NEW YORK (CNNMoney.com) - Amazon.com on Tuesday reported a first-quarter profit that was in line with Wall Street estimates but fell 35 percent from a year earlier, hurt primarily by the cost of expensing stock options.

But sales for the period modestly beat analysts' forecasts.

Shares rose about 1.5 percent on Inet after hours. Amazon (Research) shares have slumped 25 percent so far this year as investors worried that the company's string of investments into new areas such as its A9 search engine, its original Internet video show called "Amazon Fishbowl with Bill Maher" and other digital media initiatives could pressure short-term profit.

Scott Devitt, analyst with Stifel Nicolaus & Company, said Amazon appeared to have logged a "solid" quarter.

"There were positives and negatives. Amazon's free cash flow growth is looking strong. International revenue growth accelerated," Devitt said. He also expects Amazon could start to reap the benefits of its recent boost in technology spending in the second-half of the year.

At the same time, Devitt said Amazon's ongoing legal woes with Toys R Us are a significant distraction going forward. He cautioned that anytime a company is involved in pending litigation, investors see that as a possible risk to their investment.

Said Deviit, "I love the franchise, I love the Amazon brand. The business fundamentals are possible improving but there's no way to handicap the litigation issue. It's hard for me to step in front of it and make a decision on the stock until this is resolved. Scott currently has a "hold" rating on Amazon.

A New Jersey judge in March allowed Toys R Us to dissolve a partnership with Amazon and set up its own Web site. Amazon and Toys 'R' Us inked a multimillion-dollar deal in 2000 for a 10-year partnership in which the toy merchant's online sales would be done exclusively through Amazon.com.

In 2004, Toys 'R' Us sued Amazon, alleging that Amazon violated exclusivity terms by allowing third parties to sell competing products through the Web site. Amazon subsequently countersued Toys 'R' Us, seeking to sever the partnership.

Amazon said in a statement that the company was appealing the court decision that terminated the Toysrus.com contract.

"While we believe we will prevail and that Toysrus.com's claims lack merit, the timing and possible outcomes of this litigation are uncertain and possible effects of termination are not reflected in the guidance," the statement said. If Amazon does not prevail, the company expects its operating profit could be negatively impacted by as much as $50 million for the year, including by as much as $25 million for the second quarter.

"$50 million is a significant component of Amazon's operating income," said Devitt. "If they lose and are able to find another partner, then I think the stock will go up. If they take on inventory themselves, the stock will go down."

Piper Jaffray analyst Safa Rashtchy said if Amazon lost the appeal, it could potentially be a major blow for the company, since the $50 million estimate would represent half of the operating income of the second quarter.

"I'm a little bit confused by what Amazon thinks will happen [by appealing the decision]," he said.

Otherwise, Rashtchy agreed with Devitt that Amazon's results lacked any surprises.

The world's biggest online retailer said it earned $51 million, or 12 cents a share, down from $78 million, or 18 cents a share, on the same basis a year earlier, which included a gain of $26 million, or six cents a share, from the expensing of stock options.

Analysts had forecast a profit of 12 cents a share, excluding one-time items, according to First Call.

Sales grew 20 percent to $2.28 billion. Analysts had expected Amazon's sales for the quarter to come in at $2.22 billion.

Looking forward, Amazon said it expects sales of $2.03 billion to $2.18 billion for the second quarter, which would be up 16 percent to 24 percent from a year earlier, and between $9.95 billion and $10.50 billion for the full year.

That compares with analysts' average forecasts of $2 billion for the second quarter and $10 billion for the full year, according to First Call.

Though Amazon did not give earnings-per-share guidance, it said it expects operating income of $32 million to $67 million for the second quarter, or a decline of between 36 and 69 percent compared with the same period last year.

This guidance includes $38 million for stock-based compensation and other items.

For the full year, the company expects operating income to be between $390 million and $520 million, or between a decline of 10 percent and growth of 20 percent, versus 2005. The full-year guidance includes $125 million for stock option expenses and other items.

Analysts forecast a profit of 12 cents a share in the second quarter and 60 cents a share for the full year 2004.

"Amazon's guidance appears to be within the range that I'm using," said Robert Toomey, analyst with E.K. Riley Advisors. "The company is growing about 20 percent, generating very solid profit. This is certainly a positive and should support cash flow growth."

The company doubled its spending on technology as a percentage of revenue in the quarter versus last year. In a conference call with analysts, Amazon's chief financial officer Tom Szkutak said the company was focused on introducing new products but declined to offer any specifics.

Amazon's sales in its North America market -- which included the United States and Canada -- were $1.25 billion, or up 21 percent versus the year-earlier quarter.

International segment sale through its U.K., German, Japanese, French and Chinese sites, came in at $1.03 billion, or up 18 percent from the same period of 2005. Total worldwide sales increased 31 percent to $62 million.

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