Key questions from the second quarter earnings call conducted by Amazon.com, Inc. on July 24, 2007.

Dave Joseph (Morgan Stanley): You saw a strong improvement in gross margin. There was a one-time impact there, but it also seems that there might be third-party sales at work which continue to be strong. Why do you think you are seeing such strong traction in third-party sales and how sustainable is this?

Tom Szkutak: As it relates to third parties, over the past few years, the company has been investing in improving what it calls seller platforms, and that is surrounding everything that makes it easier for sellers to sell, which includes third parties as well as itself. There is an improvement in third-party sales, third-party units were 30% for the quarter as a percentage of total units, which is up from 29%. Some of that is the launch of Merchants@ International. The importance of it overall is in terms of free cash flow rather than gross margins. This model of having Amazon as a seller as well as third-party is important for customers, and also works for it financially as well. What the customer sees is they get additional selection that they might not ordinarily get from the company by having third parties. They also get the benefit of seeing where there is overlap, seeing competing sellers on Amazon’s detail pages which they can select from. The combination of these factors is great for customers and great for shareholders and so the company thinks it should be a meaningful part of its business as going forward.

Anthony Noto (Goldman Sachs): The domestic business accelerated in both media and EGM - EGM being the biggest factor, up 66% versus 51% in the first quarter. What drove the most incremental dollars in North American EGM to drive that 66% year-over-year growth, which category?

Tom Szkutak: The company is not providing details on the specific categories that make up EGM, but in terms of what is driving it, is customers are responding to what they believe is an excellent value proposition which includes low prices, fast delivery and increased selection. As part of that, fast delivery, Prime is a factor. Prime is a more meaningful part of Amazon’s overall units during the second quarter than it has been previously, so the company has more subscribers, as well as they are buying more. That is a key driver. One other thing is in addition to those key factors, looking at year over year specifically for North America, last year in the second quarter the company had the impact of the wind down and determination of TRU, which infected its revenue by approximately $20 million, which the company disclosed last year during the second quarter.

Jeetil Patel (Deutsche Bank Securities): What is the growth in the non-media-related newer categories a result of?

Jeff Bezos: What the company is finding is, when it launches a new category it needs traffic to those detail pages. As it gets more meaningful traffic to those detail pages, it becomes more attractive for third-party sellers to participate. That is the best way for Amazon to help its third-party business. It is the same as it is to help its retail business, which is to make that customer experience great. When it does that, it attracts customers and traffic to its detail pages, which is good for sellers, which ultimately is good for customers, having these offers, as well as investors.

Jeetil Patel (Deutsche Bank Securities): The penetration of third party looks like about 50% to 55% of U.S. units and around 5% to 10% in the UK. Could you comment on that?

Jeff Bezos: The company has not provided any numbers by segment. The numbers that are quoted have not been provided by Amazon. Overall, it is 30% as a percentage of the total. What the company has said though is that its North America is higher than International, so there is an opportunity. Amazon is continuously focused on how to make the experience better for customers as well as sellers.

Mark Mahaney (Citigroup): Could you provide an update on some of the digital media offerings?

Jeff Bezos: It is too early to discuss any of the traction. The company has Amazon Unbox, which has downloadable videos, and has made arrangements with TiVo so that it can offer customers those videos directly to their TiVo Series 2 and Series 3 Internet-connected boxes. Then the company has announced, but not yet launched, an MP3 DRM-free music offering that it is excited about.

Brian Pitz (Banc of America): Could you provide color on the impact of Harry Potter attachments in the quarter?

Jeff Bezos: In terms of Harry Potter 7, all of the shipments of the book are happening during the third quarter but the associated attachments, Amazon’s normal practice is to ship those products as they become available. The impact on the second quarter was less than 100 basis points globally. There is also some traffic in addition to that, which is difficult to quantify what the incremental impact of that is.

Brian Pitz (Banc of America): Is advertising becoming a more material line item?

Jeff Bezos: The company has not broken it out. It is testing a number of things and seeing how they work.

Robert Peck (Bear Stearns): What do you think about the allocation of the free cash flow going forward?

Tom Szkutak: Looking forward, the company has Board authorization to purchase up to $500 million worth of shares over the next two years. It also has an authorization to retire up to $500 million of debt. The company is going to think about it thoughtfully in making sure that it does what is right for shareholders. The company has retired debt that it thinks is appropriate. It has also retired some convertible debt that avoided potential dilution of fewer than 10 million shares. Those are some of the examples of things that Amazon has done in the past. Going forward, it will certainly be mindful and do the right thing from a treasury and corporate finance perspective.

Doug Anmuth (Lehman Brothers): In the past, when EGM has spiked as a percentage of your sales, it has negatively impacted gross margins. This time EGM came in at 34% and you still posted good gross margin upside. Could you talk about the drivers within gross margins and also whether the mix within EGM during the quarter was any different than it has been in the past?

Tom Szkutak: The gross margins for the quarter were up 50 basis points year over year. The impact that the wind down and termination of TRU, had on both revenue as well as gross profit and operating profit, is being a similar amount in terms of that termination. Those categories, meaning toys, baby and videogames, as Amazon launches those, are like other categories that it launches, that when it launches new categories it is pricing its products competitively and they are lower gross margins to start with. It is not a full impact of that 20 year over year. Those are some of the dynamics related to that. Amazon continues to have low prices for customers. Offsetting that, it continues to be diligent on the COGS side, trying to get additional COGS out. Third party is 30% of total units, up from 29%. That is overlapping where some of the toys were third-party business last year. That would have been higher if that was not in there.

Justin Post (Merrill Lynch): The marketing side was up 22% year over year, below revenue growth. Are you seeing some deflation in marketing costs, or could that have been just some Harry Potter traffic benefits that you got in the quarter?

Tom Szkutak: Marketing was 2.2% of revenue. Over the past two to three years, the range has been tight; it has been anywhere from 2.2% to 2.7%. This past quarter was at the lower end of that range. There is nothing unusual about that. The company would not expect it over time, to stay at the lower end of that range.

Justin Post (Merrill Lynch): Tech expense reaccelerated and was up $15 million sequentially. Are there any new initiatives on the tech side?