The boy wizard is the toast of cyberspace. Sales of Harry Potter merchandise have given a much-needed Christmas fillip to struggling online retailers after an ugly 2001 when e-commerce growth rates showed acute signs of slowing down.

And for online giant Amazon, the success of JK Rowling's magical character could border on alchemy. Worldwide, Amazon sold a staggering 450,000 Harry Potter books and related products during the Christmas season, three times the number of its next most popular gift, the Shrek video and DVD.

Such facts might bring a smile to Rowling's publisher, but they will also produce a huge grin on the face of Amazon's affable boss and founder, Jeff Bezos.

Early last year, with Wall Street baying for blood as Amazon's share price crashed through the floor, the world's biggest online retailer pledged that it would make an operating profit for the fourth quarter of 2001, the first profit in its relatively short history.

The company repeated its target aim last October when Bezos boasted: 'We've lowered our operating costs 20 per cent and can now afford to drive growth by lowering prices for customers. If you're buying books over $20 from anywhere but Amazon.com, you're probably wasting money.'

Now Amazon's reputation is on the line. In addition to seeing its value plummet, Amazon is also under investigation by the US Securities and Exchange Commission (SEC), which is looking into several deals involving the company and its strategic partners.

The SEC is also looking into Bezos's decision to sell some of his shares shortly before the publication of a negative broker's note. Several disgruntled investors' groups have launched actions against the firm, claiming Amazon issued them with misleading statements about its prospects.

But all this will be washed away if on 22 January, Amazon is able to tell a waiting world that it has succeeded in its aim of making an operating profit. If it has failed, any excuses will be drowned in a sea of analysts' sell notes, and with them the hopes of any remaining online retailer.

After all, despite its fall from grace, Amazon remains a huge success story. With a market capitalisation of nearly $4 billion, Amazon is worth more than high street rivals Barnes & Noble and Borders Group combined.

Amazon's fortunes might not have been on such a knife edge had it not been for the events of 11 September. But, according to its most recent quarterly filing with the SEC: 'Immediately following the events of 11 September, customer purchases significantly declined, but have recovered.

'We estimate that the net sales impact as a result of the events of 11 September was between $25 million and $35m.'

Hence Wall Street's thirst for news of how Amazon performed over Christmas, when it proved a huge hit with last-minute buyers. 'Amazon is not cheap; it's expensive compared with other booksellers. But it's the convenience factor. In the US you could order up to 20 December and still get your packages,' said David Pannell, analyst with hi-tech investment bank Durlacher.

Most analysts believe Amazon will hit its profits target, a consensus which has helped propel the firm's shares upwards from a low of just under $7 last October to more than $12 now.

Amazon is predicting that its net sales for the fourth quarter of 2001 will be somewhere between $970m and $1.07bn. It is remaining quiet on profit forecasts, but the shares' recent rally in anticipation of good news will go some way to improving employee morale, not to mention smoothing egos over at media giant America Online which last year bought $100m of Amazon stock as a strategic stake.

In September Amazon issued a further 26 million stock options, with an average exercise price of $7.93 in a bid to incentivise staff. The company concedes that given the volatility of its share price, it could be forced to increase its cash compensation to employees or grant more stock options in the future.

This is still a real possibility, regardless of whether Amazon manages to turn an operating profit for the final quarter.

'We are not convinced that the company's ability to achieve its fourth-quarter guidance sufficiently answers our longer-term questions surrounding Amazon's evolving business model and the company's profitability potential, or justifies its current valuation,' stated Lauren Cooks Levitan, an analyst with Robertson Stephens in a recent note. Cooks Levitan is particularly concerned that revenues in Amazon's books, music and video division - by far its largest - are stagnating while its electronics and international divisions continue to make losses.

Increased competition from high street retailers, many of which have finely honed their internet operations over the past 12 months, is also now a major threat. 'The remaining pure-play dotcom firms are competing against the big boys who know all about scale and physical distribution,' said Scott Smith, director of internet strategies at research firm the Yankee Group.

In a bid to show that it can compete with the established retailers, Amazon has made much of its ability to drive down the cost of acquiring new customers from an average of $15 per person in the third quarter of 2000 to $11 by the end of September 2001.

But analysts still want to see costs trimmed further. This is not surprising given that even if Amazon turns an operating profit, it has a long way to go before it enters the black. This is because operating profits don't include a number of charges such as amortising its investments or its interest payments.

And Amazon has huge interest payments. As of 30 September 2001, Amazon had debts of $2.2bn. The annual interest payments of more than $100m are a huge drain on the firm.

In addition, Amazon has been restructuring, cutting staff and closing warehouses, all which forced it to absorb charges of nearly $200m last year. The company has also had to write off investments in a number of partner companies, notably an online auction site in partnership with Sotheby's and its stake in logistics firm Webvan.

Even making an operating profit in two consecutive quarters looks challenging. 'You would expect them to do well in the last quarter of the year: it's their busiest time,' Pannell said. 'But the question is whether they can sustain it. That's a more difficult question, especially in the US, where things are not looking so great. Amazon is now big enough to be affected by the economic climate.'

This remains the great uncertainty. Said Smith: 'Everyone extended themselves in the run-up to Christmas, when retail therapy was the name of the game. But people are going to feel the pinch of job losses soon.'

For Bezos, 22 January may offer a breathing space, but it is not a panacea.