Dear Investors, Employees, Partners, and Friends of Zappos:

With the WSA shoe show coming up next week, I thought it would be
a good time to send out another company update.

As I mentioned in the last update at the beginning of this year,
our goal is to break $1 billion in gross merchandise sales for
2008. The economy has been tough, but so far we are still on track
to hit that number. Back in 2003, we had set a the goal of hitting
$1 billion by 2010, so we're very excited that we're on track to
hit the $1 billion milestone ahead of our original goal!

For those who don't know, here are our historical gross
merchandise sales numbers:

1999: Almost nothing
2000: $ 1.6 mm
2001: $ 8.6 mm
2002: $ 32 mm
2003: $ 70 mm
2004: $184 mm
2005: $370 mm
2006: $597 mm
2007: $840 mm
2008: Over $1 billion (goal)

Here are some of the highlights so far for 2008:

• We grew our customer base to a total of over 8.2 million paying

customers, meaning that almost 3% of the US population has
bought from Zappos.

• With our focus on customer service, our customers continue to be

extremely loyal to us. On any given day, approximately 75% of
our sales are from repeat customers.

• We now carry more than 4 million items in our warehouse!

• We began our partnership with Merrell, and are now selling them

on our site.

• We completed our magalog for fall, and will be dropping 1

million copies of it in a few weeks. We're very excited about
this because the quality is a big step above our previous
magalogs. Special thanks to our vendor partners who
helped support our magalog project!

• We continued to grow sales in all of our categories, especially

our non-footwear categories, including apparel, handbags,
sunglasses, watches -- even cookware and electronics! Our
apparel category is up 250% from last year, making us a "head to
toe" destination for many of our partners and customers.

• We've continued investing in our warehouse operations to handle

other product categories, including the implementation of
technology from Kiva Systems.

• We ran a television ad campaign in the spring which has helped

with our branding efforts. You can see the commercial here:

http://www.youtube.com/watch?v=uxBWfqDAQkg

• We've been doing a lot of work behind the scenes for our new

technology platform which we are internally calling "Zeta".
Among many other things, Zeta offers better search and browsing,
and you can take a sneak peak at Zeta here:

http://zeta.zappos.com

• Our "Powered by Zappos" program continues to grow and will soon

be moved over to our new Zeta platform, which will enable us to
help power more of our vendors' ecommerce operations.

• Our company blogs have taken a life of their own and have turned

out to be a great way for us to share our unique company culture
with the rest of the world:

http://blogs.zappos.com

• The 2008 edition of our culture book has just arrived. Every

year, we ask all of our employees to write a few paragraphs
about what the Zappos culture means to them, and except for
typos, it's unedited. This year's edition is bigger and better
than ever before! Be sure to pick up a copy if you ever stop by
our offices!

• We continued and improved our unique training program for new

hires in Las Vegas. All new hires in our Las Vegas office,
regardless of what department they were actually hired for, must
first go through 4 weeks of Customer Loyalty training (answering
phone calls from customers) upon joining the company.

• We officially turned 9 years old as a company!

• We were recently featured as the lead story on ABC Nightline:

http://abcnews.go.com/video/playerIndex?id=5328179

Our focus continues to be on building our brand and our culture
around providing the very best customer service and experience.
Our hope is that 10 years from now, people won't even realize that
we started out selling shoes online. In fact, our business doesn't
even have to be limited to just the online world.

If we can build Zappos so that our brand is simply about the very
best customer service and the very best customer experience, the
sky's the limit as to what we can eventually accomplish. Right
now, we are just scratching the surface of what's possible. In the
ABC Nightline story, there's even a mention of the possibility of
a Zappos Airlines later down the road:

http://abcnews.go.com/video/playerIndex?id=5328179

Thank you everyone for all of your support and getting us to where
we are today! I'll be sending out another update after the year is
over, and look forward to reporting on our progress!

---

Tony Hsieh
CEO - Zappos.com

---

Our lawyers want us to put in the following disclaimer, so here it
is:

This email contains forward-looking statements that involve risks
and uncertainties, as well as assumptions that, if they ever
materialize or prove incorrect, could cause our results to differ
materially from those expressed or implied by the forward-looking
statements and assumptions. These risks and uncertainties
include, but are not limited to, the risk of economic slowdown,
the risk of over or underbuying, the risk of consumers not
shopping online or at our web site at the rate we expected, the
risk of supplier shortages, the risk of new or growing
competition, the risk of a natural or some other type of disaster
affecting our fulfillment operations or web servers, and the risk
of the world generally coming to an end. All statements other
than statements of historical fact are statements that could be
deemed forward-looking statements, including statements of
expectation or belief; and any statement of assumptions underlying
any of the foregoing. Zappos.com assumes no obligation and does
not intend to update these forward-looking statements.

---

Dear Investors, Employees, Partners, and Friends of Zappos:

With the WSA shoe show in Las Vegas starting later this week, I thought it would be a good time to send out another company update.

I'm happy to report that we finished 2007 with approximately $840 mm in gross merchandise sales, exceeding our goal of $800 mm! (I say "approximately" because we are still in the process of closing the books for 2007. See the end of this note for more details.)

I'm also happy to report that, once our audit is complete, we are expecting 2007 to be the first year where we make a decent operating profit. (For the previous few years, we had been running the company at close to break-even in order to maximize our growth.)

It looks like 2008 will be the year where we can reach our goal of over $1 billion in gross merchandise sales -- a goal that we first set back in 2003. For those of you who don't know, here are our historical gross merchandise sales numbers:

1999: Almost nothing
2000: $ 1.6 mm
2001: $ 8.6 mm
2002: $ 32 mm
2003: $ 70 mm
2004: $184 mm
2005: $370 mm
2006: $597 mm
2007: $840 mm
2008: Over $1 billion (goal)

I've been sending out a company update about once every 6 months for almost 5 years now. I thought it would be fun to look back and share some excerpts from the very first "Friends of Zappos" update from 2003, when we were well below the $100 mm mark:

• begin clip from 2003 --

If we spend our money carefully and continue to constantly
improve the customer experience, we will reach over $1 billion
in shoe sales a year in the not too distant future. I know $1
billion sounds impossible at first -- but so did our current
sales volume 3 years ago. But the reality is, it's actually not
that crazy a number, and it's a very achievable goal: By 2010,
total footwear sales in the U.S. will be over $50 billion a
year. Online footwear sales will be 10% of that -- $5 billion a
year. If we continue to be the leader in our space because of
our relentless focus on improving the customer experience, then
there is no reason why we won't be doing at least 20% of all
online footwear sales by then.

• end clip from 2003 --

I thought this was interesting because today, various estimates from 3rd party research companies actually estimate our market share of the online footwear market at somewhere between 20% and 30%.

Here's another excerpt:

• begin clip from 2003 --

Although we happen to sell shoes today, we've built and will
continue to build the platform for a great customer experience.
This will allow us to one day expand into other categories
beyond just shoes. But for now, it's important for us to remain
focused on being the leader in online footwear sales, in terms
of both selection and service.

• end clip from 2003 --

Back in 2003, we didn't have a specific time frame for expanding into other product categories. In 2007, we started expanding into even more categories, and by the end of 2008, we expect to be selling all of the following, some of which are already on our site:

• Footwear
• Apparel
• Sunglasses
• Watches
• Bags
• Bedding/Linens
• Cosmetics
• Luggage
• Electronics

In looking back on the past year, here are some of the highlights from 2007:

• In December 2007, we broke $100 mm in gross merchandise sales

(in 1 month) for the first time in the company's history, and
had our first $5 mm day.

• We now have over 7.4 mm paying customers, representing

approximately 2.5% of the US population. Or put another way,
approximately 1 out of every 40 people in the United States is a
customer of ours.

• Of all the Next Day Air packages shipped in the United States by

UPS in 2007, approximately 1 out of every 75 was a Zappos
package.

• We launched Nike on our web site. We're extremely happy with

the new partnership, and look forward to continuing to grow it
over time!

• We purchased 6pm.com, which is positioned as our discount/outlet

web site. Old inventory that is not sold on Zappos.com now
moves to 6pm.com. This allows us to maintain Zappos as our
premium brand: Zappos stands for the very best service and
selection, whereas 6pm stands for low prices and selection.

• We now have over 1500 employees, and plan to grow to close to

2000 by the end of the year. In Las Vegas, we will soon be
expanding into a 3rd building to accomodate our growth. In
Kentucky, we will be expanding our warehouse operations into an
additional 200,000 square feet.

• We launched our Canada site:

• canada.zappos.com

• We are now operating 4 different vertical web sites, each with

its own separate 1-800 number and specialized staff:

• couture.zappos.com
• running.zappos.com
• outdoor.zappos.com
• rideshop.zappos.com

• As we expanded into other product categories, we've added many

great apparel brands, and plan to continue to add many more in
2008.

• We launched our "Powered by Zappos" program for 3 more brands:

• stuartweitzman.com
• tarynrose.com
• reportshoes.com

• We continued and improved our unique training program for new

hires in Las Vegas. All new hires in our Las Vegas office,
regardless of what department they were actually hired for, must
first go through 4 weeks of Customer Loyalty training (answering
phone calls from customers) upon joining the company. It's
extremely expensive for us to do this, but since we want the
Zappos brand to be about the very best customer service, we
believe it's important for everyone hired in our Las Vegas
office to go through the training (even accountants, lawyers,
and software developers).

Looking ahead into 2008, we plan on continuing to grow primarily through repeat customers and word of mouth. We will continue to build our brand and our culture, because in the long run, brand and culture are the same thing. Every great, enduring company has a strong culture, and we hope to one day be one of those companies.

By the way, one of the comments we've gotten from people that visit our offices is that they had no idea prior to visiting what the culture at Zappos was like. So, to help share our culture with the rest of the world, we've recently launched an "Inside Zappos" blog:

http://blogs.zappos.com/

It's meant to be "fun and a little weird" -- one of our core values at Zappos. Hope you enjoy learning more about us!

This has been a long update, so I will end it here. Thanks to all our customers, employees, vendors, partners, and investors for getting us this far... 2008 will be an exciting year, and I'll be writing another update about 6 months from now to update everyone on our progress.

---

Tony Hsieh
CEO - Zappos.com

PS: Our CFO and Finance Team know that most of you don't really care about the technical financial details, but our accountants and auditors would really prefer that we put in the following technical clarifications for those of you who do care, so here it is:

Gross merchandise sales is a non-GAAP metric. We use it to express the total demand across all of our web sites and stores.
This number measures the dollar value of the orders placed in the year before accruing for certain items such as returns, and it ignores certain timing cut-offs that are required by GAAP for revenue recognition purposes. If we were a public company, we would have to reconcile gross merchandise sales to the nearest GAAP metric (net sales), but we are currently a private company so the gross merchandise sales number should be viewed just as an interesting number that we want to share with our friends.

We understand that the mention of the purchase of 6pm.com may mean different things to different readers. Since you are reading so far down into the fine print, we presume that you must really care about the details of the 6pm.com transaction, or you are just really bored. Technically, our purchase of 6pm.com was not an acquisition of a company. It was a purchase of certain assets, mostly intangible assets. For further technical clarification, we purchased a small amount of inventory and a whole bunch of intangible assets including the 6pm.com domain name, certain trademarks, the customer list, and customer order history.

Still reading? Here are some fun disclaimers to read about:

This email contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they ever materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by the forward-looking statements and assumptions. These risks and uncertainties include, but are not limited to, the risk of economic slowdown, the risk of over or underbuying, the risk of consumers not shopping online or at our web site at the rate we expected, the risk of supplier shortages, the risk of new or growing competition, the risk of a natural or some other type of disaster affecting our fulfillment operations or web servers, and the risk of the world generally coming to an end. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements of expectation or belief; and any statement of assumptions underlying any of the foregoing. Zappos.com assumes no obligation and does not intend to update these forward-looking statements. Congratulations on making it through all the fine print. You can thank our lawyers for that.