerce could create administrative burdens for us, put us at a competitive disadvantage if they do not impose similar obligations on all of our online competitors and decrease our future sales.

We Could be Subject to Additional Income Tax Liabilities

We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating our worldwide provision for income taxes. During the ordinary course of business, there are many transactions for which the ultimate tax determination is uncertain. For example, our effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations. We are subject to audit in various jurisdictions, and such jurisdictions may assess additional income tax against us. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on our operating results or cash flows in the period or periods for which that determination is made.

Our Vendor Relationships Subject Us to a Number of Risks

We have significant vendors that are important to our sourcing, manufacturing and any related ongoing servicing of merchandise and content. We do not have long-term arrangements with most of our vendors to guarantee availability of merchandise, content, components or services, particular payment terms, or the extension of credit limits. If our current vendors were to stop selling merchandise, content, components or services to us on acceptable terms, we may be unable to procure from other vendors in a timely and efficient manner and on acceptable terms, or at all.

We May Be Subject to Product Liability Claims if People or Property Are Harmed by the Products We Sell

Some of the products we sell or manufacture may expose us to product liability claims relating to personal injury, death, or property damage, and may require product recalls or other actions. Certain third parties also sell products using our e-commerce platform that may increase our exposure to product liability claims, such as if these sellers do not have sufficient protection from such claims. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. In addition, some of our agreements with our vendors and sellers do not indemnify us from product liability.

We Are Subject to Payments-Related Risks

We accept payments using a variety of methods, including credit card, debit card, credit accounts (including promotional financing), gift certificates, direct debit from a customer’s bank account, consumer invoicing, physical bank check and payment upon delivery. As we offer new payment options to our customers, we may be subject to additional regulations, compliance requirements, and fraud. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower our profit margins. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards, electronic checks, and promotional financing, and it could disrupt our business if these companies become unwilling or unable to provide these services to us. We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers, process electronic funds transfers, or facilitate other types of online payments, and our business and operating results could be adversely affected. We also offer co-branded credit card programs that represent a significant component of our services revenue and generate high margins. If one or more of these agreements are terminated and we are unable to replace them on similar terms, or at all, it could adversely affect our operating results.

In addition, we qualify as a money services business in certain jurisdictions because we enable customers to keep account balances with us and transfer money to third parties, and because we provide services to third parties to facilitate payments on their behalf. In these jurisdictions, we may be subject to requirements for licensing, regulatory inspection, bonding, the handling of transferred funds and consumer disclosures. We are also subject to or voluntarily comply with a number of other laws and regulations relating to money laundering, international money transfers, privacy and information security and electronic fund transfers. If we were found to be in violation of applicable laws or regulations, we could be subject to civil and criminal penalties or forced to cease our payments services business.

We Could Be Liable for Breaches of Security on Our Websites

Although we have developed systems and processes that are designed to protect consumer information and prevent fraudulent payment transactions and other security breaches, failure to prevent or mitigate such fraud or breaches may adversely affect our operating results.

We Could Be Liable for Fraudulent or Unlawful Activities of Sellers

The law relating to the liability of providers of online payment services is currently unsettled. In addition, governmental agencies could require changes in the way this business is conducted. Under our seller programs, we may be unable to prevent sellers from collecting payments, fraudulently or otherwise, when buyers never receive the products they ordered or when the products received are materially different from the sellers’ descriptions. Under our A2Z Guarantee, we reimburse buyers for payments up to certain limits in these situations, and as our marketplace seller sales grow, the cost of this program will increase and could negatively affect our operating results. We also may be unable to prevent sellers on our sites or through Amazon Enterprise Solutions, and certain other programs, from selling unlawful goods, from selling goods in an unlawful manner, or violating the proprietary rights of others, and could face civil or criminal liability for unlawful activities by our sellers.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In August 2008, we called for redemption $399 million in principal amount of our outstanding 4.75% Convertible Subordinated Notes at a redemption price of 100.475% of the principal amount at maturity, plus accrued and unpaid interest from August 1, 2008 through September 16, 2008. Holders could elect to convert the

4.75% Convertible Subordinated Notes into our common stock at a conversion price of $78.0275, and they elected to convert approximately $132 million in principal amount. As a result, we issued approximately 1.7 million shares of common stock, and we redeemed approximately $266 million in principal amount of the 4.75% Convertible Subordinated Notes on September 17, 2008.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibits


Exhibit Number		Description
3.1		Restated Certificate of Incorporation of the Company (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarterly Period Ended March 31, 2000).

3.2		Restated Bylaws of the Company (incorporated by reference to the Company’s Current Report on Form 8-K, dated February 8, 2008).

31.1		Certification of Jeffrey P. Bezos, Chairman and Chief Executive Officer of Amazon.com, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2		Certification of Thomas J. Szkutak, Senior Vice President and Chief Financial Officer of Amazon.com, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1		Certification of Jeffrey P. Bezos, Chairman and Chief Executive Officer of Amazon.com, Inc., pursuant to 18 U.S.C. Section 1350.

32.2		Certification of Thomas J. Szkutak, Senior Vice President and Chief Financial Officer of Amazon.com, Inc., pursuant to 18 U.S.C. Section 1350.

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)

By:		/S/ SHELLEY REYNOLDS
		Shelley Reynolds Vice President, Worldwide Controller (Principal Accounting Officer)

Dated: October 22, 2008

EXHIBIT INDEX


Exhibit Number		Description
3.1		Restated Certificate of Incorporation of the Company (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2000).

3.2		Restated Bylaws of the Company (incorporated by reference to the Company’s Current Report on Form 8-K, dated February 8, 2008).

31.1		Certification of Jeffrey P. Bezos, Chairman and Chief Executive Officer of Amazon.com, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2		Certification of Thomas J. Szkutak, Senior Vice President and Chief Financial Officer of Amazon.com, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1		Certification of Jeffrey P. Bezos, Chairman and Chief Executive Officer of Amazon.com, Inc., pursuant to 18 U.S.C. Section 1350.

32.2		Certification of Thomas J. Szkutak, Senior Vice President and Chief Financial Officer of Amazon.com, Inc., pursuant to 18 U.S.C. Section 1350.