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 current global economic climate amplifies 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."

For additional information, see Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview" of our 2008 Annual Report on Form 10-K.

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 2008 Annual Report on Form 10-K and Item 1 of Part I, "Financial Statements - Note1 - Accounting Policies," of this Form 10-Q. 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.

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.

These assumptions about future disposition of inventory are inherently uncertain. As a measure of sensitivity, for every 1% of additional inventory valuation allowance we would have recorded an additional cost of sales of approximately $14 million at both June 30, 2009 and December 31, 2008.

Goodwill

We evaluate goodwill for impairment annually and when an event occurs or circumstances change to suggest that the carrying value may not be recoverable. 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 the book value, a second step is performed to compute the amount of impairment. We estimate fair value using discounted cash flows of reporting units. Forecasts of future cash flow are based on our best estimate of future net sales and operating expenses, based primarily on category expansion, pricing expectations, market segment penetration and general economic conditions. Additionally, certain estimates of discounted cash flows involve businesses and geographies with limited financial history and developing revenue models. In our annual testing process, a fair value for goodwill is estimated and compared to its carrying value. The shortfall of the fair value below the carrying value represents the amount of goodwill impairment. Changes in these forecasts could significantly change the amount of impairment recorded, if any.

During the year, management monitors the actual performance of the business relative to the fair value assumptions used during our annual goodwill impairment test. For the periods presented, we did not identify any triggering events which would require an update to our annual impairment test. A 10% decrease in the fair value of any of our reporting units as of December 31, 2008 would have no impact on the carrying value of our goodwill.

Financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital that we use to determine our discount rate and through our stock price that we use to determine our market capitalization. During times of volatility, significant judgment must be applied to determine whether credit or stock price changes are a short term swing or a longer-term trend. As a measure of sensitivity, a prolonged 20% decrease from our June 30, 2009 closing stock price would not be an indicator of possible impairment.

Stock-Based Compensation

We measure compensation cost for stock awards at fair value and recognize the expense as compensation expense over the service period for awards expected to vest. The fair value of restricted stock units is determined based on the number of shares granted and the quoted price of our common stock. The estimation of stock awards that will ultimately vest requires judgment for the amount that will be forfeited, 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, current economic environment, and historical experience. We update our estimated forfeiture rate quarterly. A 1% change to our estimated forfeiture rate would have an approximately $14 million impact on our Q2 2009 consolidated operating income. Our estimated forfeiture rates at June 30, 2009 and December 31, 2008 were 35.7% and 37.1%.

We utilize the accelerated method, rather than the 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 higher level of sensitivity and 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. 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.

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.

Recent Accounting Pronouncements

See Item 1 of Part I, "Financial Statements - Note 1 - Accounting Policies - Recent Accounting Pronouncements."

Liquidity and Capital Resources

Cash flow information is as follows:



                                     Three Months Ended                  Six Months Ended                  Twelve Months Ended
                                          June 30,                           June 30,                            June 30,
                                   2009              2008             2009               2008             2009              2008
                                       (in millions)                       (in millions)                      (in millions)
Operating activities            $      468        $      347       $      (117 )      $     (298 )     $    1,878        $    1,088
Investing activities                  (279 )            (301 )            (427 )            (828 )           (797 )            (934 )
Financing activities                    (3 )              14              (292 )             106             (597 )             347

Our financial focus is on long-term, sustainable growth in free cash flow1. Free cash flow, a non-GAAP financial measure, was $1.54 billion for the trailing twelve months ended June 30, 2009, compared to $816 million for the trailing twelve months ended June 30, 2008, an increase of 89%. See "Non-GAAP Financial Measures" below for a reconciliation of free cash flow to cash provided by operating activities. The increase in free cash flow for the trailing twelve months ended June 30, 2009 compared to the comparable prior year period was due to increased operating income, increased deferred revenue, decreased tax benefits on excess stock-based compensation deductions, and changes in working capital. SFAS 123 (R) requires tax benefits relating to excess stock-based compensation deductions to be presented in the statement of cash flows as financing cash inflows; accordingly, as such tax benefits decline, a greater amount of cash is classified as operating cash inflow. 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

1 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 "Non-GAAP Financial Measures" below.

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 $3.2 billion and $3.7 billion at June 30, 2009 and December 31, 2008. Amounts held in foreign currencies were $1.5 billion and $1.7 billion at June 30, 2009 and December 31, 2008, 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 $468 million and $347 million for Q2 2009 and Q2 2008. Cash used in operating activities was $117 million and $298 million for the six months ended June 30, 2009 and 2008. Our operating cash flows result primarily from cash received from our customers, from sellers, and from non-retail activities such as other seller services, miscellaneous marketing and promotional agreements, our co-branded credit card agreements and Amazon Web Services, 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. Changes to our operating cash flows have historically been driven primarily by changes in operating income and changes to the components of working capital, including changes to receivable and payable days and inventory turns, as well as changes to non-cash items such as excess stock-based compensation and deferred taxes.

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 used in investing activities was $279 million and $301 million for Q2 2009 and Q2 2008. Cash used in investing activities was $427 million and $828 million for the six months ended June 30, 2009 and 2008, with the variability caused primarily by decreased acquisition activity in 2009. Capital expenditures were $78 million and $69 million during Q2 2009 and Q2 2008 and $133 million and $130 million for the six months ended June 30, 2009 and 2008. Capital expenditures included $37 million and $33 million for internal-use software and website development during Q2 2009 and Q2 2008, and $71 million and $62 million for the six months ended June 30, 2009 and 2008. Stock-based compensation capitalized for internal-use software and website development costs does not affect cash flows. During the six months ended June 30, 2009 and 2008, we made cash payments, net of acquired cash, related to acquisition and investment activity of $35 million and $400 million.

Cash provided by (used in) financing activities was $(3) million and $14 million for Q2 2009 and Q2 2008. Cash provided by (used in) financing activities was $(292) million and $106 million for the six months ended June 30, 2009 and 2008. Cash outflows from financing activities result from repayments of long-term debt and payments on capital lease obligations. Repayments on long-term debt and payments on capital lease obligations were $25 million and $36 million in Q2 2009 and Q2 2008, and $368 million and $60 million for the six months ended June 30, 2009 and 2008. Cash inflows from financing activities primarily result from proceeds from tax benefits relating to excess stock-based compensation deductions. SFAS No. 123(R) requires tax benefits relating to excess stock-based compensation deductions be presented as financing cash flows. Cash inflows from tax benefits related to stock-based compensation deductions were $20 million and $43 million for Q2 2009 and Q2 2008, and $70 million and $106 million for the six months ended June 30, 2009 and 2008.

We recorded net tax provisions of $39 million and $46 million in Q2 2009 and Q2 2008, and $108 million for both the six months ended June 30, 2009 and 2008. 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 $23 million and $15 million for Q2

2009 and Q2 2008, and $34 million and $23 million for the six months ended June 30, 2009 and 2008. As our federal and state net operating losses and tax credits are utilized, cash paid for taxes will increase. 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, pursuant to which in Q1 2009 we redeemed the remaining €240 million ($319 million based on the Euro to U.S. Dollar exchange rate on the date of redemption) in principal of our 6.875% PEACS. In February 2008, our Board of Directors authorized a 24-month program to repurchase up to $1 billion of our common stock, pursuant to which we repurchased $100 million of our common stock in 2008.

See Item 1 of Part I, "Financial Statements - Note 4 - Commitments and Contingencies" for additional discussion of our principal contractual commitments, as well as our pledged securities. Purchase obligations and open purchase orders, consisting of inventory and significant non-inventory commitments, were $885 million at June 30, 2009.

In July 2009, we entered into an agreement to acquire all of the outstanding shares and assume all outstanding options and warrants of Zappos.com, Inc. in exchange for approximately 10 million shares of our common stock, equal to approximately $807 million based on the average closing price for the 45 trading days ending on July 17, 2009. In addition, we will provide Zappos.com employees with $40 million in cash and restricted stock units. Subject to various closing conditions, including certain regulatory approvals, the acquisition is expected to close during the Fall of 2009.

On average, our high inventory velocity means we collect from our customers before our payments to suppliers come due. Inventory turnover 2 was 12 and 13 for Q2 2009 and Q2 2008. Inventory turnover has declined slightly over the last several years, primarily due to category expansion and changes in product mix, and our continuing focus on in-stock inventory availability, which enables faster delivery of products to our customers. 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.

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 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

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.

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

Net Sales and Gross Profit

Net sales information is as follows:



                                                Three Months Ended                   Six Months Ended
                                                     June 30,                            June 30,
                                             2009               2008              2009               2008
                                                  (in millions)                        (in millions)
Net Sales:
North America                              $   2,451         $    2,168        $     5,030        $    4,294
International                                  2,200              1,895              4,511             3,904

Consolidated                               $   4,651         $    4,063        $     9,541        $    8,198


Year-over-year Percentage Growth:
North America                                     13 %               35 %               17 %              33 %
International                                     16                 47                 16                46
Consolidated                                      14                 41                 16                39

Year-over-year Percentage Growth,
excluding effect of exchange rates:
North America                                     13 %               35 %               18 %              33 %
International                                     28                 34                 28                32
Consolidated                                      20                 35                 22                33

Net Sales Mix:
North America                                     53 %               53 %               53 %              52 %
International                                     47                 47                 47                48

Consolidated                                     100 %              100 %              100 %             100 %

Revenue increased 14% in Q2 2009 and 16% for the six months ended June 30, 2009. Changes in currency exchange rates negatively affected net sales by $227 million for Q2 2009 and $496 million for the six months ended June 30, 2009. For a discussion of the effect on revenue growth of exchange rates, see "Effect of Exchange Rates" below.

The North America revenue growth rate was 13% for Q2 2009 and 17% for the six months ended June 30, 2009. 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 16% for both Q2 2009 and the six months ended June 30, 2009. 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. Additionally, changes in currency exchange rates negatively affected International net sales by $221 million for Q2 2009 and $479 million for the six months ended June 30, 2009.

North America media revenue was flat for Q2 2009, with declines in some categories, particularly video games and video game consoles, offset by growth in books.

We expect that, over time, our International segment will represent 50% or more 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               Six Months Ended
                                        June 30,                        June 30,
                                  2009             2008           2009            2008
                                      (in millions)                   (in millions)
   Gross Profit:
   North America               $      672       $      559      $   1,366      $    1,128
   International                      461              408            915             795

   Consolidated                $    1,133       $      967      $   2,281      $    1,923


   Gross Profit Growth Rate:
   North America                       20 %             29 %           21 %            29 %
   International                       13               52             15              45
   Consolidated                        17               38             19              35

   Gross Margin:
   North America                     27.4 %           25.8 %         27.2 %          26.3 %
   International                     20.9             21.5           20.3            20.4
   Consolidated                      24.4             23.8           23.9            23.5

The increase in gross profit in absolute terms during Q2 2009 and for the six months ended June 30, 2009 compared with the comparable prior year periods 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; sales by other sellers; 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 . . .