Shares of Amazon.com Inc. (AMZN) fell Wednesday after the e-commerce giant reported 30 percent drop in net income and a new fee-based membership program that expands the online retailer's foray into free shipping even further.

Amazon shares fell $1.61, or about 5 percent, to $31.10 on the Nasdaq Stock Market (search).

Amazon said Tuesday that it earned $78 million in the first quarter, or 18 cents per share, compared with net income of $111 million, or 26 cents per share, in the same period a year ago.

The results include a charge of $56 million for taxes and a $26 million gain from an accounting change. In the first quarter of 2004, Amazon received a tax benefit of $2 million.

Operating income was $108 million, down 2 percent from $110 million in the first quarter of 2004. Excluding a $14 million charge because of new accounting rules on stock options, Amazon.com's operating income would have been $122 million, or 10 percent higher than the same period last year.

Revenue rose 24 percent, to $1.9 billion, from $1.53 billion in the same period last year, and was in line with analyst forecasts.

The Seattle-based company had told Wall Street investors that operating income would be somewhere between $80 million and $110 million this quarter.

Because of the accounting change, which took effect Jan. 1, Amazon.com's operating income was not comparable to expectations of analysts polled by Thomson Financial, who were expecting on average a profit of 23 cents per share. Estimates varied widely, from 16 cents per share to 28 cents per share.

Mark Mahaney, an analyst for San Francisco-based American Technology Research, said Amazon.com's operating profits were slightly better than he expected due to an increased percentage of sales shipped by third parties, which eliminates inventory and distribution costs and mirrors the sales model of e-commerce powerhouse eBay Inc (EBAY). In the last quarter, 27 percent of Amazon.com's total unit sales were shipped directly by third-party retailers.

But Mahaney remained concerned that Amazon.com, founded by a New York financial analyst in 1994, would experience slower growth as e-commerce rivals expand and traditional retailers become more savvy about Internet sales.

"You still have revenue growth deceleration and margin growth contraction," Mahaney said. "The fundamentals continue to deteriorate and haven't stabilized yet."

Founder and CEO Jeff Bezos (search) said Tuesday revenue growth reflected strong sales in certain product categories and the February launch of a membership service called Amazon Prime, which gives users unlimited two-day shipping for $79 annually. Since the debut of Amazon Prime, executives said, members have saved $3 million in shipping charges.

The company already offers free shipping on nearly all orders above $25.

Tom Szkutak (search), Amazon's chief financial officer, characterized the quarter as "solid," thanks in part to strong electronics and international sales. Executives slightly boosted their outlook for the rest of 2005.

Sales in the United Kingdom, Germany, France, Japan and China totaled $875 million, up 28 percent from the first quarter of 2004. International sales accounted for 46 percent of worldwide sales in the first quarter, up from 45 percent in the year-ago period.

Amazon.com, which had $533 million in cash on March 31, spent $45 million on marketing in the first quarter of 2005, compared to $34 million in the same period of 2004. It spent $46 million to settle pending and potential lawsuits and pay for other "general and administrative" expenses, compared to $30 million in the year-ago period. Executives would not comment on the nature of the legal settlements.

The company spent $92 million on technology, mainly software development, up 59 percent from $58 million it spent in the first quarter last year.

Szkutak said Amazon.com would continue to hire computer programmers to work on the company's new search features and Web services. Amazon.com debuted its search engine division, A9.com, in October 2003, but last quarter the company unveiled new features and intensified efforts to grab a larger piece of the lucrative search engine market, dominated by Google Inc. and Yahoo Inc. (YHOO).

Executives expect second-quarter operating income between $50 million and $80 million, down as much as 42 percent from the second quarter of 2004. That range includes the new accounting changes, as well as risks related to currency fluctuations, lawsuit settlements and other challenges.

Amazon.com expects operating income for 2005 to be between $395 million and $510 million on sales of $8.12 billion to $8.68 billion. Previously, the company told analysts to expect 2005 operating income between $385 million and $510 million on sales of $8.05 billion and $8.65 billion.