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

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FORM 10-K

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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the fiscal year ended December 31, 2000

[_] 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 (I.R.S. Employer Identification No.)
or organization)

P.O. Box 81226
Seattle, Washington 98108-1226
(206) 266-1000
(Address, and telephone number, including area code, of registrant's principal
executive offices)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share

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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [X] No [_]

Aggregate market value of voting stock held by non-
affiliates of the registrant as of February 28, 2001...... $2,540,000,000
Number of shares of common stock outstanding as of February
28, 2001.................................................. 358,555,061

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this Report, to the extent not set
forth herein, is incorporated herein by reference from the registrant's
definitive proxy statement relating to the annual meeting of stockholders to be
held in 2001, which definitive proxy statement shall be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year to which this Report relates.

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AMAZON.COM, INC.

FORM 10-K
For the Fiscal Year Ended December 31, 2000

INDEX

Page
----

PART I

Item 1. Business............................................................................... 1

Item 2. Properties............................................................................. 16

Item 3. Legal Proceedings...................................................................... 16

Item 4. Submission of Matters to a Vote of Security Holders.................................... 17

PART II

Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters............... 18

Item 6. Selected Consolidated Financial Data................................................... 19

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 20

Item 7A. Quantitative and Qualitative Disclosure About Market Risk.............................. 30

Item 8. Financial Statements and Supplementary Data............................................ 32

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 64

PART III

Item 10. Directors and Executive Officers of the Registrant..................................... 64

Item 11. Executive Compensation................................................................. 64

Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 64

Item 13. Certain Relationships and Related Transactions......................................... 64

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 65

Signatures...................................................................................... 67

PART I

Item 1. Business

This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements based on expectations, estimates
and projections as of the date of this filing. Actual results may differ
materially from those expressed in forward-looking statements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Forward-Looking Statements."

General

Amazon.com, Inc. commenced operations on the World Wide Web in July 1995. We
seek to be the world's most customer-centric company, where customers can find
and discover anything they may want to buy online. We list millions of unique
items in categories such as books, music, DVDs, videos, consumer electronics,
toys, camera and photo items, software, computer and video games, tools and
hardware, lawn and patio items, kitchen products, and wireless products.
Through our Amazon Marketplace, Auctions and zShops services, any business or
individual can sell virtually anything to our approximately 30 million
cumulative customers, and with Amazon.com Payments, sellers can accept credit
card transactions. In addition to our U.S.-based Web site, www.amazon.com, we
operate four internationally-focused Web sites: www.amazon.co.uk,
www.amazon.de, www.amazon.fr and www.amazon.co.jp. We also operate the Internet
Movie Database (www.imdb.com), a comprehensive and authoritative source of
information on movies and entertainment titles, and cast and crew members.

Amazon.com is principally organized into three operating segments. The U.S.
Books, Music and DVD/video segment consists of our U.S. online stores for
books, music and DVDs/videos, as well as commissions earned on the sales of
these products through Amazon Marketplace, Auctions and zShops. The Early-Stage
Businesses and Other segment consists of our U.S. online stores for all other
products, as well as commissions earned on sales of these products through
Amazon Marketplace, Auctions and zShops, and all other activities that generate
service revenue rather than retail revenue, such as strategic partnerships
which often involve co-branded Web sites. The International segment consists of
operations associated with our internationally-focused Web sites. See Note 15
of "Notes to Consolidated Financial Statements" included in Item 8 of Part II
for additional information regarding our segments.

Amazon.com was incorporated in 1994 in the state of Washington and
reincorporated in 1996 in the state of Delaware. Our principal corporate
offices are located in Seattle, Washington. Amazon.com completed its initial
public offering in May 1997, and its common stock is listed on the Nasdaq
National Market under the symbol "AMZN."

As used herein, "Amazon.com" includes Amazon.com, Inc. and its subsidiaries,
unless the context indicates otherwise.

Business Strategy

Amazon.com seeks to be the world's most customer-centric company where
customers can find and discover anything they may want to buy online. We intend
to continue to optimize our Internet platform to expand the range of products
and services offered to our customers and partners. This platform consists of
strong global brand recognition, a large and growing customer base, innovative
technology, extensive and sophisticated fulfillment capabilities (consisting of
fulfillment and customer service) and significant e-commerce expertise. We
believe that this platform allows us to launch new e-commerce businesses
quickly, with a high quality of customer experience, economical incremental
cost and good prospects for success. We also believe that this platform's
flexibility allows us to expand the range of products and services offered to
our customers through relationships with strategic partners on terms that are
attractive to our customers, our strategic partners and us.

Products and Services

General

Our U.S. online retail stores currently consist of books, music, DVDs,
videos, consumer electronics, toys, camera and photo items, software, computer
and video games, tools and hardware, lawn and patio items, kitchen products and
wireless products. We anticipate new online store additions in 2001 and beyond.

U.S. Books, Music and DVD/Video Segment. The U.S. Books, Music and DVD/video
segment had net sales of $1.7 billion, $1.3 billion and $588 million in 2000,
1999 and 1998, respectively. During 2000, we continued to enhance our book,
music, DVD and video stores by expanding selection, making it easier to find
items, and generally improving the customer experience.

In 2000, our Book store had the largest pre-order in our history. Over
410,000 copies of "Harry Potter and the Goblet of Fire" were pre-ordered on our
sites worldwide. We joined with Federal Express to provide complementary
upgrades to the first 250,000 customers who ordered to ensure delivery on the
day of release. In addition, we launched an e-Books store, offering e-books in
Microsoft Reader format for PCs and laptops, as well as downloadable e-
audiobooks from our strategic partner, Audible, Inc.

During 2000, our Music store launched Bargain Music, Latin and Box Set
stores, as well as a Music Accessories store, where customers can now find
items such as MP3 players and blank media. We also continued to expand our
selection of free music downloads, adding thousands of tracks customers can
sample before making a purchase.

Also in 2000, we created over thirty genre or franchise stores for our DVD
and Video stores, such as Fitness, Bargain, Cult, and European Cinema. In
addition, we launched a new feature that notifies consumers when specific
theatrical titles are announced on DVD and/or video. We also created and hosted
the official Web sites for a number of prominent films, including Traffic, What
Lies Beneath, Nurse Betty, and The Legend of Bagger Vance. Our DVD and Video
stores were recognized in 2000 as the number one online DVD and Video retailers
by Forrester, Gomez Advisors, Video Business magazine and the Video Software
Dealers Association.

We expanded the selection available to our customers for books, music, DVDs
and videos with the launches of Amazon Marketplace, a feature that enables
customers to buy and sell used, collectible and rare titles alongside the
corresponding new title, and Amazon Outlet, a one-stop shopping area where
customers can find year-round bargains on thousands of products across our
product lines, including book, music, DVD and video titles.

Early-Stage Businesses and Other Segment. Our Early-Stage Businesses and
Other segment includes our Other U.S. Retail (non-book, music and DVD/video
retail stores in the U.S.), and commissions earned on the sales of these
products through Amazon Marketplace, Auctions and zShops, and all other
activities that generate service revenue rather than retail revenue. Net sales
for this segment were $683 million and $164 million in 2000 and 1999,
respectively. We had no revenue from this segment in previous years.

. Other U.S. Retail. Our Other U.S. Retail stores consist of the
electronics business, which is comprised of consumer electronics,
computer and video games, wireless products, camera and photo items, and
software; our home improvement business, which is comprised of tools and
hardware and lawn and patio; and our kitchen store. For 2000, the
electronics business was our second largest U.S. business after books
based on revenue. In 2000, we expanded our selection with the launch of
Amazon Marketplace, which enables customers to buy and sell used,
collectible and rare merchandise alongside the corresponding new
product, and Amazon Outlet, where customers can find year-round bargains
on thousands of products across our product lines.

. Amazon Auctions and zShops. Amazon Auctions allows buyers and sellers to
conduct transactions with respect to a wide variety of products in an
easy to use auction format. Amazon zShops allows

individuals and businesses to offer popular as well as hard-to-find
items to Amazon.com's customers. The participants in Amazon Auctions and
zShops can use our Amazon Payments service, which allows individuals and
small businesses to accept credit card payments through Amazon.com's
1-Click payment feature, thus eliminating the inconveniences associated
with checks and money orders.

. Other Services. Services other than Amazon Auctions and zShops result
from agreements with strategic partners to promote their products and
services to our customers. In September of 2000, we launched a co-
branded toy and video game store with Toysrus.com to bring customers the
best toy-buying experience available online. Other strategic partners
include drugstore.com, an online retail and information source for
health, beauty, wellness, personal care and pharmacy; Audible, which
delivers spoken audio over the Internet; Ashford.com, an online retailer
of luxury and premium products; NextCard, an online issuer of consumer
credit cards; Sotheby's.com, an online auction site devoted to art,
antiques, jewelry and collectibles; Ofoto.com, an online photography
service; and CarsDirect.com (a company that acquired Greenlight.com), an
online source for auto purchasing in partnership with local dealerships.

International Segment. Amazon.com operates four internationally-focused
sites: www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp.
Net sales for the International segment (from all internationally-focused
sites, including export sales to the U.S.) were $381 million, $168 million,
and $22 million in 2000, 1999 and 1998, respectively. According to Media
Metrix data released in November 2000, based on the number of unique Web site
hits, www.amazon.co.uk and www.amazon.de are the number one online retailers
in the United Kingdom and Germany, respectively, while www.amazon.fr is among
the top three online retailers in France and www.amazon.co.jp, launched
November 1, 2000, is the leading online bookseller in Japan. These
international sites share the universal Amazon experience of great selection,
convenience, ease of use, service, editorial content, and competitive prices.
However, each one is localized in terms of language, products, customer
service and fulfillment. In 2000, we managed international customer service
out of four international customer service facilities in the Netherlands, the
United Kingdom, Germany, and Japan, with additional support from our customer
service centers in the U.S. Recently, we announced a consolidation of our
European customer service centers to serve our European customers better and
more cost-effectively out of two expanded centers in the United Kingdom and
Germany. We have fulfillment centers in the United Kingdom, Germany and France
as well as in Japan, where we jointly manage fulfillment with Nippon Express,
a leading courier company. We intend to expand the product and service
offerings of our internationally-focused Web sites in the coming year.

Amazon.com Web Sites

Our Web sites promote brand loyalty and repeat purchases by providing an
inviting and satisfying experience that encourages customers to return
frequently and to interact with other customers. The key features of our Web
sites include broad selection, useful product information, reviews,
recommendations, low prices, 1-Click technology, secure payment systems,
availability, fulfillment, browsing and searching. Other key features include
instant and personalized recommendations, personal notification services, and
Web pages tailored to individual customer's preferences. Our Wish List feature
allows users to create an online wish list of desired products and services
that others can reference for gift-giving purposes, and our listmania feature
allows users to publish lists with accompanying commentary regarding their
favorite products on the Amazon.com Web site.

Marketing and Promotion

Amazon.com's marketing strategy is designed to strengthen and broaden the
Amazon.com brand name, increase customer traffic to the Amazon.com Web sites,
build customer loyalty, encourage repeat purchases and develop incremental
product and service revenue opportunities. We deliver personalized pages and
services and employ a variety of media, business development activities and
promotional methods to achieve these goals.

We also benefit from public relations activities as well as online and
traditional advertising, including radio, television and print media.

We direct customers to our Web site through our Associates Program, which
enables associated Web sites to make products available to their audiences with
order fulfillment by Amazon.com. Currently, over 530,000 Web sites have
enrolled in the Associates Program.

Customer Service

We believe that our ability to establish and maintain long-term relationships
with our customers and to encourage repeat visits and purchases depends, in
part, on the strength of our customer service operations, and we continually
seek to improve the Amazon.com customer service experience. Users can contact
customer service representatives 24 hours a day, 7 days a week. We have
automated certain tools used by our customer service staff and have plans for
further enhancements. We currently have customer service personnel working in
seven customer service centers located in Seattle, Washington (this center is
scheduled to close in May 2001), Tacoma, Washington; Slough, England;
Regensburg, Germany; Grand Forks, North Dakota; Huntington, West Virginia; The
Hague, Netherlands (this center is scheduled to close in June 2001); and
Sapporo, Japan, which opened in January 2001. In addition, we have an
outsourcing arrangement with Daksh.com, a vendor in India.

Warehousing, Inventory, Fulfillment and Distribution

We currently have U.S. fulfillment facilities in Fernley, Nevada;
Coffeyville, Kansas; Campbellsville and Lexington, Kentucky; New Castle,
Delaware; and Grand Forks, North Dakota, as well as a seasonal fulfillment
center in Seattle, Washington. We also have three European fulfillment centers
which are located in the United Kingdom, France and Germany. In Japan, we
jointly manage fulfillment with Nippon Express, a leading courier company. On
an aggregate basis, these fulfillment centers comprise approximately 4.5
million square feet of warehouse space. Our fulfillment centers facilitate our
ability to deliver merchandise to customers on a reliable and timely basis.

Seasonality

Our business is generally affected by both seasonal fluctuations in Internet
usage and traditional retail seasonality. Internet usage generally declines
during the summer. Traditional retail sales for most of our products, including
books, music, DVDs/videos, toys and electronics, usually increase significantly
in the fourth calendar quarter of each year. In particular, the fourth quarter
seasonal impact may be even more pronounced in our sales of toys and
electronics in comparison with our other products.

Technology

We have implemented numerous Web site management, search, customer
interaction, recommendation, transaction-processing and fulfillment services
and systems using a combination of our own proprietary technologies and
commercially available, licensed technologies. Our current strategy is to focus
our development efforts on creating and enhancing the specialized, proprietary
software that is unique to our business and to license or acquire commercially
developed technology for other applications where available and appropriate.

We use a set of applications for accepting and validating customer orders,
placing and tracking orders with suppliers, managing and assigning inventory to
customer orders and ensuring proper shipment of products to customers based on
various ordering criteria. Our transaction-processing systems handle millions
of items, a number of different status inquiries, gift-wrapping requests and
multiple shipment methods, and allow the customer to choose whether to receive
single or several shipments based on availability. These applications also
manage the process of accepting, authorizing and charging customer credit
cards. Amazon.com Web sites also incorporate a variety of search and database
tools.

Competition

The online commerce market segments are relatively new, rapidly evolving and
intensely competitive. In addition, the retail environment for our products are
generally intensely competitive. Our current or potential competitors include
(1) publishers, distributors, manufacturers and physical-world retailers of our
products, many of which possess significant brand awareness, sales volume and
customer bases, and some of which currently sell, or may sell, products or
services through the Internet, mail order or direct marketing, (2) online
vendors of products that we sell, (3) a number of indirect competitors,
including Web portals and Web search engines, that are involved in online
commerce, either directly or in collaboration with other retailers, and
(4) Web-based retailers using alternative fulfillment capabilities. We believe
that the principal competitive factors in our market segments include brand
recognition, selection, personalized services, convenience, price,
accessibility, customer service, quality of search tools, quality of editorial
and other Web site content, reliability, speed of fulfillment, ease of use and
our ability to adapt to changing conditions. As the online commerce market
segments continue to grow, other companies may also enter into business
combinations or alliances that strengthen their competitive positions.

Intellectual Property

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, partners and others to protect our proprietary rights. We
have been issued a number of trademarks, servicemarks, patents and copyrights
by U.S. and foreign governmental authorities. We also have applied for the
registration of other trademarks, service marks and copyrights in the U.S. and
internationally, and we have filed U.S. and international patent applications
covering certain of our proprietary technology. Effective trademark, service
mark, copyright, patent and trade secret protection may not be available in
every country in which our products and services are made available online. We
have licensed in the past, and expect that we may license in the future,
certain of our proprietary rights, such as trademarks, patents, technologies or
copyrighted materials, to third parties.

Employees

As of December 31, 2000, we employed approximately 9,000 full-time and part-
time employees. We also employ independent contractors and temporary personnel
on a seasonal basis. None of our employees are represented by a labor union and
we consider our employee relations to be good. Competition for qualified
personnel in our industry is intense, particularly for software development and
other technical staff. We believe that our future success will depend in part
on our continued ability to attract, hire and retain qualified personnel.

Additional Factors That May Affect Future Results

The following risk factors and other information included in this Annual
Report should be carefully considered. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial also may impair our
business operations. If any of the following risks occur, our business,
financial condition, operating results and cash flows could be materially
adversely affected.

We Have an Accumulated Deficit and Anticipate Further Losses

We have incurred significant losses since we began doing business. As of
December 31, 2000, we had an accumulated deficit of $2.3 billion and our
stockholders' equity was a deficit of $967 million. While we generated pro
forma operating segment profit in our U.S. Books, Music and DVD/video segment
for the full year 2000 and have projected pro forma operating profit for the
Company as a whole for the fourth quarter of 2001, we are incurring substantial
operating losses and may continue to incur such losses for the foreseeable

future. Our historical company-wide revenue growth rates are not sustainable
and our percentage growth rate will decrease in the future.

We Have Significant Indebtedness

As of December 31, 2000, we had indebtedness under senior discount notes,
convertible notes, capitalized lease obligations and other asset financings
totaling approximately $2.1 billion. We make annual or semi-annual interest
payments on the indebtedness under our senior discount notes and our two
tranches of convertible notes, which are due in 2008, 2009 and 2010,
respectively. We may incur substantial additional debt in the future. Our
indebtedness could limit our ability to: obtain necessary additional financing
for working capital, capital expenditures, debt service requirements or other
purposes in the future; plan for, or react to, changes in our business and
competition; and react in the event of an economic downturn.

We may not 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 other covenants in our indebtedness, we will be in default.
In addition, our 6.875% Convertible Subordinated Notes due 2010, also known as
"PEACS," are denominated in Euros, not dollars, and the exchange ratio between
the Euro and the dollar is not fixed by the indenture governing the PEACS.
Therefore, fluctuations in the Euro/dollar exchange ratio may adversely affect
us, including impacting the conversion.

We Face Intense Competition

The e-commerce market segments in which we compete are relatively new,
rapidly evolving and intensely competitive. In addition, the market segments in
which we participate are intensely competitive and we have many competitors in
different industries, including the Internet and retail industries.

Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than we have. They may be able
to secure merchandise from vendors on more favorable terms and may be able to
adopt more aggressive pricing or inventory policies. They also may be able to
devote more resources to technology development and marketing than us.

As these e-commerce market segments continue to grow, other companies may
enter into business combinations or alliances that strengthen their competitive
positions. We also expect that competition in the e-commerce market segments
will intensify. As various Internet market segments obtain large, loyal
customer bases, participants in those segments may use their market power to
expand into the markets in which we operate. In addition, new and expanded Web
technologies may increase the competitive pressures on online retailers. The
nature of the Internet as an electronic marketplace facilitates competitive
entry and comparison shopping and renders it inherently more competitive than
conventional retailing formats. This increased competition may reduce our
operating profits, or diminish our market segment share.

The Seasonality of Our Business Places Increased Strain on Our Business

We expect a disproportionate amount of our net sales to be realized during
the fourth quarter of our fiscal year. If we do not stock popular products in
sufficient amounts and fail to meet customer demand, it could significantly
impact our revenue and our future growth. If we overstock products, we may be
required to take significant inventory mark-downs or write-offs, which could
reduce gross profits. A failure to optimize inventory at our fulfillment
centers will harm our shipping margins by requiring us to make partial
shipments from one or more locations. In addition, we may experience a decline
in our shipping margins 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 Web sites within a short
period of time due to increased holiday demand, we may experience system
interruptions that make our Web sites 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.

Our inventory balance increases substantially in advance of the Christmas
holiday. Payments for purchases of much of this inventory does not occur until
the first quarter of the following fiscal year. Because we are paid for sales
of product upon shipment, we anticipate an increase in available cash in the
fourth quarter of our fiscal year, followed by a decrease in the first quarter
as we make payments for inventory purchased in the previous fiscal year.

We May Experience Significant Fluctuations in Our Operating Results

Due to our limited operating history and the unpredictability of our
industry, we may not be able to accurately forecast our net sales. We base our
current and future expense levels and our investment plans on estimates of
future net sales. Our expenses and investments are to a large extent fixed. We
may not be able to adjust our spending quickly if our net sales fall short of
our expectations.

Our operating results will fluctuate for many reasons, including:

. changes in general economic conditions, including consumer spending,

. our ability to retain and increase sales to existing customers, attract
new customers and satisfy our customers' demands,

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

. the introduction by our competitors of Web sites, products or services,

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

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

. the effects of acquisitions and other business combinations, and our
ability to successfully integrate those acquisitions and business
combinations,

. technical difficulties, system downtime or Internet brownouts,

. variations in the mix of products and services we sell,

. variations in our level of merchandise and vendor returns, and

. disruptions in service by shipping carriers.

Both seasonal fluctuations in Internet usage and traditional retail
seasonality are likely to affect our business. Internet usage generally slows
during the summer months. Sales in almost all of our product groups,
particularly toys and electronics, usually increase significantly in the fourth
calendar quarter of each year.

Our Past and Planned Future Growth Will Place a Significant Strain on our
Management, Operational and Financial Resources

We have rapidly and significantly expanded our operations and will expand
further to address growth of our product and service offerings and customer
base. This growth will continue to place a significant strain on our
management, operational and financial resources. We also need to train and
manage our employee base. Our current and planned personnel, systems,
procedures and controls may not be adequate to support and effectively manage
our future operations. We may not be able to hire, train, retain, motivate and
manage required personnel, which may limit our growth.

In addition, we may not benefit in our newer market segments from the first-
to-market advantage that we experienced in the online book market. Our gross
profits in our newer business activities may be lower than in our older
business activities. In addition, we may have limited or no experience in new
business activities and our customers may not favorably receive our new
businesses. If this were to occur, it could damage our reputation.

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

We depend on the continued services and performance of our senior management
and other key personnel, particularly Jeffrey P. Bezos, our President, Chief
Executive Officer and Chairman of the Board. 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 Web sites directly affects the volume of goods we sell
and thus affects our net sales. We experience occasional system interruptions
that make our Web sites unavailable or prevent us from efficiently fulfilling
orders, which may reduce our net sales and the attractiveness of our products
and services. To prevent system interruptions, we continually need to: add
additional software and hardware; upgrade our systems and network
infrastructure to accommodate both increased traffic on our Web sites and
increased sales volume; and integrate our systems.

Our computer and communications systems and operations could be damaged or
interrupted by fire, flood, power loss, telecommunications failure, break-ins,
earthquake and similar events. We do not have backup systems or a formal
disaster recovery plan, and we may have inadequate insurance coverage or
insurance limits to compensate us for losses from a major interruption.
Computer viruses, physical or electronic break-ins and similar disruptions
could cause system interruptions, delays and loss of critical data and could
prevent us from providing services and accepting and fulfilling customer
orders. If this were to occur, it could damage our reputation.

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

We plan, over time, to expand our reach in international market segments. We
have relatively little experience in purchasing, marketing and distributing
products or services for these market segments and may not benefit from any
first-to-market advantages. It will be costly to establish international
facilities and operations, promote our brand internationally, and develop
localized Web sites and stores and other systems. We may not succeed in these
efforts. Our net sales from international market segments may not offset the
expense of establishing and maintaining the related operations and, therefore,
these operations may never be profitable.

Our international sales and related operations are subject to a number of
risks inherent in selling abroad, including, but not limited to, risks with
respect to:

. currency exchange rate fluctuations,

. local economic and political conditions,

. restrictive governmental actions (such as trade protection measures,
including export duties and quotas and custom duties and tariffs),

. import or export licensing requirements,

. limitations on the repatriation of funds,

. difficulty in obtaining distribution and support,

. nationalization,

. longer payment cycles,

. consumer protection laws and restrictions on pricing or discounts,

. lower level of adoption or use of the Internet and other technologies
vital to our business, and the lack of appropriate infrastructure to
support widespread Internet usage,

. lower level of credit card usage and increased payment risk,

. difficulty in developing employees and simultaneously managing a larger
number of unique foreign operations as a result of distance, language
and cultural differences,

. laws and policies of the U.S. affecting trade, foreign investment and
loans, and

. tax and other laws.

As the international e-commerce market segments continue to grow, competition
will likely 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 name recognition. In
addition, governments in foreign jurisdictions may regulate e-commerce or other
online services in such areas as content, privacy, network security, copyright,
encryption or distribution. We may not be able to hire, train, retain, motivate
and manage required personnel, which may limit our growth in international
market segments.

Our Strategic Partner Program Subjects Us to a Number of Risks

Beginning in the fall of 1999, we entered into agreements with selected
companies that involved the sale of products and services by these companies on
co-branded sections of the Amazon.com Web site and other promotional services,
such as advertising placements and customer referrals. In exchange for the
services we provide under these agreements, we receive cash, equity securities
of these companies, or a combination of the two. In some cases, we have also
made separate investments in a strategic partner by making a cash payment in
exchange for equity securities of that partner. As part of this program, we may
in the future enter into additional agreements with existing strategic partners
or new ones and may also make additional investments. To the extent we have
received equity securities as compensation, fluctuations in the value of such
securities will impact our ultimate realization of cash value either positively
or negatively.

At December 31, 2000, we hold several investments in third parties, primarily
investments in our strategic partners, that are accounted for using the equity
method. Under the equity method, we are required to record our ownership
percentage of the income or loss of these companies as being income or loss for
us. We record these amounts generally one month in arrears for private
companies and three months in arrears for public companies. One of our
strategic partners, drugstore.com, is a public company and four others are
private companies. The companies in which we have equity method investments are
engaged in the Internet and e-commerce industries, are likely to experience
large losses for the foreseeable future and may or may not be ultimately
successful. While the future losses we will record under the equity method are
limited to the amount of our investment, we expect to record additional equity
method losses in the future. Our investments in equity securities that are not
accounted for under the equity method are included in "Marketable securities"
and "Other equity investments" on our balance sheet.

We regularly review all of our investments in public and private companies
for other-than-temporary declines in fair value. When we determine that the
decline in fair value of an investment below our accounting basis is other-
than-temporary, we reduce the carrying value of the securities we hold and
record a loss in the amount of any such decline. During the third and fourth
quarters of 2000, we determined that the declines in value of six of our
investments in our strategic partners were other-than-temporary, and we
recognized losses totaling $189 million (consisting of $34 million and $155
million in the third and fourth quarters of 2000, respectively) to record these
investments at their then current fair value. One of our strategic partners in
which we also had an investment, living.com, declared bankruptcy during 2000,
and another of our investments, Pets.com, voluntarily liquidated in January of
2001.

We also had net unrealized losses of $2 million on available-for-sale
securities included in accumulated other comprehensive loss as of December 31,
2000, and have recorded $305 million of equity-method losses for 2000. In
recent quarters, companies in the Internet and e-commerce industries have
experienced significant difficulties, including difficulties in raising capital
to fund expansion or to continue operations. Because the companies in which we
have investments are part of the Internet and e-commerce industries, we may
conclude in future quarters that the fair values of other of these investments
have experienced an other-than-temporary decline. In addition, if our strategic
partners experience such difficulties, we may not receive the consideration
owed to us and the value of our investment may become worthless. As agreements
with strategic partners expire or otherwise terminate, we may be unable to
renew or replace these agreements on terms that are as favorable to us.

During 2000, we amended several of our agreements with certain of our
strategic partners that reduced future cash proceeds to be received by us,
shortened the term of our commercial agreements, or both. Although these
amendments did not impact the amount of unearned revenue previously recorded by
us, the timing of revenue recognition of these recorded unearned amounts has
been changed to correspond with the terms of the amended agreements.

Our Business Could Suffer if We Are Unsuccessful in Making and Integrating
Strategic Alliances

We may enter into strategic alliances with other companies through commercial
agreements, joint ventures, investments or business combinations. These
transactions create risks such as:

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

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

. problems retaining key technical and managerial personnel,

. additional operating losses and expenses of acquired businesses,

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

. fluctuations in value and losses that may arise from our equity
investments.

We Face Significant Inventory Risk Arising Out of Changes in Consumer
Demand and Product Cycles

We are exposed to significant inventory risks as a result of seasonality, new
product launches, rapid changes in product cycles and changes in consumer
tastes with respect to our products. In order to be successful, we must
accurately predict these trends and avoid overstocking or understocking
products. Demand for products, however, can change significantly between the
time inventory is ordered and the date of sale. In addition, when we begin
selling a new product, it is particularly difficult to forecast product demand
accurately. A failure to optimize inventory will harm our shipping margins by
requiring us to make split shipments from one or more locations, complementary
upgrades, and additional long-zone shipments necessary to ensure timely
delivery. As a result of our agreement with Toysrus.com, Toysrus.com will
identify, buy, manage and bear the financial risk of inventory for the co-
branded toy and video games store, as well as for the forthcoming baby products
store. As a result, if Toysrus.com fails to forecast product demand or optimize
inventory, we would receive reduced service fees under the agreement and our
business and reputation could be harmed.

The acquisition of certain types of inventory, or inventory from certain
sources, may require significant lead-time and prepayment, and such inventory
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 factors set forth above may require us to mark down or write
off inventory.

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. Most of our
fulfillment centers are highly automated, and we have had limited experience
with automated fulfillment centers. Because it is difficult to predict sales
increases, we may not manage our facilities in an optimal way, which may result
in excess inventory, warehousing, fulfillment and distribution capacity. In
January 2001, we announced our decision to close our fulfillment center in
McDonough, Georgia and operate our fulfillment center in Seattle, Washington on
a seasonal basis.

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, partners and others to protect our proprietary rights.
Effective trademark, service mark, copyright, patent and trade secret
protection may not be available in every country in which our products and
services are made available online. 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. The protection of our
intellectual property may require the expenditure of significant financial and
managerial resources.

Third parties that license our proprietary rights may take actions that
diminish the value of our proprietary rights or reputation. In addition, the
steps we take to protect our proprietary rights may not be adequate and third
parties may infringe or misappropriate our copyrights, trademarks, trade dress,
patents and similar proprietary rights. Other parties may claim that we
infringed their proprietary rights. We have been subject to claims, and expect
to continue to be subject to legal proceedings and claims, regarding alleged
infringement by us of the trademarks and other intellectual property rights of
third parties. Such claims, whether or not meritorious, may result in the
expenditure of significant financial and managerial resources, injunctions
against us or the imposition of damages that we must pay. 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.

We Have a Limited Operating History and Our Stock Price Is Highly Volatile

We have a relatively short operating history and, as an e-commerce company,
we have a rapidly evolving and unpredictable business model. The trading price
of our common stock fluctuates significantly. For example, during the 52-week
period ended December 31, 2000, the reported sale price of our common stock on
the NASDAQ National Market was as high as $91.50 and as low as $14.88 per
share. Trading prices of our common stock may fluctuate in response to a number
of events and factors, such as:

. changes in interest rates or other general economic conditions,

. conditions or trends in the Internet and the e-commerce industry,

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

. quarterly variations in operating results,

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

. changes in financial estimates by us or securities analysts and
recommendations by securities analysts,

. changes in Internet regulation,

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

. additions or departures of key personnel,

. corporate restructurings, including layoffs or closures of facilities,

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

. news and securities analyst reports and rumors relating to general
business or Internet trends or our existing or future products or
services.

Any of these events may cause our stock price to rise or fall, and may
adversely affect our business and financing opportunities.

In conjunction with the current tight labor market, the recent volatility in
our stock price could force us to increase our cash compensation to employees
or grant larger stock option awards than we have historically, which could hurt
our operating results, or reduce the percentage ownership of our existing
stockholders, or both. In the first quarter of 2001, we offered a limited non-
compulsory exchange of employee stock options. This option exchange offer will
result in variable accounting treatment for stock options representing
approximately 15 million shares of the Company's common stock. Variable
accounting treatment will result in unpredictable stock-based compensation
dependent on fluctuations in quoted prices for the Company's common stock.
Pursuant to the option exchange offer, the number of shares issuable upon
option exercises decreased from approximately 70 million shares, or 19.5% of
the Company's outstanding common stock, to approximately 52 million shares, or
14.4% of the Company's outstanding common stock.

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. Such
existing and future laws and regulations may impede the growth of the Internet
or other online services. These regulations may cover taxation, user privacy,
pricing, content, copyrights, distribution, electronic contracts, consumer
protection, and characteristics and quality of products and services. It is not
clear how existing laws governing issues such as property ownership, sales and
other taxes, libel and personal privacy apply to the Internet and e-commerce.
Unfavorable resolution of these issues may harm our business. In addition, many
jurisdictions currently regulate "auctions" and "auctioneers" and may regulate
online auction services. Jurisdictions may also regulate consumer-to-consumer
fixed price online markets, like zShops. This could, in turn, diminish the
demand for our products and services and increase our cost of doing business.

If We Are Required to Collect Taxes in Additional Jurisdictions on the
Products We Sell, We May Be Subject to Liability for Past Sales and Our
Future Sales May Decrease

In accordance with current industry practice, we do not collect sales taxes
or other taxes with respect to shipments of goods into states other than
Washington. In addition, we collect Value Added Tax, or VAT, for products that
are ordered on www.amazon.co.uk, www.amazon.de and www.amazon.fr and that are
shipped into European Union member countries. We also collect Japanese
consumption tax for products that are ordered on www.amazon.co.jp and that are
shipped into Japan. Our fulfillment center and customer service center
networks, and any future expansion of those networks, along with other aspects
of our evolving business, may result in additional sales and other tax
obligations. One or more states or foreign countries may seek to impose sales
or other tax collection obligations on out-of-jurisdiction companies which
engage in e-commerce. A successful assertion by one or more states or foreign
countries that we should collect sales or other taxes on the

sale of merchandise could result in substantial tax liabilities for past sales,
decrease our ability to compete with traditional retailers and otherwise harm
our business.

Recent federal legislation limits the imposition of U.S. state and local
taxes on Internet-related sales. In 1998, Congress passed the Internet Tax
Freedom Act, which places a three-year moratorium on state and local taxes on
Internet access, unless such tax was already imposed prior to October 1, 1998,
and on discriminatory taxes on e-commerce. There is a possibility that Congress
may not renew this legislation in 2001. If Congress chooses not to renew this
legislation, U.S. state and local governments would be free to impose new taxes
on electronically purchased goods. The imposition of taxes on goods sold over
the Internet by U.S. state and local governments would create administrative
burdens for us and could decrease our future sales.

Various countries are currently evaluating their VAT positions on e-commerce
transactions. It is possible that future VAT legislation in these and other
countries or changes to our business model may result in additional VAT
collection obligations and administrative burdens.

We Source a Significant Portion of Our Inventory from a Few Vendors

Although we continue to increase our direct purchasing from manufacturers, we
still source a significant amount of inventory from relatively few vendors.
During 2000, approximately 27% of all inventory purchases were made from three
major vendors, of which Ingram Book Group accounts for over 10%. We do not have
long-term contracts or arrangements with most of our vendors to guarantee the
availability of merchandise, particular payment terms or the extension of
credit limits. Our current vendors may stop selling merchandise to us on
acceptable terms. If that were the case, we may not be able to acquire
merchandise from other suppliers in a timely and efficient manner and on
acceptable terms.

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

Some of our products, such as toys, tools, hardware, wireless and kitchen
products, may expose us to product liability claims relating to personal
injury, death or property damage caused by such products, and may require us to
take actions such as product recalls. Our strategic partners also may sell
products that may indirectly increase our exposure to product liability 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 vendor agreements with our suppliers do not
indemnify us from product liability.

We Could Be Liable for Breaches of Security on Our Web Site and Fraudulent
Activities of Users of Our Amazon Payments Program

A fundamental requirement for e-commerce is the secure transmission of
confidential information over public networks. Although we have developed
systems and processes to prevent fraudulent credit card transactions and other
security breaches, failure to mitigate such fraud or breaches may impact our
financial results.

The law relating to the liability of providers of online payment services is
currently unsettled. We guarantee payments made through Amazon Payments up to
certain limits for both buyers and sellers, and we may be unable to prevent
users of Amazon Payments from fraudulently receiving goods when payment may not
be made to a seller or fraudulently collecting payments when goods may not be
shipped to a buyer. Our liability risk will increase as a larger fraction of
our sellers use Amazon Payments. Any costs we incur as a result of liability
because of our guarantee of payments made through Amazon Payments or otherwise
could harm our business. In addition, the functionality of Amazon Payments
depends on certain third-party vendors delivering services. If these vendors
are unable or unwilling to provide services, Amazon Payments will not be viable
(and our businesses that use Amazon Payments may not be viable).

We May Not Be Able to Adapt Quickly Enough to Changing Customer
Requirements and Industry Standards

Technology in the e-commerce industry changes rapidly. We may not be able to
adapt quickly enough to changing customer requirements and preferences and
industry standards. Competitors often introduce new products and services with
new technologies. These changes and the emergence of new industry standards and
practices could render our existing Web sites and proprietary technology
obsolete.

The Internet as a Medium for Commerce Is a Recent Phenomenon

Consumer use of the Internet as a medium for commerce is a recent phenomenon
and is subject to a high level of uncertainty. While the number of Internet
users has been rising, the Internet infrastructure may not expand fast enough
to meet the increased levels of demand. If use of the Internet as a medium for
commerce does not continue to grow or grows at a slower rate than we
anticipate, our sales would be lower than expected and our business would be
harmed.

We Could Be Liable for Unlawful or Fraudulent Activities by Users of Our
Marketplace, Auctions and zShops Services

We may be unable to prevent users of our Amazon Marketplace, Auctions and
zShops services from selling unlawful goods, or from selling goods in an
unlawful manner. We may face civil or criminal liability for unlawful and
fraudulent activities by our users. Any costs we incur as a result of liability
relating to the sale of unlawful goods, the unlawful sale of goods, the
fraudulent receipt of goods or the fraudulent collection of payments could harm
our business.

In running our Amazon Marketplace, Auctions and zShops services, we rely on
sellers of goods to make accurate representations and provide reliable
delivery, and on buyers to pay the agreed purchase price. We do not take
responsibility for delivery of payment or goods and while we can suspend or
terminate the accounts of users who fail to fulfill their delivery obligations
to other users, we cannot require users to make payments or deliver goods. We
do not compensate users who believe they have been defrauded by other users
except through our guarantee program. Under the guarantee program, fraudulent
activities by our users, such as the fraudulent receipt of goods and the
fraudulent collection of payments, may create liability for us. In addition, we
are aware that governmental agencies are currently investigating the conduct of
online auctions and could require changes in the way we conduct this business.

Executive Officers and Directors

The following tables set forth certain information regarding the executive
officers and Directors of the Company as of February 28, 2001:

Executive Officers

Name Age Position
---- --- --------

Jeffrey P. Bezos.... 37 President, Chief Executive Officer, and Chairman of
the Board
Mark J. Britto...... 36 Senior Vice President, Cross-Site Merchandising
Richard L. Dalzell.. 43 Senior Vice President and Chief Information Officer
Warren C. Jenson.... 44 Senior Vice President and Chief Financial Officer
Diego Piacentini.... 40 Senior Vice President and General Manager,
International
John D. Risher...... 35 Senior Vice President and General Manager, U.S.
Stores
Jeffrey A. Wilke.... 34 Senior Vice President, Operations

Jeffrey P. Bezos. Mr. Bezos has been Chairman of the Board of Amazon.com
since founding it in 1994 and Chief Executive Officer since May 1996. Mr. Bezos
served as President from founding until June 1999 and

again from October 2000 to the present. He served as Treasurer and Secretary
from May 1996 to March 1997. From December 1990 to June 1994, Mr. Bezos was
employed by D.E. Shaw & Co., a Wall Street investment firm, becoming Senior
Vice President in 1992. From April 1988 to December 1990, Mr. Bezos was
employed by Bankers Trust Company, becoming Vice President in February 1990.
Mr. Bezos is also a director of drugstore.com, inc. Mr. Bezos received his B.S.
in Electrical Engineering and Computer Science from Princeton University.

Mark J. Britto. Mr. Britto has served as Senior Vice President, Cross-Site
Merchandising since February 2001. He served as Vice President, Strategic
Alliances from August 1999 to October 2000 and Senior Vice President, Marketing
and Cross-Site Merchandising from October 2000 until February 2001. From June
1999 to August 1999, Mr. Britto served as Director of Business Development. Mr.
Britto joined Amazon.com in June 1999 as part of the acquisition of Accept.com,
which he co-founded in October 1998, for which he served as a Vice President.
From October 1994 through October 1998, Mr. Britto was Executive Vice President
of Credit Policy at FirstUSA Bank, where he was responsible for their credit
risk management practice. Prior to that, he served as Senior Vice President of
Risk Management at NationsBank. Mr. Britto received an M.S. in Operations
Research and a B.S. in Industrial Engineering and Operations Research from the
University of California at Berkeley.

Richard L. Dalzell. Mr. Dalzell has served as Senior Vice President and Chief
Information Officer since October 2000. He joined Amazon.com in August 1997 as
Vice President and Chief Information Officer. From February 1990 to August
1997, Mr. Dalzell held several management positions within the Information
Systems Division at Wal-Mart Stores, Inc., including Vice President of
Information Systems from January 1994 to August 1997. From 1987 to 1990, Mr.
Dalzell acted as the Business Development Manager for E-Systems, Inc. Prior to
joining E-Systems, Inc. he served seven years in the United States Army as a
teleprocessing officer. Mr. Dalzell received a B.S. in Engineering from the
United States Military Academy, West Point.

Warren C. Jenson. Mr. Jenson joined Amazon.com in September 1999 as Senior
Vice President and Chief Financial Officer. Before joining Amazon.com, Mr.
Jenson was the Chief Financial Officer and Executive Vice President for Delta
Air Lines from April 1998 to September 1999. From September 1992 to April 1998,
Mr. Jenson served as Chief Financial Officer and Senior Vice President for the
National Broadcasting Company (NBC), a subsidiary of General Electric, and
participated in the development of MSNBC, the cable-Internet joint news venture
between NBC and Microsoft. Mr. Jenson earned his Masters of Accountancy--
Business Taxation, and B.S. in Accounting from Brigham Young University.

Diego Piacentini. Mr. Piacentini joined Amazon.com as Senior Vice President
and General Manager, International in February 2000. From April 1997 until
joining Amazon.com, Mr. Piacentini was Vice President and General Manager,
Europe, of Apple Computer, Inc., with responsibility for Apple Computer's
operations in Europe, the Middle East and Africa. From April 1996 to April
1997, Mr. Piacentini was European Sales Director of Apple Computer, Inc. From
May 1995 until April 1996, Mr. Piacentini was General Manager of Apple
Computer's Italy operations, and before that, from September 1994 to May 1995,
Mr. Piacentini was Apple Computer's Sales Director for Italy. Mr. Piacentini
joined Apple Computer in 1987. Prior to that time he held a financial
management position at Fiatimpresit in Italy. Mr. Piacentini received a degree
in Economics from Bocconi University in Milan, Italy.

John D. Risher. Mr. Risher has served as Senior Vice President, U.S. Stores
since February 2000. Mr. Risher joined Amazon.com in February 1997 as Vice
President of Product Development, a position he held until November 1997, when
he was named Senior Vice President of Product Development. From July 1991 to
February 1997, Mr. Risher held a variety of marketing and project management
positions at Microsoft Corporation, including Team Manager for Microsoft Access
and Founder and Product Unit Manager for MS Investor, Microsoft's Web site for
personal investment. Mr. Risher received his B.A. in Comparative Literature
from Princeton University and his M.B.A. from Harvard Business School.

Jeffrey A. Wilke. Mr. Wilke has served as Senior Vice President, Operations
since October 2000. He joined Amazon.com as Vice President and General Manager,
Operations in September 1999. Previously, Mr. Wilke held a variety of positions
at AlliedSignal from 1993 to 1999, including Vice President and General Manager
of the Pharmaceutical Fine Chemicals unit from March 1999 to September 1999 and
General Manager of the Carbon Materials and Technologies unit from August 1997
to February 1999. Prior to his employment at AlliedSignal, he was an
information technology consultant with Andersen Consulting. He received a
B.S.E. in chemical engineering from Princeton University and has an M.B.A. and
Master of Science in chemical engineering from the Massachusetts Institute of
Technology.

Board of Directors

Name Age Position
---- --- --------

Jeffrey P. Bezos........ 37 President, Chief Executive Officer and Chairman of the Board
Tom A. Alberg........... 61 Managing Director of Madrona Venture Fund
Scott D. Cook........... 48 Chairman of the Executive Committee of Intuit, Inc.
L. John Doerr........... 49 General Partner, Kleiner Perkins Caufield & Byers
Patricia Q. Stonesifer.. 44 President and Co-Chair of the Bill and Melinda Gates Foundation

Item 2. Properties

The Company does not own any real estate. Its principal office facilities in
the U.S. are located in several leased facilities in Seattle, Washington under
leases that expire at various times through July 2010. The Company's office
facilities in the U.S. comprise a total of approximately 725,000 square feet.
The Company's warehousing and fulfillment operations are housed in seven
fulfillment centers located in Seattle, Washington; New Castle, Delaware;
Fernley, Nevada; Lexington, Kentucky; Campbellsville, Kentucky; Coffeyville,
Kansas and Grand Forks, North Dakota. These fulfillment centers comprise a
total of approximately 3.21 million square feet. In January 2001, the Company
announced the closure of its fulfillment center in McDonough, Georgia, the
closure of its customer service center in Seattle, Washington, and its
intention to operate seasonally its fulfillment center in Seattle, Washington.
The Seattle and Delaware fulfillment center leases expire in April 2004 and
October 2002, respectively, and the remaining fulfillment center leases expire
from 2008 through 2015.

The Company leases additional properties in Europe, including approximately
150,000 square feet of office space in Germany, France, Japan and the United
Kingdom, and fulfillment centers in Germany, France and the United Kingdom with
a combined one million square feet of available space. The lease for the German
fulfillment center, located in Bad Hersfeld, Germany, expires in December 2009.
The lease for the United Kingdom fulfillment center, located in Marston Gate,
expires in March 2025. The lease for the French fulfillment center, located in
Orleans, France, expires in March 2009. In February 2001, the Company announced
a consolidation of its European customer service centers into two expanded
centers in the United Kingdom and Germany.

The Company believes its properties are suitable and adequate for its present
and anticipated near term needs.

Item 3. Legal Proceedings

During the first quarter of 2000, Supnick v. Amazon.com and Alexa Internet
and four similar class action complaints were filed against the Company and its
wholly owned subsidiary, Alexa Internet. The complaints, which have been
consolidated in the United States District Court for the Western District of
Washington, allege that Alexa Internet's tracking and storage of Internet Web
usage paths violates federal and state statutes prohibiting computer fraud,
unfair competition, and unauthorized interception of private electronic
communications, as well as common law proscriptions against trespass and
invasion of privacy. The complaints

seek actual, statutory and punitive damages, as well as restitution, on behalf
of all users of Alexa Internet's Web navigation service, as well as injunctive
relief prohibiting Alexa Internet from tracking and storing such information or
disclosing it to third parties. Although the Company disputes the allegations
of wrongdoing in these complaints, there can be no assurance that the Company
will prevail in these lawsuits.

In addition, the Federal Trade Commission has requested information and
documents regarding Alexa Internet's practices and has opened a formal
investigative file in connection with its inquiry. The Commission is seeking to
determine whether the Company has engaged in unfair or deceptive acts in
connection with the advertisement and operation of certain services provided by
Alexa Internet. The Company is cooperating voluntarily with the Federal Trade
Commission's investigation.

As previously disclosed in our Quarterly Report on Form 10-Q for the third
quarter of 2000, we have received informal inquiries from the Securities and
Exchange Commission Staff with respect to accounting treatment and disclosures
for some of our initial strategic partner transactions and have responded to
those questions. We reviewed our accounting for the transactions with our
auditors and the Securities and Exchange Commission Staff, and we believe our
accounting treatment and disclosures were appropriate. We will continue to
cooperate with the Securities and Exchange Commission Staff if they have
further questions.

In addition, a number of purported class action complaints were filed by
stockholders against the Company and some of its senior officers in March 2001,
in the United States District Court for the Western District of Washington,
alleging that the defendants made false and misleading statements regarding the
Company's financial and accounting disclosures in 2000 and early 2001,
including disclosures regarding some of the Company's strategic partner
transactions. The complaints further allege that the defendants' conduct
violated securities laws and seek compensatory damages and injunctive relief
against all defendants. The Company disputes the allegations of wrongdoing in
these complaints and intends to vigorously defend itself in these matters.

Depending on the amount and the timing, an unfavorable resolution of some or
all of these matters could materially affect the Company's business, future
results of operations or cash flows in a particular period.

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

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

No matters were submitted for a vote of stockholders of the Company during
the fourth quarter of the year ended December 31, 2000.

PART II

Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters

Market Information

The Company's common stock is traded on the Nasdaq National Market under the
symbol "AMZN." The following table sets forth the high and low sale prices for
the common stock for the periods indicated, as reported by the Nasdaq National
Market.

High Low
------- ------

Year ended December 31, 1999
First Quarter............................................ $ 99.56 $42.13
Second Quarter........................................... 110.63 44.88
Third Quarter............................................ 85.00 41.00
Fourth Quarter........................................... 113.00 61.00
Year ended December 31, 2000
First Quarter............................................ $ 91.50 $58.44
Second Quarter........................................... 68.63 32.47
Third Quarter............................................ 49.63 27.88
Fourth Quarter........................................... 40.88 14.88

The prices in this table have been adjusted to reflect the 3-for-1 stock
split effected January 4, 1999 and the 2-for-1 stock split effected September
1, 1999.

Holders

As of February 28, 2001, there were 3,723 stockholders of record of the
Company's common stock, although there is a much larger number of beneficial
owners.

Dividends

We have never declared or paid cash dividends on our common stock. We intend
to retain all future earnings to finance future growth and, therefore, do not
anticipate paying any cash dividends in the foreseeable future. In addition, we
are restricted from paying cash dividends under our senior discount notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

Recent Sales of Unregistered Securities

None.

Item 6. Selected Consolidated Financial Data

The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes thereto
and the information contained herein in Item 7 of Part II, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Historical results are not necessarily indicative of future results.

As of and for the Years Ended December 31,
----------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- --------- -------- -------
(in thousands, except per share data)

Statements of Operations
Data(1):
Net sales............... $2,761,983 $1,639,839 $ 609,819 $147,787 $15,746
Gross profit............ 655,777 290,645 133,664 28,818 3,459
Loss from operations.... (863,880) (605,755) (109,055) (32,595) (6,443)
Interest income......... 40,821 45,451 14,053 1,901 202
Interest expense........ (130,921) (84,566) (26,639) (326) (5)
Basic and diluted loss
per share(2)........... $ (4.02) $ (2.20) $ (0.42) $ (0.12) $ (0.03)
Shares used in
computation of basic
and diluted loss per
share(2)............... 350,873 326,753 296,344 260,682 222,542

Balance Sheet Data(1):
Cash and cash
equivalents............ $ 822,435 $ 133,309 $ 71,583 $110,119 $ 6,289
Marketable securities... 278,087 572,879 301,862 15,256 --
Total assets............ 2,135,169 2,465,850 648,460 149,844 8,434
Long-term debt.......... 2,127,464 1,466,338 348,140 76,702 --
Stockholders' Equity
(Deficit).............. (967,251) 266,278 138,745 28,591 2,943

- --------
(1) Reflects restatement for pooling of interests. See Notes 1 and 2 of Notes
to Consolidated Financial Statements.
(2) For further discussion of loss per share, see Notes 1 and 11 of Notes to
Consolidated Financial Statements.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Forward-Looking Statements

This Annual Report on Form 10-K 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 industry prospects and future results of operations or financial
position, made in this Annual Report on Form 10-K are forward looking. We use
words such as anticipates, believes, expects, future, and intends and similar
expressions to identify forward-looking statements. Forward-looking statements
reflect management's current expectations and are inherently uncertain. Our
actual results may differ significantly from management's expectations. The
following discussion includes forward-looking statements regarding expectations
of future operating net profit, net sales, gross profit, certain operating
expenses, improvement in operating loss and cash, cash equivalents and
marketable securities balances, all of which are inherently difficult to
predict. Actual results could differ significantly for a variety of reasons,
including the rate of growth of the Internet and online commerce and the U.S
and global economies in general, the amount that we invest in new business
opportunities and the timing of those investments, customer spending patterns,
the mix of products sold to customers, the mix of revenues derived from product
sales as compared to services, risks of inventory management, and risks of
distribution and fulfillment throughput and productivity. 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 1 of Part I, "Business--Additional Factors
That May Affect Future Results."

Results of Operations

Net Sales

Net sales includes the selling price of consumer products sold by us, less
promotional gift certificates and sales returns; outbound shipping charges
billed to our customers; service revenues earned in connection with our
business-to-business strategic relationships ("service revenues"); and
commissions earned from our Amazon Marketplace, Auctions, zShops, Payments and
other service initiatives.

Net sales were $2.8 billion, $1.6 billion and $610 million for 2000, 1999 and
1998, respectively. Increases in absolute dollars of net sales during 2000 are
primarily due to increased unit sales in our existing stores, enhancements and
additions to our product offerings, and increases in our service revenues from
strategic partners. Increases in absolute dollars of net sales during 1999 were
due to factors including increased unit sales and the introduction of new
product lines.

Net sales for our U.S. Books, Music and DVD/video segment were $1.7 billion,
$1.3 billion and $588 million for 2000, 1999 and 1998, respectively. Annual
growth rates for the U.S. Books, Music, and DVD/video segment were 30%, 122%
and 298% for 2000, 1999 and 1998, respectively. Declines in year-over-year
growth rates during 2000 are reflective of several factors including the
relative maturity and increasing revenue base of this segment, a current-year
focus on balancing revenue growth with operating efficiency, a shift in
marketing strategy aimed to expand our business beyond this segment, and a
general slowdown in consumer spending. The decline in growth rate during 1999
as compared to 1998 was due to factors including the relative maturity and
increasing revenue base of the segment.

Net sales for our Early-Stage Businesses and Other segment were $683 million
and $164 million for 2000 and 1999, respectively. Our Early-Stage Business and
Other segment commenced operations in 1999 and, accordingly, no corresponding
amounts are associated with 1998. Included in net sales for this segment are
U.S.-based consumer products sales and related shipping charges primarily for
our electronics and home improvement stores as well as service revenues. Growth
in net sales during 2000 reflects a significant increase in units sold by our
electronics and home improvement stores in comparison with 1999, as well as
enhancements to our existing product offerings with our addition of kitchen and
wireless products. Service

revenues were $167 million and $9 million for 2000 and 1999, respectively.
Growth in service revenues during 2000 related primarily to our business-to-
business strategic relationships with Toysrus.com, Ashford.com, drugstore.com
and Audible. Service revenues during 2000 included sales of inventory, at our
cost, to Toysrus.com of $29 million. Service revenue recognized during 2000
consisted of consideration, either received during the period or amortized from
previously unearned revenue, in the form of $88 million of cash, $73 million of
equity securities of public companies and $6 million of equity securities of
private companies. In accordance with accounting principles generally accepted
in the United States, the fair value of securities received is generally
determined at the date agreements are consummated; revenue is generally
recognized over the corresponding service periods based on initial valuations,
and is not adjusted due to fluctuations in the fair value of the securities.
However, if the securities are received after March 16, 2000 and are subject to
forfeiture or vesting provisions and no significant performance commitment
exists upon signing of the agreements, the fair value is determined as of the
date the respective forfeiture or vesting provisions lapse.

Net sales for our International segment were $381 million, $168 million and
$22 million for 2000, 1999 and 1998, respectively, and were comprised primarily
of books, music and DVD/video consumer product sales and related shipping
charges to our customers. The International segment includes sales from our
www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp Web sites,
including their export sales into the United States. Growth in our
International segment during 2000 reflects a significant increase in units sold
by our www.amazon.de and www.amazon.co.uk sites in comparison with 1999 as well
as the launch of our new www.amazon.fr and www.amazon.co.jp sites during the
second half of 2000. Sales to customers outside the United States, including
export sales from www.amazon.com, represented approximately 22%, 22% and 20% of
consolidated net sales for 2000, 1999 and 1998, respectively.

Shipping revenue across all segments was $339 million, $239 million and $94
million for 2000, 1999 and 1998, respectively. Increases in shipping revenue in
2000 and 1999 correspond with increases in unit sales, offset especially in
2000 by our periodic free and reduced shipping promotions offered during the
year.

We expect net sales to be between $650 million and $700 million for the
quarter ending March 31, 2001, and net sales to increase between 20% and 30% in
2001 compared to 2000. However, any such projections are subject to substantial
uncertainty. See Item 1 of Part I, "Business--Additional Factors that May
Affect Future Results."

Gross Profit

Gross profit is net sales less the cost of sales, which consists of the
purchase price of consumer products sold by us, inbound and outbound shipping
charges, packaging supplies and costs associated with our service revenues and
marketplace services businesses. Costs associated with our service revenues
include employee costs associated with the creation of content for co-branded
Web sites, fulfillment-related costs to ship products on behalf of our service
partners, and other associated costs.

Gross profit was $656 million, $291 million and $134 million for 2000, 1999
and 1998, respectively. Increases in absolute dollars of gross profit during
2000 are primarily due to increased unit sales in our existing stores,
enhancements and additions to our existing product offerings, increases in our
service revenues from strategic partners, and improvements in inventory
management and product sourcing. Increases in absolute dollars of gross profit
during 1999 were primarily due to increased unit sales and the introduction of
new product lines. Excluding the effect of our service arrangements with
strategic partners, gross margin would have been 21% and 17% as compared with
an overall gross margin of 24% and 18% for 2000 and 1999, respectively.

Gross profit for our U.S. Books, Music and DVD/video segment was $417
million, $263 million and $129 million for 2000, 1999 and 1998, respectively.
Gross margin for these same periods was 25%, 20% and 22%, respectively.
Improvements in gross margin during 2000 were largely reflective of our efforts
to improve product sourcing as we continued to increase the percentage of
products sourced directly from publishers, as well as from a favorable mix in
customer discounts and lower inventory charges as a percent of sales.

Gross profit for our U.S. Early-Stage Businesses and Other segment was $161
million in 2000 compared with a gross loss in 1999 of $8 million. Gross profit
from services was $111 million and $9 million during 2000 and 1999,
respectively, representing service margins of 66% and 100%, respectively. Gross
profit from services corresponds with service revenue of $167 million
recognized during 2000, which consisted of consideration, either received
during the period or amortized from previously recorded unearned revenue, in
the form of $88 million of cash, $73 million of equity securities of public
companies and $6 million of equity securities of private companies. See
"Results of Operations--Net Sales," and "Strategic Partnerships." The decline
in service margin during 2000 relates primarily to costs associated with our
strategic relationship with Toysrus.com, as well as costs associated with our
personnel dedicated to generate and support our other business-to-business
activities.

Gross profit for our International segment was $77 million, $36 million and
$5 million for 2000, 1999 and 1998, respectively. Gross margin for these same
periods was 20%, 21% and 23%, respectively. Increases during 2000 in our
absolute gross profit dollars reflects a significant increase in units sold by
our www.amazon.de and www.amazon.co.uk sites in comparison with 1999, as well
as the launch of our new www.amazon.fr and www.amazon.co.jp sites during the
second half of 2000. Our gross margins decreased during 2000 in comparison with
1999 due to factors including changes in the mix of customer discounts and, to
a lesser extent, the impact of lower-margin sales, including the impact of
shipping promotions, associated with launching our www.amazon.fr and
www.amazon.co.jp sites.

Shipping gross loss was $1 million during 2000 in comparison with gross
profit of $12 million and $18 million for 1999 and 1998, respectively. The
gross loss in shipping was due to additional free and reduced shipping
promotions offered during 2000 compared to 1999 and 1998, as well as increases
in split and long-zone shipments, especially during the quarter ended December
31, 2000. We will from time to time continue offering shipping promotions to
our customers and may continue to experience low or even negative gross profit
dollars from shipping activities.

We expect our overall gross margin to be at least 21% to 23% of net sales for
the quarter ending March 31, 2001. However, any such projections are subject to
substantial uncertainty. See Item 1 of Part I, "Business--Additional Factors
that May Affect Future Results."

Marketing and Fulfillment

Marketing expenses consist of advertising, promotional and public relations
expenditures, and payroll and related expenses for personnel engaged in
marketing and selling activities. Fulfillment costs represent those costs
incurred in operating and staffing our fulfillment and customer service
centers, including costs attributable to receiving, inspecting and warehousing
inventories; picking, packaging and preparing customers' orders for shipment;
credit card fees; and responding to inquiries from customers. Marketing and
sales expenses, net of co-operative marketing reimbursements, were $180
million, $176 million and $67 million for 2000, 1999 and 1998, respectively.
Fulfillment costs were $415 million, $237 million and $65 million for 2000,
1999 and 1998, respectively, representing 15%, 14% and 11% of net sales for the
corresponding periods. The increase in fulfillment costs as a percentage of net
sales in 2000 reflects the full year of operating our newly opened fulfillment
centers, offset by improved utilization of our fulfillment network in
comparison with 1999. The increase in fulfillment expense during 1999 relates
to the expansion of our fulfillment network capacity during 1999. In January
2001, we announced our decision to close our fulfillment center in McDonough,
Georgia, close our customer service center in Seattle, Washington, and operate
seasonally our fulfillment center in Seattle, Washington. In February 2001, we
announced our decision to consolidate our European customer service centers by
closing our center in The Hague, Netherlands, and operating out of two expanded
centers in the United Kingdom and Germany. We expect these decisions, along
with our continued efforts to improve operational efficiency, will cause
marketing and fulfillment costs to decline as a percentage of net sales during
2001.

Technology and Content

Technology and content expenses consist principally of payroll and related
expenses for development, editorial, systems and telecommunications operations
personnel and consultants; systems and telecommunications infrastructure; and
costs of acquired content, including freelance reviews. Technology and content
expense was $269 million, $160 million and $46 million for 2000, 1999 and 1998,
representing 10%, 10%, and 8% of net sales for the corresponding periods. The
increase in absolute dollars spent during 2000 and 1999 were primarily
reflective of our continual enhancements to the features, content and
functionality of our Web sites and transaction-processing systems, as well as
increased investment in systems and telecommunications infrastructure. These
increases were also attributable to our new product offerings and expansions of
existing product offerings, as well as costs associated with launching our
www.amazon.fr and www.amazon.co.jp sites during 2000. During 2000 and 1999, in
accordance with SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, which we adopted in 1999, we
capitalized, net of depreciation, $16 million and $8 million, respectively, of
costs related to the development of internal-use software, including those
relating to operating our Web sites. We expect to continue to invest in
technology and improvements in our Web sites during 2001, including, but not
limited to, offering additional product categories to our customers, as well as
potentially continuing our international expansion.

General and Administrative

General and administrative expenses consist of payroll and related expenses
for executive, finance and administrative personnel, recruiting, professional
fees and other general corporate expenses. General and administrative expenses
were $109 million, $70 million and $16 million for 2000, 1999 and 1998,
respectively, representing 4%, 4%, and 3% of net sales for the corresponding
periods.

Stock-Based Compensation

Stock-based compensation is comprised of the portion of acquisition-related
consideration conditioned on the continued tenure of key employees of certain
of our acquired businesses, which must be classified as compensation expense
rather than as a component of purchase price under accounting principles
generally accepted in the United States. Stock-based compensation also includes
stock-based charges such as option-related deferred compensation recorded at
our initial public offering, as well as certain other compensation and
severance arrangements. Stock-based compensation was $25 million, $31 million,
and $2 million for 2000, 1999 and 1998, respectively. During 2000, declines in
the Company's stock price and the termination of certain acquisition-related
employees prior to vesting in stock-based compensation awards had the effect of
reducing stock-based compensation in comparison with 1999. The increase during
1999 of stock-based compensation was primarily attributable to deferred
compensation arrangements associated with our business acquisitions during
1999. In the first quarter of 2001, we announced plans to offer a limited non-
compulsory exchange of employee stock options. This option exchange offer will
result in variable accounting treatment for stock options representing
approximately 15 million shares of the Company's common stock. Variable
accounting treatment will result in unpredictable stock-based compensation
dependent on fluctuations in quoted prices for the Company's common stock.
These unpredictable fluctuations in stock-based compensation may result in
material non-cash fluctuations in our results of operations. For example, in
periods of general decline in the quoted price of our common stock, if any,
variable accounting will cause us to recognize less stock-based compensation
than in periods of general appreciation in the quoted price of our common
stock. Furthermore, in circumstances where increases in the quoted price of our
common stock are followed by declines in the quoted price of our common stock,
variable accounting may result in negative expense recognition as we adjust the
cumulative compensation of our stock-based awards. Stock-based compensation is
non-cash and will therefore have no impact on our cash flows or liquidity.
Pursuant to the option exchange offer, the number of shares issuable upon
option exercises decreased from approximately 70 million shares, or 19.5% of
the Company's outstanding common stock, to approximately 52 million shares, or
14.4% of the Company's outstanding common stock.

Amortization of Goodwill and Other Intangibles

Amortization of goodwill and other intangibles was $322 million, $215 million
and $43 million for 2000, 1999 and 1998, respectively. These costs increased in
2000 relating to the full year of amortization for the acquisitions completed
in 1999, and increased during 1999 resulting from amortization of goodwill
recorded in connection with acquisitions completed during the first part of
1999. During the fourth quarter of 2000, we recorded an impairment loss on
goodwill and other intangibles of $184 million relating to certain of our 1999
acquisitions (See "Results of Operations--Impairment-Related and Other"). This
impairment loss reduced our recorded basis in goodwill and other intangibles as
of December 31, 2000 and will have the effect of reducing amortization expense
in 2001. The Financial Accounting Standards Board has tentatively decided to
require use of a nonamortization approach to account for purchased goodwill.
Under a nonamortization approach, goodwill would not be amortized into
earnings, but instead would be reviewed for impairment, that is, written down
and charged to earnings only in the periods in which the recorded value of
goodwill is more than its fair value. If this tentative decision is finalized,
our amortization of goodwill and other intangibles would significantly decline
in future periods.

Impairment-Related and Other

Impairment-related and other was $200 million, $8 million and $4 million for
2000, 1999 and 1998, respectively. We record impairment losses on goodwill and
other intangible assets when events and circumstances indicate that such assets
might be impaired and the estimated fair value of the asset is less than its
recorded amount. Conditions that would necessitate an impairment assessment
include material adverse changes in operations, significant adverse differences
in actual results in comparison with initial valuation forecasts prepared at
the time of acquisition, a decision to abandon acquired products, services or
technologies, or other significant adverse changes that would indicate the
carrying amount of the recorded asset might not be recoverable. During the
fourth quarter of 2000, we identified indicators of possible impairment of our
recorded goodwill and other intangibles. Such indicators included the general
slowdown in consumer spending, our decline in market capitalization as
determined by the quoted market price for our common stock, the pervasive and
significant declines in e-commerce business valuations in comparison with the
market valuations at the time we invested in our acquisitions, and changes in
our strategic plans for certain of our acquired businesses. Based on the
results of our discounted cash flow analyses, we identified certain levels of
impairment corresponding with the business-unit goodwill and other intangibles
initially recorded in connection with the following acquisitions: Alexa
Internet, Back to Basics Toys, Inc., Acme Electric Motor Co. (Tool Crib) and
LiveBid.com, Inc. Accordingly, we recorded an impairment loss of $184 million
during the fourth quarter of 2000. No impairments were identified in the
Company's enterprise-level goodwill and other intangibles, and no impairments
of goodwill and other intangibles were recorded in 1999 and 1998.

Loss from Operations

Our loss from operations was $864 million, $606 million and $109 million for
2000, 1999 and 1998, respectively. These increases are primarily due to the
aggressive expansion of our business through strategic acquisitions and
investments, new consumer product-line offerings, launching additional
internationally-focused Web sites, and significantly increasing our fulfillment
capacity in advance of demand. Additionally, during 2000 our operating loss
included impairment-related and other costs of $200 million primarily relating
to the impairment of goodwill and other intangibles. Our operating expenses
have historically increased more quickly than our revenues as we have expanded
our operations. We expect that our overall loss from operations incurred in
2001 will decrease significantly as a percentage of net sales, and in absolute
dollars, compared to 2000. However, any such projections are subject to
substantial uncertainty. See Item 1 of Part I "Business--Additional Factors
that May Affect Future Results."

Net Interest Expense and Other

Net interest expense and other, excluding "Non-cash gains and losses," was
$100 million, $37 million and $13 million for 2000, 1999 and 1998,
respectively. Included was interest income of $41 million,

$45 million and $14 million, and interest expense of $131 million, $85 million
and $27 million for 2000, 1999 and 1998, respectively. Interest income relates
primarily to interest earned on fixed income securities and correlates with the
average balance of those investments. The increase in interest expense during
2000 and 1999 is primarily related to our February 2000 issuance of 690 million
Euros of 6.875% Convertible Subordinated Notes due 2010, also known as PEACS
(the "PEACS"), our February 1999 issuance of $1.25 billion of 4.75% Convertible
Subordinated Notes due 2009 (the "4.75% Convertible Subordinated Notes"), and
our May 1998 issuance of approximately $326 million gross proceeds of 10%
Senior Discount Notes due 2008 (the "Senior Discount Notes").

Non-Cash Gains and Losses

Non-cash gains and losses were recorded during 2000 and amounted to a loss of
$143 million, net. No corresponding amounts related to 1999 or 1998. During
2000, we recorded non-cash impairment losses, which totaled $189 million,
relating to other-than-temporary declines in our equity investments in Audible,
Inc., NextCard, Inc., Webvan Group, Inc., Ashford.com, Inc., Greg Manning
Auctions, Inc, and Sotheby's Holdings, Inc. Additionally, we recorded a non-
cash gain of $40 million in connection with the September 2000 acquisition of
HomeGrocer.com, Inc. by an unrelated third-party, Webvan Group, Inc. This non-
cash gain represents the difference between our recorded basis in the common
stock of HomeGrocer.com prior to the acquisition and the fair value of equity
securities received from the acquiring company, Webvan Group, Inc. After the
acquisition, we classified the resulting investment as available-for-sale as we
no longer have the ability to exercise significant influence over the investee.
We also recorded a net gain when living.com, Inc. declared bankruptcy and
terminated its commercial agreement with us. Our net gain of $6 million was
comprised of a $14 million loss representing our remaining investment balance
in living.com and a $20 million gain relating to the unamortized portion of
unearned revenue associated with the living.com commercial agreement. As of
December 31, 2000, our basis in equity securities was $128 million, including
$36 million classified as "Marketable securities," $52 million classified as
"Investments in equity-method investees," and $40 million classified as "Other
equity investments."

Equity in Losses of Equity-Method Investees

Equity in losses of equity-method investees represents our share of losses of
companies in which we have investments that give us the ability to exercise
significant influence, but not control, over an investee. This is generally
defined as an ownership interest of the voting stock of the investee of between
20% and 50%, although other factors, such as representation on the investee's
Board of Directors and the impact of commercial arrangements, are considered in
determining whether the equity method of accounting is appropriate. Our share
of equity-method losses was $305 million, $77 million and $3 million for 2000,
1999 and 1998, respectively. Equity-method losses reduce our underlying
investment balances until the recorded basis is reduced to zero. As of December
31, 2000, our basis in equity-method investments was $52 million. Accordingly,
we expect equity-method losses to decline substantially during 2001 in
comparison with 2000.

Income Taxes

We provided for an immaterial amount of current and deferred U.S. federal,
state or foreign income taxes for the current and all prior periods presented.
We provided a full valuation allowance on our deferred tax asset, consisting
primarily of net operating losses, because of uncertainty regarding its
realization.

Operational Restructuring

Subsequent to December 31, 2000, we approved a plan for an operational
restructuring in which we will reduce our employee staff by approximately 1,300
positions, or 15% of our workforce. Additionally, we will consolidate our
Seattle, Washington corporate office locations, close our McDonough, Georgia
fulfillment center, operate our Seattle, Washington fulfillment center on a
seasonal basis, close our customer service centers in Seattle, Washington and
The Hague, Netherlands, and migrate a large portion of our technology

infrastructure to a new hardware and software platform. We estimate that the
restructuring will result in costs during the first half of 2001 exceeding $150
million relating primarily to severance, fixed asset impairments, continuing
lease obligations and other exit costs directly related to our restructuring.

Pro Forma Results of Operations

We provide certain pro forma information regarding our results from
operations, which excludes stock-based compensation, amortization of goodwill
and other intangibles, and impairment-related and other. We also provide
certain pro forma information regarding our net loss which excludes non-cash
gains and losses, net; equity in losses of equity-method investees, net; as
well as the amounts excluded from pro forma operating results. This pro forma
information is not presented in accordance with accounting principles generally
accepted in the United States and may not necessarily be useful in analyzing
our results. For information about our financial results, as reported in
accordance with accounting principles generally accepted in the United States,
see Item 6 of Part II, "Selected Consolidated Financial Data," and Item 8 of
Part II, "Financial Statements and Supplementary Data."

Full year and corresponding quarterly pro forma results, and certain cash
flow information for 2000, 1999 and 1998, were as follows:

Year Ended December 31, 2000
----------------------------------------------------
Fourth Third Second First
Full Year Quarter Quarter Quarter Quarter
--------- --------- -------- --------- ---------

Pro forma loss from
operations.............. $(317,000) $ (59,946) $(68,439) $ (89,349) $ (99,266)
Pro forma net loss....... $(417,158) $ (90,426) $(89,493) $(115,704) $(121,535)
Pro forma loss from
operations as a
percentage of net
sales................... 11% 6% 11% 15% 17%
Pro forma basic and
diluted loss per share.. $ (1.19) $ (0.25) $ (0.25) $ (0.33) $ (0.35)
Shares used in
computation of pro forma
basic and diluted loss
per share............... 350,873 355,681 353,954 349,886 343,884
Net cash provided by
(used in) operating
activities.............. $(130,442) $ 247,653 $ (3,688) $ (54,029) $(320,378)

Year Ended December 31, 1999
----------------------------------------------------
Fourth Third Second First
Full Year Quarter Quarter Quarter Quarter
--------- --------- -------- --------- ---------

Pro forma loss from
operations.............. $(352,371) $(175,349) $(79,198) $ (67,253) $ (30,571)
Pro forma net loss....... $(389,815) $(184,885) $(85,810) $ (82,786) $ (36,334)
Pro forma loss from
operations as a
percentage of net
sales................... 21% 26% 22% 21% 10%
Pro forma basic and
diluted loss per share.. $ (1.19) $ (0.55) $ (0.26) $ (0.26) $ (0.12)
Shares used in
computation of pro forma
basic and diluted loss
per share............... 326,753 338,389 332,488 322,340 313,794
Net cash provided by
(used in) operating
activities.............. $ (90,875) $ 31,506 $(75,573) $ (29,614) $ (17,194)

Year Ended December 31, 1998
----------------------------------------------------
Fourth Third Second First
Full Year Quarter Quarter Quarter Quarter
--------- --------- -------- --------- ---------

Pro forma loss from
operations.............. $ (61,038) $ (17,632) $(20,802) $ (12,798) $ (9,800)
Pro forma net loss....... $ (73,623) $ (21,990) $(24,466) $ (16,977) $ (10,184)
Pro forma loss from
operations as a
percentage of net
sales................... 10% 7% 14% 11% 11%
Pro forma basic and
diluted loss per share.. $ (0.25) $ (0.07) $ (0.08) $ (0.06) $ (0.04)
Shares used in
computation of pro forma
basic and diluted loss
per share............... 296,344 308,778 301,405 292,554 282,636
Net cash provided by
(used in) operating
activities.............. $ 31,035 $ 38,698 $ (572) $ (654) $ (6,437)

Presentation of pro forma results on the face of the financial statements is
not in conformity with accounting principles generally accepted in the United
States. We are providing pro forma results for informational purposes only. The
pro forma results are derived from information recorded in our financial
statements.

We expect that our pro forma loss from operations will decline as a
percentage of net sales for 2001. Additionally, we expect to generate pro forma
operating income for the quarter ended December 31, 2001. We also expect that
our U.S. Books, Music and DVD/video segment will generate income on a pro forma
operating basis for the second consecutive year in 2001. Over the longer term,
it is our objective that pro forma operating profit will reach the low double-
digits as a percentage of net sales and our return on invested capital may
reach the low triple-digits. However, any such projections are subject to
substantial uncertainty. See Item 1 of Part I, "Business--Additional Factors
That May Affect Future Results."

Liquidity and Capital Resources

Our cash and cash equivalents balance was $822 million and $133 million, and
our marketable securities balance was $278 million and $573 million, at
December 31, 2000 and 1999, respectively.

Net cash used by operating activities in 2000 was $130 million. This was
primarily attributable to the net loss for the year of $1.4 billion, largely
offset by net non-cash charges totaling $995 million primarily related to
depreciation, stock-based compensation, equity in losses of equity-method
investees, amortization of goodwill and other intangibles, impairment-related
and other costs, amortization of unearned revenue, investment gains and losses,
and interest expense, as well as $286 million of cash provided by changes in
operating assets and liabilities. Cash provided by changes in operating assets
and liabilities is primarily a function of a decrease in inventories, increases
in accounts payable and accrued liabilities and increases in unearned revenue,
offset by an increase in prepaid expenses and other current assets. For 1999,
net cash used in operating activities was $91 million and was primarily
attributable to the net loss for the year of $720 million offset by net non-
cash expenses of $399 million and changes in operating assets and liabilities
of $230 million. For 1998, net cash provided by operating activities was $31
million.

Net cash provided by investing activities in 2000 was $164 million and
consisted of net sales of marketable securities of $361 million, offset by
purchases of fixed assets of $135 million and cash paid for investments in
equity-method investees and other investments of $63 million. Net cash used in
investing activities during 1999 and 1998 was $952 million and $324 million,
respectively, and consisted of net purchases of marketable securities of $295
million and $277 million, purchases of fixed assets of $287 million and $28
million, and cash paid for investments in equity-method investees and other
investments of $370 million and $19 million, respectively.

Net cash provided by financing activities in 2000 was $693 million relating
primarily to our issuance of 690 million Euros of PEACS, net of financing costs
of $16 million, and proceeds of $45 million from exercises of stock options,
offset by repayments of long-term debt of $17 million. Net cash provided by
financing activities of $1.1 billion for 1999 was primarily due to $1.25
billion of proceeds from the sale of our 4.75% Convertible Subordinated Notes,
net of financing costs of $35 million, and proceeds of $64 million from
exercises of stock options, offset by repayments of long-term debt, including
$178 million of cash paid to repurchase a portion of our outstanding Senior
Discount Notes. Net cash provided by financing activities during 1998 was $254
million and was related to the issuance of our Senior Discount Notes, offset by
financing costs and the repayment of other long-term debt obligations.

As of December 31, 2000, our principal sources of liquidity consisted of $1.1
billion of cash and cash equivalents and marketable securities. As of that
date, our principal commitments consisted of obligations totaling $2.1 billion
related primarily to our 6.875% PEACS, 4.75% Convertible Subordinated Notes and
Senior Discount Notes, as well as $1.1 billion in obligations related to
operating leases, trade payables, and commitments for advertising and
promotional arrangements.

For a more complete discussion of our long-term debt and other commitments
see Notes 8 and 9 to Consolidated Financial Statements incorporated by
reference to Item 8 of Part II "Financial Statements and Supplementary Data".

We believe that current cash and cash equivalents and marketable securities
balances will be sufficient to meet our anticipated operating cash needs for at
least the next 12 months. We expect that our cash and cash equivalents and
marketable securities balance will be approximately $650 million at March 31,
2001 and approximately $900 million at December 31, 2001. However, any
projections of future cash needs and cash flows are subject to substantial
uncertainty. See Item 1 of Part I, "Business--Additional Factors that May
Affect Future Results." We continually evaluate opportunities to sell
additional equity or debt securities, or obtain credit facilities from lenders,
for strategic reasons or to further strengthen our financial position. The sale
of additional equity or convertible debt securities could result in additional
dilution to the Company's stockholders. In addition, we will, from time to
time, consider the acquisition of or investment in complementary businesses,
products, services and technologies, and the repurchase and retirement of debt,
which might impact our liquidity requirements or cause us to issue additional
equity or debt securities. There can be no assurance that financing will be
available in amounts or on terms acceptable to us, if at all.

Strategic Partnerships

In the fall of 1999, we began entering into commercial agreements with select
strategic partners that involved the sale of their products and services on co-
branded sections of our Web site as well as other promotional services, such as
advertising placements and customer referrals. As compensation for the services
we provide under these agreements, we receive cash, equity securities of these
strategic partners, or a combination of the two. In some cases, we have also
made separate investments in these partners by making cash payment in exchange
for their equity securities. During 2000, we received cash payments or recorded
cash receivables of $98 million as unearned revenue, of which $85 million was
cash received from our strategic partners. We also recorded as unearned revenue
equity securities received in a number of these partners, net of cash paid by
us, with an estimated fair value of $107 million as of the date the securities
were received. Service revenue recognized during 2000 was $167 million, which
consisted of consideration, either received during the period or amortized from
previously unearned revenue, in the form of $88 million of cash, $73 million of
equity securities of public companies and $6 million of equity securities of
private companies.

For equity securities of public companies, we generally determine fair value
based on the quoted market price at the time we enter into the underlying
commercial agreement, and adjust such market price appropriately if significant
restrictions on marketability exist. Because an observable market price does
not exist for equity securities of private companies, our estimates of fair
value of such securities are more subjective than for the securities of public
companies. For significant transactions involving equity securities in private
companies, we obtain and consider independent, third-party valuations where
appropriate. Such valuations use a variety of methodologies to estimate fair
value, including comparing the security with securities of publicly traded
companies in similar lines of business, applying price multiples to estimated
future operating results for the private company, and then also estimating
discounted cash flows for that company. These valuations also reduce the
otherwise fair value by a factor that is intended to account for restrictions
on control and marketability where appropriate. Using these valuations and
other information available to us, such as our knowledge of the industry and
knowledge of specific information about the investee, we determine the
estimated fair value of the securities received.

The fair value of these securities, less the net amount of cash we paid for
them, is then recorded as unearned revenue. Our recorded unearned revenue
resulting from these transactions and any additional proceeds received under
the arrangements is recognized as revenue over the terms (generally, one to
three years) of the commercial agreements with our strategic partners. We do
not adjust unearned revenue to give effect to either increase or decrease in
value of the equity securities subsequent to their initial measurement (to the
extent that such securities are either not subject to vesting or forfeiture or,
if subject to vesting or forfeiture were not

modified after March 16, 2000, pursuant to Emerging Issues Task Force Issue No.
00-8 "Accounting by a Grantee for an Equity Instrument to Be Received in
Conjunction with Providing Goods or Services,"). Therefore, the value of equity
securities recorded as unearned revenue could decline in value significantly
after the initial measurement is made. We have in the past experienced, and may
experience in the future, losses with respect to investments in strategic
partners that are not equity method investees as a result of either liquidation
of such investments at a loss or provision for an other-than-temporary decline
in the fair value of these investments. See "Non-cash Gains and Losses." During
2000, we amended several of our agreements with certain of our strategic
partners that reduced future cash proceeds to be received by us, shortened the
term of our commercial agreements, or both. Although these amendments did not
impact the amount of unearned revenue previously recorded by us, the timing of
revenue recognition of these recorded unearned amounts has been changed to
correspond with the terms of the amended agreements.

During 2000, we recorded $305 million of equity-method losses, which reduced
our investment in equity-method investees. Offsetting this reduction are new
investments we have made since December 31, 1999. We also made cash payments
during 2000 for investments in equity-method investees and other investments of
$63 million, which included cash payments by us of $62 million to purchase
securities primarily of strategic partners, and non-cash consideration we
received from our partners consisting of their equity securities with an
estimated fair value of $107 million. Additionally, three of the Company's
equity-method investees (HomeGrocer.com, Inc., acquired by Webvan Group, Inc.;
Pets.com, Inc.; and drugstore.com, inc.), successfully completed public
offerings of their common stock during 2000 and 1999. As a result of these
public offerings, and in accordance with Staff Accounting Bulletin No. 51,
Accounting by the Parent in Consolidation for Sale of Stock by Subsidiary, the
Company recorded unrealized gains, net of unrealized losses, as additional
paid-in capital totaling $77 million and $14 million in 2000 and 1999,
respectively. Furthermore, the Company's ownership percentage in each investee
was diluted, creating an "implied sale" of a portion of our investments. The
net unrealized gains represent the difference between the Company's carrying
basis and the fair value of the portion of each investment deemed to have been
sold by the investees. As of December 31, 2000, our recorded basis was $11
million, $38 million, and $0 for our investments in Webvan (acquiror of
Homegrocer.com), drugstore.com, and Pets.com, respectively.

We reclassified certain of our equity investments amounting to $60 million
from "Other equity investments" to "Marketable securities" as we no longer had
the intent to hold these investments for over one year from the date of
reclassification. Additionally, we reclassified $14 million of equity
investments from "Investments in equity-method investees" to "Other equity
investments" upon the acquisition of an investee by a third party, which
resulted in the loss of significant influence over the investee. As of December
31, 2000, the fair value of all equity securities classified in "Marketable
securities" on the accompanying consolidated balance sheet was $36 million. No
equity securities were classified in "Marketable securities" as of December 31,
1999.

"Unearned revenue" increased from $55 million at December 31, 1999 to $131
million at December 31, 2000. This is due to our receipt of consideration in
the form of cash payments of $98 million and equity securities of $107 million
from strategic partners and others. The revenue is termed "unearned" because it
is received in advance of our performance of certain services we have agreed to
provide in the future. Offsetting these increases in unearned revenue, we have
recognized $108 million of revenue during 2000 that was previously categorized
as being "unearned." We have also recognized previously unearned revenue of
$20 million associated with the termination of our commercial agreement with
living.com, which was offset by a $14 million loss from our investment in
living.com and reported as a net amount of $6 million included in "Non-cash
gains and losses, net" on the accompanying consolidated statements of
operations.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

We are exposed to market risk for the impact of interest rate changes,
foreign currency fluctuations and changes in the market values of our
investments. We have not utilized derivative financial instruments in our
investment portfolio.

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

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 balance sheets. We
generally invest our excess cash in A-rated or higher short- to intermediate-
term fixed income securities and money market mutual funds. Fixed rate
securities may have their fair market value adversely impacted 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.

The following table provides information about our cash equivalent and
marketable fixed income securities, including principal cash flows for 2001
through 2005 and the related weighted average interest rates. Amounts are
presented in U.S. dollar equivalents, which is the Company's reporting
currency.

Principal (notional) amounts by expected maturity in U.S. dollars as of
December 31, 2000 are as follows (in thousands, except percentages):

Estimated Fair
Value at
December 31,
2001 2002 2003 2004 2005 Thereafter Total 2000
-------- ------- ------- ------ ------- ---------- -------- --------------

Commercial paper and
short-term
obligations............ $677,895 $ -- $ -- $ -- $ -- $ -- $677,895 $677,895
Weighted average
interest rate......... 5.40% -- -- -- -- -- 5.40%
Corporate notes and
bonds.................. 950 7,937 8,560 -- -- -- 17,447 17,447
Weighted average
interest rate......... 4.45% 4.95% 4.95% -- -- -- 4.92%
Asset-backed and agency
securities............. 21,507 11,718 11,114 -- 19,635 20,748 84,721 85,189
Weighted average
interest rate......... 5.68% 5.96% 4.71% -- 6.87% 7.39% 6.30%
Treasury notes and
bonds.................. 42,535 74,021 25,595 -- -- -- 142,151 142,085
Weighted average
interest rate......... 5.05% 5.22% 4.52% -- -- -- 5.04%
-------- ------- ------- ------ ------- ------- -------- --------
Cash equivalents and
marketable fixed-income
securities............. $742,887 $93,676 $45,269 $ $19,635 $20,748 $922,214 $922,616
======== ======= ======= ====== ======= ======= ======== ========

Principal (notional) amounts by expected maturity in U.S. dollars as of
December 31, 1999 are as follows (in thousands, except percentages):

Estimated Fair
Value at
December 31,
2001 2002 2003 2004 2005 Thereafter Total 1999
------- -------- ------- ------ ------- ---------- -------- --------------

Commercial paper and
short-term
obligations............ $37,477 $ 6,250 $12,176 $1,047 $ 9,599 $ 8,236 $ 74,785 $ 73,558
Weighted average
interest rate......... 5.80% 8.58% 8.96% 6.61% 6.98% 7.00% 6.84%
Corporate notes and
bonds.................. 2,455 102,850 -- -- -- -- 105,305 103,844
Weighted average
interest rate......... 5.80% 6.70% -- -- -- -- 6.68%
Asset-backed and agency
securities............. 32,807 81,160 24,198 25 20,119 100,246 258,555 247,667
Weighted average
interest rate......... 20.20% 8.48% 7.49% 7.68% 7.00% 7.97% 9.56%
Treasury notes and
bonds.................. 12,400 127,795 20,000 3,950 -- -- 164,145 164,158
Weighted average
interest rate......... 5.21% 6.60% 0.00% 6.07% -- -- 5.68%
------- -------- ------- ------ ------- -------- -------- --------
Cash equivalents and
marketable fixed-income
securities............. $85,139 $318,055 $56,374 $5,022 $29,718 $108,482 $602,790 $589,227
======= ======== ======= ====== ======= ======== ======== ========

Foreign Currency Exchange Rate Risk

In 2000, net sales from our foreign subsidiaries accounted for 14% of
consolidated revenues. Net sales generated from our foreign subsidiaries, as
well as most expenses incurred, are denominated in their local currencies.
Accordingly, our foreign subsidiaries use their local currencies as their
functional currencies. Results of operations from our foreign subsidiaries are
exposed to foreign currency exchange rate fluctuations as the financial results
of foreign subsidiaries are translated into U.S. dollars upon consolidation. As
exchange rates vary, net sales and other operating results, when translated,
may differ materially from expectations. The effect of foreign currency
exchange rate fluctuations for the year ended December 31, 2000 was not
material.

At December 31, 2000, we were also exposed to foreign currency risk related
to our PEACS and Euro denominated cash equivalents and investment securities
("Euro investments"). The PEACS have an outstanding principal balance of 690
million Euros ($650 million), and our Euro investments, classified as
available-for-sale, had a balance of 624 million Euros ($589 million). Debt
principal of 615 million Euros is designated as a hedge of an equivalent
portion of our Euro investments, which results in offsetting currency gains and
losses, which are recorded as a net amount in "Accumulated other comprehensive
loss." We also hedge the exchange rate risk on the remaining debt principal and
a portion of the interest payments using a cross-currency swap agreement and a
series of foreign currency forward purchase agreements. Under the swap
agreement, we agreed to pay at inception and receive upon maturity 75 million
Euros in exchange for receiving at inception and paying at maturity $67
million. In addition, we agreed to receive in February of each year 27 million
Euros for interest payments on 390 million Euros of the PEACS and,
simultaneously, to pay $32 million. This agreement is cancelable, in whole or
in part, at our option at no cost on or after February 20, 2003 if our common
stock price (converted into Euros) is greater than or equal to the minimum
conversion price of the PEACS. Under the forward purchase agreements, we agreed
to pay $18 million and receive 21 million Euros in February 2001. We account
for these agreements as hedges of the risk of exchange rate fluctuations on the
debt principal and interest. Currency gains and losses on the hedge agreements
are recognized upon the recognition of the corresponding currency gains and
losses on the hedged liabilities. Additionally, because the conversion option
in the PEACS is denominated in Euros, changes in the Euro to U.S. dollar
exchange rate may affect the future conversion of the PEACS.

Investment Risk

As of December 31, 2000, our total holdings in equity securities of other
companies, including equity- method investments, investments recorded at cost,
and available-for-sale equity securities, was $128 million. We invest in both
private and public companies, including our business partners, primarily for
strategic purposes. We have also received securities from some of our strategic
partners in exchange for services provided by us to those partners. These
investments are accounted for under the equity method if they give us the
ability to exercise significant influence, but not control, over an investee.
Some of our cost-method investments are in private companies and are accounted
for at cost and others are in public companies and are accounted for as
available-for-sale securities and recorded at fair value. We regularly review
the carrying value of our investments and identify and record losses when
events and circumstances indicate that such declines in the fair value of such
assets below our accounting basis are other-than-temporary. In 2000, we
recorded non-cash impairment losses totaling $189 million to write-down several
of our equity securities to fair value. As of December 31, 2000, we had equity-
method investments of $52 million, which includes $11 million of securities of
private companies; investments recorded at cost of $33 million, which includes
$30 million of securities of private companies; and available-for-sale equity
securities at fair value totaling $43 million ($36 million of which was
included in "Marketable securities" and $7 million of which was included in
"Other equity investments"). All of these investments are in companies involved
in the Internet and e-commerce industries and their fair values are subject to
significant fluctuations due to volatility of the stock market and changes in
general economic conditions. Based on the fair value of the publicly traded
equity securities we held, including $11 million included in "Investments in
equity-method investees," at December 31, 2000, an assumed 15%, 30% or 50%
adverse change to market prices of these securities would result in a
corresponding decline in total fair value of approximately $8 million, $16
million or $27 million, respectively.

Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
----

Report of Ernst & Young LLP, Independent Auditors.......................... 33

Consolidated Balance Sheets................................................ 34

Consolidated Statements of Operations...................................... 35

Consolidated Statements of Cash Flows...................................... 36

Consolidated Statements of Stockholders' Equity (Deficit).................. 37

Notes to Consolidated Financial Statements................................. 38

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Amazon.com, Inc.

We have audited the accompanying consolidated balance sheets of Amazon.com,
Inc. as of December 31, 2000 and 1999, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for each of the
three years in the period ended December 31, 2000. Our audits also included the
financial statement schedule listed in the Index at Item 14(a)(2). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Amazon.com, Inc.
at December 31, 2000 and 1999, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Seattle, Washington
January 26, 2001,
except for Note 16, as to which the date is
March 19, 2001

AMAZON.COM, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)

December 31,
-----------------------
2000 1999
----------- ----------
ASSETS
------

Current assets:
Cash and cash equivalents................................ $ 822,435 $ 133,309
Marketable securities.................................... 278,087 572,879
Inventories.............................................. 174,563 220,646
Prepaid expenses and other current assets................ 86,044 79,643
----------- ----------
Total current assets................................... 1,361,129 1,006,477
Fixed assets, net.......................................... 366,416 317,613
Goodwill, net.............................................. 158,990 534,699
Other intangibles, net..................................... 96,335 195,445
Investments in equity-method investees..................... 52,073 226,727
Other equity investments................................... 40,177 144,735
Other assets............................................... 60,049 40,154
----------- ----------
Total assets......................................... $ 2,135,169 $2,465,850
=========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------

Current liabilities:
Accounts payable......................................... $ 485,383 $ 463,026
Accrued expenses and other current liabilities........... 272,683 176,208
Unearned revenue......................................... 131,117 54,790
Interest payable......................................... 69,196 24,888
Current portion of long-term debt and other.............. 16,577 14,322
----------- ----------
Total current liabilities.............................. 974,956 733,234
Long-term debt............................................. 2,127,464 1,466,338

Commitments and contingencies

Stockholders' equity (deficit):
Preferred stock, $0.01 par value:
Authorized shares -- 500,000
Issued and outstanding shares -- none.................. -- --
Common stock, $0.01 par value:
Authorized shares -- 5,000,000
Issued and outstanding shares -- 357,140 and 345,155
shares at December 31, 2000 and 1999, respectively.... 3,571 3,452
Additional paid-in capital............................... 1,338,303 1,194,369
Deferred stock-based compensation........................ (13,448) (47,806)
Accumulated other comprehensive loss..................... (2,376) (1,709)
Accumulated deficit...................................... (2,293,301) (882,028)
----------- ----------
Total stockholders' equity (deficit)................... (967,251) 266,278
----------- ----------
Total liabilities and stockholders' equity
(deficit)........................................... $ 2,135,169 $2,465,850
=========== ==========

See accompanying notes to consolidated financial statements.

AMAZON.COM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

Years Ended December 31,
----------------------------------
2000 1999 1998
----------- ---------- ---------

Net sales................................. $ 2,761,983 $1,639,839 $ 609,819
Cost of sales............................. 2,106,206 1,349,194 476,155
----------- ---------- ---------
Gross profit.............................. 655,777 290,645 133,664
Operating expenses:
Marketing and fulfillment............... 594,489 413,150 132,654
Technology and content.................. 269,326 159,722 46,424
General and administrative.............. 108,962 70,144 15,618
Stock-based compensation................ 24,797 30,618 1,889
Amortization of goodwill and other
intangibles............................ 321,772 214,694 42,599
Impairment-related and other............ 200,311 8,072 3,535
----------- ---------- ---------
Total operating expenses.............. 1,519,657 896,400 242,719
----------- ---------- ---------
Loss from operations...................... (863,880) (605,755) (109,055)
Interest income........................... 40,821 45,451 14,053
Interest expense.......................... (130,921) (84,566) (26,639)
Other income (expense), net............... (10,058) 1,671 --
Non-cash gains and losses, net............ (142,639) -- --
----------- ---------- ---------
Net interest expense and other.......... (242,797) (37,444) (12,586)
----------- ---------- ---------
Loss before equity in losses of equity-
method investees, net.................... (1,106,677) (643,199) (121,641)
Equity in losses of equity-method
investees, net........................... (304,596) (76,769) (2,905)
----------- ---------- ---------
Net loss.................................. $(1,411,273) $ (719,968) $(124,546)
=========== ========== =========
Basic and diluted loss per share.......... $ (4.02) $ (2.20) $ (0.42)
=========== ========== =========
Shares used in computation of basic and
diluted loss per share................... 350,873 326,753 296,344
=========== ========== =========

See accompanying notes to consolidated financial statements.

AMAZON.COM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

Years Ended December 31,
-----------------------------------
2000 1999 1998
----------- ----------- ---------

CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD.................................. $ 133,309 $ 71,583 $ 110,119

OPERATING ACTIVITIES:
Net loss................................. (1,411,273) (719,968) (124,546)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation of fixed assets and other
amortization.......................... 84,460 36,806 9,421
Amortization of deferred stock-based
compensation.......................... 24,797 30,618 2,386
Equity in losses of equity-method
investees, net........................ 304,596 76,769 2,905
Amortization of goodwill and other
intangibles........................... 321,772 214,694 42,599
Impairment-related and other........... 200,311 8,072 1,561
Amortization of previously unearned
revenue............................... (108,211) (5,837) --
Loss (gain) on sale of marketable
securities, net....................... (280) 8,688 271
Non-cash investment gains and losses,
net................................... 142,639 -- --
Non-cash interest expense and other.... 24,766 29,171 23,970
Changes in operating assets and
liabilities:
Inventories............................ 46,083 (172,069) (20,513)
Prepaid expenses and other current
assets................................ (8,585) (54,927) (16,758)
Accounts payable....................... 22,357 330,166 78,674
Accrued expenses and other current
liabilities........................... 93,967 95,839 31,232
Unearned revenue....................... 97,818 6,225 --
Interest payable....................... 34,341 24,878 (167)
----------- ----------- ---------
Net cash provided by (used in)
operating activities................ (130,442) (90,875) 31,035
INVESTING ACTIVITIES:
Sales and maturities of marketable
securities.............................. 545,724 2,064,101 227,789
Purchases of marketable securities....... (184,455) (2,359,398) (504,435)
Purchases of fixed assets................ (134,758) (287,055) (28,333)
Investments in equity-method investees
and other investments................... (62,533) (369,607) (19,019)
----------- ----------- ---------
Net cash provided by (used in)
investing activities................ 163,978 (951,959) (323,998)

FINANCING ACTIVITIES:
Proceeds from exercise of stock options.. 44,697 64,469 14,366
Proceeds from long-term debt............. 681,499 1,263,639 325,987
Repayment of long-term debt.............. (16,927) (188,886) (78,108)
Financing costs.......................... (16,122) (35,151) (7,783)
----------- ----------- ---------
Net cash provided by financing
activities.......................... 693,147 1,104,071 254,462
Effect of exchange-rate changes on cash
and cash equivalents.................... (37,557) 489 (35)
----------- ----------- ---------
Net increase (decrease) in cash and cash
equivalents............................. 689,126 61,726 (38,536)
----------- ----------- ---------
CASH AND CASH EQUIVALENTS, END OF
PERIOD.................................. $ 822,435 $ 133,309 $ 71,583
=========== =========== =========

SUPPLEMENTAL CASH FLOW INFORMATION:
Fixed assets acquired under capital
leases.................................. $ 4,459 $ 25,850 $ --
Fixed assets acquired under financing
agreements.............................. 4,844 5,608 --
Stock issued in connection with business
acquisitions............................ 32,130 774,409 217,241
Equity securities received for commercial
agreements.............................. 106,848 54,402 --
Cash paid for interest................... 92,253 59,688 26,629

See accompanying notes to consolidated financial statements.

AMAZON.COM, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)

Accumulated Total
Common Stock Additional Deferred Other Stockholders'
-------------- Paid-In Stock-Based Comprehensive Accumulated Equity
Shares Amount Capital Compensation Income (Loss) Deficit (Deficit)
------- ------ ---------- ------------ ------------- ----------- -------------

Balance at January 1,
1998.................... 289,818 $2,898 $ 65,137 $ (1,930) $ -- $ (37,514) $ 28,591
-----------
Net loss................ -- -- -- -- -- (124,546) (124,546)
Foreign currency
translation losses...... -- -- -- -- (35) -- (35)
Change in unrealized
gain on available-for-
sale securities......... -- -- -- -- 1,841 -- 1,841
Comprehensive loss...... -- -- -- -- -- -- (122,740)
Issuance of capital
stock................... 18,050 180 225,444 -- -- -- 225,624
Exercise of common stock
options................. 10,666 108 5,875 -- -- -- 5,983
Note receivable for
common stock............ -- -- (1,099) -- -- -- (1,099)
Deferred stock-based
compensation............ -- -- 2,081 (2,081) -- -- --
Amortization of deferred
stock-based
compensation............ -- -- -- 2,386 -- -- 2,386
------- ------ ---------- -------- ------- ----------- -----------
Balance at December 31,
1998.................... 318,534 3,186 297,438 (1,625) 1,806 (162,060) 138,745
Net loss................ -- -- -- -- -- (719,968) (719,968)
Foreign currency
translation gains....... -- -- -- -- 490 -- 490
Change in unrealized
gain (loss) on
available-for-sale
securities, net......... -- -- -- -- (4,005) -- (4,005)
-----------
Comprehensive loss...... -- -- -- -- -- -- (723,483)
Issuance of capital
stock................... 10,496 105 743,169 -- -- -- 743,274
Exercise of common stock
options................. 16,125 161 67,969 -- -- -- 68,130
Public offering of
equity-method investee.. -- -- 13,787 -- -- -- 13,787
Note receivable for
common stock............ -- -- (72) -- -- -- (72)
Deferred stock-based
compensation............ -- -- 72,078 (72,078) -- -- --
Amortization of deferred
stock-based
compensation............ -- -- -- 25,897 -- -- 25,897
------- ------ ---------- -------- ------- ----------- -----------
Balance at December 31,
1999.................... 345,155 3,452 1,194,369 (47,806) (1,709) (882,028) 266,278
Net loss................ -- -- -- -- -- (1,411,273) (1,411,273)
Foreign currency
translation gains....... -- -- -- -- (364) -- (364)
Change in unrealized
gain (loss) on
available-for-sale
securities, net......... -- -- -- -- (303) -- (303)
-----------
Comprehensive loss...... -- -- -- -- -- -- (1,411,940)
Issuance of capital
stock, net of
adjustments............. 866 8 30,977 -- -- -- 30,985
Exercise of common stock
options................. 11,119 111 41,995 -- -- -- 42,106
Public offering of
equity-method investees,
net..................... -- -- 76,898 -- -- -- 76,898
Repayments of note
receivable for common
stock................... -- -- 27 -- -- -- 27
Deferred stock-based
compensation............ -- -- (5,963) 2,528 -- -- (3,435)
Amortization of deferred
stock-based
compensation, net....... -- -- -- 31,830 -- -- 31,830
------- ------ ---------- -------- ------- ----------- -----------
Balance at December 31,
2000.................... 357,140 $3,571 $1,338,303 $(13,448) $(2,376) $(2,293,301) $ (967,251)
======= ====== ========== ======== ======= =========== ===========

See accompanying notes to consolidated financial statements.

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1--DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES

Description of Business

Amazon.com, Inc. (Amazon.com or the Company) is an Internet retailer of
consumer products and a business platform for business-to-consumer and
business-to-business online commerce. The Company sells products worldwide,
with its principal geographic market segments in North America, Europe and
Asia. The Company was incorporated in July 1994 and began operations in July
1995. Amazon.com lists millions of unique items in a variety of consumer
product categories and through its marketplace services, Amazon.com Auctions
and zShops, the Company's business platform allows virtually any business or
individual to sell products to Amazon.com's customer base. The Company
maintains several Web sites including www.amazon.com, www.amazon.co.uk,
www.amazon.de, www.amazon.fr, www.amazon.co.jp and www.imdb.com.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates are used for, but not limited to, the
accounting for doubtful accounts, inventory reserves, depreciation,
amortization, sales returns, unearned revenue, taxes and contingencies. Actual
results could differ from those estimates.

Business Combinations

For business combinations that have been accounted for under the purchase
method of accounting, the Company includes the results of operations of the
acquired business from the date of acquisition. Net assets of the companies
acquired are recorded at their fair value at the date of acquisition. The
excess of the purchase price over the fair value of tangible and identifiable
intangible net assets acquired is included in goodwill in the accompanying
consolidated balance sheets.

For business combinations accounted for under the pooling of interests method
of accounting, the assets, liabilities and stockholders' equity of the acquired
entity are combined with the Company's respective accounts at recorded values
and the consolidated financial statements are restated to reflect the
historical results of the pooled entity. The historical results of the pooled
entity reflect its actual operating cost structures and, as a result, do not
necessarily reflect the cost structure of the newly-combined entity and may not
be indicative of future results.

Cash and Cash Equivalents

Effective April 1, 2000, the Company changed its policy for determining which
investments are treated as cash equivalents and now classifies all highly
liquid instruments with an original maturity of three months or less as cash
equivalents. Previously, such instruments were included in "Marketable
securities." The Company believes this change is preferable because it results
in a presentation that is consistent with practice in the Company's industry
and because it results in a better reflection of the Company's liquidity. The
consolidated financial statements presented in this Form 10-K reflect this
change.

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Investments

The Company has certain investments in debt and equity securities.

Investments are accounted for using the equity method of accounting if the
investment gives the Company the ability to exercise significant influence, but
not control, over an investee. Significant influence is generally deemed to
exist if the Company has an ownership interest in the voting stock of the
investee of between 20% and 50%, although other factors, such as representation
on the investee's Board of Directors and the impact of commercial arrangements,
are considered in determining whether the equity method of accounting is
appropriate. The Company records its equity in the income or losses of these
investees generally one month in arrears for private companies and three months
in arrears for public companies. The Company records its investments in equity-
method investees on the consolidated balance sheets as "Investments in equity-
method investees" and its share of the investees' earnings or losses as "Equity
in losses of equity-method investees, net" on the consolidated statements of
operations.

All other equity investments, which consist of investments for which the
Company does not have the ability to exercise significant influence, are
accounted for under the cost method. Under the cost method of accounting,
investments in private companies are carried at cost and are adjusted only for
other-than-temporary declines in fair value, distributions of earnings and
additional investments. For public companies that have readily determinable
fair values, the Company classifies its equity investments as available-for-
sale and, accordingly, records these investments at their fair values with
unrealized gains and losses included in "Accumulated other comprehensive loss."
Such investments are included in "Marketable securities" on the accompanying
consolidated balance sheets if the Company does not have the intent to hold the
investment for over one year from the balance sheet date and are included in
"Other equity investments" in cases where the Company does not have the intent
and ability to liquidate such investments within one year from the balance
sheet date.

The Company also invests in certain marketable debt securities, which consist
primarily of high-quality short- to intermediate-term fixed income securities
that are also classified as available-for-sale securities. Such investments are
included in "Marketable securities" on the accompanying consolidated balance
sheets and are reported at fair value with unrealized gains and losses included
in "Accumulated other comprehensive loss." The specific identification method
is used to determine the cost of securities sold.

The initial cost of the Company's investments is determined based on the fair
value of the investment at the time of its acquisition. The Company has
received equity securities as consideration for services to be performed for
the issuer under commercial agreements. In such cases, the Company has
estimated the fair value of the equity securities received. For securities of
public companies, the Company generally determines fair value based on the
quoted market price at the time the Company enters into the underlying
agreement, and adjusts such market price appropriately if significant
restrictions on marketability exist. As an observable market price does not
exist for equity securities of private companies, estimates of fair value of
such securities are more subjective than for securities of public companies.
For significant transactions involving equity securities in private companies,
the Company obtains and considers independent, third party valuations where
appropriate. Such valuations use a variety of methodologies to estimate fair
value, including comparing the security with securities of publicly traded
companies in similar lines of business, applying price multiples to estimated
future operating results for the private company, and estimating discounted
cash flows for that company. These valuations also reduce the fair value to
account for restrictions on control and marketability where appropriate. Using
these valuations and other information available to the Company, such as the
Company's knowledge of the industry and knowledge of specific information about
the investee, the Company determines the estimated fair value of the securities
received. To the extent that equity securities received or modified after March
16, 2000 are subject to forfeiture or vesting provisions and no significant
performance

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

commitment exists upon signing of the agreements, the fair value of the
securities is determined as of the date the respective forfeiture or as vesting
provisions lapse.

The Company periodically evaluates whether the declines in fair value of its
investments are other-than-temporary. This evaluation consists of a review of
qualitative and quantitative factors by members of senior management. For
investments with publicly quoted market prices, the Company generally considers
a decline to be an other-than-temporary impairment if the quoted market price
is less than its accounting basis for two consecutive quarters, absent evidence
to the contrary. The Company considers additional factors to determine whether
declines in fair value are other-than-temporary, such as the investee's
financial condition, results of operations, operating trends and other
financial ratios. The evaluation also considers publicly available information
regarding the investee companies, including reports from investment analysts
and other publicly available investee-specific news or general market
conditions. For investments in private companies with no quoted market price,
the Company considers similar qualitative and quantitative factors and also
considers the implied value from any recent rounds of financing completed by
the investee, as well as market prices of comparable public companies. The
Company generally requires its private investees to deliver monthly, quarterly
and annual financial statements to assist in reviewing relevant financial data
and to assist in determining whether such data may indicate other-than-
temporary declines in fair value below the Company's accounting basis.

Inventories

Inventories, consisting of products available for sale, are recorded using
the specific-identification method and valued at the lower of cost or market
value.

Fixed Assets

Fixed assets are stated at cost less accumulated depreciation, which includes
the amortization of assets recorded under capital leases. Fixed assets are
depreciated on a straight-line basis over the estimated useful lives of the
assets (generally two to ten years). Fixed assets purchased under capital
leases are amortized on a straight-line basis over the lesser of the estimated
useful life of the asset or the lease term.

Included in fixed assets is the cost of internal-use software, including
software used to operate the Company's Web sites. The Company expenses all
costs related to the development of internal-use software other than those
incurred during the application development stage. Costs incurred during the
application development stage are capitalized and amortized over the estimated
useful life of the software (generally two years).

Goodwill and Other Intangibles

Goodwill represents the excess of the purchase price over the fair value of
net assets acquired in business acquisitions accounted for under the purchase
accounting method. Other intangibles include identifiable intangible assets
purchased by the Company, primarily in connection with business acquisitions.
Goodwill and other intangibles are presented net of related accumulated
amortization and impairment charges and are being amortized over lives ranging
from two to four years.

The Company records impairment losses on goodwill and other intangible assets
when events and circumstances indicate that such assets might be impaired and
the estimated fair value of the asset is less than its recorded amount.
Conditions that would necessitate an impairment assessment include material
adverse changes in operations, significant adverse differences in actual
results in comparison with initial valuation forecasts prepared at the time of
acquisition, a decision to abandon acquired products, services or technologies,

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

or other significant adverse changes that would indicate the carrying amount of
the recorded asset might not be recoverable.

Goodwill is viewed in two separate categories: enterprise-level and business-
unit level. Enterprise-level goodwill results from purchase acquisitions of
businesses that have been fully integrated into the Company's operations and no
longer exist as a discrete business unit. Business-unit goodwill results from
purchase business combinations where the acquired operations have been managed
as a separate business unit and not fully absorbed into the Company.
Enterprise-level goodwill is evaluated using the market-value method, which
compares the Company's net book value to the value indicated by the market
price of the Company's equity securities; if the net book value were to exceed
the Company's market capitalization, the excess carrying amount of goodwill
would be written off as an impairment-related charge. Measurement of fair value
for business-unit goodwill as well as other intangibles is based on discounted
cash flow analysis at the business-unit level.

Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets might not be
recoverable. The Company does not perform a periodic assessment of assets for
impairment in the absence of such information or indicators. Conditions that
would necessitate an impairment assessment include a significant decline in the
observable market value of an asset, a significant change in the extent or
manner in which an asset is used, or a significant adverse change that would
indicate that the carrying amount of an asset or group of assets is not
recoverable. For long-lived assets to be held and used, the Company measures
fair value based on quoted market prices or based on discounted estimates of
future cash flows. Long-lived assets to be disposed of are carried at fair
value less costs to sell.

Unearned Revenue

Unearned revenue is recorded when payments, whether received in cash or
equity securities, are received in advance of the Company's performance in the
underlying agreement. Unearned revenue is amortized ratably over the period in
which services are provided.

Income Taxes

The Company recognizes deferred tax assets and liabilities based on
differences between the financial reporting and tax bases of assets and
liabilities using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to be recovered. The Company provides
a valuation allowance for deferred tax assets for which it does not consider
realization of such assets to be more likely than not.

Revenue Recognition

The Company recognizes revenue from product sales, net of any promotional
gift certificates, when the products are shipped and title passes to customers.
Outbound shipping charges are included in net sales and amounted to $339
million, $239 million and $94 million in 2000, 1999 and 1998, respectively. The
Company provides an allowance for sales returns based on historical experience.

Under an agreement with Toysrus.com and other third parties, the Company acts
as an agent for the sale of certain products ordered on its Web site. For such
arrangements, the Company records the net amount of revenue earned as
commissions on transactions rather than the gross amount of product sales and
related costs.

The Company also earns revenues from other services, primarily by entering
into commercial agreements that involve the sale of products and services by
third-party companies ("strategic partners" or "partners") on

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

co-branded sections of the Amazon.com Web site and by other promotional
services, such as advertising placements and customer referrals. Generally, the
fair value of consideration received, whether in cash, equity securities, or a
combination thereof, is measured at the commencement of the service term, and
any subsequent appreciation or decline in the fair value of the securities
received does not impact the amount of revenue recognized over the term of the
agreement. The Company generally recognizes revenue from these services on a
straight-line basis over the period during which the Company performs services
under these agreements. Subsequent appreciation or decline in the fair value of
equity securities received in connection with services agreements is accounted
for in accordance with the Company's Investment policies, as described in
"Investments." For securities received from public companies, the Company
generally determines fair value based on the quoted market price at the time
the Company enters into the underlying agreement, and adjusts such market price
appropriately if significant restrictions on marketability exist. As an
observable market price does not exist for equity securities of private
companies, estimates of fair value of such securities are more subjective than
for securities of public companies. For significant transactions involving
equity securities in private companies, the Company obtains and considers
independent, third party valuations where appropriate. Such valuations use a
variety of methodologies to estimate fair value, including comparing the
security with securities of publicly traded companies in similar lines of
business, applying price multiples to estimated future operating results for
the private company, and then also estimating discounted cash flows for that
company. These valuations also reduce the fair value to account for
restrictions on control and marketability where appropriate. Using these
valuations and other information available to the Company, such as the
Company's knowledge of the industry and knowledge of specific information about
the investee, the Company determines the estimated fair value of the securities
received. To the extent that equity securities received or modified after March
16, 2000 are subject to forfeiture or vesting provisions and no significant
performance commitment exists upon signing of the agreements, the fair value of
the securities is determined as of the date the respective forfeiture or
vesting provisions lapse.

Revenue is recognized over the period in which the service is performed
(generally one to three years). During the years ended December 31, 2000 and
1999, the Company recorded $167 million and $9 million, respectively, of
service revenue from strategic partners. Service revenues for the year ended
December 31, 2000 included sales of inventory, at cost, to Toysrus.com of $29
million. For the year ended December 31, 2000, service revenue recognized
during the period consisted of consideration, either received during the period
or amortized from previously unearned revenue, in the form of $88 million of
cash, $73 million of equity securities of public companies and $6 million of
equity securities of private companies.

Cost of Sales

Cost of sales consists of the purchase price of products sold, inbound and
outbound shipping charges, packaging supplies and costs associated with service
revenues and marketplace business. Outbound shipping charges and the cost of
tangible supplies used to package products for shipment to customers totaled
$340 million, $227 million, and $76 million in 2000, 1999, and 1998,
respectively.

Marketing and Fulfillment

Marketing costs include advertising, public relations, and other promotional
costs including payroll and related expenses for personnel engaged in marketing
activities. Such costs are expensed as incurred, except for advance payments
under marketing-related contracts, which are deferred and recognized on a
straight-line basis over the life of the underlying contract. The prepaid
marketing balance was $6 million and $5 million as of December 31, 2000 and
1999. For the years ended December 31, 2000, 1999, and 1998, the Company
incurred marketing expense of $180 million, $176 million, and $67 million,
respectively, which includes advertising expenses of $130 million, $141 million
and $54 million for the same periods.

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Fulfillment costs represent costs incurred in operating and staffing
fulfillment and customer service centers (including costs attributable to
receiving, inspecting and warehousing inventories; picking, packaging and
preparing customers' orders for shipment; and responding to inquiries from
customers), and credit card fees. Fulfillment costs amounted to $415 million,
$237 million, and $65 million in 2000, 1999, and 1998, respectively.

Technology and Content

Technology and content costs are generally expensed as incurred, except for
certain costs relating to the development of internal-use software, including
those relating to operating the Company's Web sites, that are capitalized and
depreciated over two years. For the years ended December 31, 2000 and 1999,
capitalized costs related to the development of internal-use software,
including those relating to operating the Company's Web sites, net of
amortization, were $16 million and $8 million, respectively. No such costs were
capitalized during 1998.

Stock-Based Compensation

The Company recognizes expense relative to its employee stock option plans
based on the intrinsic value of the stock options granted. Generally, expense
is not recorded to the extent individual stock option exercise prices are set
equal to the current market price of the Company's stock on the date of grant.
The Company provides additional pro forma disclosure of the accounting impact
as if it had adopted fair value treatment (see Note 10).

Foreign Currency

The functional currency of the Company's subsidiaries that operate our
www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp Web sites
and our foreign subsidiaries is the local currency. Assets and liabilities of
these subsidiaries are translated into U.S. dollars at year-end exchange rates,
and revenues and expenses are translated at average rates prevailing during the
year. Translation adjustments are included in "Accumulated other comprehensive
loss," a separate component of stockholders' equity (deficit). Transaction
gains and losses arising from transactions denominated in a currency other than
the functional currency of the entity involved, which have been insignificant,
are included in "Other income (expense), net" on the consolidated statements of
operations.

Hedging

The Company uses derivative financial instruments to hedge the risk of
fluctuations in foreign exchange rates associated with its Euro denominated
debt. Currency gains and losses on hedge instruments are included in "Other
income (expense), net" and are recognized concurrently with currency gains and
losses of the hedged liabilities. The Company also uses a portion of the Euro
denominated debt to hedge an equivalent amount of Euro denominated cash
equivalents and marketable fixed income securities classified as available for
sale. Currency gains and losses on the Euro debt are included in "Accumulated
other comprehensive loss" as an offset to the currency changes in the
underlying cash equivalents and investments. The level of effectiveness of the
hedge is determined based on the extent to which changes in the value of the
hedged item due to fluctuations in the foreign exchange rates are reduced by
inverse changes in the hedge instruments. The hedge

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

instruments are determined to be highly inversely correlated to the hedged
items and are designated, and considered effective as, hedges of the underlying
assets and liabilities. As a matter of policy, the Company does not enter into
derivative transactions for trading or speculative purposes.

Earnings per Share

Basic earnings per share excludes any dilutive effects of options, warrants
and convertible securities. Basic earnings per share is computed using the
weighted average number of common shares outstanding, net of shares subject to
repurchase, during the period. Diluted earnings per share is computed using the
weighted average number of common and common stock equivalent shares
outstanding during the period; common stock equivalent shares are excluded from
the computation as their effect is antidilutive.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
which was issued in June 2000. The Company will adopt SFAS No. 133 on January
1, 2001. SFAS No. 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. Adoption of SFAS No. 133 will
result in cumulative transition losses in "Net loss" of approximately $11
million and in "Accumulated other comprehensive loss" of approximately
$12 million in the first quarter of 2001. Assets and liabilities recorded on
the balance sheet will also be impacted by adoption of SFAS No. 133.

In March 2000, the Emerging Issues Task Force (EITF) of the FASB reached a
consensus on EITF Issue 00-2, "Accounting for Web Site Development Costs." This
consensus provides guidance on what types of costs incurred to develop Web
sites should be capitalized or expensed. The Company adopted this consensus on
July 1, 2000. During the year ended December 31, 2000, the Company capitalized
$3 million of Web site development costs. Such capitalized costs are included
in "Fixed assets, net" and will be depreciated over a period of two years.

In March 2000, the FASB issued Financial Interpretation (FIN) No. 44,
"Accounting for Certain Transactions Involving Stock Compensation." FIN 44
clarifies the application of Accounting Principles Board (APB) Opinion No. 25
for certain issues, such as the definition of an employee for purposes of
applying APB Opinion No. 25, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award and the
accounting for an exchange of stock compensation awards in a business
combination. Adoption of FIN 44 did not change the Company's existing
accounting policies or disclosures.

In July 2000, the EITF reached a consensus on EITF Issue 99-19, "Reporting
Revenue Gross as a Principal versus Net as an Agent." This consensus provides
guidance concerning under what circumstances a company should report revenue
based on (a) the gross amount billed to a customer because it has earned
revenue from the sale of the goods or services or (b) the net amount retained
(that is, the amount billed to the customer less the amount paid to a supplier)
because it has earned a commission or fee. Adoption of this consensus did not
change the Company's existing accounting policies.

In September 2000, the EITF reached a final consensus on EITF Issue 00-10,
"Accounting for Shipping and Handling Fees and Costs." This consensus requires
that all amounts billed to a customer in a sale transaction related to shipping
and handling, if any, represent revenue and should be classified as revenue.
The

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company historically has classified shipping charges to customers as revenue.
With respect to the classification of costs related to shipping and handling
incurred by the seller, the EITF determined that the classification of such
costs is an accounting policy decision that should be disclosed. Adoption of
this consensus did not change the Company's existing accounting policies or
disclosures.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current
year presentation.

Note 2--BUSINESS COMBINATIONS

The Company completed the following acquisitions during 1999: e-Niche
Incorporated (Exchange.com), Accept.com Financial Services Corporation, Alexa
Internet (Alexa), LiveBid.com, Inc. (Livebid), the catalog and online commerce
assets of Acme Electric Motor Co. (Tool Crib), Back to Basics Toys, Inc. (Back
to Basics), and other less significant acquisitions. The aggregate original
purchase price of these acquisitions, plus related charges, was approximately
$780 million. The consideration for the acquisitions was comprised of common
stock and cash. The Company originally issued an aggregate of approximately 10
million shares of its common stock to effect these transactions. Pursuant to
the terms of certain of these acquisitions, the Company issued approximately
866,000 additional shares during 2000 with a value of approximately $32
million; these additional shares increased the purchase price of the related
transactions and corresponding goodwill. Each transaction was recorded under
the purchase method of accounting, and results of operations for each acquired
company have been included in the financial results of the Company from the
closing date of each transaction forward. The goodwill and other intangibles
are being amortized on a straight-line basis over a period of two to four years
and are subject to the Company's periodic impairment evaluation.

No significant acquisitions occurred during 2000.

Note 3--CASH AND MARKETABLE SECURITIES

The following tables summarize, by major security type, the Company's cash
and marketable securities:

Cash and Cash Equivalents

December 31, 2000
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)

Cash............................. $141,922 $ -- $ -- $141,922
Commercial paper and short-term
obligations..................... 696,545 87 (18,737) 677,895
Asset-backed and agency
securities...................... 2,618 -- -- 2,618
-------- ----- -------- --------
$841,085 $ 87 $(18,737) $822,435
======== ===== ======== ========

December 31, 1999
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)

Cash............................. $116,961 $ -- $ -- $116,961
Commercial paper and short-term
obligations..................... 16,348 -- -- 16,348
-------- ----- -------- --------
$133,309 $ -- $ -- $133,309
======== ===== ======== ========

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Marketable Securities

December 31, 2000
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)

Corporate notes and bonds........ $ 16,063 $ 1,384 $ -- $ 17,447
Asset-backed and agency
securities...................... 80,748 1,982 (159) 82,571
Treasury notes and bonds......... 134,646 7,647 (208) 142,085
Equity securities................ 37,434 -- (1,450) 35,984
-------- ------- -------- --------
$268,891 $11,013 $ (1,817) $278,087
======== ======= ======== ========

December 31, 1999
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)

Commercial paper and short-term
obligations..................... $ 57,856 $ 8 $ (654) $ 57,210
Corporate notes and bonds........ 105,282 -- (1,438) 103,844
Asset-backed and agency
securities...................... 252,874 136 (5,343) 247,667
Treasury notes and bonds......... 169,021 32 (4,895) 164,158
-------- ------- -------- --------
$585,033 $ 176 $(12,330) $572,879
======== ======= ======== ========

The following table summarizes contractual maturities of the Company's
marketable fixed-income securities as of December 31, 2000:

Estimated
Amortized Fair
Cost Value
--------- ---------
(in thousands)

Due within one year.................................... $ 40,504 $ 43,306
Due after one year through five years.................. 110,205 116,226
Asset-backed and agency securities with various
maturities............................................ 80,748 82,571
-------- --------
$231,457 $242,103
======== ========

Gross gains of $7 million and $7 million and gross losses of $11 million and
$15 million were realized on sales of available-for-sale marketable securities
for the years ended December 31, 2000 and 1999, respectively.

During the year ended December 31, 2000, the Company recorded non-cash
impairment losses, which totaled $189 million, relating to other-than-temporary
declines in its equity investments in Audible, Inc., Nextcard, Inc.,
Ashford.com, Inc., Webvan Group, Inc., Greg Manning Auctions, Inc., and
Sotheby's Holdings, Inc. These impairment losses were recorded to reflect each
investment at its fair value. No such impairment-related losses were reported
in 1999 and 1998.

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 4--FIXED ASSETS

Fixed assets, at cost, consist of the following:

December 31,
------------------
2000 1999
-------- --------
(in thousands)

Computers, equipment and software........................ $317,806 $187,345
Leasehold improvements................................... 107,367 43,968
Leased assets............................................ 51,969 52,374
Construction in progress................................. 4,122 83,290
-------- --------
481,264 366,977
Less accumulated depreciation............................ (99,244) (43,204)
Less accumulated amortization on leased assets........... (15,604) (6,160)
-------- --------
Fixed assets, net...................................... $366,416 $317,613
======== ========

Depreciation expense on fixed assets was $83 million, $35 million and $10
million, which includes amortization of fixed assets acquired under capital
lease obligations of $11 million, $6 million and $0, for the years ended
December 31, 2000, 1999 and 1998.

For the year ended December 31, 1999, the Company capitalized $3 million of
interest on construction-in-progress. No such amounts were capitalized during
the year ended December 31, 2000.

During the year ended December 31, 2000, the Company recorded an impairment
loss of $11 million relating to the decline in fair value, measured using
discounted estimates of future cash flows, of certain fixed assets. The
impairment amount was included in "Impairment-related and other" on the
consolidated statements of operations, and included $4 million, $3 million and
$4 million of computers, equipment and software; leasehold improvements; and
leased assets, respectively. No comparable losses were recorded during 1999 or
1998.

Note 5--GOODWILL AND OTHER INTANGIBLES

Goodwill and other intangibles were as follows:

December 31,
--------------------
2000 1999
--------- ---------
(in thousands)

Goodwill............................................... $ 776,208 $ 747,720
Accumulated amortization............................... (454,433) (213,021)
Impairment adjustments................................. (162,785) --
--------- ---------
Goodwill, net.......................................... $ 158,990 $ 534,699
========= =========
Other intangibles...................................... $ 241,357 $ 239,717
Accumulated amortization............................... (123,848) (44,272)
Impairment adjustments................................. (21,174) --
--------- ---------
Other intangibles, net................................. $ 96,335 $ 195,445
========= =========

During the fourth quarter of 2000, the Company identified indicators of
possible impairment of its recorded goodwill and other intangibles. Such
indicators included the general slowdown in the retail economy

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

evidenced by general declines in consumer spending, the Company's decline in
market capitalization as determined by the quoted market price for its common
stock, the pervasive and significant declines in e-commerce valuations in
comparison with the market valuations at the time the Company invested in its
acquisitions, and changes in the Company's strategic plans for certain of the
acquired businesses. Based on the results of its discounted cash flow analyses,
the Company identified certain levels of impairment corresponding with the
business-unit goodwill and other intangibles initially recorded in connection
with the following acquisitions: Alexa, Back to Basics, Tool Crib and Livebid.
Accordingly, the Company recorded an impairment loss of $184 million during the
fourth quarter of 2000 included in "Impairment-related and other" on the
consolidated statements of operations. No impairments were identified in the
Company's enterprise-level goodwill and other intangibles, and no impairments
of goodwill and other intangibles were recorded in 1999 and 1998.

Note 6--INVESTMENTS

At December 31, 2000, the Company's equity-method investees and the Company's
approximate ownership interest in each investee, based on outstanding shares,
were as follows:

Percentage
Company Ownership
------- ----------

Basis Technology.................................................. 11%
Drugstore.com..................................................... 21
Eziba.com......................................................... 20
Greenlight.com.................................................... 5
Kozmo.com......................................................... 16

Although the Company's ownership percentage for Basis Technology,
Greenlight.com and Kozmo.com is below 20%, the Company's representation on the
investees' Boards of Directors and the impact of commercial arrangements result
in the Company having significant influence over the operations of each
investee.

Summarized balance sheet information of the Company's equity-method investees
is as follows:

December 31,
-----------------
2000 1999
-------- --------
(in thousands)

Current assets............................................ $279,487 $353,182
Noncurrent assets......................................... 511,671 316,720
Current liabilities....................................... 71,954 47,062
Noncurrent liabilities.................................... 113,258 67,692

Summarized statement of operations information of the Company's equity-method
investees, calculated for each investee for the period during which the Company
had investments in such investees, is as follows:

For the Years Ended
December 31,
-----------------------------
2000 1999 1998
--------- --------- -------
(in thousands)

Net sales..................................... $ 133,821 $ 27,996 $ --
Gross profit (loss)........................... 42,402 (3,072) --
Net loss...................................... (453,263) (152,541) (6,008)

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Activity in the Company's equity-method investments and other equity
investments for the years ended December 31, 1999 and 2000, is as follows:

Equity- Other
Method Equity
Investments Investments Total
----------- ----------- --------
(in thousands)

Balance, January 1, 1999.................. $ 7,740 $ 0 $ 7,740
Cash investments........................ 281,969 80,329 362,298
Fair value of equity securities received
in non-cash transactions............... -- 54,402 54,402
Equity-method losses, net............... (76,769) -- (76,769)
Basis adjustments for public offerings
or acquisitions of investees by a third
party.................................. 13,787 -- 13,787
Unrealized gains on available-for-sale
investments, net....................... -- 10,004 10,004
-------- -------- --------
Balance, December 31, 1999................ 226,727 144,735 371,462
Cash investments........................ 48,091 13,485 61,576
Fair value of equity securities received
in non-cash transactions............... 80,190 26,658 106,848
Equity-method losses, net............... (304,596) -- (304,596)
Sales of investments.................... (41) (9,163) (9,204)
Realized gains (losses) on sales of
investments............................ (2,763) 8,156 5,393
Basis adjustments for public offerings
or acquisitions of investees by a third
party.................................. 117,058 -- 117,058
Non-cash loss, living.com bankruptcy.... (14,092) -- (14,092)
Non-cash losses for other-than-temporary
declines in fair value (see Note 3).... -- (100,726) (100,726)
Unrealized gains on available-for-sale
investments, net....................... -- 693 693
Investment reclassifications, net, at
fair value............................. (98,501) (43,661) (142,162)
-------- -------- --------
Balance, December 31, 2000................ $ 52,073 $ 40,177 $ 92,250
======== ======== ========

Three of the Company's equity-method investees, HomeGrocer.com, Inc.,
Pets.com, Inc. and drugstore.com, inc., completed public offerings of their
common stock during 2000 and 1999. As a result of those public offerings, the
Company's ownership percentage in each investee was diluted, creating an
"implied sale" of a portion of its investments. In accordance with Staff
Accounting Bulletin No. 51 "Accounting for Sales of Stock by a Subsidiary," the
Company recorded unrealized gains, net of unrealized losses, as additional
paid-in capital totaling $77 million and $14 million in 2000 and 1999,
respectively. The unrealized gains, net represent the difference between the
Company's carrying basis and the fair value of the portion of each investment
deemed to have been sold by the investees.

The Company recorded a non-cash gain of $40 million in connection with the
September 2000 acquisition of HomeGrocer.com, Inc. by an unrelated third-party,
Webvan Group, Inc. This non-cash gain represents the difference between the
Company's recorded basis in the common stock of HomeGrocer.com, Inc. prior to
the acquisition and the fair value of equity securities received from the
acquiring company, Webvan Group, Inc. The resulting investment is classified as
available-for-sale at December 31, 2000 as the Company no longer has the
ability to exercise significant influence over the investee. This change in
classification resulted in a reclassification from "Investments in equity-
method investees" of $82 million and $2 million to "Marketable securities" and
"Other equity investments," respectively.

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company also reclassified certain of its equity investments amounting to
$60 million from "Other equity investments" to "Marketable securities" as it no
longer had the intent to hold these investments for over one year from the date
of reclassification. Additionally, the Company reclassified $15 million of
equity investments from "Investments in equity-method investees" to "Other
equity investments" upon the acquisition of an investee, Della and James, Inc.,
by an unrelated third party, WeddingChannel.com, Inc., which resulted in the
loss of significant influence over the investee. As of December 31, 2000, the
fair value of all equity securities classified in "Marketable securities" on
the accompanying consolidated balance sheet was $36 million. No equity
securities were classified in "Marketable securities" as of December 31, 1999.

At December 31, 2000 and 1999, "Other equity investments" included $7 million
and $57 million of equity securities recorded at fair value and $33 million and
$88 million of equity securities accounted for under the cost-method,
respectively. Gross unrealized gains were $0 and $15 million and gross
unrealized losses were $3 million and $5 million at December 31, 2000 and 1999,
respectively.

At December 31, 2000 and 1999, the Company's investments in the common stock
of publicly held equity-method investees, at fair value, was $12 million and
$409 million, respectively.

Note 7--UNEARNED REVENUE

Activity in unearned revenue was as follows (in thousands):

Balance, January 1, 1999.......................................... $ --
Cash received or cash receivable................................ 6,225
Fair value of equity securities received........................ 54,402
Amortization to revenue......................................... (5,837)
---------
Balance, December 31, 1999........................................ 54,790
Cash received or cash receivable................................ 97,818
Fair value of equity securities received........................ 106,848
Amortization to revenue......................................... (108,211)
Contract termination............................................ (20,128)
---------
Balance, December 31, 2000........................................ $ 131,117
=========

During 2000, living.com, Inc. (living.com) declared bankruptcy and terminated
its commercial agreement with the Company. As a result, the Company recorded a
net gain of $6 million, comprised of a $14 million loss representing the
Company's remaining investment balance in living.com and a $20 million gain
relating to the unamortized portion of unearned revenue associated with the
living.com commercial agreement. The gain and the loss are recorded net and
included in "Non-cash investment gains and losses" on the accompanying
consolidated statements of operations.

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 8--LONG-TERM DEBT

The Company's long-term debt is summarized as follows:

December 31,
----------------------
2000 1999
---------- ----------
(in thousands)

Convertible Subordinated Notes...................... $1,249,807 $1,249,807
Euro Convertible Subordinated Notes................. 650,463 --
Senior Discount Notes............................... 210,278 190,728
Capital lease obligations........................... 24,837 31,266
Other long-term debt................................ 8,656 8,859
---------- ----------
2,144,041 1,480,660
Less current portion of long-term debt.............. (4,831) (4,520)
Less current portion of capital lease obligations... (11,746) (9,802)
---------- ----------
$2,127,464 $1,466,338
========== ==========

Euro Convertible Subordinated Notes

On February 16, 2000, the Company completed an offering of 690 million Euros
of 6.875% Convertible Subordinated Notes due 2010, also known as PEACS "Premium
Adjustable Convertible Securities." The PEACS are convertible into the
Company's common stock at an initial conversion price of 104.947 Euros per
share. Interest on the PEACS is payable annually in arrears in February of each
year, commencing in February 2001. The PEACS are unsecured and are subordinated
to all of the Company's existing and future senior indebtedness. The PEACS rank
equally with the Company's outstanding 4.75% Convertible Subordinated Notes due
2009 (the "Convertible Notes"). The conversion price for the PEACS will be
reset on February 16, 2001 and February 16, 2002, but in no event will the
conversion price be reset lower than 84.883 Euros per share. Subject to certain
conditions, the PEACS may be redeemed at the Company's option on or after
February 20, 2003, in whole or in part, at the redemption price of 1,000 Euros
per note, plus accrued and unpaid interest.

In order to hedge a portion of the risk of exchange rate fluctuations between
the U.S. dollar and the Euro, the Company entered into a cross-currency swap
agreement and into a series of foreign currency forward purchase agreements.
Under the swap agreement, the Company agreed to pay at inception and receive
upon maturity 75 million Euros in exchange for receiving at inception and
paying at maturity $67 million. In addition, the Company agreed to receive in
February of each year 27 million Euros for interest payments on 390 million
Euros of the PEACS and, simultaneously, to pay $32 million. This agreement is
cancelable, in whole or in part, at the Company's option at no cost on or after
February 20, 2003 if the Company's underlying stock price (converted into
Euros) is greater than or equal to the minimum conversion price of the PEACS.
Under the forward purchase agreements, the Company agreed to pay $18 million
and receive 21 million Euros in February 2001. The Company accounts for these
agreements as hedges of the risk of exchange rate fluctuations on the debt
principal and interest. Currency gains and losses on the hedge agreements are
recognized upon the recognition of the corresponding currency gains and losses
on the hedged liabilities.

At December 31, 2000, debt of 615 million Euros was also designated as a
hedge of the risk of foreign exchange fluctuations on a portion of the 624
million Euro cash equivalent and marketable fixed-income securities classified
as available-for-sale. Accordingly, currency gains and losses on the Euro debt
were included in "Accumulated other comprehensive loss" as an offset to the
currency changes in the underlying available-for-sale cash equivalents and
investments.

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

At December 31, 2000, the swap agreement represented an obligation with a
fair value of $11 million. The fair value was determined as the present value
of net future cash payments and receipts, adjusted for the Company's ability to
cancel the agreement and the likelihood of such cancellation. The fair value
takes into consideration current foreign currency exchange rates, market
interest rates and the current market price of our common stock. The fair value
of the forward purchase agreements, as of December 31, 2000, was $1 million.
Based upon quoted market prices, the fair value of the PEACS, as of December
31, 2000, was $248 million.

Convertible Subordinated Notes

On February 3, 1999, the Company completed an offering of $1.25 billion of
4.75% Convertible Subordinated Notes due 2009 (the Convertible Subordinated
Notes). The Convertible Subordinated Notes are convertible into the Company's
common stock at the holders' option at a conversion price of $78.0275 per
share, subject to adjustment in certain events. Interest on the Convertible
Subordinated Notes is payable semi-annually in arrears on February 1 and August
1 of each year, and commenced August 1, 1999. The Convertible Subordinated
Notes are unsecured and are subordinated to all existing and future Senior
Indebtedness as defined in the indenture governing the Convertible Subordinated
Notes (the Convertible Subordinated Notes Indenture). Subject to certain
conditions, the Convertible Subordinated Notes may be redeemed at the option of
the Company prior to February 6, 2002, in whole or in part, at the redemption
price of $1,000 per note, plus accrued and unpaid interest, if the closing
price for the Company's common stock has exceeded 150% of the conversion price
for at least 20 trading days within a period of 30 consecutive trading days
ending on the trading day prior to the date of mailing of the notice of
redemption. Upon any redemption made prior to February 6, 2002, the Company
will also make an additional cash payment with respect to the Convertible
Subordinated Notes called for redemption in an amount equal to $212.60 per
$1,000 note redeemed, less the amount of any interest actually paid on such
Convertible Subordinated Notes prior to the call for redemption. At any time on
and after February 6, 2002, the Company may redeem the notes, in whole or in
part, at the redemption prices set forth in the Convertible Subordinated Notes
Indenture.

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

Based upon quoted market prices, the fair value of the Convertible
Subordinated Notes as of December 31, 2000 and December 31, 1999 was $471
million and $1.42 billion, respectively.

Senior Discount Notes

In May 1998, the Company completed the offering of approximately $326 million
of 10% Senior Discount Notes due May 1, 2008 (the Senior Discount Notes).
Pursuant to a registration statement on Form S-4 in September 1998, the Company
completed an exchange offer of 10% Senior Discount Notes due 2008 (the Exchange
Notes), which are registered under the Securities Act of 1933, as amended, for
all outstanding Senior Discount Notes. The Exchange Notes have identical terms
in all material respects to the terms of the original Senior Discount Notes,
except that the Exchange Notes generally are freely transferable (the Exchange
Notes are referred to throughout these notes to consolidated financial
statements interchangeably with the Senior Discount Notes). The Exchange Notes
were issued under the indenture governing the original Senior Discount Notes
(the Indenture). The Senior Discount Notes were sold at a substantial discount
from their principal amount at maturity of $530 million. Prior to November 1,
2003, no cash interest payments are required; instead, interest will accrete
during this period to the aggregate principal amount at maturity. From and
after May 1, 2003, the Senior Discount Notes will bear interest at a rate of
10% per annum payable in cash on each May 1 and November 1. The Senior Discount
Notes are redeemable, at the option of the Company, in whole or

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

in part, at any time on or after May 1, 2003, at the redemption prices set
forth in the Indenture, plus accrued interest, if any, to the date of
redemption.

During 1999, the Company repurchased $266 million (principal amount) of the
Senior Discount Notes, representing accreted value of $178 million. The Company
recorded an immaterial loss on extinguishment of this debt. No repurchases of
Senior Discount Notes occurred in 2000.

The Senior Discount Notes are senior unsecured indebtedness of the Company
ranking equally with the Company's existing and future unsubordinated,
unsecured indebtedness and senior in right of payment to all subordinated
indebtedness of the Company. The Senior Discount Notes are effectively
subordinated to all secured indebtedness and to all existing and future
liabilities of the Company's subsidiaries.

The Indenture contains certain covenants that, among other things, limit the
ability of the Company and its Restricted Subsidiaries (as defined in the
Indenture) to incur indebtedness, pay dividends, prepay subordinated
indebtedness, repurchase capital stock, make investments, create liens, engage
in transactions with stockholders and affiliates, sell assets and engage in
mergers and consolidations. However, these limitations are subject to a number
of important qualifications and exceptions. The Company was in compliance with
all financial covenants at December 31, 2000 and 1999.

Based upon quoted market prices, the fair value of the outstanding Senior
Discount Notes as of December 31, 2000 and December 31, 1999 was $134 million
and $174 million, respectively.

Note 9--COMMITMENTS AND CONTINGENCIES

Leases and Marketing Agreements

The Company currently leases office and fulfillment center facilities and
fixed assets under noncancelable operating and capital leases. Rental expense
under operating lease agreements for 2000, 1999 and 1998 was $98 million, $43
million and $8 million, respectively.

The Company has also entered into certain marketing agreements that include
fixed-fee commitments into the first half of 2002. Total marketing-related
commitments amount to $19 million; the corresponding costs are recognized
according to the terms of the related agreements.

Future minimum commitments are as follows:

Capital Operating Marketing
Leases Leases Agreements
------- --------- ----------
(in thousands)

Year Ending December 31,
2001........................................ $13,676 $105,230 $17,495
2002........................................ 9,070 88,958 1,016
2003........................................ 5,828 55,200 --
2004........................................ 41 46,767 --
2005........................................ -- 43,936 --
Thereafter.................................. -- 256,907 --
------- -------- -------
Total minimum lease payments.................. 28,615 $596,998 $18,511
======== =======
Less imputed interest......................... (3,778)
-------
Present value of net minimum lease payments... 24,837
Less current portion........................ (11,746)
-------
Long-term capital lease obligation............ $13,091
=======

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Legal Proceedings

Certain federal class action lawsuits were filed against the Company and its
wholly owned subsidiary, Alexa. The lawsuits allege that Alexa tracking and
storage of Internet Web usage paths violates federal and state statutes
prohibiting computer fraud, unfair competition, and unauthorized interception
of private electronic communications, as well as common law proscriptions
against trespass and invasion of privacy. The complaints seek actual,
statutory, and punitive damages, as well as restitution, on behalf of all users
of Alexa Web navigation service, along with injunctive relief prohibiting Alexa
from tracking and storing such information or disclosing it to third parties.
Although the Company disputes the allegations of wrongdoing in these
complaints, there can be no assurance that the Company will prevail in these
lawsuits.

In addition, the Federal Trade Commission has requested information and
documents regarding Alexa practices and has opened a formal investigative file
in connection with its inquiry. The Company is cooperating voluntarily with the
Federal Trade Commission's investigation. An unfavorable resolution of some or
all of these matters could materially affect the Company's business, future
results of operations or cash flows in a particular period, depending on the
amount and timing.

As previously disclosed in the Company's Quarterly Report on Form 10-Q for
the third quarter of 2000, the Company has received informal inquiries from the
SEC staff with respect to accounting treatment and disclosures for some of its
initial strategic partner transactions and has responded to those questions.
Members of the Company's management have reviewed the Company's accounting for
the transactions with the Company's auditors and the SEC staff. The Company
believes that its accounting treatment and disclosures were appropriate and
will continue to cooperate with the SEC staff if they have further questions.

Inventory Suppliers

During 2000, approximately 27% of all inventory purchases were made from
three major vendors. The Company does not have long-term contracts or
arrangements with most of its vendors to guarantee the availability of
merchandise, particular payment terms or the extension of credit limits.

Letters of Credit

The Company is contingently liable under unused letters of credit of
approximately $57 million as of December 31, 2000.

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 10--STOCKHOLDERS' EQUITY (DEFICIT)

Preferred Stock

The Company has authorized 500,000,000 shares of $0.01 par value Preferred
Stock. No preferred stock shares were outstanding during 2000, 1999 or 1998.

Common Stock

On June 1, 1998, the Company effected a 2-for-1 stock split in the form of a
stock dividend to stockholders of record on May 20, 1998. On January 4, 1999,
the Company effected a 3-for-1 stock split in the form of a stock dividend to
the stockholders of record on December 18, 1998. On September 1, 1999, the
Company effected a 2-for-1 stock split in the form of a stock dividend to
stockholders of record on August 12, 1999. Accordingly, the accompanying
consolidated financial statements reflect these stock splits.

Stock Option Plans

The Company's stock option plans consist of the 1999 Nonofficer Employee
Stock Option Plan, the 1997 Stock Incentive Plan and the Amended and Restated
1994 Stock Option Plan. Shares reserved under these Plans at December 31, 2000
consist of 40 million shares in the 1999 Nonofficer Employee Stock Option Plan,
80 million shares in the 1997 Stock Incentive Plan and 58 million shares in the
1994 Stock Option Plan. Any shares of common stock available for issuance under
the Amended and Restated 1994 Stock Option Plan, up to a maximum of 21,025,075
shares, that are not issued under that plan may be added to the aggregate
number of shares available for issuance under the 1997 Stock Incentive Plan. In
connection with certain acquisitions in 1998 and 1999, the Company assumed
outstanding options to purchase common stock originally issued under the
acquired companies' stock option plans. The Company's stock option plans as
well as the assumed stock option plans are hereby collectively referred to as
the "Plans."

Generally, the Company's Board of Directors grants options at an exercise
price of not less than the fair market value of the Company's common stock at
the date of grant. Each outstanding option granted prior to December 20, 1996
has a term of five years from the date of vesting. Generally, outstanding
options granted on or subsequent to December 20, 1996 have a term of 10 years
from the date of grant; however, certain nonqualified stock options were
granted in 1999 and 2000 with terms of approximately 15 and 20 years. Subject
to Internal Revenue Service limitations, options granted under the Company's
plans prior to April 1999 and granted under certain assumed plans generally
became exercisable immediately. Options granted under the Plans since April
1999 generally vest and become exercisable in accordance with the following
vesting schedule: 20% after year one, 20% after year two and 5% at the end of
each quarter for years three through five. Certain options were granted during
2000 that vest and become exercisable in accordance with the following
schedule: 50% after year one and 50% after year two. Shares issued upon
exercise of options that are unvested are restricted and subject to repurchase
by the Company at the exercise price upon termination of employment or services
and such restrictions lapse over the original vesting schedule. At December 31,
2000, approximately 920,000 shares of restricted common stock, which includes
restricted shares issued in connection with acquisitions, were subject to
repurchase.

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Stock Option Activity

The following table summarizes the Company's stock option activity:

Weighted
Number Average
of Shares Exercise Price
-------------- --------------
(in thousands)

Balance January 1, 1998........................ 54,664 $ 0.75
Options granted and assumed.................. 39,548 12.73
Options canceled............................. (7,537) 4.10
Options exercised............................ (10,666) 0.55
-------
Balance December 31, 1998...................... 76,009 6.69
Options granted and assumed.................. 31,739 63.60
Options canceled............................. (11,281) 19.70
Options exercised............................ (16,125) 4.00
-------
Balance December 31, 1999...................... 80,342 27.76
Options granted.............................. 20,717 38.13
Options canceled............................. (18,291) 39.37
Options exercised............................ (12,330) 3.63
-------
Balance December 31, 2000...................... 70,438 32.17
=======

At December 31, 2000, 52 million shares of common stock were available for
future grant under the Plans.

The following table summarizes information about options outstanding and
exercisable at December 31, 2000:

Options Outstanding Options Exercisable
--------------------------------- -----------------------------
Weighted Average
------------------
Remaining Weighted
Range of Number of Life Exercise Number Average
Exercise Prices Options (yrs) Price of Options Exercise Price
--------------- -------------- --------- -------- ------------- --------------
(in thousands) (in thousands)

$ 0.014 -$ 1.000 9,843 5.9 $ 0.40 4,391 $ 0.35
1.167 - 6.979 8,330 6.9 4.35 2,457 3.88
6.990 - 16.333 7,572 7.4 9.68 2,495 9.73
16.521 - 21.656 4,430 7.7 19.61 1,504 19.72
21.833 - 30.875 13,358 9.6 30.60 81 23.92
30.900 - 55.125 7,580 8.9 46.53 929 46.38
55.187 - 63.250 8,456 11.6 60.65 1,136 59.71
63.437 - 71.281 7,392 8.6 68.16 673 67.29
71.687 - 104.969 3,477 8.6 82.65 650 82.72
------ ------
0.014 - 104.969 70,438 8.4 32.17 14,316 19.34
====== ======

Deferred Stock-Based Compensation

The Company recorded an adjustment to reduce previously recorded deferred
stock-based compensation of $3 million, relating to the termination of
employment prior to vesting of certain employees acquired from business
combinations. In the years ended December 31, 1999 and 1998, the Company
recorded aggregate

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

deferred stock-based compensation of $72 million and $2 million, respectively.
In 1999, deferred stock-based compensation was recorded in connection with
acquisitions made by the Company in which restricted Company stock was issued
to employees of acquired companies. Such stock is considered compensation for
services to be provided by employees, and the related expense will be
recognized over the term of the services provided, which is generally four
years. The amount recorded in 1998 represents the difference between the grant
price and the deemed fair value of the Company's common stock for shares
subject to options granted in 1998. Shares underlying options granted below
fair market value and the associated weighted average exercise price were
1,072,000 and $2.048 during the year ended December 31, 1998. The amortization
of deferred stock-based compensation is charged to operations over the vesting
period of the options, which is typically five years. Total amortization
expense recognized in 2000, 1999 and 1998 related to deferred stock-based
compensation was $35 million, $26 million and $2 million, respectively.

Accumulated Other Comprehensive Loss

Activity in unrealized gains (losses) on available-for-sale securities
included in "Accumulated other comprehensive loss" on the consolidated balance
sheets was as follows:

For the Years Ended
December 31,
---------------------------
2000 1999 1998
--------- -------- ------
(in thousands)

Unrealized gains (losses) arising during year... $(178,815) $(12,698) $1,841
Less reclassification of net realized losses
included
in net loss.................................... 178,512 8,693 --
--------- -------- ------
Net unrealized gains (losses) on available-for-
sale
Securities..................................... $ (303) $ (4,005) $1,841
========= ======== ======

Pro Forma Disclosure

The Company uses the intrinsic value method in accounting for its stock
options. If compensation cost had been recognized based on the fair value at
the date of grant for options granted in 2000, 1999 and 1998, the pro forma
amounts of the Company's net loss and net loss per share, which may not
necessarily be indicative of effects on reported results for future years, for
the years ended December 31, 2000, 1999 and 1998 would have been as follows:

For the Years Ended December 31,
-----------------------------------
2000 1999 1998
----------- ----------- ---------
(in thousands, except per share
data)

Net loss -- as reported............... $(1,411,273) $ (719,968) $(124,546)
Net loss -- pro forma................. (1,720,312) (1,031,925) (194,269)

Basic and diluted loss per share -- as
reported............................. $ (4.02) $ (2.20) $ (0.42)
Basic and diluted loss per share --
pro forma............................ (4.90) (3.16) (0.66)

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The fair value for each option granted was estimated at the date of grant
using a Black-Scholes option-pricing model, assuming no expected dividends and
the following weighted average assumptions:

For the Years
Ended December
31,
----------------
2000 1999 1998
---- ---- ----

Average risk-free interest rates......................... 6.2% 5.5% 4.7%
Average expected life (in years)......................... 3.0 3.5 3.0
Volatility(1)............................................ 89.6% 84.9% 81.6%

- --------
(1) Options granted prior to the Company's initial public offering and by
PlanetAll prior to its merger with the Company were valued using the
minimum value method and therefore volatility was not applicable.

The weighted average fair value of options granted during 2000, 1999 and 1998
was $22.12, $43.36 and $19.07, respectively, for options granted with exercise
prices at the current fair value of the underlying stock. During 1998, some
options were granted with exercise prices that were below the current fair
value of the underlying stock. The weighted average fair value of options
granted with exercise prices below the current fair value of the underlying
stock during 1998 was $4.61. Compensation expense that is recognized in
providing pro forma disclosures might not be representative of the effects on
pro forma earnings for future years because SFAS No. 123, "Accounting for
Stock-Based Compensation," does not apply to stock option grants made prior to
1995.

Common Stock Reserved for Future Issuance

At December 31, 2000, common stock reserved for future issuance is as follows
(in thousands):

Stock options.................................................... 122,082
Shares issuable upon conversion of Convertible Subordinated
Notes........................................................... 16,017
Shares issuable upon conversion of Euro Convertible Subordinated
Notes........................................................... 6,575
-------
Total............................................................ 144,674
=======

Note 11--EARNINGS (LOSS) PER SHARE

The following represents the calculations for net loss per share:

For the Years Ended December
31,
---------------------------------
2000 1999 1998
----------- --------- ---------
(in thousands, except per share
data)

Net loss -- as reported.................... $(1,411,273) $(719,968) $(124,546)
=========== ========= =========
Weighted average shares outstanding........ 353,394 332,409 304,938
Weighted average common shares issued
subject to repurchase agreements ......... (2,521) (5,656) (8,594)
----------- --------- ---------
Shares used in computation of basic and
diluted loss per share.................... 350,873 326,753 296,344
=========== ========= =========
Basic and diluted loss per share........... $ (4.02) $ (2.20) $ (0.42)
=========== ========= =========

All of the Company's stock options (see Note 10) are excluded from diluted
loss per share since their effect is antidilutive.

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 12--STOCK-BASED COMPENSATION

Stock-based compensation is comprised of the portion of acquisition-related
consideration conditioned on the continued tenure of key employees, which must
be classified as compensation expense rather than as a component of purchase
price under generally accepted accounting principles. Stock-based compensation
also includes stock-based charges, such as option-related deferred compensation
recorded at the Company's initial public offering, as well as certain other
compensation and severance arrangements.

During 2000, declines in the Company's market capitalization and the
termination of certain acquisition-related employees prior to vesting in stock-
based compensation awards had the effect of reversing previously recorded
stock-based compensation. The following table shows the amounts of stock-based
compensation that would have been recorded under the following income statement
categories had stock-based compensation not been separately stated in the
consolidated statements of operations:

For the Years Ended December 31,
-----------------------------------
2000 1999 1998
----------- ----------- ----------
(in thousands)

Marketing and fulfillment............. $ (2,464) $ 3,975 $ 1,276
Technology and content................ 28,252 25,490 384
General and administrative............ (991) 1,153 229
----------- ----------- ----------
$ 24,797 $ 30,618 $ 1,889
=========== =========== ==========

Note 13--INCOME TAXES

The Company has provided for an immaterial amount of current and deferred
U.S. federal, state or foreign income taxes for the current and all prior
periods presented. The Company has provided a full valuation allowance on the
deferred tax asset, consisting primarily of net operating loss carryforwards,
because of uncertainty regarding its realization. The increase in the valuation
allowance on the deferred tax asset during the year ended December 31, 2000 was
$226 million.

At December 31, 2000, the Company had net operating losses of approximately
$1.65 billion related to U.S. federal, foreign and state jurisdictions.
Utilization of net operating losses, which begin to expire at various times
starting in 2010, may be subject to certain limitations under Sections 382 and
1502 of the Internal Revenue Code of 1986, as amended, and other limitations
under state and foreign tax laws. To the extent that net operating losses, when
realized, relate to stock option deductions of approximately $973 million, the
resulting benefits will be credited to stockholders' equity.

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets are as follows:

December 31,
------------------
2000 1999
-------- --------
(in thousands)

Net operating loss carryforwards....................... $576,024 $423,222
Depreciation and amortization.......................... 9,777 (931)
Accrued expenses and valuation allowances.............. 32,050 19,482
Unearned revenue....................................... 39,916 --
Other.................................................. 19,435 9,030
-------- --------
Total deferred tax assets............................ 677,202 450,803
Valuation allowance for deferred tax assets.......... (677,202) (450,803)
-------- --------
Net deferred tax assets................................ $ -- $ --
======== ========

Note 14--EMPLOYEE BENEFIT PLAN

The Company has a 401(k) savings plan covering substantially all of its
employees. Eligible employees may contribute through payroll deductions. The
Company matches employees' contributions at the discretion of the Company's
Board of Directors. To date, the Company has not matched employee contributions
to the 401(k) savings plan.

Note 15--SEGMENT INFORMATION

The Company identifies operating segments based on product line information,
considering line maturity, within the United States and separately identifies
its international operations as an operating segment. The financial results of
the Company's operating segments are reported to the Company's Chief Operating
Decision Maker in the following groupings: U.S. Books; Music; DVD/video;
International; and Early-Stage Businesses and Other. The results for U.S.
Books, Music and DVD/video have been aggregated into one reportable segment due
to the similarity of their economic characteristics.

The measure of profit or loss used for each reportable segment is income
(loss) from operations before non-cash operating expenses, including stock-
based compensation, amortization of goodwill and other intangibles, and
impairment-related and other. Assets are not allocated to operating segments
for reporting to the Company's Chief Operating Decision Maker and there are no
intersegment revenues on transactions between reportable segments.

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

U.S.
Books, Early-Stage
Music and Businesses
DVD/video and Other Total U.S. International Consolidated
---------- ----------- ---------- ------------- ------------
(in thousands)

2000:
Net sales............... $1,698,266 $ 682,642 $2,380,908 $381,075 $ 2,761,983
Gross profit............ 417,452 160,889 578,341 77,436 655,777
Segment gain (loss)..... 71,441 (243,371) (171,930) (145,070) (317,000)
Other non-cash operating
expenses............... -- -- -- -- (546,880)
Net interest expense and
other.................. -- -- -- -- (242,797)
Equity in losses of
equity-method
investees, net ........ -- -- -- -- (304,596)
-----------
Net loss................ -- -- -- -- $(1,411,273)
===========

1999:
Net sales............... $1,308,292 $ 163,804 $1,472,096 $167,743 $ 1,639,839
Gross profit (loss)..... 262,871 (7,801) 255,070 35,575 290,645
Segment loss............ (31,000) (242,148) (273,148) (79,223) (352,371)
Other non-cash operating
expenses............... -- -- -- -- (253,384)
Net interest expense and
other.................. -- -- -- -- (37,444)
Equity in losses of
equity-method
investees, net ........ -- -- -- -- (76,769)
-----------
Net loss................ -- -- -- -- $ (719,968)
===========

1998:
Net sales............... $ 588,013 $ -- $ 588,013 $ 21,806 $ 609,819
Gross profit............ 128,710 -- 128,710 4,954 133,664
Segment loss............ (35,534) -- (35,534) (25,498) (61,032)
Other non-cash operating
expenses............... -- -- -- -- (48,023)
Interest expense, net... -- -- -- -- (12,586)
Equity in losses of
equity-method
investees, net ........ -- -- -- -- (2,905)
-----------
Net loss................ -- -- -- -- $ (124,546)
===========

Net sales to customers outside of the U.S. represented approximately 22%, 22%
and 20% of net sales for the years ended December 31, 2000, 1999 and 1998,
respectively. No individual foreign country or geographical area or customer
accounted for more than 10% of net sales in any of the periods presented. There
were no transfers between geographic areas during the years ended December 31,
2000, 1999 or 1998.

Included in U.S. Early-Stage Businesses and Other are revenues earned in
connection with the Company's business-to-business strategic relationships
("service revenues"). Service revenues were $167 million and $9 million, and
related cost of services included in "Cost of sales" were $57 million and $0
for the years ended December 31, 2000 and 1999, respectively. Service revenues
during 2000 related primarily to commercial agreements with Toysrus.com,
Ashford.com, drugstore.com and Audible. Service revenues during 2000 included
sales of inventory, at cost, to Toysrus.com of $29 million.

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Depreciation expense for the U.S. Books, Music and DVD/video segment was $30
million, $15 million and $7 million in 2000, 1999 and 1998, respectively.
Depreciation expense for the International segment was $19 million, $7 million
and $3 million in 2000, 1999 and 1998, respectively. Depreciation expense for
the Early-Stage Business and other segment was $34 million and $13 million in
2000 and 1999, respectively.

At December 31, 2000 and 1999, fixed assets, net totaled $315 million and
$309 million in the United States, respectively, and $51 million and $9 million
in other countries, respectively.

Note 16--SUBSEQUENT EVENTS

Subsequent to December 31, 2000, the Company approved a plan for an
operational restructuring in which it will reduce its employee staff by
approximately 1,300 positions, or 15% of its workforce. Additionally, the
Company will consolidate its Seattle, Washington corporate office locations,
close its McDonough, Georgia fulfillment center, operate its Seattle,
Washington fulfillment center on a seasonal basis, close its customer service
centers in Seattle, Washington and The Hague, Netherlands, and migrate a large
portion of its technology infrastructure to a new hardware and software
platform. The Company estimates that the restructuring will result in costs
during the first half of 2001 exceeding $150 million relating primarily to
severance, fixed asset impairments, continuing lease obligations and other exit
costs directly related to its restructuring.

Subsequent to December 31, 2000, the Company offered a limited non-compulsory
exchange of employee stock options. The option exchange offer will result in
variable accounting treatment for stock options representing approximately 15
million shares of the Company's common stock. Variable accounting treatment
will result in unpredictable stock-based compensation dependent on fluctuations
in quoted prices for the Company's common stock. Pursuant to the option
exchange offer, the number of shares issuable upon option exercises decreased
from approximately 70 million shares, or 19.5% of the Company's outstanding
common stock, to approximately 52 million shares, or 14.4% of the Company's
outstanding common stock.

A number of purported class action complaints were filed by stockholders
against the Company and some of its senior officers in March 2001, in the
United States District Court for the Western District of Washington, alleging
that the defendants made false and misleading statements regarding the
Company's financial and accounting disclosures in 2000 and early 2001,
including disclosures regarding some of the Company's strategic partner
transactions. The complaints further allege that the defendants' conduct
violated securities laws and seek compensatory damages and injunctive relief
against all defendants. The Company disputes the allegations of wrongdoing in
these complaints and intends to vigorously defend itself in these matters.

AMAZON.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 17--QUARTERLY RESULTS (unaudited)

The following tables contain selected unaudited statement of operations
information for each quarter of 2000, 1999 and 1998. The Company believes that
the following information reflects all normal recurring adjustments necessary
for a fair presentation of the information for the periods presented. The
operating results for any quarter are not necessarily indicative of results for
any future period.

Year Ended December 31, 2000
------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(in thousands, except per share data)

Net sales...................... $ 972,360 $ 637,858 $ 577,876 $ 573,889
Gross profit................... 224,300 167,279 136,064 128,134
Net loss....................... (545,140) (240,524) (317,184) (308,425)
Basic and diluted loss per
share (1)..................... $ (1.53) $ (0.68) $ (0.91) $ (0.90)
Shares used in computation of
basic and diluted loss per
share......................... 355,681 353,954 349,886 343,884

Year Ended December 31, 1999
------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(in thousands, except per share data)

Net sales...................... $ 676,042 $ 355,777 $ 314,377 $ 293,643
Gross profit................... 87,846 70,477 67,531 64,791
Net loss....................... (323,213) (197,080) (138,008) (61,667)
Basic and diluted loss per
share (1)..................... $ (0.96) $ (0.59) $ (0.43) $ (0.20)
Shares used in computation of
basic and
diluted loss per share........ 338,389 332,488 322,340 313,794

Year Ended December 31, 1998
------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(in thousands, except per share data)

Net sales...................... $ 252,829 $ 153,648 $ 115,981 $ 87,361
Gross profit................... 53,353 34,825 26,188 19,298
Net loss....................... (46,427) (45,171) (22,579) (10,369)
Basic and diluted loss per
share (1)..................... $ (0.15) $ (0.15) $ (0.08) $ (0.04)
Shares used in computation of
basic and diluted
loss per share................ 308,778 301,405 292,554 282,636

- --------
(1) The sum of quarterly per share amounts may not equal per share amounts
reported for year-to-date periods. This is due to changes in the number of
weighted-average shares outstanding and the effects of rounding for each
period.

ITEM 9. Changes in and Disagreements with Accountants On Accounting and
Financial Disclosure

None.

PART III

ITEM 10. Directors and Executive Officers of the Registrant

Information regarding our executive officers required by Item 10, Part III,
is set forth in Item 1 of Part I herein under the caption "Executive Officers
and Directors." Information required by Item 10, Part III, regarding our
directors is included in our Proxy Statement relating to our annual meeting of
stockholders to be held on May 23, 2001, and is incorporated herein by
reference. Information relating to compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, is set forth in the Proxy
Statement and incorporated herein by reference.

ITEM 11. Executive Compensation

Information required by Item 11, Part III, is included in our Proxy Statement
relating to our annual meeting of stockholders to be held on May 23, 2001, and
is incorporated herein by reference.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

Information required by Item 12, Part III, is included in our Proxy Statement
relating to our annual meeting of stockholders to be held on May 23, 2001, and
is incorporated herein by reference.

ITEM 13. Certain Relationships and Related Transactions

Information regarding certain of our relationships and related transactions
is included in our Proxy Statement relating to our annual meeting of
stockholders to be held on May 23, 2001, and is incorporated herein by
reference.

PART IV

ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) List of Documents Filed as a Part of This Report:

(1) Index to Consolidated Financial Statements:

Report of Ernst & Young LLP, Independent Auditors

Consolidated Balance Sheets as of December 31, 2000 and 1999

Consolidated Statements of Operations for each of the three years
ended December 31, 2000

Consolidated Statements of Cash Flows for each of the three years
ended December 31, 2000

Consolidated Statements of Stockholders' Equity (Deficit) for each of
the three years ended December 31, 2000

Notes to Consolidated Financial Statements

(2) Index to Financial Statement Schedules:

Schedule II Valuation and Qualifying Accounts

All other schedules have been omitted because the required
information is included in the consolidated financial statements or the
notes thereto, or is not applicable or required.

(3) Index to Exhibits

Exhibit
Number Description
------- -----------

3.1 Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the period ending 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 28, 2000).

4.1 Indenture, dated as of May 8, 1998, between Amazon.com, Inc. and the
Bank of New York, as trustee (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the Quarterly Period
Ended March 31, 1998).

4.2 Form of 10% Senior Discount Notes Due 2008 (incorporated by reference
to the Company's Registration Statement on Form S-4 (Registration No.
333-56723) filed June 12, 1998).

4.3 Registration Rights Agreement entered into on May 8, 1998, between
Amazon.com, Inc. and Morgan Stanley & Co. Incorporated (incorporated
by reference to the Company's Quarterly Report on Form 10-Q for the
Quarterly Period Ended March 31, 1998).

4.4 Indenture, dated as of February 3, 1999, between Amazon.com, Inc. and
The Bank of New York, as trustee, including the form of 4 3/4%
Convertible Subordinated Note Due 2009 attached as Exhibit A thereto
(incorporated by reference to the Company's Current Report on Form 8-
K dated February 3, 1999).

4.5 Registration Rights Agreement by and among Amazon.com, Inc. and the
Initial Purchasers (incorporated by reference to the Company's
Current Report on Form 8-K dated February 3, 1999).

4.6 Indenture, dated as of February 16, 2000, between Amazon.com, Inc. and
the Bank of New York, as trustee (incorporated by Reference to the
Company's Current Report on Form 8-K dated February 16, 2000).

4.7 Form of 6 7/8% Convertible Subordinated Notes due 2010 (incorporated
by reference to the Company's Current Report on Form 8-K dated
February 28, 2000).

Exhibit
Number Description
------- -----------

10.1+ Amended and Restated 1994 Stock Option Plan (version as of December
20, 1996 for Amended and Restated Grants and version as of December
20, 1996 for New Grants) (incorporated by reference to the Company's
Registration Statement on Form S-1 (Registration No. 333-23795) filed
March 24, 1997).

10.2+ 1997 Stock Incentive Plan (incorporated by reference to Appendix B to
the Company's Proxy Statement on Schedule 14A, filed with the
Securities and Exchange Commission on March 29, 2000).

10.3+ 1999 Non-Officer Employee Stock Option Plan (incorporated by reference
to the Company's Registration Statement on Form S-8 (Registration No.
333-74419) filed March 15, 1999)

10.4+ Accept.com Financial Services Corporation 1998 Stock Option Plan
(incorporated by reference to the Company's Registration Statement on
Form S-8 (Registration No. 333-80495) filed June 11, 1999)

10.5+ Form of Indemnification Agreement between the Company and each of its
Directors (incorporated by reference to the Company's Registration
Statement on Form S-1 (Registration No. 333-23795) filed March 24,
1997).

10.6+ Non-Qualified Stock Option Letter Agreement, effective December 6,
1995, from the Company to Tom A. Alberg (incorporated by reference to
the Company's Registration Statement on Form S-1 (Registration No.
333-23795) filed March 24, 1997).

10.7+ Non-Qualified Stock Option Letter Agreement, effective December 6,
1995, from the Company to Tom A. Alberg (incorporated by reference to
the Company's Registration Statement on Form S-1 (Registration No.
333-23795) filed March 24, 1997).

10.8+ Investor Rights Agreement, dated as of June 21, 1996, by and among the
Company, Kleiner Perkins Caufield & Byers VIII, KPCB Information
Sciences Zaibatsu Fund II and Jeffrey P. Bezos (incorporated by
reference to the Company's Registration Statement on Form S-1
(Registration No. 333-23795) filed March 24, 1997).

10.9+ Offer Letter of Employment to Warren C. Jenson dated September 4,
1999, as amended and restated September 30, 1999 (incorporated by
reference to the Company's Annual Report on Form 10-K for the Year
Ended December 31, 1999).

10.10+ Offer Letter of Employment to Jeff Wilke, dated September 2, 1999
(incorporated by reference to the Company's Annual Report on Form 10-
K for the Year Ended December 31, 1999).

10.11+ Offer Letter of Employment to Diego Piacentini, dated January 17,
2000.

10.12+ Executive Compensation Letter to Jeff Wilke, dated May 16, 2000
(incorporated by reference to the Company's Quarterly Report on Form
10-Q for the Quarter Ended June 30, 2000).

10.13+ Executive Compensation Letter to Warren Jenson, dated May 16, 2000
(incorporated by reference to the Company's Quarterly Report on Form
10-Q for the Quarter Ended June 30, 2000).

10.14+ Executive Compensation Letter to Mark Britto, dated January 3, 2000.

10.15+ Executive Compensation Letter to Mark Britto, dated July 27, 2000.

10.16+ Executive Compensation Letter to Diego Piacentini, dated May 16, 2000.

12.1 Computation of Ratio of Earnings to Fixed Charges.

18.1 Preferability Letter of Ernst & Young LLP, Independent Auditors,
regarding change in accounting principle

21.1 List of Subsidiaries.

23.1 Consent of Ernst & Young LLP, Independent Auditors.

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

(b) Reports on Form 8-K:

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, as of March 21,
2001.

AMAZON.COM, INC.

/s/ Jeffrey P. Bezos
By: _________________________________
Jeffrey P. Bezos
President, Chief Executive
Officer and Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 21, 2001.

Signature Title
--------- -----

/s/ Jeffrey P. Bezos Chairman of the Board, President and Chief
___________________________________________ Executive Officer (Principal Executive
Jeffrey P. Bezos Officer)

/s/ Warren C. Jenson Senior Vice President, and Chief Financial
___________________________________________ Officer (Principal Financial and Accounting
Warren C. Jenson Officer)

/s/ Tom A. Alberg Director
___________________________________________
Tom A. Alberg

/s/ Scott D. Cook Director
___________________________________________
Scott D. Cook

/s/ L. John Doerr Director
___________________________________________
L. John Doerr

/s/ Patricia Q. Stonesifer Director
___________________________________________
Patricia Q. Stonesifer

AMAZON.COM, INC.

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

Inventory Valuation Allowance

Charged/ Balance
Balance at (Credited) Inventory at End
Beginning to Costs and Disposed or of
Year Ended of Period Expenses Written Off Period
- ---------- ---------- ------------ ----------- -------
(in thousands)

December 31, 2000................... $29,583 $31,095 $(40,225) $20,453
======= ======= ======== =======
December 31, 1999................... $ 4,600 $38,152 $(13,169) $29,583
======= ======= ======== =======
December 31, 1998................... $ 800 $ 4,420 $ (620) $ 4,600
======= ======= ======== =======

Accounts Receivable Allowance--Customers

Charged/ Balance
Balance at (Credited) at End
Beginning to Costs and Amounts of
Year Ended of Period Expenses Written Off Period
- ---------- ---------- ------------ ----------- -------
(in thousands)

December 31, 2000................... $ 3,503 $14,585 $ (2,595) $15,493
======= ======= ======== =======
December 31, 1999................... $ 855 $ 3,579 $ (931) $ 3,503
======= ======= ======== =======
December 31, 1998................... $ 69 $ 863 $ (78) $ 855
======= ======= ======== =======

Accounts Receivable Allowance--Vendors

December 31, 2000................... $10,337 $12,499 $ (8,703) $14,133
======= ======= ======== =======
December 31, 1999................... $ -- $10,677 $ (340) $10,337
======= ======= ======== =======
December 31, 1998................... $ -- $ -- $ -- $ --
======= ======= ======== =======

EXHIBIT INDEX