(FORTUNE Magazine) – Like a phoenix, Amazon.com (AMZN, $45) has risen from the dot-com ashes. Shares of the Internet retailer have zoomed from a low of $6 during the 2001 tech meltdown to as much as $58 this past January, rewarding true believers like Bill Miller of Legg Mason. Revenues for 2003 hit a new high of $5.3 billion, 34% above the previous year. In fact, thanks to cost cutting and strong holiday sales, CEO Jeff Bezos said earlier this year that Amazon had reached a milestone skeptics once thought impossible: a full-year profit of $35 million.

Or did it? Dig into the company's recently filed 10-K and you have to wonder. Forget one-time gains from things like securities sales and the falling dollar, though they surely contributed. Buried in the footnotes are the details of a clever accounting adjustment that allowed the ten-year-old company to book its first annual profit. Amazon's international operations are financed in part by the U.S. parent, and the company has historically recorded any foreign-currency adjustments for intercompany balances as long-term investments on its balance sheet. But in last year's fourth quarter, management decided to treat the balances as temporary loans, so gains or losses are now recorded on the income statement. The change boosted net income by $36 million--enough to account for the entire 2003 profit and then some. Amazon spokeswoman Patty Smith says the company changed its accounting because management "just felt it was appropriate."

More troubling is Amazon's falling profit margin. Gross profit margin, or the amount of sales left after subtracting cost of goods sold, fell to 21.9% in last year's fourth quarter, from 23.5% in the same period a year earlier. The decline was due mainly to continued price cutting and the company's free-shipping offer to customers. If you accept Amazon's numbers, then its reported margin has fallen to the level of many brick-and-mortar retailers, like Wal-Mart, which have greater infrastructure costs.

Unfortunately, Amazon's gross profit margin is overstated to begin with. Like many other Internet retailers, Amazon reports "fulfillment" and other order-processing costs in its selling and administrative expenses, thereby excluding it from the computation of gross margin. As a result, gross margins are artificially inflated compared with traditional retailers, which report processing costs as a component of cost of sales. Amazon stands by its accounting. But Camelback Research Alliance, a forensic research firm, notes that if Amazon's fulfillment costs were deducted as a component of cost of sales, gross profits would have been reduced by more than a third in each of the past three years.

Amazon shares have fallen 25% this year, partly because of heavy insider selling. Yet they still sell for 44 times this year's projected earnings. Accounting issues aside, a cold look at the numbers suggests that Amazon's stock price is still a fantasy.