10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

FOR THE QUARTERLY PERIOD ENDED JULY 3, 2004.

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

FOR THE TRANSITION PERIOD FROM             TO             .

Commission File Number 0-16611

GSI COMMERCE, INC.

(Exact name of registrant as specified in its charter)

Delaware	04-2958132
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
1075 First Avenue, King of Prussia, PA	19406
(Address of principal executive offices)	(Zip Code)

610-265-3229

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x     No   ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 2, 2004:

Common Stock, $.01 par value	41,039,535
(Title of each class)	(Number of Shares)

FORM 10-Q

FOR THE QUARTER ENDED JULY 3, 2004

TABLE OF CONTENTS

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of January 3, 2004 and July 3, 2004 (Unaudited)	1
	Condensed Consolidated Statements of Operations for the three-and six-month periods ended June 28, 2003 and July 3, 2004 (Unaudited)	2
	Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 28, 2003 and July 3, 2004 (Unaudited)	3
	Notes to Condensed Consolidated Financial Statements (Unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	32
Item 3.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 4.	Defaults Upon Senior Securities	33
Item 5.	Submission of Matters to a Vote of Security Holders	33
Item 6.	Other Information	33
Item 7.	Exhibits and Reports on Form 8-K	33
SIGNATURES		34

For all years prior to 1999, our fiscal year ended on December 31. Effective for 1999, we changed our fiscal year from the last day of December to the Saturday nearest the last day of December. Accordingly, references to fiscal 1999, fiscal 2000, fiscal 2001, fiscal 2002, fiscal 2003 and fiscal 2004 refer to the years ended January 1, 2000, December 30, 2000, December 29, 2001, December 28, 2002, January 3, 2004 and the year ending January 1, 2005.

Although we refer to the retailers, branded manufacturers, entertainment companies and professional sports organizations for which we develop and operate e-commerce businesses as our “partners,” we do not act as an agent or legal representative for any of our partners. We do not have the power or authority to legally bind any of our partners. Similarly, our partners do not have the power or authority to legally bind us. In addition, we do not have the types of liabilities for our partners that a general partner of a partnership would have.

Certain financial information is presented on a rounded basis, which may cause minor differences.

i

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GSI COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

	January 3, 2004			July 3, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	57,558		$	32,975
Marketable securities		11,912			15,268
Accounts receivable, net of allowance of $709 and $718, respectively		4,898			7,283
Inventory		22,910			22,031
Current portion – notes receivable		1,377			900
Prepaid expenses and other current assets		1,848			1,502
Total current assets		100,503			79,959
Property and equipment, net		44,840			63,269
Goodwill, net		13,453			13,453
Notes receivable		2,356			1,293
Other equity investments		2,159			2,847
Other assets, net of accumulated amortization of $2,644 and $3,352, respectively		12,272			11,745
Total assets	$	175,583		$	172,566
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	27,677		$	22,215
Accrued expenses and other		22,538			21,344
Deferred revenue		14,998			11,769
Current portion – note payable		—			150
Total current liabilities		65,213			55,478
Note payable		—			12,850
Mandatorily redeemable preferred stock, Series A, $0.01 par value, 10,000 shares authorized; 0 shares issued and outstanding as of January 3, 2004 and July 3, 2004, respectively		—			—
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value, 4,990,000 shares authorized; 0 shares issued and outstanding as of January 3, 2004 and July 3, 2004, respectively		—			—
Common stock, $0.01 par value, 90,000,000 shares authorized; 40,781,036 and 41,011,620 shares issued as of January 3, 2004 and July 3, 2004, respectively; 40,779,826 and 41,010,410 shares outstanding as of January 3, 2004 and July 3, 2004, respectively		408			410
Additional paid in capital		287,571			288,708
Accumulated other comprehensive loss		—			(97	)
Accumulated deficit		(177,609	)		(184,783	)
		110,370			104,238
Less: Treasury stock, at par		—			—
Total stockholders’ equity		110,370			104,238
Total liabilities and stockholders’ equity	$	175,583		$	172,566

The accompanying notes are an integral part of these condensed consolidated financial statements.

1

GSI COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended						Six Months Ended
	June 28, 2003			July 3, 2004			June 28, 2003			July 3, 2004
Revenues:
Net revenues from product sales	$	45,722		$	53,131		$	89,895		$	110,009
Service fee revenues		4,626			11,558			9,332			20,948
Net revenues		50,348			64,689			99,227			130,957
Cost of revenues from product sales		33,307			39,564			65,160			81,072
Gross profit		17,041			25,125			34,067			49,885
Operating expenses:
Sales and marketing, exclusive of $279, $195, $508 and $689 reported below as stock-based compensation, respectively		11,095			16,787			24,219			34,236
Product development, exclusive of $0, $(47), $0 and $2 reported below as stock-based compensation, respectively		3,418			4,498			7,117			8,981
General and administrative, exclusive of $125, $5, $184 and $89 reported below as stock-based compensation, respectively		3,457			4,375			6,538			8,295
Stock-based compensation		404			153			692			780
Depreciation and amortization		2,734			2,646			5,432			5,245
Total operating expenses		21,108			28,459			43,998			57,537
Other (income) expense:
Interest expense		—			54			—			54
Interest income		(290	)		(242	)		(671	)		(532	)
Total other (income) expense		(290	)		(188	)		(671	)		(478	)
Net loss	$	(3,777	)	$	(3,146	)	$	(9,260	)	$	(7,174	)
Losses per share—basic and diluted:
Net loss	$	(0.10	)	$	(0.08	)	$	(0.24	)	$	(0.18	)
Weighted average shares outstanding—basic and diluted		38,838			40,991			38,811			40,930

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

GSI COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended
	June 28, 2003			July 3, 2004
Cash Flows from Operating Activities:
Net loss	$	(9,260	)	$	(7,174	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		5,432			5,245
Stock-based compensation		692			780
Gain on exchange of note receivable		—			(6	)
Changes in operating assets and liabilities:
Accounts receivable, net		372			(2,385	)
Inventory		4,029			879
Prepaid expenses and other current assets		(130	)		346
Notes receivable		(113	)		32
Other assets, net		—			(182	)
Accounts payable and accrued expenses and other		(26,690	)		(6,656	)
Deferred revenue		1,832			(3,229	)
Net cash used in operating activities		(23,836	)		(12,350	)
Cash Flows from Investing Activities:
Acquisition of property and equipment, net		(2,221	)		(23,658	)
Payments received on notes receivable		450			826
Purchases of marketable securities		(9,598	)		(6,058	)
Sales of marketable securities		9,625			2,605
Sales of short-term investments		891			—
Net cash used in investing activities		(853	)		(26,285	)
Cash Flows from Financing Activities:
Repayments of capital lease obligations		(78	)		—
Proceeds from mortgage note		—			13,000
Proceeds from sales of common stock		211			—
Proceeds from exercises of common stock options		102			1,052
Net cash provided by financing activities		235			14,052
Net decrease in cash and cash equivalents		(24,454	)		(24,583	)
Cash and cash equivalents, beginning of period		61,004			57,558
Cash and cash equivalents, end of period	$	36,550		$	32,975

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—BASIS OF PRESENTATION

GSI Commerce, Inc. (“GSI” or the “Company”), a Delaware corporation, provides an e-commerce platform that enables retailers, branded manufacturers, entertainment companies and professional sports organizations to operate e-commerce businesses. The Company’s e-commerce platform includes Web site design and development, e-commerce technology, managed hosting, order fulfillment, customer service, merchandising and order management, online merchandising, customer relationship management, content development and online marketing. The Company currently derives virtually all of its revenues from the sale of goods through its partners’ e-commerce businesses, toll-free telephone number sales, business-to-business and group sales and related outbound shipping charges, net of allowances for returns and discounts. The Company also derives revenue from fixed and variable fees earned in connection with the development and operation of partners’ e-commerce businesses and the provision of marketing and other services.

The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

The accompanying financial information is unaudited; however, in the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the financial position, results of operations and cash flows for the periods reported have been included. The results of operations for the periods reported are not necessarily indicative of those that may be expected for a full year.

This quarterly report should be read in conjunction with the financial statements and notes thereto included in the Company’s audited financial statements presented in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2004, as amended May 3, 2004.

Certain reclassifications have been made to the prior year condensed consolidated financial statements to conform to those used in the current period.

NOTE 2—ACCOUNTING POLICIES

Marketable Securities: Marketable securities, which consist of investments in debt securities, are classified as available-for-sale and are reported at fair value, with unrealized gains and losses recorded as a component of stockholders’ equity. The Company does not intend to hold its marketable securities for more than one year from the most recent balance sheet date and has therefore classified them as a current asset. Realized gains or losses and declines in value judged to be other than temporary, if any, on available-for-sale securities are reported in other income or loss. As of January 3, 2004, the aggregate amortized cost of the Company’s marketable securities approximated their aggregate fair value. As of July 3, 2004, the Company recorded net unrealized losses on its marketable securities of $97,000.

Notes Receivable and Other Equity Investments: On April 28, 2004, the Company converted $730,000 of principal due from Odimo Incorporated (“Odimo”) under a five year subordinated secured promissory note in exchange for 2,036,830 shares of Odimo’s Series C preferred stock and a warrant to purchase 305,525 shares of Odimo’s Series C preferred stock at an exercise price of $0.3584 per share. As a result of the conversion, the principal amount owing under the promissory note as of April 28, 2004 was $2.6 million, due in eleven consecutive quarterly payments of $225,000 each, beginning June 2004 through December 2006 and one final payment of $170,000 due in March 2007. The carrying amount of the portion of the note exchanged was approximately $682,000. In order to determine the fair value of the portion of the note exchanged, the Company obtained an independent, third-party valuation. Using this valuation, the Company determined the estimated fair value of the portion of the note exchanged to be approximately $688,000. The Company recorded the investment in Odimo at $688,000 and recorded a gain on the exchange of approximately $6,000 which is included in interest income.

During the three-month period ended July 3, 2004, the Company collected all amounts due under a $376,000 full-recourse promissory note, including accrued interest.

4

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Other Assets, Net: Other assets, net consists primarily of deferred partner revenue share charges, resulting from the exercise of a right to receive 1,600,000 shares of the Company’s common stock in lieu of future cash partner revenue share payments. The 1,600,000 fully vested shares of the Company’s common stock issued are subject to restrictions on the holder’s ability to transfer such shares. These transfer restrictions lapsed as to 70% of such shares as of June 30, 2004 and will lapse as to 10% of such shares on the last day of each quarter thereafter, becoming free of all such transfer restrictions on March 31, 2005. Deferred partner revenue share charges were $11.8 million and $11.1 million as of January 3, 2004 and July 3, 2004, respectively, and are being amortized as stock-based compensation expense as the partner revenue share expense is incurred. The partner revenue share expense incurred is based on actual revenues recognized in a given period and the imputed partner revenue share percentage, which is based on the value of the Company’s common stock that was issued upon exercise of the right. Stock-based compensation expense related to the amortization of deferred partner revenue share charges was $273,000 and $495,000 for the three- and six-month periods ended June 28, 2003, respectively, and $332,000 and $692,000 for the three- and six-month periods ended July 3, 2004, respectively.

Shipping and Handling Costs: The Company defines shipping and handling costs as only those costs incurred for a third-party shipper to transport products to the customer and these costs are included in cost of revenues from product sales. In some instances, shipping and handling costs exceed shipping charges to the customer and are subsidized by the Company. Additionally, the Company selectively offers promotional free shipping whereby it ships merchandise to customers free of all shipping and handling charges. The cost of promotional free shipping and subsidized shipping and handling was $(105,000) and $401,000 for the three- and six-month periods ended June 28, 2003, respectively, and $473,000 and $1.1 million for the three- and six-month periods ended July 3, 2004, respectively, and was charged to sales and marketing expense.

Fulfillment Costs: The Company defines fulfillment costs as personnel, occupancy and other costs associated with its Kentucky fulfillment center and Ashford.com’s Texas fulfillment center that it formerly maintained, personnel and other costs associated with its logistical support and vendor operations departments and third-party warehouse and fulfillment services costs. Fulfillment costs were $2.7 million and $5.8 million for the three- and six-month periods ended June 28, 2003, respectively, and $4.7 million and $9.6 million for the three- and six-month periods ended July 3, 2004, respectively, and are included in sales and marketing expense.

Stock-Based Compensation: Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, compensation expense for stock options issued to employees is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock. The Company accounts for stock-based compensation for stock options and warrants issued to non-employees in accordance with SFAS No. 123 and Emerging Issues Task Force (“EITF”) No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” and EITF No. 00-18, “Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other Than Employees.” Accordingly, compensation expense for stock options and warrants issued to non-employees is measured using a Black-Scholes multiple option pricing model that takes into account significant assumptions as to the expected life of the option or warrant, the expected volatility of the Company’s common stock and the risk-free interest rate over the expected life of the option or warrant.

5

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table illustrates the pro forma net loss and losses per share for the three- and six-month periods ended June 28, 2003 and July 3, 2004 as if compensation expense for stock options issued to employees had been determined consistent with SFAS No. 123:

	Three Months Ended						Six Months Ended
	June 28, 2003			July 3, 2004			June 28, 2003			July 3, 2004
	(in thousands)						(in thousands)
Net loss, as reported	$	(3,777	)	$	(3,146	)	$	(9,260	)	$	(7,174	)
Add: Stock-based compensation expense included in reported net loss		51			(246	)		131			14
Deduct: Total stock-based compensation determined under fair value based method for all awards		(977	)		(1,396	)		(1,440	)		(2,748	)
Pro forma net loss	$	(4,703	)	$	(4,788	)	$	(10,569	)	$	(9,908	)
Losses per share—basic and diluted:
Net loss per share, as reported	$	(0.10	)	$	(0.08	)	$	(0.24	)	$	(0.18	)
Pro forma net loss per share	$	(0.12	)	$	(0.12	)	$	(0.27	)	$	(0.24	)

The Company also records stock-based compensation as deferred partner revenue share charges are amortized. Stock-based compensation expense related to the amortization of deferred partner revenue share charges was $273,000 and $495,000 for the three- and six-month periods ended June 28, 2003, respectively, and $332,000 and $692,000 for the three- and six-month periods ended July 3, 2004, respectively.

NOTE 3—CESSATION OF ASHFORD.COM OPERATIONS

In December 2002, the Company announced and implemented its plan to cease the operations of Ashford.com, which accounted for approximately $167,000 and $902,000 of the Company’s net revenues for the three- and six-month periods ended June 28, 2003, respectively, and $1,000 and $9,000 for the three- and six-month periods ended July 3, 2004, respectively. This plan involved the liquidation of Ashford.com’s remaining inventory, the closure of its Houston, Texas fulfillment center and offices and the termination of 71 employees. This plan was substantially completed in January 2003. As of July 3, 2004, 71 employees had been terminated and actual termination benefits paid were $417,000.

At July 3, 2004, the accrued liability associated with the cessation of Ashford.com operations was $370,000 and consisted of the following (in thousands):

	Balance at April 3, 2004		Subsequent Accruals, net		Non-Cash Settlements and Other Adjustments		Payments		Balance at July 3, 2004		Due Within 12 Months		Due After 12 Months
Contractual obligations	$	370	$	—	$	—	$	—	$	370	$	370	$	—

The contractual obligations relate to agreements entered into by Ashford.com prior to the sale of assets to Odimo Acquisition Corp.

6

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

NOTE 4—MARKETABLE SECURITIES

Marketable securities, at estimated fair value, consist of the following:

	January 3, 2004
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses (1)			Estimated Fair Value
	(in thousands)
Corporate bonds	$	2,908	$	7	$	(10	)	$	2,905
U.S. government agency securities		9,004		12		(9	)		9,007
	$	11,912	$	19	$	(19	)	$	11,912

	July 3, 2004
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses (1)			Estimated Fair Value
	(in thousands)
Corporate bonds	$	5,563	$	—	$	(49	)	$	5,514
U.S. government agency securities		9,802		3		(51	)		9,754
	$	15,365	$	3	$	(100	)	$	15,268

(1) The fair value of marketable securities with loss positions was $6.1 million and $13.5 million and the gross unrealized losses on these marketable securities were $19,000 and $100,000 as of January 3, 2004 and July 3, 2004, respectively. The Company considered the nature of these marketable securities, which are primarily U.S. government agency securities, the amount of the impairments relative to the carrying value of the related investments and the duration of the impairments, which are all less than twelve months, and concluded that the impairments were not other than temporary.

The amortized cost and estimated fair value of investments in debt securities as of July 3, 2004, by contractual maturity, are as follows:

	Amortized Cost		Estimated Fair Value
	(in thousands)
Due within one year	$	5,571	$	5,551
Due after one year through two years		9,794		9,717
	$	15,365	$	15,268

NOTE 5—BUILDING PURCHASE/NOTE PAYABLE

On March 16, 2004, a wholly-owned subsidiary of the Company entered into an agreement to purchase a new corporate headquarters in King of Prussia, Pennsylvania, together with an option to purchase an additional parcel of land. The Company closed on the purchase on June 9, 2004 and the purchase price for the building was $17.0 million.

In connection with the purchase of the new corporate headquarters, a wholly-owned subsidiary of the Company entered into a $13.0 million mortgage note on June 9, 2004, collateralized by a first lien on substantially all of the assets of that subsidiary, which have a carrying value of approximately $17.5 million. The mortgage note has a term of ten years and six months and bears interest at 6.32% per annum. As of July 3, 2004, the mortgage note had an aggregate outstanding principal balance of $13.0 million, with $150,000 classified as current and $12.9 million classified as long term. The Company recorded $54,000 of interest expense related to the note during the three- and six-month periods ended July 3, 2004, respectively.

The fair value of the mortgage note is estimated based on current rates offered for similar debt with similar terms and maturity using available market information. As of July 3, 2004, the estimated fair value of the Company’s mortgage note approximates its carrying value.

7

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Annual maturities of the mortgage note are based on a thirty-year amortization and as of July 3, 2004 are as follows (in thousands):

Year 1	$	150
Year 2		146
Year 3		157
Year 4		165
Year 5		178
Thereafter		12,204
	$	13,000

NOTE 6—CHANGES IN STOCKHOLDERS’ EQUITY

The following table summarizes the changes in stockholders’ equity for the three-month periods ended June 28, 2003 and July 3, 2004:

	Common Stock			Additional Paid in Capital			Accumulated Deficit			Comprehensive Loss			Accumulated Other Comprehensive Income (Loss)			Treasury Stock				Total
	Shares	Dollars														Shares	Dollars
	(in thousands)
Consolidated balance at March 29, 2003	38,849	$	389	$	285,692		$	(171,030	)				$	49		74	$	(1	)	$	115,099
Net loss								(3,777	)	$	(3,777	)									(3,777	)
Net unrealized losses on available-for-sale securities											(14	)		(14	)						(14	)
Comprehensive loss										$	(3,791	)
Issuance of options to purchase common stock in exchange for services					131																131
Issuance of common stock upon exercise of options	26		—		100																100
Issuance of common stock under Employee Stock Purchase Plan	84		1		210																211
Consolidated balance at June 28, 2003	38,959	$	390	$	286,133		$	(174,807	)				$	35		74	$	(1	)	$	111,750
Consolidated balance at April 3, 2004	40,974	$	410	$	288,739		$	(181,637	)				$	(25	)	1	$	—		$	107,487
Net loss								(3,146	)	$	(3,146	)									(3,146	)
Net unrealized losses on available-for-sale securities											(72	)		(72	)						(72	)
Comprehensive loss										$	(3,218	)
Issuance of options to purchase common stock in exchange for services					(179	)															(179	)
Issuance of common stock upon exercise of options	38		—		148																148
Consolidated balance at July 3, 2004	41,012	$	410	$	288,708		$	(184,783	)				$	(97	)	1	$	—		$	104,238

NOTE 7—STOCK OPTIONS AND WARRANTS

The Company maintains incentive and non-incentive stock option plans for certain employees, directors and other persons (the “Plans”). Under the terms of the Plans, the Company may grant incentive and non-incentive options and restricted stock and unrestricted stock awards to purchase up to 9,025,071 shares of common stock. The options granted under the Plans generally vest at various times over periods ranging up to five years and have terms of up to ten years after the date of grant, unless the optionee leaves the employ of or ceases to provide services to the Company. Stock appreciation rights (“SARs”) may be granted under the Plans either alone or in tandem with stock options. Generally, recipients of SARs are entitled to receive, upon exercise, cash or shares of common stock (valued at the then fair market value of the Company’s common stock) equal to such fair market value on the date of exercise minus such fair market value on the date of grant of the shares subject to the SAR, although certain other measurements also may be used. A SAR granted in tandem with a stock option is exercisable only if and to the extent that the option is exercised. No SARs have been granted to date under the Plans.

8

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

.

The following table summarizes the stock option activity for the three-month periods ended June 28, 2003 and July 3, 2004:

	Three Months Ended
	June 28, 2003				July 3, 2004
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
	(in thousands)				(in thousands)
Outstanding, beginning of period	5,327		$	7.78	6,401		$	8.28
Granted	33			2.34	385			9.40
Exercised	(26	)		3.92	(37	)		4.00
Cancelled	(35	)		7.18	(227	)		8.97
Outstanding, end of period	5,299			7.77	6,522			8.35
Exercisable, end of period	3,235			8.10	4,008			8.00

The following table summarizes the warrant activity for the three-month periods ended June 28, 2003 and July 3, 2004:

	Three Months Ended
	June 28, 2003				July 3, 2004
	Number of Shares		Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price
	(in thousands)				(in thousands)
Outstanding, beginning of period	6,882		$	9.18	803	$	7.68
Granted	—			—	13		9.31
Exercised	—			—	—		—
Cancelled	(1,563	)		10.00	—		—
Outstanding, end of period	5,319			8.94	816		7.71
Exercisable, end of period	5,119			9.20	616		9.40

During the three-month period ended July 3, 2004, the Company granted to employees options to purchase an aggregate of 384,750 shares of the Company’s common stock at prices ranging from $8.51 to $10.89 per share. The weighted average fair value and the weighted average exercise price of the options granted with exercise prices at the then-current market prices of the underlying stock during the three-month period ended July 3, 2004 was $5.88 and $9.40 per share, respectively. For the three- and six-month periods ended July 3, 2004, the Company recorded $268,000 and $1,000 reductions in stock-based compensation expense, respectively, relating to options and restricted stock.

During the three-month period ended July 3, 2004, the Company granted to Rustic Canyon Ventures, LP (“Rustic Canyon”) a warrant to purchase 12,500 shares of the Company’s common stock at a price of $9.31 per share. The weighted average fair value and the weighted average exercise price of the warrant granted with an exercise price at the then-current market price of the underlying stock during the three-month period ended July 3, 2004 was $7.09 and $9.31 per share, respectively. For the three- and six-month periods ended July 3, 2004, the Company recorded $89,000 of stock-based compensation expense, respectively, relating to warrants.

During the three-month period ended June 28, 2003, the Company granted to employees options to purchase an aggregate of 32,800 shares of the Company’s common stock at a price of $2.34 per share. The weighted average fair value and the weighted average exercise price of the options granted with exercise prices at the then-current market prices of the underlying stock during the three-month period ended June 28, 2003 was $1.64 and $2.34 per share, respectively. For the three- and six-month periods ended June 28, 2003, the Company recorded $131,000 and $197,000 of stock-based compensation expense, respectively, relating to options and restricted stock.

9

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table summarizes information regarding options and warrants outstanding and exercisable as of July 3, 2004:

	Outstanding				Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life In Years	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
	(in thousands)				(in thousands)
$ 1.00 – $ 5.56	2,651	6.32	$	4.46	1,965	$	4.67
$ 5.69 – $10.00	3,556	5.45		8.66	1,845		8.04
$10.60 – $24.69	1,122	6.11		15.39	805		16.09
$33.33 – $50.00	9	0.19		36.82	9		36.82
$ 1.00 – $50.00	7,338	5.87		8.28	4,624		8.18

As of July 3, 2004, 561,938 shares of common stock were available for future grants under the Plans.

The fair value of options granted under the Plans during the three-month periods ended June 28, 2003 and July 3, 2004 were estimated on the date of grant using the Black-Scholes multiple option pricing model, with the following weighted average assumptions:

	Three Months Ended
Assumption	June 28, 2003		July 3, 2004
Dividend yield	None		None
Expected volatility	105.00	%	96.00	%
Average risk free interest rate	1.87	%	3.35	%
Average expected lives	3.87 years		3.30 years

No warrants were granted or issued by the Company during the three-month period ended June 28, 2003. The fair value of the warrant granted and issued during the three-month period ended July 3, 2004 was estimated on the date of grant using the Black-Scholes multiple pricing model, with the following assumptions:

Assumption	Three Months Ended July 3, 2004
Dividend yield	None
Expected volatility	100.00	%
Average risk free interest rate	3.93	%
Average expected life	5.00 years

NOTE 8—LOSSES PER SHARE

Losses per share for all periods have been computed in accordance with SFAS No. 128, “Earnings Per Share.” Basic and diluted losses per share are computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Outstanding common stock options and warrants have been excluded from the calculation of diluted losses per share because their effect would be antidilutive.

The amounts used in calculating losses per share data are as follows:

	Three Months Ended						Six Months Ended
	June 28, 2003			July 3, 2004			June 28, 2003			July 3, 2004
	(in thousands)						(in thousands)
Net loss	$	(3,777	)	$	(3,146	)	$	(9,260	)	$	(7,174	)
Weighted average shares outstanding—basic and diluted		38,838			40,991			38,811			40,930
Outstanding common stock options having no dilutive effect		5,299			6,522			5,299			6,522
Outstanding common stock warrants having no dilutive effect		5,319			816			5,319			816

10

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

NOTE 9—COMPREHENSIVE LOSS

The following table summarizes the components of comprehensive loss:

	Three Months Ended						Six Months Ended
	June 28, 2003			July 3, 2004			June 28, 2003			July 3, 2004
	(in thousands)						(in thousands)
Net loss	$	(3,777	)	$	(3,146	)	$	(9,260	)	$	(7,174	)
Other comprehensive loss:
Net unrealized losses on available-for-sale securities		(14	)		(72	)		(22	)		(97	)
Other comprehensive loss		(14	)		(72	)		(22	)		(97	)
Comprehensive loss	$	(3,791	)	$	(3,218	)	$	(9,282	)	$	(7,271	)

NOTE 10—CONCENTRATIONS OF CREDIT RISK

As of January 3, 2004 and July 3, 2004, the Company had $3.4 million and $7.5 million, respectively, of operating cash and $66.1 million and $40.7 million, respectively, of cash equivalents and marketable securities invested with several financial institutions, which are potentially subject to credit risk. The composition of these investments are regularly monitored by management of the Company.

NOTE 11—MAJOR SUPPLIERS/ECONOMIC DEPENDENCY

During the three-month period ended July 3, 2004, the Company purchased inventory from one supplier amounting to $12.8 million or 37% of total inventory purchased. During the six-month period ended July 3, 2004, the Company purchased inventory from one supplier amounting to $25.3 million or 37% of total inventory purchased.

During the three-month period ended June 28, 2003, the Company purchased inventory from one supplier amounting to $8.9 million or 36% of total inventory purchased. During the six-month period ended June 28, 2003, the Company purchased inventory from one supplier amounting to $20.7 million or 38% of total inventory purchased.

No other supplier amounted to more than 10% of total inventory purchased for any period presented.

NOTE 12—COMMITMENTS AND CONTINGENCIES

Legal Proceedings

The Company is involved in various litigation incidental to its current and discontinued businesses, including alleged infringement of intellectual property rights of third parties, contractual claims and claims relating to the manner in which goods are sold through its e-commerce platform.

While the Company sold certain assets of Ashford.com, Inc. in December 2002, Ashford.com continues to be a party to certain litigation that was commenced prior to the Company’s acquisition of Ashford.com in March 2002. Since July 11, 2001, several stockholder class action complaints have been filed in the United States District Court of the Southern District of New York against Ashford.com, several of Ashford.com’s officers and directors, and various underwriters of Ashford.com’s initial public offering. The purported class actions have all been brought on behalf of purchasers of Ashford.com common stock during various periods beginning on September 22, 1999, the date of Ashford.com’s initial public offering. The plaintiffs allege that Ashford.com’s prospectus, included in Ashford.com’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission, was materially false and misleading because it failed to disclose, among other things, certain fees and commissions collected by the underwriters or arrangements designed to inflate the price of the common stock. The plaintiffs further allege that because of these purchases, Ashford.com’s post-initial public offering stock price was artificially inflated. As a result of the alleged omissions in the prospectus and the purported inflation of the stock price, the plaintiffs claim violations of Sections 11 and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934. The complaints have been consolidated into a single action, and the consolidated cases against Ashford.com have been consolidated with similarly consolidated cases filed against 308 other issuer defendants for the purposes of pretrial proceedings. The claims against Ashford.com’s officers and directors were dismissed in exchange for tolling agreements which permit the refiling of claims

11

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

against officers and directors at a later date. A motion to dismiss filed on behalf of all issuer defendants, including Ashford.com, was denied in all aspects relevant to Ashford.com on February 19, 2003. Ashford.com and its insurers have entered into a memorandum of understanding regarding terms for settlement of this suit. Under the settlement, plaintiffs’ claims against Ashford.com and other issuers will be dismissed in exchange for certain consideration from the issuers’ insurers and for the issuers’ assignment to plaintiffs of certain potential claims against the underwriters of the relevant initial public offerings. Formal documentation of the settlement contemplated by the memorandum of understanding is complete and is pending approval by the judge presiding over this matter. In the event that a settlement is not finalized, the Company believes that Ashford.com has defenses against these actions.

In September 2003, the Company learned that it, along with several of its partners, were named in an action in the Circuit Court of Cook County, Illinois, by a private litigant who is alleging that the Company, along with certain of its partners, wrongfully failed to collect and remit sales and use taxes for sales of personal property to customers in Illinois and knowingly created records and statements falsely stating the Company was not required to collect or remit such taxes. The complaint seeks injunctive relief, unpaid taxes, interest, attorneys’ fees, civil penalties of up to $10,000 per violation, and treble damages under the Illinois Whistleblower Reward and Protection Act. The Company is aware that this same private litigant has filed similar actions against retailers in other states, and it may be possible that the Company and/or partners may have been or may be named in similar cases in other states. The Company does not believe that it is liable under existing laws and regulations for any failure to collect sales or other taxes relating to internet sales and intends to vigorously defend itself in this matter.

The Company does not believe, based on current knowledge, that any of the foregoing claims are likely to have a material adverse effect on its business, financial position or results of operations. However, the Company may incur substantial expenses and devote substantial time to defend third-party claims whether or not such claims are meritorious. In the event of a determination adverse to the Company, the Company may incur substantial monetary liability, and may be required to implement expensive changes in its business practices or enter into costly royalty or licensing agreements. Any of these could have a material adverse effect on the Company’s business, financial position or results of operations.

Employment Agreements

As of July 3, 2004, the Company had employment agreements with several of its employees for an aggregate annual base salary of $1.6 million plus bonuses and increases in accordance with the terms of the agreements. Remaining terms of such contracts range from less than one to three years.

Advertising and Media Agreements

As of July 3, 2004, the Company was contractually committed for the purchase of future advertising totaling approximately $206,000 through the fiscal year ending January 1, 2005. The expense related to these commitments will be recognized in accordance with the Company’s accounting policy related to advertising.

Partner Revenue Share Payments

As of July 3, 2004, the Company was contractually committed to minimum cash revenue share payments of $375,000 per fiscal quarter through July, 2011.

NOTE 13—SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

	Six Months Ended
	June 28, 2003			July 3, 2004
	(in thousands)
Cash paid during the period for interest	$	—		$	54
Noncash Investing and Financing Activities:
Receipt of shares of, and warrants to purchase, Odimo’s Series C preferred stock in connection with a conversion of principal due under a note	$	—		$	688
Exchange of a portion of a promissory note in connection with a conversion of principal due under the note	$	—		$	(682	)
Net unrealized losses on available-for-sale securities	$	(22	)	$	(97	)

12

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Concluded)

(Unaudited)

NOTE 14—RELATED PARTY TRANSACTIONS

The Company has entered into a strategic alliance to provide technology, procurement and fulfillment services for QVC, Inc. Interactive Technology Holdings, LLC, which is a major stockholder of the Company, is a joint venture company of Comcast Corporation and QVC. The Company recognized net revenues of $460,000 and $986,000 on sales to this related party for the three- and six-month periods ended June 28, 2003, respectively, and $238,000 and $571,000 for the three- and six-month periods ended July 3, 2004, respectively. The terms of these sales are comparable to those with other business-to-business partners of the Company. As of July 3, 2004, the amount included in accounts receivable was $333,000 related to these sales.

In the fiscal year ended January 3, 2004, the Company entered into an agreement with QVC pursuant to which QVC will provide shipping services to the Company in exchange for variable fees. The Company incurred fees of $0 for the three- and six-month periods ended June 28, 2003, respectively. The Company incurred fees of $264,000 and $583,000 for the three- and six-month periods ended July 3, 2004, respectively, of which $250,000 and $557,000 related directly to products shipped and was charged to cost of revenues from product sales and $14,000 and $26,000 related to professional services provided and was charged to sales and marketing expense.

In exchange for Rustic Canyon forfeiting its right to designate one member to the Company’s Board, on June 26, 2004, the Company granted to Rustic Canyon a warrant to purchase 12,500 shares of the Company’s common stock with a term of five years and an exercise price of $9.31 per share. The fair value of the warrant was estimated on the date of grant using the Black-Scholes multiple option pricing model and the Company recorded $89,000 of stock-based compensation expense, relating to the warrant.

NOTE 15—SUBSEQUENT EVENT

On August 3, 2004, the Company received prepayment in full of the $2.4 million principal amount then outstanding under the five year subordinated secured promissory note from Odimo, together with related accrued interest. In connection with the prepayment, the remaining discount on the note of $217,000 was fully amortized and recorded as interest income.

13

ITEM  2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

All statements made in this Quarterly Report on Form 10-Q, other than statements of historical fact, are forward-looking statements. The words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “may”, “plan”, “will”, “would”, “should”, “guidance”, “potential”, “continue”, “project”, “forecast”, “confident”, “prospects”, and similar expressions typically are used to identify forward-looking statements. Forward-looking statements are based on the then-current expectations, beliefs, assumptions, estimates and forecasts about our business and the industries and markets in which we operate. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. Factors which may affect our business, financial condition and operating results include the effects of changes in the economy, consumer spending, the financial markets and the industries in which we and our partners operate, changes affecting the Internet and e-commerce, our ability to develop and maintain relationships with strategic partners and suppliers and the timing of our establishment or extension of our relationships with strategic partners, our ability to timely and successfully develop, maintain and protect our technology and product and service offerings and execute operationally, our ability to attract and retain qualified personnel, our ability to successfully integrate our acquisitions of other businesses, if any, and the performance of acquired businesses. More information about potential factors that could affect us are described under the heading of “Risk Factors.” We expressly disclaim any intent or obligation to update these forward-looking statements, except as otherwise specifically stated by us.

Overview and Executive Summary

• We provide an e-commerce platform that enables retailers, branded manufacturers, entertainment companies and professional sports organizations to operate e-commerce businesses. Our e-commerce platform includes Web site design and development, e-commerce technology, managed hosting, order fulfillment, customer service, merchandising and order management, online merchandising, customer relationship management, content development and online marketing. We currently derive virtually all of our revenues from the sale of goods through our partners’ e-commerce businesses, toll-free telephone number sales, business-to-business and group sales and related outbound shipping charges, net of allowances for returns and discounts. We also derive revenue from fixed and variable fees earned in connection with the development and operation of partners’ e-commerce businesses and the provision of marketing and other services.

• Our revenue growth from the second quarter and first six months of fiscal 2003 to the second quarter and first six months of fiscal 2004 was due to the addition of new partners in fiscal 2003, increases in sales from partners’ e-commerce businesses that were operated for the entirety of each of the periods, and increases in sales from partners’ e-commerce businesses that were operated for part of the second quarter and first six months of fiscal 2003 and all of the second quarter and first six months of fiscal 2004. We expect that the new partners added during fiscal 2003 will have a greater impact on net revenues in fiscal 2004 than these new partners did in fiscal 2003, as we will operate the businesses of these partners on our e-commerce platform for the entirety of fiscal 2004. We also expect that we will add more service fee-based partners in fiscal 2004 than GSI-owned inventory model partners.

• For the second quarter of fiscal 2004, operating expenses increased $7.4 million from $21.1 million in the second quarter of fiscal 2003 to $28.5 million in the same period in fiscal 2004, and increased as a percentage of net revenues from 41.9% in the second quarter of fiscal 2003 to 44.0% in the same period in fiscal 2004. For the first six months of fiscal 2004, operating expenses increased $13.5 million from $44.0 million in the first six months of fiscal 2003 to $57.5 million in the same period in fiscal 2004, but decreased as a percentage of net revenues from 44.3% in the first six months of fiscal 2003 to 43.9% in the same period in fiscal 2004.

• We expect to achieve profitability in fiscal 2004. For the second quarter of fiscal 2004, we reported a net loss of $3.1 million or $0.08 per share, based on 41.0 million weighted average shares outstanding. This compares to a net loss of $3.8 million or $0.10 per share for the same period in fiscal 2003, based on 38.8 million weighted average shares outstanding. For the first six months of fiscal 2004, we reported a net loss of $7.2 million or $0.18 per share, based on 40.9 million weighted average shares outstanding. This compares to a net loss of $9.3 million or $0.24 per share for the same period in fiscal 2003, based on 38.8 million weighted average shares outstanding. We expect to realize net income in fiscal 2004 based on continued revenue growth and related increased gross profit, increased variable cost efficiencies and slower than historical growth of our fixed costs.

14

• We compete in the market for outsourced solutions for the development and operation of e-commerce businesses. Over the past four years, a number of competitors have exited the market, but competition remains intense. We believe that we deliver a unique and compelling value proposition as we provide expertise and infrastructure that enable our partners to grow their e-commerce businesses and to use their e-commerce businesses as a tool to complement and enhance their offline businesses. We believe that our differentiated offering has allowed us to compete successfully. We are relying on our differentiated offering to attract new partners businesses in the future.

Results of Operations

Comparison of the three- and six-month periods ended June 28, 2003 and July 3, 2004

The following table sets forth the dollar amount and percentage of net revenues for certain line items of our statements of operations for the second quarter of fiscal 2003 and the second quarter of fiscal 2004 and the dollar and percentage change in these line items period over period.

	Second Qtr Fiscal 2003					Second Qtr Fiscal 2004					Second Qtr Fiscal 2004 vs Second Qtr Fiscal 2003
	$			%		$			%		$ Change			% Change
	(dollars in millions)
Net revenues from product sales	$	45.7		90.9	%	$	53.1		82.1	%	$	7.4		16.2	%
Service fee revenues		4.6		9.1	%		11.6		17.9	%		7.0		152.2	%
Net revenues		50.3		100.0	%		64.7		100.0	%		14.4		28.6	%
Cost of revenues from product sales		33.3		66.2	%		39.6		61.2	%		6.3		18.9	%
Gross profit		17.0		33.8	%		25.1		38.8	%		8.1		47.6	%
Sales and marketing expenses		11.1		22.1	%		16.8		26.0	%		5.7		51.4	%
Product development expenses		3.4		6.8	%		4.5		7.0	%		1.1		32.4	%
General and administrative expenses		3.5		7.0	%		4.4		6.8	%		0.9		25.7	%
Stock-based compensation expense		0.4		0.8	%		0.2		0.3	%		(0.2	)	-50.0	%
Depreciation and amortization expenses		2.7		5.4	%		2.6		4.0	%		(0.1	)	-3.7	%
Interest expense		—		0.0	%		0.1		0.2	%		0.1		0.0	%
Interest income		(0.3	)	-0.6	%		(0.2	)	-0.3	%		(0.1	)	-33.3	%
Net loss		(3.8	)	-7.6	%		(3.1	)	-4.8	%		0.7		18.4	%

The following table sets forth the dollar amount and percentage of net revenues for certain line items of our statements of operations for the first six months of fiscal 2003 and the first six months of fiscal 2004 and the dollar and percentage change in these line items period over period .

	First Six Months Fiscal 2003					First Six Months Fiscal 2004					First Six Months Fiscal 2004 vs First Six Months Fiscal 2003
	$			%		$			%		$ Change			% Change
	(dollars in millions)
Net revenues from product sales	$	89.9		90.6	%	$	110.0		84.0	%	$	20.1		22.4	%
Service fee revenues		9.3		9.4	%		20.9		16.0	%		11.6		124.7	%
Net revenues		99.2		100.0	%		131.0		100.0	%		31.8		32.1	%
Cost of revenues from product sales		65.2		65.7	%		81.1		61.9	%		15.9		24.4	%
Gross profit		34.1		34.4	%		49.9		38.1	%		15.8		46.3	%
Sales and marketing expenses		24.2		24.4	%		34.2		26.1	%		10.0		41.3	%
Product development expenses		7.1		7.2	%		9.0		6.9	%		1.9		26.8	%
General and administrative expenses		6.5		6.6	%		8.3		6.3	%		1.8		27.7	%
Stock-based compensation expense		0.7		0.7	%		0.8		0.6	%		0.1		14.3	%
Depreciation and amortization expenses		5.4		5.4	%		5.2		4.0	%		(0.2	)	-3.7	%
Interest expense		—		0.0	%		0.1		0.1	%		0.1		0.0	%
Interest income		(0.7	)	-0.7	%		(0.5	)	-0.4	%		(0.2	)	-28.6	%
Net loss		(9.3	)	-9.4	%		(7.2	)	-5.5	%		2.1		22.6	%

15

Net Revenues from Product Sales

Net revenues from product sales are derived from the sale of goods through our partners’ e-commerce businesses, toll-free telephone number sales, business-to-business and group sales and related outbound shipping charges, net of allowances for returns and discounts.

The following table provides information about our net revenues from product sales by category for the second quarter of fiscal 2003 and the second quarter of fiscal 2004:

					Second Qtr Fiscal 2004 vs Second Qtr Fiscal 2003
	Second Qtr Fiscal 2003		Second Qtr Fiscal 2004		$ Change		% Change
	(dollars in thousands)
Net revenues from product sales:
Category:
Sporting goods	$	27,011	$	33,586	$	6,575	24	%
Other		18,711		19,545		834	4	%
Total net revenues from product sales	$	45,722	$	53,131	$	7,409	16	%

The following table provides information about our net revenues from product sales by category for the first six months of fiscal 2003 and the first six months of fiscal 2004:

					First Six Months Fiscal 2004 vs First Six Months Fiscal 2003
	First Six Months Fiscal 2003		First Six Months Fiscal 2004		$ Change		% Change
	(dollars in thousands)
Net revenues from product sales:
Category:
Sporting goods	$	51,418	$	67,124	$	15,706	31	%
Other		38,477		42,885		4,408	11	%
Total net revenues from product sales	$	89,895	$	110,009	$	20,114	22	%

Net revenues from product sales increased $7.4 million and $20.1 million for the second quarter and first six months of fiscal 2004, respectively, of which $6.6 million and $15.7 million, respectively, was due to increases in sales in the sporting goods category and $834,000 and $4.4 million, respectively, was due to increases in sales in our other product categories, which include consumer electronics, general merchandise and licensed entertainment products. The increases in the sporting goods and other categories were due to the addition of new partners in fiscal 2003, increases in sales from partners’ e-commerce businesses that were operated for the entirety of each of the periods and increases in sales from partners’ e-commerce businesses that were operated for part of the second quarter and first six months of fiscal 2003 and all of the second quarter and first six months of fiscal 2004.

Service Fee Revenues

Service fee revenues are derived from fixed and variable fees earned in connection with the development and operation of our partners’ e-commerce businesses and the provision of marketing and other services. Cost of service fee revenues includes the cost of products sold and inbound freight related to those products, as well as outbound shipping and handling costs, other than those related to promotional free shipping and subsidized shipping and handling which would be included in sales and marketing expense. We do not specifically record “Cost of service fee revenues” as these costs are incurred by our fee-based partners rather than by us. Operating expenses relating to service fee revenues consist primarily of personnel and other costs associated with our engineering, production and creative departments which are included in product development expense, as well as fulfillment costs and personnel and other costs associated with our marketing and customer service departments which are included in sales and marketing expense.

Service fee revenues increased $7.0 million and $11.6 million for the second quarter and first six months of fiscal 2004, respectively, due primarily to the launch of new fee-based partners in the second half of fiscal 2003.

16

Cost of Revenues from Product Sales

Cost of revenues from product sales includes the cost of products sold and inbound freight related to those products, as well as outbound shipping and handling costs, other than those related to promotional free shipping and subsidized shipping and handling which are included in sales and marketing expense.

As a percentage of net revenues from product sales, cost of revenues from product sales was 72.8% and 72.5% for the second quarter and first six months of fiscal 2003, respectively, and 74.5% and 73.7% for the second quarter and first six months of fiscal 2004, respectively. These increases were due primarily to higher product costs in the sporting goods category in the second quarter and first six months of fiscal 2004.

Gross Profit

The increases in gross profit dollars for the second quarter and first six months of fiscal 2004 compared to the same periods in fiscal 2003 were due primarily to $7.0 million and $11.6 million increases in service fee revenues in the second quarter and first six months of fiscal 2004, respectively. The increases in gross profit percentage for the second quarter and first six months of fiscal 2004 compared to the same periods in fiscal 2003 were due primarily to the increases in service fee revenues, offset, in part, by lower margins on sales in the sporting goods category in the second quarter and first six months of fiscal 2004.

Sales and Marketing Expenses

Sales and marketing expenses include advertising and promotional expenses, including promotional free shipping and subsidized shipping and handling costs, online marketing fees, commissions to participants in the affiliate programs for our partners’ Web sites, fulfillment costs, customer service costs, credit card fees, merchandising costs and payroll and related expenses. These expenses also include partner revenue share charges, which are royalty payments made to our partners in exchange for the use of their brands, the promotion of our partners’ URLs, Web sites and toll-free telephone numbers in their marketing and communications materials, the implementation of programs to provide incentives to customers to shop through the e-commerce businesses that we operate for our partners and other programs and services provided to the customers of the e-commerce businesses that we operate for our partners.

Sales and marketing expenses increased $5.7 million for the second quarter of fiscal 2004 primarily due to a $3.1 million increase in personnel and related costs, of which $1.5 million was attributable to our fulfillment operations and $996,000 was attributable to our customer service department, an $1.1 million increase in advertising costs, a $624,000 increase in credit card fees and a $578,000 increase in subsidized shipping and handling costs. Sales and marketing expenses increased $10.0 million for the first six months of fiscal 2004 primarily due to a $5.1 million increase in personnel and related costs, of which $2.9 million was attributable to our fulfillment operations and $1.5 million was attributable to our customer service department, an $1.9 million increase in advertising costs, a $1.2 million increase in credit card fees, a $689,000 increase in partner revenue share charges and a $652,000 increase in subsidized shipping and handling costs. The increases in personnel and related costs attributable to our fulfillment operations were primarily due to high processing volume in our fulfillment center. The increases in partner revenue share charges and credit card fees were due principally to increased sales volume in the second quarter and first six months of fiscal 2004.

Product Development Expenses

Product development expenses consist primarily of expenses associated with planning, maintaining and operating our partners’ e-commerce businesses and payroll and related expenses for engineering, production, creative and management information systems.

Product development expenses increased $1.1 million for the second quarter of fiscal 2004 primarily due to a $549,000 increase in personnel and related costs and a $403,000 increase in costs related to our use of temporary technical professionals. Product development expenses increased $1.9 million for the first six months of fiscal 2004 primarily due to a $1.1 million increase in costs related to strategic technology planning and our use of temporary technical professionals and a $791,000 increase in personnel and related costs, offset, in part, by a $235,000 decrease in equipment and software maintenance costs.

General and Administrative Expenses

General and administrative expenses consist primarily of payroll and related expenses for executive, finance, human resources, legal and administrative personnel, as well as bad debt expense and occupancy costs for our headquarters and other offices.

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General and administrative expenses increased $918,000 for the second quarter of fiscal 2004 primarily due to a $477,000 increase in personnel and related costs and a $264,000 increase in professional fees. General and administrative expenses increased $1.8 million for the first six months of fiscal 2004 primarily due to a $933,000 increase in personnel and related costs and a $608,000 increase in professional fees.

Stock-Based Compensation Expense

Stock-based compensation expense consists of the amortization of deferred compensation expense for options granted to employees and certain non-employees, the value of options or warrants granted to certain partners and investors and amortization of deferred partner revenue share charges.

Stock-based compensation expense decreased $251,000 for the second quarter of fiscal 2004 primarily due to a decrease of $352,000 in charges related to options subject to variable accounting and a decrease of $47,000 in charges related to the issuance of options granted during fiscal 2000 and fiscal 2001 with exercise prices below the then-current market prices of the underlying stock, offset, in part, by an increase of $89,000 related to the issuance of a warrant and an increase of $59,000 related to the amortization of deferred partner revenue share charges. Stock-based compensation expense increased $88,000 for the first six months of fiscal 2004 primarily due to an increase of $197,000 related to the amortization of deferred partner revenue share charges and an increase of $89,000 related to the issuance of a warrant, offset, in part, by a decrease of $102,000 in charges related to the issuance of options granted during fiscal 2000 and fiscal 2001 with exercise prices below the then-current market prices of the underlying stock and a decrease of $96,000 in charges related to options subject to variable accounting. As of July 3, 2004, we had an aggregate of $1.1 million of deferred stock-based compensation remaining to be amortized. We had stock-based compensation expense related to the amortization of deferred partner revenue share charges of $273,000 and $495,000 for the second quarter and first six months of fiscal 2003, respectively, and $332,000 and $692,000 for the second quarter and first six months of fiscal 2004, respectively.

Depreciation and Amortization Expenses

Depreciation and amortization expenses relate primarily to the depreciation of our corporate headquarters and Kentucky fulfillment center, the depreciation and amortization of the capitalized costs for our purchased and internally developed technology, including a portion of the cost related to the employees that developed such technology, hardware and software and the depreciation of improvements, furniture and equipment at our corporate headquarters and our fulfillment and customer contact centers.

Depreciation and amortization expenses decreased $88,000 for the second quarter of fiscal 2004 and decreased $187,000 for the first six months of fiscal 2004 primarily due to certain previously purchased assets becoming fully depreciated in fiscal 2003, offset, in part, by additional assets to build, manage and operate our business.

Other (Income) Expense

Interest income consists primarily of interest earned on cash, cash equivalents, short-term investments and marketable securities. Interest expense consists of interest paid in connection with the mortgage note on our new corporate headquarters.

The decreases in interest income of $48,000 and $139,000 for the second quarter and first six months of fiscal 2004, respectively, were due lower average balances of cash, cash equivalents, short-term investments and marketable securities, offset, in part, by higher interest rates during the second quarter and first six months of fiscal 2004 compared to the same periods in fiscal 2003.

The increases in interest expense of $54,000 for the second quarter and first six months of fiscal 2004, respectively, were due to interest incurred on the $13.0 million mortgage note on our new corporate headquarters which was entered into on June 9, 2004.

Income Taxes

Since the sales of our discontinued operations in fiscal 1999 and fiscal 2000, we have not generated taxable income. Net operating losses generated have been carried back to offset income taxes paid in prior years. The remaining net operating losses will be carried forward. As of July 3, 2004, we had available net operating loss carryforwards of approximately $428.1 million which expire in the years 2004 through 2023. The use of certain net operating loss carryforwards are subject to annual limitations based on ownership changes of our stock, as defined by Section 382 of the Internal Revenue Code. We expect that net operating losses of approximately $243.2 million will expire before they can be used. Any otherwise recognizable deferred tax assets have been offset by a valuation allowance for the net operating loss carryforwards.

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Certain Related Party Transactions

We have entered into a strategic alliance to provide technology, procurement and fulfillment services for QVC, Inc. Interactive Technology Holdings, LLC, which is one of our major stockholders, is a joint venture company of Comcast Corporation and QVC. We recognized net revenues on sales to this related party of $460,000 and $986,000 for the second quarter and first six months of fiscal 2003, respectively, and $238,000 and $571,000 for the second quarter and first six months of fiscal 2004, respectively. The terms of these sales are comparable to those with our other business-to-business partners. As of July 3, 2004, the amount included in accounts receivable was $333,000 related to these sales.

In fiscal 2003, we entered into an agreement with QVC pursuant to which QVC will provide shipping services to us in exchange for variable fees. We incurred fees of $0 for the second quarter and first six months of fiscal 2003, respectively. We incurred fees of $264,000 and $583,000 for the second quarter and first six months of fiscal 2004, of which $250,000 and $557,000 related directly to products shipped and was charged to cost of revenues from product sales and $14,000 and $26,000 related to professional services provided and was charged to sales and marketing expense.

In exchange for Rustic Canyon forfeiting its right to designate one member to our Board, on June 26, 2004, we granted to Rustic Canyon a warrant to purchase 12,500 shares of our common stock with a term of five years and an exercise price of $9.31 per share. The fair value of the warrant was estimated on the date of grant using the Black-Scholes multiple option pricing model and we recorded $89,000 of stock-based compensation expense, relating to the warrant.

Liquidity and Capital Resources

Our principal source of liquidity is our cash, cash equivalents and marketable securities. Our cash, cash equivalents and marketable securities balances were $69.5 million and $48.2 million as of January 3, 2004 and July 3, 2004, respectively.

We raised an aggregate of $176.3 million in gross proceeds through equity financings in fiscal 1999, fiscal 2000 and fiscal 2001, as well as $5.3 million in gross proceeds through a mortgage financing in fiscal 2000. We received an aggregate of $23.5 million in proceeds from the sales of our discontinued operations in fiscal 1999 and fiscal 2000, as well as $35.7 million in net cash from the acquisition of Fogdog in fiscal 2000.

We have incurred substantial costs to develop our e-commerce platform and to recruit, train and compensate personnel for our creative, engineering, business development, marketing, merchandising, customer service, management information systems and administrative departments. During the first and second quarters of fiscal 2004, we spent approximately $4.9 million on continued upgrades to our technology infrastructure and $1.2 million on warehouse equipment and improvements for our Kentucky fulfillment center. Also, during the second quarter of fiscal 2004, we spent approximately $17.5 million to purchase our new corporate headquarters in King of Prussia, Pennsylvania. We expect to spend $5.0 to $6.0 million in building improvements to our new headquarters. We expect additional capital expenditures for fiscal 2004 to be between $6.4 and $11.4 million as we continue to improve our technology infrastructure and invest in our fulfillment and customer contact center operations. As of July 3, 2004, we had working capital of $24.5 million and an accumulated deficit of $184.8 million.

We used approximately $12.4 million in net cash for operating activities during the first six months of fiscal 2004. Our principal sources of operating cash during the first six months of fiscal 2004 were payments received from customers and fee-based partners, which generally approximate our net revenues from product sales and our service fee revenues, respectively. Our principal uses of operating cash during the first six months of fiscal 2004 were cash paid to product suppliers, which generally approximates our cost of revenues from product sales, employee compensation and partner revenue share payments. Changes in our operating assets and liabilities during the first six months of fiscal 2004 resulted in a net cash outflow of $11.2 million. The most significant changes were a decrease in accounts payable, accrued expenses and other, a decrease in deferred revenue and an increase in accounts receivable compared to the end of fiscal 2003. The decrease in accounts payable, accrued expenses and other was due primarily to a decrease in operating accounts payable related to decreased sales volume compared to the fourth quarter of fiscal 2003. The decrease in deferred revenue was due to a decrease in service fees paid to us in advance by certain partners. The increase in accounts receivable was due primarily to decreases in our accounts receivable reserves. Our investing activities during the first six months of fiscal 2004 consisted primarily of the purchase of our new corporate headquarters and other capital expenditures totaling approximately $23.7 million. During the first six months of fiscal 2004, we also purchased $6.1 million and sold $2.6 million of marketable securities. Our financing activities during the first six months of fiscal 2004 consisted primarily of the receipt of $13.0 million in gross proceeds from a mortgage note on our new corporate headquarters.

We used approximately $23.8 million in net cash for operating activities during the first six months of fiscal 2003. Our principal sources of operating cash during the first six months of fiscal 2003 were payments received from customers and fee-based partners. Our principal uses of operating cash during the first six months of fiscal 2003 were cash paid to product suppliers,

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employee compensation and partner revenue share payments. Changes in our operating assets and liabilities during the first six months of fiscal 2003 resulted in a net cash outflow of $20.7 million. The most significant changes were a decrease in accounts payable, accrued expenses and other, offset, in part, by a decrease in inventory compared to the end of fiscal 2002. The decrease in accounts payable, accrued expenses and other was due primarily to a decrease in trade accounts payable due primarily to lower inventory levels at the end of the second quarter of fiscal 2003. The increase in deferred revenue was due primarily to an increase in service fees paid to us in advance by certain partners. During the first six months of fiscal 2003, we purchased $9.6 million and sold $9.6 million of marketable securities, incurred capital expenditures of $2.2 million and received $891,000 in gross proceeds from sales of short-term investments.

To date, we have financed our e-commerce operations primarily from the sale of equity securities. Management expects that our current cash and the collection of accounts receivable will be sufficient to meet our anticipated cash needs for the foreseeable future. While in the fourth quarter of fiscal 2003 we realized net income of $2.7 million and in the fourth quarter of fiscal 2001 we realized net income of $260,000, we did not realize net income for the full years of fiscal 2001, fiscal 2002 or fiscal 2003. While we do expect to realize net income in fiscal 2004, in order to fund our anticipated operating expenses and realize income, our revenues must increase significantly. If cash flows are insufficient to fund our expenses, we may need to raise additional funds in future periods through public or private debt or equity financings or other arrangements to fund our operations until we achieve profitability. Failure to raise future capital when needed could seriously harm our business and operating results. If additional funds are raised through the issuance of equity securities, the percentage ownership of our current stockholders would be reduced to the extent they did not participate in that financing. Furthermore, these equity securities might have rights, preferences or privileges senior to our common stock.

Seasonality

We have experienced and expect to continue to experience seasonal fluctuations in our revenues. These seasonal patterns will cause quarterly fluctuations in our operating results. In particular, our fourth fiscal quarter has accounted for and is expected to continue to account for a disproportionate percentage of our total annual revenues. We believe that results of operations for a quarterly period may not be indicative of the results for any other quarter or for the full year.

Risk Factors

Any investment in our common stock or other securities involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information contained in this Quarterly Report on Form 10-Q. If any of the following risks occur, our business could be materially harmed. In these circumstances, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock.

All statements made in this Quarterly Report on Form 10-Q, other than statements of historical fact, are forward-looking statements. The words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “may”, “plan”, “will”, “would”, “should”, “guidance”, “potential”, “continue”, “project”, “forecast”, “confident”, “prospects”, and similar expressions typically are used to identify forward-looking statements. Forward-looking statements are based on the then-current expectations, beliefs, assumptions, estimates and forecasts about our business and the industries and markets in which we operate. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. Factors which may affect our business, financial condition and operating results include the effects of changes in the economy, consumer spending, the financial markets and the industries in which we and our partners operate, changes affecting the Internet and e-commerce, our ability to develop and maintain relationships with strategic partners and suppliers and the timing of our establishment or extension of our relationships with strategic partners, our ability to timely and successfully develop, maintain and protect our technology and product and service offerings and execute operationally, our ability to attract and retain qualified personnel, our ability to successfully integrate our acquisitions of other businesses, if any, and the performance of acquired businesses. More information about potential factors that could affect us is provided below. We expressly disclaim any intent or obligation to update these forward-looking statements, except as otherwise specifically stated by us.

Our future success cannot be predicted based upon our limited operating history.

Compared to certain of our current and potential competitors, we have a relatively short operating history. In addition, the nature of our business has undergone rapid development and change since we began operating it. Accordingly, it is difficult to predict whether we will be successful. Thus, our chances of financial and operational success should be evaluated in light of the risks, uncertainties, expenses, delays and difficulties associated with operating a business in a relatively new and unproven market or a new business in an existing market, many of which may be beyond our control. If we are unable to address these issues, we may not be financially or operationally successful.

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We have an accumulated deficit and may incur additional losses.

We incurred substantial losses over the past five fiscal years while operating our business. As of the end of the second quarter of fiscal 2004, we had an accumulated deficit of $184.8 million. We may not obtain an appropriate volume of purchases through our e-commerce platform, generate an appropriate amount of service fee revenue from our existing partners, add an appropriate amount of new partners to generate sufficient revenues or adequately control our expenses in order to achieve profitability. While we expect to be profitable in fiscal 2004, there can be no assurances that we will be able to achieve profitability.

We will continue to incur significant operating expenses and capital expenditures as we:

• enhance our distribution and order fulfillment capabilities;

• further improve our order processing systems and capabilities;

• develop enhanced technologies and features to improve our partners’ e-commerce businesses;

• purchase and improve our new corporate headquarters;

• enhance our customer contact center capabilities to better serve customers’ needs;

• improve our marketing, customer relationship management and design capabilities;

• increase our general and administrative functions to support our growing operations; and

• continue our business development, sales and marketing activities.

Because we will incur many of these expenses before we receive any revenues from our efforts, our losses will be greater than the losses we would incur or our profits will be less than we would generate if we developed our business more slowly. In addition, we may find that these efforts are more expensive or less productive than we currently anticipate, which could further increase our losses. Also, the timing of these expenses may contribute to fluctuations in our quarterly operating results.

We have recently expanded our operations into new categories. If we do not successfully expand our operations into these new categories, our growth could be limited.

Until fiscal 2001, our business was limited to sporting goods. Today, our operations have expanded into other categories, including consumer electronics, home products, apparel and footwear, beauty products and licensed entertainment merchandise. In order to successfully expand our business into these and other categories, we must develop and maintain relationships with manufacturers and other suppliers in those categories and hire and retain skilled personnel to help manage these areas of our business. Our failure to successfully expand our business into these and other categories could limit our ability to increase revenues and attract new partners.

Our success is tied to the success of the partners for which we operate e-commerce businesses.

Our future success is substantially dependent upon the success of the partners for which we operate e-commerce businesses. If our partners were to have financial difficulties or seek protection from their creditors or if they were to suffer impairment of their brand, or if we are unable to replace our partners or obtain new partners, it could adversely affect our ability to grow our business. The growth of our business could also be adversely affected if our partners’ marketing, brands or retail stores are not successful or if our partners reduce their marketing investment or number of retail stores.

The uncertainty regarding the general economy may reduce our revenues.

Our revenue and rate of growth depends on the continued growth of demand for the products offered by us, and our business is affected by general economic and business conditions. A decrease in demand, whether caused by changes in consumer spending or a weakening of the U.S. economy or the local economies outside of the United States where we also sell products, may result in decreased revenue or growth. Terrorist attacks and armed hostilities create economic and consumer uncertainty that could adversely affect our revenue or growth.

We have an e-commerce agreement with Bluelight.com, a subsidiary of Kmart, pursuant to which we operate the Kmart.com Web site. Even though Kmart and Bluelight emerged from bankruptcy in 2003, we may not realize all of the economic benefits of that agreement.

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Kmart, as well as Bluelight.com, operated in bankruptcy from January 2002 until May 2003. In connection with its bankruptcy restructuring plan, Bluelight assumed its e-commerce agreement with us. In March 2003, we and Bluelight modified our agreement to shorten the term, eliminate the last two of eight fixed fee payments required under the agreement and provide for early termination rights for both us and Bluelight. We will, however, continue to receive a percentage of sales through the Bluelight Web site for the services that we provide under this agreement. Bluelight.com may terminate its agreement with us early. If Bluelight.com terminates its agreement with us, we will not realize all of the economic benefits of that agreement.

We enter into contracts with our partners. Some of these partners’ online retail stores account for a significant portion of our revenue. If we do not maintain good working relationships with our partners or perform as required under these agreements, it could adversely affect our business. Additionally, if our partners terminate their contracts with us due to our failure to cure contractual breaches, it could negatively affect our business.

The contracts with our partners establish complex relationships between our partners and us. We spend a significant amount of time and effort to maintain our relationships with our partners and address the issues that from time to time may arise from these complex relationships. For fiscal 2003, sales to customers through one of our partner’s e-commerce businesses accounted for 28% of our revenue, sales through another one of our partner’s e-commerce businesses accounted for 17% of our revenue and sales through our top five partners’ e-commerce businesses accounted for 70% of our revenue. For fiscal 2002, sales to customers through one of our partner’s e-commerce businesses accounted for 20% of our revenue, sales to customers through another one of our partner’s e-commerce businesses accounted for 12% of our revenue, sales to Kmart as well as related service fees accounted for 14% of our revenue, and sales through our top four partners’ e-commerce businesses and sales to Kmart accounted for 56.4% of our revenue. If we do not maintain good working relationships with our partners, our partners could decide not to renew their agreements at the end of the term. Additionally, if we do not perform as required under these agreements, our partners could seek to terminate their agreements prior to the end of the term. This could adversely affect our business, financial condition and results of operations. Moreover, our partners could decide not to renew these contracts for reasons not related to our performance.

Our operating results have and may continue to fluctuate significantly, which may cause the market price of our common stock to be volatile.

Our annual and quarterly operating results have and may continue to fluctuate significantly due to a variety of factors, many of which are outside of our control. Because our operating results may be volatile and difficult to predict, quarter-to-quarter comparisons of our operating results may not be a good indication of our future performance. In some future quarter, our operating results may also fall below our expectations and the expectations of securities analysts and investors which likely will cause the market price of our common stock to decline significantly.

Factors that may cause our operating results to fluctuate or harm our business include but are not limited to the following:

• our ability to obtain new partners or to retain existing partners;

• the performance of one or more of our partner’s e-commerce businesses;

• our ability to obtain new consumers at a reasonable cost or encourage repeat purchases;

• the number of visitors to or viewers of the businesses on our e-commerce platform operated by us or our ability to convert these visitors and viewers into customers;

• our ability to offer an appealing mix of products or to sell products that we purchase;

• our ability to adequately maintain, upgrade and develop our partners’ Web sites or the technology and systems we use to process customers’ orders and payments;

• the ability of our competitors to offer new or superior e-commerce businesses, services or products;

• price competition that results in lower profit margins or losses;

• our inability to obtain or develop specific products or brands or unwillingness of vendors to sell their products to us;

• unanticipated fluctuations in the amount of consumer spending on various products that we sell, which tend to be discretionary spending items;

• the cost of advertising and the amount of free shipping promotions we offer;

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• increases in the amount and timing of operating costs and capital expenditures relating to expansion of our operations;

• our inability to manage our shipping costs on a profitable basis or unexpected increases in shipping costs or delivery times, particularly during the holiday season;

• technical difficulties, system security breaches, system downtime or Internet slowdowns;

• seasonality;

• our inability to manage inventory levels or control inventory shrinkage;

• our inability to manage distribution operations or provide adequate levels of customer service;

• an increase in the level of our product returns or our inability to effectively process returns;

• government regulations related to the Internet or e-commerce which could increase the costs associated with operating our businesses, including requiring the collection of sales tax on all purchases through the e-commerce businesses we operate; and

• unfavorable economic conditions in general or specific to the Internet, e-commerce or the industries in which we operate, which could reduce demand for the products sold through the businesses operated by us.

Seasonal fluctuations in sales could cause wide fluctuations in our quarterly results.

We have experienced and expect to continue to experience seasonal fluctuations in our revenues. These seasonal patterns have caused and will cause quarterly fluctuations in our operating results. In particular, our fourth fiscal quarter has accounted for and is expected to continue to account for a disproportionate percentage of our total annual revenues. In anticipation of increased sales activity during our fourth fiscal quarter, we typically hire a significant number of temporary employees to supplement our permanent staff and significantly increase our inventory levels. For this reason, if our revenues are below seasonal expectations during the fourth fiscal quarter, our operating results could be below the expectations of securities analysts and investors. If our revenues exceed seasonal expectations during the fourth quarter, it could put significant strain on our fulfillment and customer service operations.

Due to the nature of our business, it is difficult to predict the seasonal pattern of our sales and the impact of this seasonality on our business and financial results. In the future, our seasonal sales patterns may become more pronounced, may strain our personnel, product distribution and shipment activities and may cause a shortfall in revenues as compared to expenses in a given period.

We have been unable to fund our e-commerce operations with the cash generated from our business. If we do not generate cash sufficient to fund our operations, we may in the future need additional financing to continue our growth or our growth may be limited.

Because we have not generated sufficient cash from operations to date, we have funded our e-commerce business primarily from the sale of equity securities. Cash from revenues must increase significantly for us to fund anticipated operating expenses internally. If our cash flows are insufficient to fund these expenses, we may in the future need to fund our growth through additional equity or debt financings or reduce costs. Further, we may not be able to obtain financing on satisfactory terms. Our inability to finance our growth, either internally or externally, may limit our growth potential and our ability to execute our business strategy. If we issue securities to raise capital, our existing stockholders may experience dilution or the new securities may have rights senior to those of our common stock.

We and our partners must develop and maintain relationships with key manufacturers to obtain a sufficient assortment and quantity of quality merchandise on acceptable commercial terms. If we or our partners are unable to do so, it could adversely affect our business, results of operations and financial condition.

For the categories in which we own inventory, we primarily purchase products from the manufacturers and distributors of the products. For the categories in which we provide e-commerce services to our partners, our partners purchase products from the manufacturers and distributors of products. If we or our partners are unable to develop and maintain relationships with these manufacturers, we or our partners may be unable to obtain or continue to carry a sufficient assortment and quantity of quality merchandise on acceptable commercial terms and our business could be adversely impacted. We do not have written contracts with many manufacturers or distributors. During the fiscal 2003, we purchased 37% of the total amount of inventory we purchased from one manufacturer. In addition, during fiscal 2002, we purchased 20% of the total amount of inventory we purchased from one manufacturer and during fiscal 2001, we purchased 23% and 16% of the total amount of inventory we

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purchased from two manufacturers. Manufacturers could stop selling products to our partners or us and may ask us or our partners to remove their products or logos from our partners’ Web sites. If our partners or we are unable to obtain products directly from manufacturers, especially popular brand manufacturers, we may not be able to obtain the same or comparable merchandise in a timely manner or on acceptable commercial terms.

We may not be successful in finding, developing and marketing products that consumers of the direct response television campaigns we operate will want to purchase.

For the direct response television campaigns we operate or for which we provide services, our success depends on our ability to find, develop and market products that consumers will want to purchase. We promote these products on our partners’ Web sites as well as through direct response television programming. If we do not select products that consumers want to purchase, this could result in lost opportunities which could reduce sales.

We may be unable to source product for direct response television campaigns on favorable terms. Additionally, we may not be successful in selling the products we source at a profit or at all.

For direct response television campaigns, our financial performance depends on our ability to develop products or acquire the rights to products that will be appealing to consumers. We select products based on management’s retail experience. We may not be successful in finding and sourcing products that consumers will want to purchase. Any failure to meet consumers’ desires could result in lost opportunities and excess inventory which could reduce our revenues. Additionally, we may select products that are not profitable which could result in lower margins.

Capacity constraints or system failures could materially and adversely affect our business, results of operations and financial condition.

Any system failure, including network, telecommunications, software or hardware failure, that causes interruption of the availability of our partners’ e-commerce businesses could result in decreased usage and sales. If these failures are sustained or repeated, they could reduce the attractiveness of our partners’ e-commerce businesses to customers, vendors and advertisers. Our operations are subject to damage or interruption from:

• fire, flood, earthquake or other natural disasters;

• power losses, interruptions or brown-outs;

• Internet, telecommunications or data network failures;

• physical and electronic break-ins or security breaches;

• computer viruses;

• acts of terrorism; and

• other similar events.

The inherent unpredictability of these events makes it difficult to predict whether the occurrence of any of these events is likely. If any of these events does occur, it could result in interruptions, delays or cessations in service to customers of our partners’ e-commerce businesses.

In addition, we maintain the computers on which we operate our partners’ e-commerce businesses at two facilities of a third-party hosting company. We cannot control the security, maintenance or operation of these facilities, which is also susceptible to similar disasters and problems. Our insurance policies may not adequately compensate us for any losses that we may incur. Any system failure that causes an interruption in our service or a decrease in responsiveness could harm our relationships with our customers, partners and vendors and result in reduced revenues.

We may be unable to protect our proprietary technology or keep up with that of our competitors.

Our success depends to a significant degree upon the protection of our software and other proprietary intellectual property rights. We may be unable to deter misappropriation of our proprietary information, detect unauthorized use or take appropriate steps to enforce our intellectual property rights. In addition, our competitors could, without violating our proprietary rights, develop technologies that are as good as or better than our technology.

Our failure to protect our software and other proprietary intellectual property rights or to develop technologies that are as good as our competitors’ could put us at a disadvantage to our competitors. In addition, the failure of our partners to protect their intellectual property rights, including their trademarks and domain names, could impair our operations. These failures could have a material adverse effect on our ability to generate revenues.

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If we do not respond to rapid technological changes, our services could become obsolete and we could lose customers.

Due to the costs and management time required to introduce new services, products and enhancements, we may be unable to respond to rapid technological changes in a timely enough manner to avoid our services becoming uncompetitive. If this happens, our customers may forgo the use of our services or our partners’ e-commerce businesses and use those of our competitors. To remain competitive, we must continue to enhance and improve the functionality and features of our partners’ e-commerce businesses. The Internet and e-commerce are constantly changing. If competitors introduce new products and services using new technologies or if new industry standards and practices emerge, our partners’ existing e-commerce businesses and our services and proprietary technology and systems may become uncompetitive.

Developing our services offering, our partners’ e-commerce businesses and other proprietary technology entails significant technical and business risks. We may use new technologies ineffectively or we may fail to adapt our services offering, our partners’ e-commerce businesses, and our technology to meet customer requirements or emerging industry standards. Additionally, the technology vendors we use for our partners’ e-commerce businesses may not provide the level of service we expect or may not be available on commercially reasonable terms, if at all.

We may be subject to intellectual property claims or competition or trade practices claims that could be costly and could disrupt our business.

Third parties may assert that our business or technologies infringe their intellectual property rights. From time to time, we may receive notices from third parties questioning our right to offer certain services or products or to present specific images or logos on our partners’ e-commerce businesses, or stating that we have infringed their patents, trademarks, copyrights or other rights. We may in the future receive claims that we are engaging in unfair competition or other illegal trade practices. We may be unsuccessful in defending against these claims, which could result in substantial damages, fines or other penalties. The resolution of a claim could also require us to change how we do business, redesign our service offering or partners’ e-commerce businesses or enter into burdensome royalty or licensing agreements. These license or royalty agreements, if required, may not be available on acceptable terms, if at all, in the event of a successful claim of infringement. Our insurance coverage may not be adequate to cover every claim that third parties could assert against us. Even unsuccessful claims could result in significant legal fees and other expenses, diversion of management’s time and disruptions in our business. Any of these claims could also harm our reputation.

We rely on our ability to enter into marketing and promotion agreements with online services, search engines, directories and other Web sites to drive traffic to the e-commerce businesses we operate. If we are unable to enter into or properly develop these marketing and promotional agreements, our ability to generate revenue could be adversely affected.

We have entered into marketing and promotion agreements with online services, search engines, directories and other Web sites to provide content, advertising banners and other links that link to our partners’ e-commerce businesses. We expect to rely on these agreements as significant sources of traffic to our partners’ e-commerce businesses and to generate new customers. If we are unable to enter into satisfactory agreements on acceptable terms, our ability to attract new customers could be harmed. Further, many of the parties with which we may have online advertising arrangements could provide advertising services for other marketers of goods. As a result, these parties may be reluctant to enter into or maintain relationships with us. Failure to achieve sufficient traffic or generate sufficient revenue from purchases originating from third parties may result in termination of these types of agreements. Without these relationships, we may not be able to sufficiently increase our market share and revenue.

Our success is dependent upon our executive officers and other key personnel.

Our success depends to a significant degree upon the contribution of our executive officers and other key personnel, particularly Michael G. Rubin, Chairman, Co-President and Chief Executive Officer. We have employment agreements with certain of our executive officers and key personnel. Due to the costs associated with compensating executive officers and key personnel and the competition for highly qualified personnel, we cannot be sure that we will be able to retain or attract executive, managerial or other key personnel. We have obtained key person life insurance for Mr. Rubin in the amount of $9.0 million. We have not obtained key person life insurance for any of our other executive officers or key personnel.

We may be unable to hire and retain the skilled personnel necessary to develop our business.

We intend to continue to hire a significant number of skilled personnel. Due to intense competition for these individuals from our competitors and other employers, we may not be able to attract, assimilate or retain highly qualified personnel in the future. Our failure to attract and retain the experienced and highly trained personnel that are integral to our business may limit our growth.

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We may not be able to compete successfully against current and future competitors, which could harm our margins and our business.

E-commerce and the provision of e-commerce services are constantly evolving and are extremely competitive. Increased competition could result in fewer successful outsourced opportunities, price reductions, reduced gross margins and loss of market share, any of which could seriously harm our business, financial condition and results of operations. We primarily compete with companies who can offer a full range of e-commerce services similar to the services we provide through our e-commerce platform, such as Amazon.com, Digital River, Foot Locker (principally in the sporting goods category) and ValueVision. We also compete with companies that can provide some of the components similar to those that we offer through our e-commerce platform, including Web site developers, third-party consultants and third-party fulfillment and customer service providers. We also compete with companies that may choose to develop and operate their e-commerce businesses in-house and the online and offline businesses of a variety of retailers and manufacturers.

If we experience problems in our fulfillment, warehouse and distribution operations, we could lose customers.

Although we operate our own fulfillment center, we rely upon multiple third parties for the shipment of our products. We also rely upon certain vendors to ship products directly to our customers. As a result, we are subject to the risks associated with the ability of these vendors to successfully and timely fulfill and ship customer orders and to successfully handle our inventory delivery services to meet our shipping needs. The failure of these vendors to provide these services, or the termination or interruption of these services, could adversely affect the satisfaction of our customers, which could result in reduced sales.

Consumers are constantly changing their buying preferences. If we fail to anticipate these changes, we could experience lower sales, higher inventory markdowns and lower margins for the inventory that we own.

Our success depends, in part, upon our ability and our partners’ ability to anticipate and respond to consumer trends with respect to products sold through the e-commerce businesses we operate. Consumers’ tastes are subject to frequent and significant changes. In order to be successful, our partners and we must accurately predict consumers’ tastes and avoid overstocking or understocking products. If we fail to identify and respond to changes in merchandising and consumer preferences, our sales could suffer and we could be required to mark down unsold inventory. If our partners fail to identify and respond to changes in merchandising and customer preferences, our sales could suffer. This would depress our profit margins. In addition, any failure to keep pace with changes in consumers’ tastes could result in lost opportunities which could reduce sales.

High merchandise returns could adversely affect our business, financial condition and results of operations.

Our policy for allowing our customers to return products is generally consistent with the policies of each of our partners for which we operate e-commerce businesses. If merchandise returns are significant, our revenues and expenses related to our fulfillment center could be adversely affected.

We may be subject to product liability claims that could be costly and time-consuming.

We sell products manufactured by third parties, some of which may be defective. We also sell some products that are manufactured by third parties for us. If any product that we sell were to cause physical injury or injury to property, the injured party or parties could bring claims against us as the retailer of the product. Our insurance coverage may not be adequate to cover every claim that could be asserted. Similarly, we could be subject to claims that customers of our partners’ e-commerce businesses were harmed due to their reliance on our product information, product selection guides, advice or instructions. If a successful claim were brought against us in excess of our insurance coverage, it could adversely affect our business. Even unsuccessful claims could result in the expenditure of funds and management time and could have a negative impact on our business.

We may be liable if third parties misappropriate our customers’ personal information.

If third parties are able to penetrate our network or telecommunications security or otherwise misappropriate our customers’ personal information or credit card information or if we give third parties improper access to our customers’ personal information or credit card information, we could be subject to liability. This liability could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims. They could also include claims for other misuses of personal information, including unauthorized marketing purposes. These claims could result in litigation. Liability for misappropriation of this information could be significant. In addition, the Federal Trade Commission and state agencies regularly investigate various companies’ use of customers’ personal information. We could incur additional expenses if new regulations regarding the use of personal information are introduced or if government agencies investigate our privacy practices.

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From time to time, we may acquire or invest in other companies. There are risks associated with potential acquisitions and investments. As a result, we may not achieve the expected benefits of potential acquisitions.

If we are presented with appropriate opportunities, we may make investments in complementary companies, products or technologies or we may purchase other companies. We may not realize the anticipated benefits of any investment or acquisition. We may not be able to successfully assimilate the additional personnel, operations, acquired technology or products or services into our business. Any acquisition may further strain our existing financial and managerial controls and reporting systems and procedures. If we do not successfully integrate any acquired business, the expenditures on integration efforts will reduce our cash position without us being able to realize the expected benefits of the merger. In addition, key personnel of an acquired company may decide not to work for us. These difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses. Further, the physical expansion in facilities that would occur as a result of any acquisition may result in disruptions that could seriously impair our business. Finally, we may have to incur debt or issue additional equity securities to pay for other acquisitions or investments, the issuance of which could be dilutive to our stockholders.

The consideration we received in exchange for the sale of certain assets related to Ashford.com, Inc. may be subject to a number of risks.

In connection with the sale of certain assets of Ashford.com to Odimo Acquisition Corp., we received equity securities and an earn out that is dependent on Odimo’s consolidated earnings. Fluctuations in the value of these securities and Odimo’s performance will affect our actual realization of the amounts we expect to receive from this sale. Further, as an observable market price does not exist for equity securities of Odimo as it is a private company, our estimates of fair value of such securities are more subjective than for the securities of public companies.

There are certain risks as a result of litigation pending or threatened against Ashford.com at the time of the acquisition and with respect to which Ashford.com may be liable.

While we sold certain assets of Ashford.com in December 2002, Ashford.com continues to be a party to certain litigation that was commenced prior to our acquisition of Ashford.com in March 2002. Since July 11, 2001, several stockholder class action complaints have been filed in the United States District Court of the Southern District of New York against Ashford.com, several of Ashford.com’s officers and directors, and various underwriters of Ashford.com’s initial public offering. The purported class actions have all been brought on behalf of purchasers of Ashford.com common stock during various periods beginning on September 22, 1999, the date of Ashford.com’s initial public offering. The plaintiffs allege that Ashford.com’s prospectus, included in Ashford.com’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission, was materially false and misleading because it failed to disclose, among other things, certain fees and commissions collected by the underwriters or arrangements designed to inflate the price of the common stock. The plaintiffs further allege that because of these purchases, Ashford.com’s post-initial public offering stock price was artificially inflated. As a result of the alleged omissions in the prospectus and the purported inflation of the stock price, the plaintiffs claim violations of Sections 11 and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934. The complaints have been consolidated into a single action, and the consolidated cases against Ashford.com have been consolidated with similarly consolidated cases filed against 308 other issuer defendants for the purposes of pretrial proceedings. The claims against Ashford.com’s officers and directors were dismissed in exchange for tolling agreements which permit the refiling of claims against officers and directors at a later date. A motion to dismiss filed on behalf of all issuer defendants, including Ashford.com, was denied in all aspects relevant to Ashford.com on February 19, 2003. Ashford.com and its insurers have entered into a memorandum of understanding regarding terms for settlement of this suit. Under the settlement, plaintiffs’ claims against Ashford.com and other issuers will be dismissed in exchange for certain consideration from the issuers’ insurers and for the issuers’ assignment to plaintiffs of certain potential claims against the underwriters of the relevant initial public offerings. Formal documentation of the settlement contemplated by the memorandum of understanding is complete and is pending approval by the judge presiding over this matter. In the event that a settlement is not finalized, we believe that Ashford.com has defenses against these actions.

We may expand our business internationally, causing our business to become increasingly susceptible to numerous international business risks and challenges that could affect our profitability.

We believe that the current globalization of the economy requires businesses to consider pursuing international expansion. We recently began shipping certain products to Canada. In the future, we may expand into other international markets. International sales are subject to inherent risks and challenges that could adversely affect our profitability, including:

• the need to develop new supplier and manufacturer relationships, particularly because major manufacturers may require that our international operations deal with local distributors;

• unexpected changes in international regulatory requirements and tariffs;

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• difficulties in staffing and managing foreign operations;

• greater difficulty in accounts receivable collection;

• potential adverse tax consequences;

• uncertain political and economic climates;

• price controls or other restrictions on foreign currency; and

• difficulties in obtaining export and import licenses and compliance with applicable export controls.

Any negative impact on our international business could negatively impact our business, operating results and financial condition as a whole. In particular, gains and losses on the conversion of foreign payments into United States dollars may contribute to fluctuations in our results of operations and fluctuating exchange rates could cause reduced revenues and/or gross margins from non-dollar-denominated international sales.

Our success is tied to the continued growth in the use of the Internet and the adequacy of the Internet infrastructure.

Our future success is substantially dependent upon continued growth in the use of the Internet. The number of users and advertisers on the Internet may not increase and commerce over the Internet may not continue to grow for a number of reasons, including:

• actual or perceived lack of security of information or privacy protection;

• lack of access and ease of use;

• congestion of traffic on the Internet;

• inconsistent quality of service and lack of availability of cost-effective, high-speed service;

• possible disruptions, computer viruses or other damage to the Internet servers or to users’ computers;

• excessive governmental regulation;

• uncertainty regarding intellectual property ownership;

• lack of high-speed modems and other communications equipment; and

• increases in the cost of accessing the Internet.

Published reports have also indicated that growth in the use of the Internet has resulted in users experiencing delays, transmission errors and other difficulties. As currently configured, the Internet may not support an increase in the number or requirements of users. In addition, there have been outages and delays on the Internet as a result of damage to the current infrastructure. The amount of traffic on our partners’ Web sites could be materially affected if there are outages or delays in the future. The use of the Internet may also decline if there are delays in the development or adoption of modifications by third parties that are required to support increased levels of activity on the Internet. If any of the foregoing occurs, or if the Internet does not become a viable commercial medium, the number of our customers could decrease. In addition, we may be required to spend significant capital to adapt our operations to any new or emerging technologies relating to the Internet.

The technology of the Internet is changing rapidly and could render the e-commerce businesses which we operate obsolete.

The technology of the Internet and online retailing is evolving rapidly for many reasons, including:

• customers frequently changing their requirements and preferences;

• competitors frequently introducing new products and services; and

• industry associations and others creating new industry standards and practices.

If the costs associated with the changing technology of the Internet prevents us from enhancing our e-commerce platform, those businesses could become less effective, which would reduce our competitive advantage and put our ability to attract and retain customers at risk. Therefore, the potential negative impact of these businesses becoming less effective would affect us to a greater extent than it would affect a company that has other significant channels for the sale or distribution of its products.

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In order to keep the Web sites that we operate from becoming obsolete, and maintain our ability to attract and retain customers, we must accomplish the following tasks:

• continuously enhance and improve our partners’ Web sites;

• identify, select and obtain leading technologies useful in our business; and

• respond to technological advances and emerging industry standards in a cost-effective and timely manner.

Customers may be unwilling to use the Internet to purchase goods.

Our long-term future depends heavily upon the general public’s willingness to use the Internet as a means to purchase goods. The failure of the Internet to continue to develop as an effective commercial tool would seriously damage our future operations. E-commerce is still a relatively new concept, and large numbers of customers may not begin or continue to use the Internet to purchase goods. The demand for and acceptance of products sold over the Internet are highly uncertain, and most e-commerce businesses have a short track record. If consumers are unwilling to use the Internet to conduct business, our business may not develop profitably. The Internet may not succeed as a medium of commerce because of delays in developing elements of the needed Internet infrastructure, such as a reliable network, high-speed modems, high-speed communication lines and other enabling technologies.

The security risks of online retailing may discourage customers from purchasing goods from us.

In order for e-commerce to develop successfully, we and other market participants must be able to transmit confidential information securely over public networks. Third parties may have the technology or know-how to breach the security of customer transaction data and store confidential information on our own servers. Any breach could cause customers to lose confidence in the security of our partners’ e-commerce businesses and choose not to purchase from those businesses. If someone is able to circumvent our security measures, he or she could destroy or steal valuable information or disrupt the operation of our partners’ e-commerce businesses. Concerns about the security and privacy of transactions over the Internet could inhibit the growth of the Internet and e-commerce. Our security measures may not effectively prohibit others from obtaining improper access to the information on our partners’ e-commerce businesses. Any security breach could expose us to risks of loss, litigation and liability and could seriously disrupt our operations.

We need to continuously acquire and effectively use entertainment space to market and sell our direct response television campaign products.

We generally enter into agreements with entertainment companies, branded manufacturers and other sellers of products to run their e-commerce businesses, including some of their direct response television campaigns. In those agreements, the entertainment companies, branded manufacturers and other sellers of products generally agree to certain marketing, advertising and air-time commitments for the promotion of products sold through their e-commerce businesses, including direct response television and online retail stores. Air-time is very valuable and is essential for the success of direct response television campaigns. If we are unable to negotiate favorable marketing, advertising and air-time commitments in our agreements with our partners or if our partners do not fulfill their commitments, the amount of products we could sell likely would be lower which would cause our revenues to be lower.

Credit card fraud and other fraud could adversely affect our business.

We do not carry insurance against the risk of credit card fraud and other fraud, so the failure to adequately control fraudulent transactions could increase our general and administrative expenses. With respect to credit card fraud, we have put in place technology and processes to help us detect the fraudulent use of credit card information. With respect to other fraud, such as fraud related to checks and installment sales, we use third-party service providers to help us detect fraud. To date, we have not suffered material losses due to fraud. However, we may in the future suffer losses as a result of orders placed with fraudulent credit card data even though the associated financial institution or third-party service provider approved payment of the orders. Under current credit card practices, we are liable for fraudulent credit card transactions because we do not obtain a cardholder’s signature. With respect to checks and installment sales, generally we are liable for fraudulent transactions.

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If one or more states successfully assert that we should collect sales or other taxes on the sale of our merchandise, our business could be harmed.

We currently only collect sales or other similar taxes for goods sold by us and shipped into certain states. One or more local, state or foreign jurisdictions may seek to impose sales tax collection obligations on us or our partners and other out-of-state companies that engage in e-commerce. Recently, certain large retailers, such as Wal-Mart, Target and Toys “R” Us, expanded their collection of sales tax on purchases made through affiliated Web sites. Our business could be adversely affected if one or more states or any foreign country successfully asserts that we should collect sales or other taxes on the sale of merchandise through the e-commerce businesses we operate.

In September 2003, we learned that we, along with several of our partners, were named in an action in the Circuit Court of Cook County, Illinois, by a private litigant who is alleging that we, along with certain of our partners, wrongfully failed to collect and remit sales and use taxes for sales of personal property to customers in Illinois and knowingly created records and statements falsely stating we were not required to collect or remit such taxes. The complaint seeks injunctive relief, unpaid taxes, interest, attorneys’ fees, civil penalties of up to $10,000 per violation, and treble damages under the Illinois Whistleblower Reward and Protection Act. We are aware that this same private litigant has filed similar actions against retailers in other states, and it may be possible that we and/or partners may have been or may be named in similar cases in other states. We do not believe that we are liable under existing laws and regulations for any failure to collect sales or other taxes relating to internet sales and intend to vigorously defend ourselves in this matter. However, we may incur substantial expenses in defending against this claim. In the event of a determination adverse to us, we may incur substantial monetary liability, and be required to change our business practices, either of which could have a material adverse effect on our business, financial position or results of operations.

Existing or future government regulation could harm our business.

We are subject to the same federal, state and local laws as other companies conducting e-commerce businesses. Due to the increasing growth and popularity of the Internet and e-commerce, many laws and regulations relating to these businesses, particularly the Internet, are proposed and considered at the federal, state and local levels. These laws and regulations could cover issues such as user privacy, freedom of expression, pricing, fraud, quality of products and services, taxation, advertising, intellectual property rights and information security. Applicability of existing laws governing issues such as property ownership, copyrights and other intellectual property issues, taxation, libel, obscenity and personal privacy could also harm our business. For example, United States and foreign laws regulate our ability to use customer information and to develop, buy and sell mailing lists. Many of these laws may not contemplate or address the unique issues raised by the Internet or e-commerce. Some laws that do contemplate or address those unique issues, such as the Digital Millennium Copyright Act and the CAN-SPAM Act of 2003, are only beginning to be interpreted by the courts and their applicability and reach are therefore uncertain. These current and future laws and regulations could reduce our ability to operate efficiently.

Laws or regulations relating to user information and online privacy may adversely affect the growth of our Internet business or our marketing efforts.

We are subject to increasing regulation at the federal and state levels relating to privacy and the use of personal user information. Several states have proposed legislation that would limit the uses of personal user information online or require collectors of information to establish privacy policies. The Federal Trade Commission has adopted regulations regarding the collection and use of personal identifying information obtained from children under 13. In addition, bills may be introduced in Congress that would extend online privacy protections to adults. Laws and regulations of this kind may include requirements that we establish procedures to disclose and notify users of privacy and security policies, obtain consent from users for collection and use of information, or provide users with the ability to access, correct and delete personal information stored by us. Even in the absence of those regulations, the Federal Trade Commission has settled several proceedings resulting in consent decrees in which Internet companies have been required to establish programs regarding the manner in which personal information is collected from users and provided to third parties. We could become a party to a similar enforcement proceeding. These regulatory and enforcement efforts could also harm our ability to collect demographic and personal information from users, which could be costly or adversely affect our marketing efforts.

We have never paid dividends on our common stock and do not anticipate paying dividends in the foreseeable future.

We have never paid cash dividends on our common stock and do not anticipate that any cash dividends will be declared or paid in the foreseeable future. As a result, holders of our common stock will not receive a return, if any, on their investment unless they sell their shares of our common stock.

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We are controlled by certain principal stockholders.

As of August 2, 2004, Michael G. Rubin, our Chairman, Co-President and Chief Executive Officer, beneficially owned 19.0%, funds affiliated with SOFTBANK Holdings Inc., or SOFTBANK, beneficially owned 21.1% and Interactive Technology Holdings, LLC, or ITH, a joint venture company of Comcast Corporation and QVC, Inc., beneficially owned 26.9% of our outstanding common stock, including currently exercisable warrants and options to purchase common stock. Should they decide to act together, any two of Mr. Rubin, SOFTBANK and ITH would be in a position to exercise effective control, and all three would be in a position to exercise complete control, over most matters requiring stockholder approval, including the election or removal of directors, approval of significant corporate transactions and the ability generally to direct our affairs. Furthermore, the stock purchase agreements pursuant to which SOFTBANK and ITH acquired their shares of our common stock provide that SOFTBANK and ITH each have the right to designate up to two members of our board of directors. This concentration of ownership and SOFTBANK’s and ITH’s right to designate members to our board of directors may have the effect of delaying or preventing a change in control of us, including transactions in which stockholders might otherwise receive a premium over current market prices for their shares.

It may be difficult for a third-party to acquire us and this could depress our stock price.

Pursuant to our amended and restated certificate of incorporation, we have authorized a class of 5,000,000 shares of preferred stock, which our board of directors may issue with terms, rights, preferences and designations as the board may determine and without any vote of the stockholders, unless otherwise required by law. Issuing the preferred stock, depending upon the terms, rights, preferences and designations set by our board, may delay, deter or prevent a change in control of us. In addition, issuing additional shares of common stock could result in dilution of the voting power of the current holders of our common stock. Moreover, “anti-takeover” provisions of Delaware law may restrict the ability of the stockholders to approve a merger or business combination or obtain control of us. As many investors consider a change of control as a desirable path to liquidity, delaying or preventing a change in control of our company may reduce the number of investors interested in our common stock, which could depress our stock price.

There are limitations on the liabilities of our directors.

Pursuant to our amended and restated certificate of incorporation and under Delaware law, our directors are not liable to us or our stockholders for monetary damages for breach of fiduciary duty, except for liability for breach of a director’s duty of loyalty, acts or omissions by a director not in good faith or which involve intentional misconduct or a knowing violation of law, dividend payments or stock repurchases that are unlawful under Delaware law or any transaction in which a director has derived an improper personal benefit. In addition, we have entered into indemnification agreements with each of our directors. These agreements, among other things, require us to indemnify each director for certain expenses including attorneys’ fees, judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by us or in our right, arising out of the person’s services as one of our directors. Our directors are not currently subject to legal action that would require us to indemnify them; however, if any such actions were brought, the costs associated with such actions could be harmful to our business.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes in market risk for the quarter ended July 3, 2004. See the information set forth in Part II, Item 7A of the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2004 filed with the Securities and Exchange Commission on March 18, 2004, as amended May 3, 2004.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. Based on the evaluation of our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) or 15d-15(e)), our Chief Executive Officer and our Chief Financial Officer have concluded as of the end of the period covered by this Quarterly Report on Form 10-Q, that our disclosure controls and procedures were effective.

(b) Changes in Internal Controls. During the most recently completed fiscal quarter, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

We are involved in various litigation incidental to our current and discontinued businesses, including alleged infringement of intellectual property rights of third parties, contractual claims and claims relating to the manner in which goods are sold through our e-commerce platform.

While we sold certain assets of Ashford.com in December 2002, Ashford.com continues to be a party to certain litigation that was commenced prior to our acquisition of Ashford.com in March 2002. Since July 11, 2001, several stockholder class action complaints have been filed in the United States District Court of the Southern District of New York against Ashford.com, several of Ashford.com’s officers and directors, and various underwriters of Ashford.com’s initial public offering. The purported class actions have all been brought on behalf of purchasers of Ashford.com common stock during various periods beginning on September 22, 1999, the date of Ashford.com’s initial public offering. The plaintiffs allege that Ashford.com’s prospectus, included in Ashford.com’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission, was materially false and misleading because it failed to disclose, among other things, certain fees and commissions collected by the underwriters or arrangements designed to inflate the price of the common stock. The plaintiffs further allege that because of these purchases, Ashford.com’s post-initial public offering stock price was artificially inflated. As a result of the alleged omissions in the prospectus and the purported inflation of the stock price, the plaintiffs claim violations of Sections 11 and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934. The complaints have been consolidated into a single action, and the consolidated cases against Ashford.com have been consolidated with similarly consolidated cases filed against 308 other issuer defendants for the purposes of pretrial proceedings. The claims against Ashford.com’s officers and directors were dismissed in exchange for tolling agreements which permit the refiling of claims against officers and directors at a later date. A motion to dismiss filed on behalf of all issuer defendants, including Ashford.com, was denied in all aspects relevant to Ashford.com on February 19, 2003. Ashford.com and its insurers have entered into a memorandum of understanding regarding terms for settlement of this suit. Under the settlement, plaintiffs’ claims against Ashford.com and other issuers will be dismissed in exchange for certain consideration from the issuers’ insurers and for the issuers’ assignment to plaintiffs of certain potential claims against the underwriters of the relevant initial public offerings. Formal documentation of the settlement contemplated by the memorandum of understanding is complete and is pending approval by the judge presiding over this matter. In the event that a settlement is not finalized, we believe that Ashford.com has defenses against these actions.

In September 2003, we learned that we, along with several of our partners, were named in an action in the Circuit Court of Cook County, Illinois, by a private litigant who is alleging that we, along with certain of our partners, wrongfully failed to collect and remit sales and use taxes for sales of personal property to customers in Illinois and knowingly created records and statements falsely stating we were not required to collect or remit such taxes. The complaint seeks injunctive relief, unpaid taxes, interest, attorneys’ fees, civil penalties of up to $10,000 per violation, and treble damages under the Illinois Whistleblower Reward and Protection Act. We are aware that this same private litigant has filed similar actions against retailers in other states, and it may be possible that we and/or partners may have been or may be named in similar cases in other states. We do not believe that we are liable under existing laws and regulations for any failure to collect sales or other taxes relating to internet sales and intend to vigorously defend ourselves in this matter.

We do not believe, based on current knowledge, that any of the foregoing claims are likely to have a material adverse effect on our business, financial position or results of operations. However, we may incur substantial expenses and devote substantial time to defend third-party claims whether or not such claims are meritorious. In the event of a determination adverse to us, we may incur substantial monetary liability, and may be required to implement expensive changes in our business practices or enter into costly royalty or licensing agreements. Any of these could have a material adverse effect on our business, financial position or results of operations.

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES.

None.

ITEM 3. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

In exchange for Rustic Canyon forfeiting its right to designate one member to the Company’s Board, on June 26, 2004, the Company granted to Rustic Canyon a warrant to purchase 12,500 shares of the Company’s common stock with a term of five years and an exercise price of $9.31 per share.

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ITEM 4. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

ITEM 6. OTHER INFORMATION.

None.

ITEM 7. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

10.1		First Amendment to Contract of Sale, dated April 30, 2004, by and between Brandywine Operating Partnership, L.P. and 935 KOP Associates, LLC
10.2		Second Amendment to Contract of Sale, dated May 24, 2004, by and between Brandywine Operating Partnership, L.P. and 935 KOP Associates, LLC
10.3		Option Agreement, dated June 9, 2004, by and between Brandywine Operating Partnership, L.P. and 935 KOP Associates, LLC
10.4	*	Amended and Restated E-Commerce Agreement between GSI Commerce Solutions, Inc. and palmOne, Inc. dated May 10, 2004
10.5		Promissory Note from 935 HQ Associates, LLC to CIBC Inc. dated June 9, 2004
10.6		Mortgage, Assignment of Leases and Rents and Security Agreement from 935 HQ Associates, LLC in favor of CIBC Inc. dated as of June 9, 2004
31.1		Certification of Chief Executive Officer pursuant to Rule 13a—14(a) under the Securities Exchange Act of 1934
31.2		Certification of Chief Financial Officer pursuant to Rule 13a—14(a) under the Securities Exchange Act of 1934
32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Confidential treatment has been requested as to certain portions of this exhibit. The omitted portions have been separately filed with the Securities and Exchange Commission.

(b) Reports on Form 8-K

During the fiscal quarter ended July 3, 2004, we filed or furnished to the Securities and Exchange Commission:

(i) a Current Report on Form 8-K under Item 12 dated April 28, 2004 regarding our results for the fiscal quarter ended April 3, 2004;

(ii) a Current Report on Form 8-K under Item 9 dated May 4, 2004 regarding investor presentation materials; and

(iii) a Current Report on Form 8-K under Item 9 dated May 26, 2004 regarding investor presentation materials

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, hereunto duly authorized.

GSI COMMERCE, INC.
By:	/s/ MICHAEL G. RUBIN
	Michael G. Rubin Chairman, Co-President & Chief Executive Officer (principal executive officer)
By:	/s/ JORDAN M. COPLAND
	Jordan M. Copland Executive Vice President & Chief Financial Officer (principal financial officer & principal accounting officer)

Date:    August 9, 2004

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EX-10.1

Exhibit 10.1

FIRST AMENDMENT TO CONTRACT OF SALE

This First Amendment to Contract of Sale (“First Amendment”) is entered into this 30^th day of April, 2004 by and between 935 KOP Associates, LLC (“Purchaser’) and Brandywine Operating Partnership, L.P. (“Seller”).

BACKGROUND

A. Seller and Purchaser entered into a Contract of Sale dated March 16, 2004 as amended by certain letter agreements dated as of April 13, 2004 and April 22, 2004, respectively (collectively, the “Contract of Sale”) for the sale and purchase of the Premises.

B. Seller and Purchaser desire to amend the Contract of Sale as hereinafter set forth.

NOW, THEREFORE, intending to be legally bound hereby, the parties agree as follows:

1. All capitalized terms used and not defined in this First Amendment shall have the meanings ascribed to such terms in the Contract of Sale.

2. As a condition precedent to Closing, the roof warranty issued by Firestone Building Products Company (“Firestone”) shall be transferred (or reissued) to Purchaser. Purchaser shall pay for (a) any maintenance or repair work required by Firestone (other than the Seller’s obligations to repair and maintain pursuant to Section 6.7 of the Contract of Sale), and (b) any transfer (or reissuance fees) in order to obtain Firestone’s consent to the transfer of the warranty and/or its reissuance to Purchaser; provided, however, that Purchaser shall have no obligation to incur more than $20,000.00 in connection with the transfer or re-issuance of the roof warranty. If the costs of transferring or re-issuing the roof warranty exceed $20,000.00, Purchaser shall have the right to terminate the Contract of Sale by delivering written notice to Seller, in which event, the Deposit shall be paid to Purchaser and neither party shall have any further obligation hereunder except for those that expressly survive termination. Seller shall cooperate with Purchaser in obtaining the consent of Firestone to the transfer (or reissuance) of the warranty to Purchaser; provided, however, that Seller shall have no obligation to perform any maintenance or repair work required by Firestone (other than the Seller’s obligations to repair and maintain pursuant to Section 6.7 of the Contract of Sale).

3. At Closing, Seller shall pay to the Upper Merion Township Authority (“Authority”) and Upper Merion Township (“Township”), as applicable, the following fees and costs:

(a) to the Authority, the sum of $100,192 on account of the traffic assessment fee pursuant to this certain Agreement dated April 17, 2001 (the “TIA Agreement”) by and between 935 First Avenue Associates (“935 Associates”) and the Authority. Any amounts due but not yet payable under the TIA Agreement shall be payable in accordance with the terms of the Condominium Documents; and

(b) to the Township, the sum of $22,000 on account of a recreation and open space fee in lieu of dedication, which sum is payable pursuant to that certain Land Development Agreement dated May 16, 2001 (the “Land Development Agreement”) by and between the Township and 935 Associates.

If the Authority requires that the Seller pay more than $100,192 at Closing in connection with the traffic impact fee under the TIA Agreement (i.e., if the entire amount of $200,384 is paid), then the purchase price for the Option Property shall be increased by the amount paid by the Seller to the Authority at Closing that is in excess of $100,192.

4. The definition of “Premises” shall include all of Seller’s right, title and interest, in and to all equivalent dwelling units (“EDUs”) allocable by the Township to the buildings and improvements previously existing on the Tract, which the parties understand to be not less than 10 EDUs. Seller shall cooperate and assist Purchaser in effectuating such assignment.

5. (a) Seller will maintain in effect its existing surety bond issued in favor of the Township pursuant to the Development Agreement, and shall otherwise comply, at Seller’s sole cost and expense, with the obligations imposed under the Development Agreement except to the extent otherwise set forth in the Condominium Documents.

(b) Seller will comply, at Seller’s sole cost and expense, with the obligations imposed under the TIA Agreement, except to the extent otherwise set forth in the Condominium Documents.

6. The Outside Closing Date shall be May 24, 2004.

7. Except as modified hereby, all of the terms and provisions of the Contract of Sale shall remain in full force and effect.

8. This First Amendment shall be binding upon, and inure to the benefit of, the parties hereto, and their respective successors and assigns.

9. This First Amendment shall be governed by, and construed in accordance with, the laws of the Commonwealth of Pennsylvania.

[Signatures continued on next page]

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IN WITNESS WHEREOF, the parties hereto have duly executed this First Amendment to Contract of Sale the day and year first above written.

PURCHASER:
935 KOP ASSOCIATES, LLC,
a Pennsylvania limited liability company
By:	GSI COMMERCE, INC., Sole Member
	By:/s/Jordan M. Copland
	Name: Jordan M. Copland
	Title: Executive Vice President
SELLER:
BRANDYWINE OPERATING PARTNERSHIP, L.P., A Delaware limited partnership
By:	BRANDYWINE REALTY TRUST,
	a Maryland trust, its general partner
	By:/s/Anthony A. Nichols, Jr.
	Name: Anthony A. Nichols, Jr.
	Title: Senior Vice President

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EX-10.2

Exhibit 10.2

SECOND AMENDMENT TO CONTRACT OF SALE

This Second Amendment to Contract of Sale (“Second Amendment”) is entered into this 24^th day of May, 2004 (the “Effective Date”) by and between 935 KOP Associates, LLC (“Purchaser”) and Brandywine Operating Partnership, L.P. (“Seller”).

BACKGROUND

A. Seller and Purchaser entered into a Contract of Sale dated March 16, 2004, as amended by certain letter agreements dated as of April 13, 2004 and April 22, 2004, respectively, and further amended by that certain First Amendment to Contract of Sale dated April 30, 2004 (collectively, the “Contract of Sale”) for the sale and purchase of 935 First Avenue, King of Prussia, Pennsylvania (the “Premises”).

B. Seller and Purchaser desire to amend the Contract of Sale as hereinafter set forth.

NOW, THEREFORE, intending to be legally bound hereby, the parties agree as follows:

1. All capitalized terms used and not defined in this Second Amendment shall have the meanings ascribed to such terms in the Contract of Sale.

2. The Outside Closing Date shall be May 27, 2004; provided, however, that if the Seller and Purchaser have agreed upon the final form of the Condominium Documents on or before May 27, 2004, then the Outside Closing Date shall be automatically extended (i.e., without further action by Seller or Buyer) to June 9, 2004. Seller and Purchaser shall negotiate in good faith in accordance with the terms of Section 16 of the Contract of Sale.

3. Purchaser has delivered to Escrow Agent the sum of $750,000.00 (the “Extension Deposit”) to be held by Escrow Agent as a part of the Deposit, and to be disbursed by Escrow Agent in accordance with the terms and conditions of the Contract, except that if for any reason the Seller and Purchaser have not agreed upon the final form of the Condominium Documents on or before May 27, 2004, then (a) the Extension Deposit shall be promptly returned to the Purchaser (without the consent of Seller), and (b) the balance of the Deposit (i.e., $250,000.00) shall be disbursed in accordance with the terms of Section 16 of the Contract of Sale.

4. Except as modified hereby, all of the terms and provisions of the Contract of Sale shall remain in full force and effect.

5. This Second Amendment shall be binding upon, and inure to the benefit of, the parties hereto, and their respective successors and assigns.

6. This Second Amendment shall be governed by, and construed in accordance with, the laws of the Commonwealth of Pennsylvania.

[Signatures continued on next page]

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IN WITNESS WHEREOF, the parties hereto have duly executed this Second Amendment to Contract of Sale the day and year first above written.

PURCHASER:
935 KOP ASSOCIATES, LLC,
a Pennsylvania limited liability company
By:	GSI COMMERCE, INC., Sole Member
	By:/s/Jordan M. Copland
	Name: Jordan M. Copland
	Title: Executive Vice President
SELLER:
BRANDYWINE OPERATING PARTNERSHIP, L.P., A Delaware limited partnership
By:	BRANDYWINE REALTY TRUST,
	a Maryland trust, its general partner
	By:/s/Anthony A. Nichols, Jr.
	Name: Anthony A. Nichols, Jr.
	Title: Senior Vice President

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EX-10.3

Exhibit 10.3

OPTION AGREEMENT

THIS OPTION AGREEMENT (the “Agreement”) is made and entered into as of the 9th day of June, 2004, by and between BRANDYWINE OPERATING PARTNERSHIP, L.P., a Delaware limited partnership (“Optionor”), and 935 KOP Associates, LLC., a Pennsylvania limited liability company (“Optionee”).

RECITALS

A. Optionor is the fee simple owner of a certain parcel of real property containing approximately 14.222 acres as outlined on the plan attached hereto as Exhibit “A,” located in Upper Merion Township, Montgomery County, Pennsylvania, which property is more fully described on Exhibit “B” attached hereto and made a part hereof (the “Full Parcel”).

B. In connection with that certain Contract of Sale dated March 16, 2004 between Optionor and Optionee, as extended by letter agreements dated April 13, 2004 and April 22, 2004, as amended by First Amendment to Contract of Sale dated April 30, 2004, as further amended by Second Amendment to Contract of Sale dated May 24, 2004, as affected by letter agreement dated May 26, 2004, and as assigned by Optionee to 935 HQ Associates LLC, a Pennsylvania limited liability company (“HQ”), pursuant to a certain Assignment of Contract of Sale dated of even date herewith (as so extended, amended, affected and assigned, the “Purchase Contract”), Optionor has subjected or contemporaneously with the execution hereof is subjecting the Full Parcel to a condominium declaration and related documents creating two condominium units upon the Full Parcel. The first unit contains the existing four (4) story building located upon the Full Parcel known as 935 First Avenue, Upper Merion Township, Montgomery County, Pennsylvania (the “Adjacent Property”), which is the subject of the Purchase Contract. The second unit contains the land outlined in red on Exhibit “C” attached hereto and more fully describe on Exhibit “D” attached hereto and made a part hereof (the “Land”).

C. HQ is an affiliate of Optionee.

D. Under and subject to the terms and conditions of the Purchase Contract, HQ is contemporaneously with the execution hereof purchasing the Adjacent Property from Optionor.

E. As an inducement to HQ to Purchase the Property under the Purchase Contract, Optionor hereby agrees to grant Optionee an exclusive option to purchase the Property (as hereinafter defined) pursuant to the terms and provisions contained herein.

F. Capitalized terms used but not defined in this Agreement have the meanings provided in the Purchase Contract. As used herein, the following terms have the following meanings:

“affiliate” has the meaning provided in the Purchase Contract.

“Optionor’s knowledge” means and is strictly limited to the actual, personal knowledge of Tony Nichols, Jr. formed without independent investigation, other than a review of the Optionor’s files relating to the Property.

NOW, THEREFORE, in consideration of the mutual promises and agreements hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:

1. Option. Optionor hereby grants Optionee the exclusive right and option (the “Option”) to purchase the Property at any time from and after the June 9, 2004 through June 9, 2006 (the “Option Period”). If Optionee exercises the Option, then on the Closing Date (as hereinafter defined), Optionor shall sell, assign, transfer and convey to Optionee and Optionee shall purchase from Optionor all of Optionor’s right, title and interest in and to: (a) the Land, and all other improvements located therein and associated therewith which are owned by Optionor, subject only to the Permitted Exceptions (as hereinafter defined); (b) all easements, covenants and other rights appurtenant to the Land; (c) to the extent assignable by Optionor, all permits, approvals, variances, rights, benefits, privileges and licenses (collectively, “Approvals”) issued in connection with the development, use and operation of the Land; and (d) to the extent assignable by Optionor, and to the extent in Optionor’s possession or control, all plans, specifications, drawings, site plans, blueprints, surveys, reports and studies performed in connection with the investigation of the Land and the issuance of the Approvals (the “Due Diligence Materials”). The Land, together with the interests described in subsections (a) through (d) herein shall be referred to collectively as the “Property”. The Option shall automatically terminate if not exercised on or prior to the expiration of the Option Period. This Agreement and the Option shall terminate upon closing of any purchase contract between Optionor and HQ (the “First Offer Contract”) pursuant to the right of first offer provided for in Section 13 of the Purchase Contract, provided, however, during the pendency of the First Offer Contract, Optionee may not exercise the Option but the Option Period shall automatically be extended during the period between the date of the First Offer Contract and the closing date under the First Offer Contract.

2. Exercise of Option; Option Payment Purchase Price; Time of Payment; Development Approval; Closing.

(a) Option Payment. In consideration of the Option, Optionee shall pay to Optionor the sum of Ten Dollars ($10.00) the receipt of which is hereby acknowledged.

(b) Exercise of Option. Optionee shall exercise the Option by delivery of a written notice to Optionor.

(c) Purchase Price. The purchase price to be paid by Optionee to Optionor for the Property (the “Purchase Price”) shall be Three Million Seven Hundred Fifty Thousand Dollars ($3,750,000) The Purchase Price shall be paid to Optionor as follows: (i) $50,000 shall be paid by Optionee to Optionor to be held in escrow by the Title Company (as hereinafter defined) contemporaneously with Optionee’s notice of exercise of the Option (the “Deposit”), and (ii) the balance of the Purchase Price shall be paid to Optionor at Closing by immediately available federal funds, wire transferred to an account designated by Optionor, as adjusted pursuant to Section 6 of this Agreement.

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(d) Development Approvals. Optionor represents and warrants that it has received or applied for, as indicated, the Approvals set forth on Exhibit “E” attached hereto and made a part hereof from the governmental and quasi-governmental authorities and utility companies that have issued the same in connection with the proposed construction upon the Land of a four (4) story office building containing 104,000 net rentable square feet therein (collectively, the “Development Approvals”). All of the Development Approvals are subject to the terms and limitations set forth therein, provided for by law or provided for by the issuing authority in connection with the issuance or approval thereof and, in addition, the development of any such office building is subject to the obtaining of a building permit. To Optionor’s knowledge, Exhibit E contains a true, correct and complete list of the Development Approvals. Optionor shall take no action which would amend, modify or alter the existing Development Approvals without the prior written consent of Optionee which consent shall not unreasonably be withheld or delayed.

(e) Closing. The closing of the acquisition of the Property (the “Closing”) shall occur not later than forty five (45) days after Optionee exercises the Option (the “Outside Closing Date”) at the law offices of Blank Rome LLP in Philadelphia, Pennsylvania, or such earlier date as designated by Optionee upon five (5) business days notice (the “Closing Date”). The Closing shall begin at 10:00 a.m. on the Closing Date, unless otherwise agreed by the parties.

3. No Marketing; Encumbrances. Optionor may not directly or indirectly, sell, assign, dispose of or otherwise transfer, lease or encumber all or a portion of the Property or any interest therein during the Option Period or thereafter if the Option is exercised; provided that Optionor may sell, or otherwise transfer the Property during the Option Period to any affiliate of the Optionor, to any entity into or with which Optionor may merge and to any entity purchasing all or substantially all of the assets of Optionor, provided that in any and every such case, such sale or other transfer is subject to the Option. In addition, Optionor may mortgage the Property, provided that such mortgage is expressly made subject and subordinate to the Option.

4. Title and Conveyance of the Property; Delivery of Possession of the Property.

(a) Title. The Optionor shall convey and the Optionee shall accept good, insurable, fee simple title to the Property subject only to those matters listed in Exhibit F attached hereto (collectively, “Permitted Exceptions”), and insurable as such by Fidelity National Title Insurance Company (the “Title Company”) at the regular rates.

(b) Removal of Unacceptable Encumbrances. The Optionor shall be obligated to satisfy at or prior to Closing (including, without limitation, out of Closing proceeds) unacceptable encumbrances which are (i) mortgages made by Optionor and past due real estate taxes and assessments secured by or affecting the Property, (ii) consensual judgments against the Optionor or other consensual monetary Liens secured by or affecting the Property, and (iii) other judgments against the Optionor or other monetary Liens secured by or affecting the Property which judgments and other Liens can be satisfied by payment of liquidated amounts not to exceed $100,000 in the aggregate for all such judgments and other Liens. The Optionor may eliminate any such encumbrances by the payment of amounts necessary to cause the removal thereof of record, by bonding over such encumbrance in a manner reasonably satisfactory to the

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Optionee or by arranging for title insurance reasonably satisfactory to the Optionee insuring against enforcement of such encumbrance against, or collection of the same out of, the Property. If the Optionor fails to eliminate any such encumbrance referred to in clause (i), (ii) or (iii) above in accordance with the procedures set forth in the immediately preceding sentence, the Optionee may proceed to Closing and withhold from the Purchase Price such amounts reasonably necessary (subject in cases under clause (iii) above to the $100,000 limitation set forth in this Section 4.b) to cause the removal thereof of record.

(c) Options Upon Failure to Remove Unacceptable Liens. If the Optionor is unable or unwilling (and is not otherwise obligated pursuant to Section 4(b)) to eliminate all encumbrances described in 4(b) above, or to bond over in a manner reasonably satisfactory to the Optionee any encumbrances or to arrange for title insurance reasonably acceptable to the Optionee insuring against enforcement of such encumbrances against, or collection of the same out of, the Property, and to convey title in accordance with the terms of this Agreement on or before the Closing Date, the Optionee shall elect on the Closing Date, as its sole remedy for such inability or unwillingness of the Optionor, either (i) to terminate this Agreement by notice given to the Optionor, in which event the Deposit (and all interest thereon shall be paid to Optionee) and neither party shall have any further obligations under this Agreement or with respect to the Option other than those expressly made to survive, or (ii) to offset the amount of such encumbrances described in Section 4(b)(i), (ii) and (iii) above (in the case of 4(b)(iii) limited to $100,000) against the Purchase Price or created by Optionor in violation of this Agreement.

5. Closing Documents. At the time and place of Closing, Optionor shall deliver to Optionee the following: (a) a special warranty deed in recordable form executed by Optionor for the Land; (b) a bill of sale and assignment executed by Optionor conveying to Optionee all of Optionor’s right, title and interest, to the extent assignable by Optionor without the consent of any governmental entity or other person or entity, the Approvals (including without limitation, the Development Approvals) and the Due Diligence Materials, provided that Optionor shall be entitled to retain copies of the all of the same; (c) an affidavit certifying that it is not a “foreign person” within the meaning of the Internal Revenue Code of 1986, as amended; (d) to the extent in Optionor’s possession (and to the extent assignable without the consent of any governmental entity or other person or entity) originals of the Approvals (including the Development Approvals) and the Due Diligence Materials; (e) a title affidavit in form and substance acceptable to Optionor in its discretion; (f) evidence that the sale of the Property is not a bulk sale pursuant to the Bulk Sales Law of the Commonwealth of Pennsylvania; and (g) such other documents, and materials reasonably requested by Title Company to confirm Optionor’s authority to consummate the terms of this Agreement.

6. Prorations and Closing Costs. All matters involving prorations or adjustments to be made in connection with Closing and not specifically provided for in some other provision of this Agreement shall be adjusted as follows: All items to be prorated pursuant to this Section shall be prorated as of the Closing Date, with Optionee to be treated as the owner of the Property, for purposes of prorations of income and expenses, on and after the Closing Date. Real estate taxes shall be prorated based on the fiscal year of the applicable taxing authorities. Optionor shall be responsible for the payment of those portions of all special assessments for work which has been completed prior to the date of this Agreement which have been filed as a lien against the Property whether payable prior to or after the Closing Date and provided Closing occurs

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hereunder, Optionee shall be responsible for all special assessments which have been filed as a lien against the Property after the date hereof. Optionee shall pay the cost of the title premium for any title insurance policy, the legal fees of its own counsel, and the expense of preparing any Closing documents other than those expressly provided in this Agreement to be paid for and prepared by Optionor. Optionor agrees to pay the recording fees for the deed, and the cost of all instruments which Optionor has agreed to provide pursuant to this Agreement to pay the expense of its counsel in preparing the deed. Optionor and Optionee shall share equally all transfer taxes due as a result of the conveyance of the Property. Optionor and Optionee shall prorate any condominium fees for the period in which the Closing occurs and any installment of any special condominium assessment due during such year.

7. Representations of Optionor.

(a) Optionor hereby represents and warrants as follows, all of which shall be true and correct as of the date of this Agreement and as of the Closing Date:

(i) Optionor is, and at the Closing shall be, a limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware and qualified to conduct business in the Commonwealth of Pennsylvania. Optionor has the right, power and authority to make and perform its obligations under this Agreement without the need for governmental approval, consent or filing, other than and except for any and all consents, approvals and filings of a type reasonably typically necessary to create a commercial condominium similar to the Condominium and to convey property similar to the Property, including, without limitation, the filing of a condominium declaration, the filing of a transfer tax return and the recording of a deed.

(ii) the execution, delivery and performance of this Agreement in accordance with its terms do not violate the organizational documents of Optionor, or any Agreement, agreement, commitment, order, judgment or decree to which Optionor is a party or by which it is bound; (ii) Optionor has the right, power and authority to make and perform its obligations under this Agreement; and (iii) this Agreement is a valid and binding obligation of Optionor enforceable against Optionor in accordance with its terms, subject to bankruptcy, limitations on creditors rights generally and equitable principals, whether enforced at law or in equity.

(iii) Optionor is not a “foreign person” and will deliver to Optionee at Closing, an affidavit certifying that it is not a “foreign person” within the meaning of the Internal Revenue Code of 1986, as amended.

(iv) Within the past two (2) years, Optionor has not given or received written notice of any violation of any covenant, condition or restriction or any agreement contained in any instrument of record encumbering or benefiting the Property which remains uncured.

(v) There is no litigation, proceeding, investigation, complaint or action pending, to Optionor’s knowledge, or threatened (A) against Optionor with respect to the Property or the Property itself or (B) with respect to this Agreement.

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(vi) To Optionor’s knowledge, there is no condemnation or eminent domain proceeding (whether temporary or permanent) pending with regard to all or part of the Premises and Optionor has not received written notice that any such proceeding is contemplated or threatened by any governmental authority.

(vii) Optionor has received no written notice of any pending threat of modification or cancellation of any certificate, permit, approval or license which is necessary to permit the lawful development, use and operation of the Premises.

(viii) Optionor has not received any written notice that the Premises or the use thereof, and to the best of Optionor’s knowledge, the Premises or the use thereof do not violate any federal, state, local, building, health, fire or other law, regulation, ordinance, statute, order or consent relating to the Premises or the use thereof (including without limitation zoning and environmental laws).

(ix) Optionor has not used for the generation, storage or disposal of Hazardous Substances or as a land-fill or other waste disposal site and no Hazardous Substances or any toxic wastes, substances or materials (including, without limitation, asbestos) have been released or discharged from or onto the Property by Optionor other than in the ordinary course maintaining the Property in the ordinary course in accordance with all applicable environmental laws. The term “Hazardous Substances” includes petroleum, including crude oil or any fraction thereof, natural gas, natural gas liquids, liquefied natural gas, or synthetic gas usable for fuel (or mixtures of natural gas or such synthetic gas), asbestos and any substance, material waste, pollutant or contaminant listed or defined as hazardous or toxic under any environmental law, regulation, ordinance, order or consent.

(x) Optionor has not granted any person, firm, corporation or other entity any right or option including, without limitation, any right of first refusal or first offer to purchase or lease the Property or any portion thereof.

(xi) Optionor has no actual knowledge that any Property Information (as hereinafter defined) prepared by Optionor omits any material fact or is inaccurate or incomplete in any material respect.

(b) Reaffirmation; Knowledge and Survival. Optionor agrees to renew the foregoing representations and warranties at the Closing Date. The representations and warranties made in this Agreement shall survive the Closing for a period of twelve (12) months.

(c) Limited Nature of Representations. This Agreement, as written, contains all the terms of the agreement entered into between the parties as of the date hereof, and the Optionee acknowledges that neither the Optionor nor any of the Optionor’s affiliates, nor Optionor’s broker has made any representations or held out any inducements to the Optionee, and the Optionor hereby specifically disclaims any representation or warranty, oral or written, past, present or future, express or implied, other than those specifically set forth in this Section 7, or elsewhere in this Agreement or any of the Conveyance Documents, and that subject only to those express representations, warranties, covenants and obligations of Optionor in this Agreement, the Property is being sold “as is” “where is” and “with all faults.” The Optionee

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acknowledges that the Optionor, pursuant to the terms of this Agreement, has or will afford the Optionee the opportunity for full and complete investigations, examinations and inspections of the Property. The Optionee acknowledges and agrees that, subject to the representations and warranties set forth elsewhere in this Agreement or the Conveyance Documents, (i) some or all of the information relating to the Property (any and all such information, the “Property Information”) delivered or made available to the Optionee and the Optionee’s representatives by the Optionor or the Optionor’s affiliates (or any of their agents or representatives), may have been prepared by third parties and may not be the work product of the Optionor and/or any of the Optionor’s affiliates; (ii) neither the Optionor nor any of the Optionor’s affiliates has made any independent investigation or verification of, or has any knowledge of, the accuracy or completeness of, any Property Information prepared by unaffiliated third parties; (iii) the Optionee is relying solely on its own investigations, examinations and inspections of the Property and those of the Optionee’s representatives and on the representations, warranties, covenants and obligations of Optionor contained herein and in the Conveyance Documents; and (iv) the Optionor expressly disclaims any representations or warranties with respect to the accuracy or completeness of the Property Information prepared by unaffiliated third parties, and, subject to the representations, warranties, covenants and obligations set forth in this Agreement and the Conveyance Documents, the Optionee releases the Optionor and the Optionor’s affiliates, from any and all liability with respect to the Property Information subject to such representations, warranties, covenants and obligations. The Optionee or anyone claiming by, through or under the Optionee, hereby fully and irrevocably releases the Optionor and the Optionor’s Affiliates, from any and all claims that it may now have or hereafter acquire against any of the Optionor or the Optionor’s affiliates, for any cost, loss, liability, damage, expense, action or cause of action, whether foreseen or unforeseen, arising from or related to the presence of environmentally hazardous, toxic or dangerous substances, or any other conditions (whether patent, latent or otherwise) affecting the Property, except for claims against the Optionor based upon any obligations and liabilities of the Optionor expressly provided in this Agreement and the documents to be delivered to the Optionee pursuant to Sections 5(a) and (b) (collectively, the “Conveyance Documents”).

(d) Modifications. If prior to the Closing, there is, to Optionor’s knowledge, any change in the facts underlying any of Optionor’s representations, then Optionor shall promptly notify Optionee. If such change in facts results from a default or a breach by Optionor of any of its representations or warranties contained herein, or of the covenants set forth in Sections 3 and 8 herein, then Optionee shall have all of the rights and remedies set forth in Section 11(b)(i) below. If Optionee elects not to terminate this Agreement and proceed to Closing, the representations shall be so modified and Optionee shall be deemed to have forever waived and released any objection thereto and Optionor shall have no liability to Optionee in connection therewith.

(e) Optionee’s Representations. Optionee represents that:

(i) Optionee is, and at the Closing shall be, a limited liability company duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania and qualified to conduct business in the Commonwealth of Pennsylvania. Optionee has the right, power and authority to make and perform its obligations under this Agreement without the need for governmental approval, consent or filing, other than and except

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for any and all consents, approvals and filings of a type reasonably typically necessary to create a commercial condominium similar to the Condominium and to convey property similar to the Property, including, without limitation, the filing of a condominium declaration, the filing of a transfer tax return and the recording of a deed.

(ii) the execution, delivery and performance of this Agreement in accordance with its terms do not violate the organizational documents of Optionee, or any contract, agreement, commitment, order, judgment or decree to which Optionee is a party or by which it is bound; (ii) Optionee has the right, power and authority to make and perform its obligations under this Agreement; and (iii) this Agreement is a valid and binding obligation of Optionee enforceable against Optionee in accordance with its terms, subject to bankruptcy, limitations on creditors rights generally and equitable principals, whether enforced at law or in equity.

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8. Covenants. Optionor agrees that during the Option Period and thereafter if the Option is exercised:

(a) It will not place any liens, encumbrances, easements, restrictions or covenants or consent to the placement thereof against the Property other than Permitted Exceptions, and other than mortgages which are subordinate to the Option, and with the prior written consent of Optionee, which consent shall not be unreasonably withheld or delayed, utility easements.

(b) It will not enter into any options or leases, licenses or other rights of occupancy with respect to the Property or any portion thereof.

(c) It shall not amend, terminate, grant concessions regarding, or enter into any contract or agreement that will be an obligation of the owner of the Property or binding on Optionee after the Closing without the prior consent of Optionee.

(d) It shall maintain in existence the Development Approvals unless it is commercially unreasonable for it to do so. If Optionor does not intend to maintain in existence any Development Approval, Optionor, to the extent that Optionor has actual knowledge of the necessary action, shall notify Optionee at least five (5) Business Days prior to the date that any action need be taken in order to maintain any Development Approval. Optionee may, with Optionor’s prior written consent, which consent shall not be unreasonably withheld or delayed, take any action necessary at Optionee’s expense in order to maintain in existence the Development Approvals.

(e) It will not use the Property as a dump or land fill, and shall not generate, manufacture, transport or store Hazardous Substances at, on or beneath the Land.

(f) It will timely comply with all of the material terms and provisions of any mortgage.

(g) It will make no alterations to the Land without the consent of Optionee, which consent shall not unreasonably be withheld or delayed, or commit waste.

The provisions of this Section 8 shall survive Closing.

9. Development Option. Optionor is an experienced developer of projects contemplated by the Development Approvals. Optionor hereby grants Optionee the right, in Optionee’s exclusive discretion, to engage Optionor to act as the developer on behalf of Optionee (the “Development Option”). If Optionee elects to exercise such option, Optionor and Optionee shall enter into a mutually acceptable development agreement which shall provide for among things, a development fee to be paid to Optionor of $5.00 per square foot of the square footage to be erected on the Land plus 5% of the hard costs incurred to construct the building and other improvements.

If Optionee, in its sole discretion, elects not to exercise the Development Option or if Optionee does elect the Development Option, but Optionor and Optionee fail to agree upon a mutually acceptable development agreement, then at Closing, Optionor shall be paid the sum of Two Hundred Thousand Dollars ($200,000) as liquidated damages and not as a penalty.

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10. Condemnation.

(a) Optionor shall promptly notify Optionee of notice of condemnation with respect to the Property which Optionor receives between the date hereof and the Closing Date.

(b) If, after the exercise of the Option but prior to Closing, any material portion of the Property, any parking areas (affecting more than 10 parking spaces) or any access way (either a taking of such access or a material impairment in Optionee’s reasonable discretion) to the Property is taken by eminent domain or if such a taking is pending, Optionee may terminate this Agreement upon notification to Optionor in which event the Deposit shall be returned to Optionee and neither party shall have any further obligations hereunder. If Optionee elects to proceed and to consummate the purchase despite said taking, there shall be no reduction in the Purchase Price, but Optionor shall assign to Optionee all of Optionor’s right, title and interest in and to any award made or to be made in the condemnation proceeding. If Optionee elects to proceed to Closing despite a taking, Optionor shall not finalize any settlement agreement with any taking authority relating to the Property without the prior written consent of Optionee. If any taking occurs prior to the exercise of the Option, then such taking shall be a Permitted Exception and the land or rights taken shall be excluded from the Property.

11. Default.

(a) Optionee’s Default. If Optionee should fail to close title on the Premises in default of the provisions of this Contract, the parties hereto agree that the damages that Optionor will sustain as a result thereof will be substantial but will be difficult to ascertain. Accordingly, the parties agree that in the event of such default, Escrowee is hereby directed to pay the Deposit (plus all interest thereon) to Optionor, who shall retain the Deposit as and for its liquidated damages and sole remedy hereunder and this Agreement shall terminate. Optionor hereby waives all other rights and remedies that it may have for any default by Optionee under this Contract, including, but not limited to, the right to sue for damages and specific performance.

(b) Optionor’s Default.

(i) Prior to Closing. If Optionor defaults in its obligation to sell and convey the Premises to Optionee pursuant to this Contract, Optionee may, as its sole and exclusive remedies, either (x) terminate this Contract in which event the Deposit and any interest earned thereon shall be returned to Optionee, and Optionor shall reimburse Optionee for its out-of-pocket expenses incurred in connection with this transaction and its due diligence activities, including without limitation, the fees of its consultants, architects, engineers, surveyors and attorneys, not to exceed $50,000 in the aggregate (the “Expenses”); or (y) assert and seek specific performance. Subject only to Section 11(b)(ii) below, the foregoing are Optionee’s sole and exclusive remedies, and Optionee hereby waives all other rights and remedies that it may have for any default by Optionor under this Contract, including, but not limited to, the right to sue for damages.

(ii) Post Closing. If: (i) Optionor breaches any representation or warranty set forth in Section 7 above that survives the Closing, (ii) Optionee notifies Optionor of

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such claim prior to the expiration of the twelve (12) month survival period, (iii) Optionee had no knowledge of the breach of such representation or warranty at or prior to Closing, then Optionee shall, as its sole and exclusive remedy, be entitled to recover from Optionor any actual, out of pocket, compensatory damages incurred by Optionee up to a maximum aggregate amount for any all such claims of $137,500. Notwithstanding the foregoing, Optionee shall have all remedies available at law or in equity if Optionor breaches any of the covenants set forth in Section 8 above or 14 below. In no event shall Optionee be entitled to any consequential, exemplary or punitive damages.

12. Conditions Precedent to Closing.

(a) Optionee’s obligation to close hereunder is contingent upon the satisfaction of the following conditions: (i) as of the Closing Date, title to the Property shall be as required pursuant to this Agreement (ii) Optionor shall have performed all of its obligations hereunder and; and (iii) all of the representations and warranties of Optionor set forth in this Agreement shall be true and correct as of the Closing Date.

(b) Optionor’s obligation to close hereunder is contingent upon the satisfaction of the following conditions: (i) Optionee shall have performed all of its obligations hereunder, and (ii) all of the representations and warranties of Optionee set forth in this Agreement shall be true and correct as of the Closing Date.

(c) If any of the foregoing conditions precedent in Section 12(a) or (b) are not satisfied on the Closing Date, Optionee, in the case of any failure under 12(a), or Optionor, in the case of any failure under 12(b) may, at its sole option: (i) exercise its rights under the provisions of Section 11 above; or (ii) waive such condition, in whole or in part.

13. Intentionally omitted.

14. Brokers. Optionor and Optionee represent to each other that neither party has dealt with any broker or real estate consultant in connection with the transaction contemplated by this Agreement other than GVA Smith Mack (“Broker”), who will be paid a commission of two percent (2%) of the Purchase Price by Optionor. Optionor and Optionee shall indemnify and hold the other free and harmless from and against any liabilities, damages, costs or expenses (including, but not limited to, reasonable attorneys’ fees and disbursements) suffered by the indemnified party arising from a misrepresentation or a breach of any covenant made by the indemnifying party pursuant to this Section 14. The provisions of this Section 14 shall survive the Closing or termination of this Agreement.

15. Notices. All notices, demands, requests or communication required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed to have been properly given or served and shall be effective (i) if sent by registered or certified mail, upon the sooner of the date on which receipt is acknowledged or the expiration of two (2) days after deposit in United States post office facilities properly addressed with postage prepaid, (ii) upon delivery by a nationally recognized overnight delivery service, (iii) upon the date of receipt of hand delivery which is received any Business Day on or before 5 P.M. in the location of receipt or on the next Business Day after receipt if received after 5 P.M. on any Business Day, or

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(iv) upon the date of receipt of a facsimile which is received any Business Day on or before 5 P.M. in the location of receipt or on the next Business Day after receipt if received by facsimile after 5 P.M. on any Business Day, provided that a hard copy is sent in accordance with one of the foregoing methods. Any such notice, demand, request or communication if given shall be addressed as follows:

if to Optionor:	Brandywine Realty Trust
	401 Plymouth Road, Suite 500
	Plymouth Meeting, PA 19462
	Attn: Brad A. Molotsky, General Counsel
with a copy to:	Brandywine Realty Trust
	401 Plymouth Road, Suite 500
	Plymouth Meeting, PA 19462
	Attn: Tony Nichols, Jr.
and to:	Klehr, Harrison, Harvey, Branzburg & Ellers LLP
	260 South Broad Street
	Philadelphia, PA 19102
	Attn: Jon S. Robins, Esq.
if to Optionee:	c/o GSI Commerce Solutions, Inc.
	1075 First Avenue
	King of Prussia, PA 19406
	Attn: General Counsel
with a copy to:	Blank Rome LLP
	One Logan Square
	Philadelphia, PA 19103
	Attention: Barry Friedman, Esquire

By written notice, each party to this Agreement may change the address to which notice is given to that party, provided that such change of notice shall include a street address to which notices may be delivered by overnight courier in the ordinary course on any business day.

16. Access to the Property. From and after the date of this Agreement, upon reasonable prior notice to Optionor (it being agreed that in the ordinary course, twenty-four (24) hours oral notice given on a Business Day shall be reasonable), and during business hours, Optionee and its consultants may enter upon the Property and perform inspections and tests of the Property at reasonable times, provided that Optionee shall not perform any invasive testing without Optionor’s prior written consent which consent shall not be unreasonably withheld or delayed. Optionee shall restore, repair and replace any and all damage or destruction of the Property caused by Optionee or its consultants. Optionee hereby agrees to indemnify, defend and hold harmless, from any and all loss, cost, expense (including, without limitation, reasonable attorneys fees), claims, liabilities and damages incurred or suffered by Optionor to the extent caused by Optionee’s entry upon the Property or any of its activities thereon, excluding any pre-existing condition or defect. Prior to any entry by Optionee or any of its consultants upon the

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Property, Optionee shall provide Optionor with acceptable evidence of liability insurance reasonably acceptable to Optionor and Optionee shall have the same in force at all times that it or its consultants enters the Property. Within five (5) days from the date hereof, Optionor shall deliver to Optionee copies of the Development Approvals and the Due Diligence Materials. Optionor shall have the right to have a representative present during any site inspections. Optionee’s obligations under this Section 16 shall survive Closing as well as any termination of this Agreement.

17. Successors and Assigns. Optionee may not assign this Agreement without the prior written consent of Optionor in its sole discretion; provided, however, that Optionee may assign this Agreement to an affiliate of Optionee or to any person or entity which is acquiring the Adjacent Property from Optionee without the consent of Optionor. This Agreement shall inure to the benefit of, and be binding upon and enforceable against, the parties hereto and their respective permitted successors and assigns, to the same extent as if specified at length throughout this Agreement.

18. Counterparts/Facsimile Signatures. The parties agree that: (a) this Agreement may be executed in several counterparts, each of which shall be deemed an original and all of which counterparts together shall constitute one and the same instruments, provided that each of the parties use due diligence to deliver executed counterpart originals are delivered within five (5) business days from the date hereof; and (b) original signatures transmitted via facsimile shall be acceptable for purposes of executing this Agreement provided that the parties use due diligence to deliver the executed counterpart originals within five (5) business days from the date hereof.

19. Time of the Essence. Time is of the essence of this Agreement. If any time period or date ends on a day or time which is a weekend, legal holiday or bank holiday, such period shall be extended to the same time on the next business day.

20. Judicial interpretation. Should any provision of this Agreement require judicial interpretation, it is agreed that the court interpreting or construing the same shall not apply a presumption that the terms hereof shall be more strictly construed against one party by reason of the rule of construction that a document is to be construed more strictly against the party who itself or through its agent prepared the same, it being agreed that the agents of all parties have participated in the preparation of this Agreement.

21. Captions; and Recitals. The name of this Agreement and the captions contained herein are not a part of this Agreement and are included solely for the convenience of the parties. The Recitals set forth at the beginning of this Agreement are hereby incorporated herein and made a part hereof.

22. Entire Agreement. This Agreement contains the entire agreement between the parties relating to the acquisition of the Property and there are no promises, agreements, conditions, undertakings, warranties or representations, oral or written, express or implied, between them other than as herein set forth. No change or modification of this Agreement shall be valid unless the same is in writing and signed by the parties hereto. No waiver of any of the provisions of this Agreement, or any other agreement referred to herein, shall be valid unless in writing and signed by the party against whom it is sought to be enforced.

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23. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, without giving effect to any conflict of law principles or provisions.

24. Attorneys’ Fees. If any action or dispute arises related to or as a result of this Agreement, the prevailing party shall be entitled to recover court costs and reasonable fees of attorneys and professional assistants (whether in court or out), through all appellate levels and in any administrative or arbitration hearings.

25. Memorandum. The parties hereto acknowledge and agree that a Memorandum of this Agreement, shall be recorded in the public records in the County in which the Land is located, at Optionee’s expense. Optionee hereby agrees that it shall promptly execute and deliver for recording a termination of this Agreement and any such Memorandum upon Optionor’s request made at any time on or after the termination of this Agreement. Optionee further agrees that this provision may be enforced by specific performance, that Optionor shall have all other rights and remedies available to it at law or in equity or hereunder with respect to any breach of this provision by Optionee and that the limitations on Optionee’s liability contained in Section 11 shall not apply to this provision.

26. Post Closing Leasing Restriction. If Optionee acquires the Property, Optionee agrees that it will not lease, license or otherwise grant rights of possession or occupancy of or permit any sublease to an unaffiliated third party of more than a Full Floor (as defined in the Purchase Contract), in the aggregate, of space in any building erected on the Property and in the Building upon the Adjacent Property for a period ending on the third (3^rd) anniversary of the closing date under the Purchase Contract (e.g., if one half of a Full Floor is so Leased (as defined in the Purchase Contract) in the building located upon the Adjacent Parcel, then Optionee would not be able to Lease more than one half of a Full Floor in any building erected upon the Property). Notwithstanding the foregoing, this restriction shall not apply to and shall be of no further force or effect in the event of the occurrence of any of the events described in Section 27(ii) below and shall not apply to any “sale-leaseback” transaction for all or any portion of the Property. The provisions of this Section 26 shall survive the closing hereunder.

27. Right of First Offer. If on or before the third (3^rd) anniversary of the Purchase Contract Closing Date, Optionee desires to sell its ownership interest in the Property, other than in the event of (i) a transfer of ownership to an affiliate, or (ii) a transfer by or in lieu of foreclosure to an institutional lender (including, without limitation, any so-called “conduit lender”), or (iii) a merger, consolidation or sale of all or substantially all of the stock or assets of GSI Commerce, Inc. (“GSI”), then Optionee shall give Optionor written notice of such intention (“Optionee’s Notice”). In such event, Optionor shall have the right to exercise the option set forth below (the “Right to Negotiate Purchase”).

(a) Optionor shall have a period of ten (10) Business Days from receipt of Optionee’s Notice within which to exercise its Right to Negotiate Purchase by delivery to Optionee of written notice (“Optionor’s Notice”) stating Optionor’s intention to enter into negotiations with Optionee concerning the purchase and sale of the Property. Optionee and

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Optionor shall promptly commence, and pursue in good faith for a period of thirty-five (35) calendar days after Optionor ‘s Notice is given, negotiations in an effort to reach agreement concerning the purchase of the Property by Optionor. If at the expiration of such thirty-five (35) day period, Optionor and Optionee have failed to reach agreement concerning the purchase by Optionor for any reason whatsoever, then Optionee shall be entitled to sell or transfer the Property to any third party for a stated purchase price which is not more than two and one-half percent (2 ¹/2%) less than the purchase price offered by Optionor thereafter without any further obligation to Optionor. If Optionee intends to sell the Property for more than 2.5% less than such purchase price, then Optionee shall first provide Optionor with notice of such intent, which notice shall specify the intended sales price (the “Intended Price”). Optionor shall have ten (10) Business Days from after its receipt of such notice to determine whether or not it wishes to purchase the Property at the Intended Price and to provide Optionee with notice of its election. If Optionor elects to purchase the Property, then, within Five Business Days after Optionor provides notice of such election to Optionee, Optionor and Optionee shall enter into a contract for the purchase and sale of the Property on the same terms as the Purchase Contract with only such changes as are necessary to reflect the passage of time, that the contract shall not include an option on the Property, that Optionor and Optionee have switched positions and that the purchase price shall be equal to the Intended Price, and provided that the thirty (30) day “Purchaser’s Review Period” afforded Optionor under such contract shall commence upon the expiration of Optionor’s ten (10) day election period (rather than on the date of the execution of such contract), and any closing pursuant thereto shall occur within thirty (30) days from after the expiration of such thirty (30) day period. If Optionee does not enter into a contract of sale and close on a sale of the Property to an unrelated third party within the Open Period and/or the Open Period Extension, then Optionor’s Right to Negotiate Purchase shall again apply on all of the terms above provided. The parties acknowledge that any sales price for the Property is likely to be significantly affected by the terms of any leaseback subject to which Optionee is offering to sell the Property. Therefore, all references to price in this Section 27 shall include, without limitation, the economic terms of any leaseback to which the Property will be subject after any sale.

(b) This Right to Negotiate Purchase is personal to Optionor and may not be exercised by or assigned to, either voluntarily or involuntarily, any other person or entity other than an affiliate of Optionor or any successor to Optionor by merger, reorganization or by purchase of all or substantially all of the assets of Optionor.

(c) Notwithstanding anything to the contrary contained herein, if Optionee and HQ are selling both the Premises and the Property, Optionor’s Right to Negotiate Purchase shall apply to and may only be exercised with respect to both the Premises and the Property. If Optionee and HQ have offered the Property and the Adjacent Property to Optionor only as a package, then before Optionee or HQ may sell either of such properties separately, Optionor’s Right to Negotiate shall apply to each of such properties separately.

28. Recordation. The restrictions and rights contained in Sections 26 and 27 above shall run with the land and shall be contained in a document to be recorded upon Closing. Optionor hereby agrees that it shall promptly execute and deliver for recording a termination of such restrictions and rights at Optionee’s request made at any time on or after the termination of the restrictions and rights contained in Sections 26 and 27. Optionor further agrees that this

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provision may be enforced by specific performance, that Optionee shall have all other rights and remedies available to it at law or in equity or hereunder with respect to any breach of this provision by Optionor and that the limitations on Optionor’s liability contained in Section 11(b) shall not apply to this provision. Such restrictions and rights contained in any such document (but not the document itself) shall be self subordinating to any mortgage (as amended, consolidated, extended, restated, modified or renewed from time to time) of any unaffiliated, institutional lender providing financing to the Property. Optionor shall execute any subordination agreement confirmatory of the foregoing requested by any such lender reasonably acceptable in form and substance to Optionor. Optionor shall be entitled to reimbursement by Optionee for any actual out of pocket costs incurred by Optionor, including reasonable attorneys’ fees, in connection with any such subordination agreement other than any such agreement executed at closing.

29. 1031 Exchange. If one or more parties to this Agreement desires to exchange other property of like kind and qualifying use within the meaning of Section 1031 of the Internal Revenue Code of 1986, as amended, and its accompanying regulations, for the fee simple title in, or proceeds of, the Property, then the parties each agree to assist one another in the consummation of such transactions, and the parties reserve the right to assign their respective rights (but not obligations) to a Qualified Intermediary, as provided for in IRC Regulation 1.103(a)-I(g)(4) on or before the Closing Date, through written assignment and as otherwise may be necessary to accomplish the Section 1031 Exchange under the Internal Revenue Code, provided that the assisting parties shall incur no additional expense or liability, and the same is not a condition to and does not delay Closing; provided, however, that if Optionor provides Optionee with written notice within not more than five (5) Business Days after the date upon which Optionee exercises the Option that Optionor intends to (but shall not be obligated to) enter into a Section 1031 exchange with respect to the Property, then Optionor shall have a one-time right to extend the Closing for up to a maximum of ten (10) Business Days if and to the extent necessary to facilitate any such exchange, but in no event shall such extension extend the Closing Date beyond the Outside Closing Date.

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IN WITNESS WHEREOF, intending to be legally bound hereby, the parties have duly executed this Option as of the day and year first above stated.

OPTIONEE:
935 KOP ASSOCIATES, LLC. a
Pennsylvania limited liability company
By:	GSI COMMERCE, INC., a Delaware
	corporation, its sole member
	By: /s/Jordan M. Copland
	Name: Jordan M. Copland
	Title: Executive Vice President

OPTIONOR:
BRANDYWINE OPERATING PARTNERSHIP, L.P., a Delaware limited partnership
By:	BRANDYWINE REALTY TRUST, a
	Maryland trust, its general partner
	By:/s/Gerard H. Sweeney
	Name: Gerard H. Sweeney
	Title: President

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EX-10.4

Exhibit 10.4

GSI COMMERCE SOLUTIONS, INC.

AMENDED AND RESTATED E-COMMERCE AGREEMENT

BETWEEN

GSI COMMERCE SOLUTIONS, INC.

AND

PALMONE, INC.

AMENDED AND RESTATED E-COMMERCE AGREEMENT

This Amended and Restated E-Commerce Agreement, dated as of May 10, 2004 (the “Agreement”), is made and entered into by and between GSI Commerce Solutions, Inc., a Pennsylvania corporation (“GSI”), and palmOne, Inc. (formerly Palm, Inc.), a Delaware corporation (the “Company”).

Recitals

WHEREAS, GSI and the Company entered into an E-Commerce Agreement, dated as of June 14, 2002 (the “Effective Date”), as amended as of December 3, 2002 (the “Original Agreement”);

WHEREAS, GSI and the Company wish to amend and restate the Original Agreement, effective as of the Effective Date;

WHEREAS, GSI is in the business of, among other things, developing and operating e-commerce businesses for retailers and manufacturers and providing for those companies GSI’s proprietary technology, Web Site design and development capabilities, order processing capabilities, customer service capabilities, fulfillment capabilities and centralized inventory management to enable those companies to offer e-commerce to their customers;

WHEREAS, the Company is in the business of developing, manufacturing and selling Palm Products (as defined below) and is the owner of the Company Site (as defined below);

WHEREAS, the Company desires to have GSI create the Company Stores (as defined below) that will offer Merchandise (as defined below) for sale and that can be accessed directly through the Designated URLs (as defined below) or through fixed links that will appear on pages of the Company Site, including the Home Page (as defined below) of the Company Site;

WHEREAS, the Company has made a substantial investment to establish its trade names among consumers and distributors so as to create a retail image connoting a specific manner in which merchandise is presented and sold by the Company;

WHEREAS, both the Company and GSI recognize that the overall success of the Company Stores depends on consumers perceiving the Company Stores to be an extension of the Company Site;

WHEREAS, the Company and GSI desire to have GSI provide to the Company a complete solution by which the Company and/or its Affiliates will sell Merchandise through the Internet during the Term (as defined below) of this Agreement; and

WHEREAS, the Company desires to obtain e-commerce capability from GSI in a manner that allows the Company to protect its Trademarks and that will complement the Company Site.

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NOW, THEREFORE, in reliance upon the above recitals (which are made a part of the Agreement below) and in consideration of the mutual promises and covenants contained in this Agreement, the Company and GSI (each a “Party” and collectively, the “Parties”), intending to be legally bound, agree as follows:

Section 1. Definitions.

Whenever used in this Agreement, the following capitalized terms shall have the following specified meanings:

1.1 “Affiliate” means, as to any Person, any other Person that, directly or indirectly, is controlled by, is under common control with or controls such Person, but only as long as such control exists. For this purpose, control means ownership or voting rights over at least 50% of the outstanding voting or equity securities of the Person in question or the power to direct or cause the direction of management or policies of such Person, whether through voting securities, by contract or otherwise.

1.2 “Aggregate Information” means any information or data derived from Customer Information which is not specific to a Person, does not refer to or identify any specific Person, and cannot be used, alone or in conjunction with any other information, to identify any specific Person.

1.3 “Company Content” means the following content or information owned or controlled (e.g., by license or otherwise) by the Company or its Affiliates and furnished by the Company or its Affiliates to GSI in accordance with the terms of this Agreement: text, graphics, photographs, video, audio and/or other data or information and e-mail addresses furnished by the Company for use in connection with the Company Stores and Specialized Stores.

1.4 “Company Site” means that Web Site, the primary Home Page for which is identified by the URL, www.palmone.com (and any successor or replacement Web Site).

1.5 “Company Stores” means the Web Sites, as operated by GSI pursuant to this Agreement, the primary Home Pages for which are identified by the Designated URLs (and any successor or replacement Web Sites).

1.6 “Company Stores Functionality” means, collectively: (a) functionality and features available on the Company Stores and/or Specialized Stores that GSI may make available from time to time, and (b) any future equivalents, improvements and enhancements of any of the foregoing.

1.7 “Company Stores Links” means links to the Company Stores which are to be created on the Company Site pursuant to this Agreement, and which, in each case, shall be as described in Schedule “A”.

1.8 “Confidential Information” means all nonpublic information relating to a Party or its Affiliates that is designated as confidential or that, given the nature of the information or the circumstances surrounding its disclosure, reasonably should be considered as confidential. Confidential Information includes, without limitation, (a) all nonpublic information relating to a Party’s or its Affiliates’ technology, customers, business plans, promotional and marketing activities, finances and other business affairs, and (b) all third party information that a Party or its Affiliates is obligated to keep confidential. Confidential Information may be contained in tangible materials, such as drawings, data, specifications, reports and computer programs, or may be in the nature of unwritten knowledge. Neither Party shall have any obligation to maintain the confidentiality of Confidential Information that (i) has become publicly available without breach of this Agreement, (ii) can be shown by documentation to have been known to the receiving Party at the time of its receipt from the disclosing Party or its Affiliates, (iii) is

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received from a third party who did not acquire or disclose such information by a wrongful or tortious act, or (iv) can be shown by documentation to have been independently developed by the receiving Party without reference to any Confidential Information.

1.9 “Customer” means a Person who accesses any of the Company Stores, the Wireless Products Store or Specialized Stores in any manner, whether or not a purchase is made.

1.10 “Customer Information” means the name, mailing address, telephone number, e-mail address, Order and Order processing information and any other identifying information provided by or obtained from Customers through the Company Stores, the Wireless Products Store or the Specialized Stores; provided, however, Customer Information does not include (i) any information that either GSI or the Company owns or to which GSI or the Company has the rights and which is obtained from Customers other than through transactions contemplated under this Agreement, (ii) Aggregate Information, or (iii) Financial Information.

1.11 “Designated URLs” means www.store.palmone.com or any successor or replacement URL and www.store.palmone.com/outlet or any successor or replacement URL.

1.12 “Extended Warranty” means a warranty for Palm Products offered for sale through the Company Stores, the Wireless Products Store or Specialized Stores which is administered solely by the Company or a third party on its behalf and the obligations under which are performed solely by the Company or a third party on its behalf.

1.13 “Financial Information” means all information relating to the financial performance and/or operations of the Company Stores, the Wireless Products Store and Specialized Stores which is not specific to a Person, does not refer to or identify any specific Person, and cannot be used, alone or in conjunction with other information, to identify any specific Person.

1.14 “Gross Revenue” means all cash consideration (not including any portion of payment made through the redemption of coupons, discount codes, credits or On-Line Gift Certificates, but including the sale of On-Line Gift Certificates) received from Customers for Orders of Merchandise, taxes, duties, shipping and handling services and the provision of gift wrapping and other value added services through this Agreement, including amounts received in connection with Orders of Merchandise which result in returns.

1.15 “GSI Content” means any and all content or information owned or controlled (e.g., by license or otherwise) by GSI or its Affiliates, including text, graphics, photographs, video and audio, and furnished by GSI or its Affiliates in connection with the Company Stores, the Wireless Products Store or the Specialized Stores or otherwise in connection with the performance of its obligations under this Agreement.

1.16 “Home Page” means, with respect to a Web Site, the Web page designated by the operator of the Web Site as the initial and primary end user interface for the Web Site.

1.17 “Intellectual Property Rights” means any and all now known or hereafter known tangible and intangible (a) rights associated with works of authorship throughout the universe, including but not limited to copyrights, moral rights, and mask-works, (b) trademark, trade dress and trade name rights and similar rights, (c) trade secret rights, (d) patents, designs, algorithms and other industrial property rights, (e) all other intellectual and industrial property rights of every

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kind and nature throughout the universe and however designated (including domain names, logos, “rental” rights and rights to remuneration), whether arising by operation of law, contract, license, or otherwise, and (f) all registrations, initial applications, renewals, extensions, continuations, divisions or reissues hereof now or hereafter in force (including any rights in any of the foregoing).

1.18 “Internet” means the system of computer networks interconnected with routers, worldwide in scope, that facilitates data communication services such as remote login, file transfer, electronic mail, and the Web, and any successor to such system.

1.19 “Launch Date” means, with respect to each of the Company Stores and Specialized Stores, the date on which such Company Store or Specialized Store, as operated by GSI hereunder, is first made available to the public on the Web.

1.20 “Look and Feel” means the appearance, coloring, graphics, fonts, logos and other look and feel characteristics of a Web Site which are unique to the Web Site and are consistent from page to page and which indicate a common identity of the various pages and identify such pages as forming a part of a single Web Site.

1.21 “Merchandise” means Palm Products, Non-Palm Products, Extended Warranties and Service Contracts which are offered for sale through the Company Stores, the Wireless Products Store and/or Specialized Stores from time to time.

1.22 “Merchandise Cost of Sales” means, with respect to (i) Palm Products, the amount payable by GSI to the Company for such Palm Products pursuant to Section 3.6 hereof, and (ii) Non-Palm Products, GSI’s actual out of pocket cost of such products, including applicable transportation fees to GSI’s warehouse but excluding any and all other fixed or variable costs.

1.23 “Merchandise Revenue” means [*].

1.24 “Non-Palm Products” means products which are offered for sale through the Company Stores, the Wireless Products Store and/or Specialized Stores, other than Palm Products.

1.25 “On-Line Gift Certificates” means gift certificates, pre-programmed cards, and other forms of credit in fixed denominations redeemable only through the Company Stores, the Wireless Products Store or Specialized Stores.

1.26 “Open-Box Return” means a Palm Product returned by a Customer and not salable as “new” but salable if properly marked as “Open-Box”, as determined by GSI after using good faith efforts to comply with the Testing Specifications (as defined below).

1.27 “Order” means an order for Merchandise made by a Customer.

1.28 “Palm COGS” means Merchandise Cost of Sales for Palm Products.

1.29 “Palm Products” means (i) products which are manufactured by or on behalf of the Company and/or its Affiliates and which use or bear the Company’s or its Affiliates’ Trademarks, including Refurbished Products and Software Products, and (ii) third-party products sourced by the Company.

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1.30 “Palm Revenue” means Merchandise Revenue derived from the sale of Palm Products.

1.31 “Person” means, whether or not capitalized, any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, labor union, or other entity or governmental body.

1.32 “Group Order” means a written order by a third party for Merchandise which (i) is accepted and fulfilled by GSI, and (ii) results in the Group Order Threshold Amount (as defined below) of cash consideration (not including any portion of payment made through the redemption of coupons, discount codes or credits) received by GSI for the sale of Palm Products which are personal digital assistants; provided, however, that Group Orders shall not include any orders placed through the Employee Store. For purposes of this definition, the “Group Order Threshold Amount” shall be $[*] between the Launch Date and the Re-Launch Date and $[*] on and after the Re-Launch Date.

1.33 “Refurbished Product” means a Palm Product not salable as “new” but reconditioned to be salable if properly marked as “used”, as determined by the Company.

1.34 “Re-Launch Date” means, with respect to the Company Stores and Specialized Stores, May 29, 2004.

1.35 “Secondary URLs” means uniform resource locators other than the Designated URLs that include one or more of the trade names, trademarks, or service marks used by the Company or its Affiliates, or any variant of such trade names, trademarks, or service marks or other references to the Company or the Company’s business.

1.36 “Service Contract” means a service contract (other than Wireless Plans) for technical support related to Palm Products offered for sale through the Company Stores, the Wireless Products Store or Specialized Stores which is administered solely by the Company or a third party on its behalf, and the obligations under which are performed solely by the Company or a third party on its behalf.

1.37 “Services Revenue” means [*].

1.38 “Shipping Revenue” means [*].

1.39 “Software Product” means a compact disc, multimedia card, secure digital expansion card containing software to be used in connection with other Palm Products.

1.40 “Specialized Stores” means Web Sites focused on particular customer groups such as the Education Store, the Employee Store, the Canadian Store (each as defined below) and other mutually agreed upon Web Sites.

1.41 “Technology” means any design, specification, content (which includes product files, catalogs, images and editorial content), data, database, software, code, template, user interface, technique, algorithm, method, process, device, procedure, functionality or other technology or item.

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1.42 “Term” is defined in Section 13.1 of this Agreement.

1.43 “Trademark” means any trademark, service mark, trade name, URL, domain name, trade dress, proprietary logo or insignia or other source or business identifier.

1.44 “URL” means the uniform resource locator of a Web Site.

1.45 “Web” means the Internet client-server hypertext distributed information retrieval system known as the World Wide Web.

1.46 “Web Site” means any point of presence maintained on the Internet or on any other public data network. With respect to any Web Site maintained on the World Wide Web or any successor public data network, such Web Site includes all HTML pages (or similar unit of information presented in any relevant data protocol) that either (a) are identified by the same second-level domain (such as http://www.palm.com) or by the same equivalent level identifier in any relevant address scheme, or (b) contain branding, graphics, navigation or other characteristics such that a user reasonably would conclude that the pages are part of an integrated information or service offering.

1.47 “Wireless Plan” means a written plan, agreement or materials established by a third party carrier or service provider which set forth the rates at which, and the terms and conditions pursuant to which, wireless voice and data services and applications for personal digital assistants and/or cellular phones is provided to Customers.

1.48 “Wireless Product” means a personal digital assistant approved for operation on a carrier network offering data and/or voice service.

1.49 “Wireless Products Store” means the Web Site, as operated pursuant to this Agreement, where Palm Products which are Wireless Products are offered for sale to Customers by GSI and Wireless Plans are offered for sale to Customers by the Company (and any successor or replacement Web Site).

Section 2. Creation and Operation of the Company Stores and the Wireless Products Store.

2.1 Design and Development; Launch. GSI will design and develop the Company Stores in accordance with this Agreement. The Company will design and develop the Wireless Products Store in accordance with this Agreement. The Company Stores and the Wireless Products Store will be generally comparable in quality, ease of use and performance as then-current industry standards for e-commerce Web Sites that sell products and services similar to those then offered through the Company Stores and Wireless Products Store, respectively. The Company Stores will contain at a minimum the functionality and features set forth on Schedule “B” attached to this Agreement and such other functionality and features as may be agreed upon by the Parties. The Parties will work together in good faith and use commercially reasonable efforts to cause the Launch Dates for each Company Store to be as soon as practicable after the Effective Date.

2.2 Design Templates; Look and Feel; Approval Rights. The Company Stores will be comprised of a series of templates (“Design Templates”) developed by GSI and the Company that will define the format and layout of a page on the Company Stores and establish the placement and size of content type blocks (e.g. text, graphics, promotions, advertising,

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navigation bar and images). The Look and Feel characteristics of the Company Stores and the Wireless Products Store will be consistent with that of the Company Site, or as otherwise agreed upon by the Parties. The Company will provide GSI with the Company Content necessary for the operation of the Company Stores in such format as may be agreed upon by the Parties. The Company shall have the right to approve the overall Design Templates and Look and Feel of the Company Stores prior to their respective Launch Dates, with such approval not to be unreasonably withheld or delayed. After the Launch Date for each Company Store, no material changes to the Design Templates or Look and Feel of such Company Store will be made without the approval of the Parties.

2.3 Hosting, Maintenance and Operations of Company Stores. GSI will host, maintain and operate the Company Stores in accordance with this Agreement. The Company will host, maintain and operate the Wireless Products Store in accordance with this Agreement until the Transition Date (as defined below). GSI will host, maintain and operate the Wireless Products Store in accordance with this Agreement after the Transition Date. The equipment and software used by GSI to host and operate the Company Stores and the security provided by GSI with respect to the Company Stores, will be at least generally comparable to then-current prevailing industry standards for e-commerce Web Sites that sell products and services similar to those then offered through the Company Stores. GSI agrees that during the Term it will comply with [*]. The Company Stores will be operated at the Designated URLs and at such other URLs as may be agreed upon by the Parties. The Wireless Products Store will be operated at the URL designated by the Company. The Company agrees that GSI will be enabled, throughout the entire Term, to provide all domain name server services for the Designated URLs and all Secondary URLs for the Company Stores. Without limiting the generality of the preceding sentence, throughout the entire Term, the Company will ensure that (i) the Designated URLs and all Secondary URLs are registered with Network Solutions Inc. (or another reputable registrar approved by GSI) in such a way that the Designated URLs and all designated Secondary URLs point to domain name servers designated and controlled by GSI, (ii) it complies with the requirements of, and provides GSI with the information set forth on, Schedule “D” attached to this Agreement with respect to security for and registration of all URLs for the Company Stores, and (iii) GSI is appointed as technical contact with Network Solutions, Inc. (or such other approved registrar) for the Designated URLs and all Secondary URLs. If the Company notifies GSI that it reasonably believes that GSI’s use of the Company’s Trademarks on the Company Stores or Specialized Stores is not consistent with the quality or goodwill of such Trademarks, then GSI will use [*] efforts to alter such use so that it is consistent with such quality or goodwill.

2.4 Order Processing and Fulfillment. Between the Re-Launch Date and the Transition Date, the Company will be responsible for accurately transmitting to GSI all information related to Orders through the Wireless Products Store which is reasonably requested by GSI, in the time period and format reasonably specified by GSI. GSI will be responsible for all aspects of order processing and fulfillment for the Company Stores and the Wireless Products Store, including those functions set forth on Schedule “E” attached to this Agreement. The order processing and fulfillment services provided by GSI with respect to the Company Stores will be generally comparable in quality as then-current prevailing industry standards for e-commerce Web Sites that sell products and services similar to those then offered through the Company Stores. At the Company’s request, GSI will ship Palm Products in a manner which requires the Customer’s signature for delivery. The Order receipt, processing and fulfillment services provided by GSI with respect to the Company Stores will at a minimum comply with [*]. GSI will only accept Orders for shipments to addresses in the United States and APO/FPO addresses and to addresses in such other locations as are mutually agreed upon

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by the Parties; provided, however, that GSI shall also accept Orders for shipments to addresses in [*} beginning [*] and continuing throughout the Term. In the event that Wireless Plans are offered on the Company Stores, the Wireless Products Store or Specialized Stores for credit check and activation by the applicable carrier or service provider through the Company’s systems, GSI shall be responsible for (i) handling Customer and order information transmitted by the Company for the purposes of order processing per Schedule “E”, and (ii) providing product and shipment details, necessary Customer Information, and, if necessary, specific product information such as IMEI numbers and SIM card identifying information to the Company for the purpose of completing device activations through the Company’s systems. The Company shall be responsible for (i) collecting information from Customers to complete applications for Wireless Plans, (ii) submitting applications for such Wireless Plans to the applicable carrier(s), and (iii) notifying GSI as to whether such applications have been approved by the applicable carrier(s). GSI will assume responsibility for back end operations in connection with the offer and sale of Wireless Plans on the Company Stores, the Wireless Products Store and/or Specialized Stores by March 30, 2005 in a manner generally comparable or superior to the manner in which the Company is performing such obligations as of the Re-Launch Date; provided that the Company has provided GSI with (i) all the Company Content necessary for GSI to assume responsibility for such operations in a timely manner, and (ii) its cooperation as reasonably requested by GSI. The date on which GSI assumes responsibility for back end operations in connection with the offer and sale of Wireless Plans shall be referred to as the “Transition Date”. After GSI assumes responsibility for back end operations in connection with the offer and sale of Wireless Plans, any revenue derived therefrom shall be as set forth in this Agreement and GSI agrees to include information within the buy path that the Company reasonably deems necessary (such as a Customer notice regarding chargebacks for cancellation of Wireless Plans by the Customer).

2.5 Returns.

(a) GSI will accept the return of Palm Products which are personal digital assistants (other than Refurbished Products or Wireless Products) and accessories sold through the Company Stores only if (i) a return merchandise authorization number is issued to the Customer, and (ii) (A) such Merchandise is defective or such Merchandise is damaged during shipment as determined by GSI after using good faith efforts to comply with the testing specifications set forth in Schedule “F” (the “Testing Specifications”), or (B) authorization to return such Merchandise is requested within [*] after the Merchandise is received by the Customer (or such other mutually agreed upon time) and such Merchandise is in a condition suitable for resale as new goods or as Open-Box Returns.

(b) GSI will accept the return of a Software Product sold through the Company Stores only if (i) a return merchandise authorization number is issued to the Customer, (ii) such Software Product is defective or damaged during shipment (i.e. does not operate properly with the device), and (iii) authorization to return such Software Product is requested within [*] after the Software Product is received by the Customer (or such other mutually agreed upon time). GSI shall ship a replacement Software Product to such Customer. GSI shall not issue a refund in connection with the return of any Software Product.

(c ) GSI will accept the return of Refurbished Products which are personal digital assistants (other than Wireless Products) and accessories sold through the Company Stores only if (i) a return merchandise authorization number is issued to the Customer, (ii) such Refurbished Product is defective or damaged during shipment as determined by GSI after using good faith efforts to comply with the Testing Specifications, and (iii) authorization to return such

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Refurbished Product is requested within [*] after the Refurbished Product is received by the Customer (or such other mutually agreed upon time). GSI shall refund to the Customer returning a Refurbished Product an amount equal to the amount paid by such Customer for the Refurbished Product.

(d) For Wireless Products, GSI will accept the return of any such products (excluding any associated carrier services, if applicable) from the Customer only if (i) a return merchandise authorization number is issued to the Customer, and (ii) (A) such Wireless Product is defective or is damaged during shipment as determined by GSI based on basic visual inspection, or (B) authorization to return such Wireless Product is requested within [*] after the Wireless Product is received by the Customer (or such other mutually agreed upon time) and such Merchandise is in a condition suitable for resale as new goods or as refurbished product. GSI will issue Customer credits, batch the returned units and ship them to Company’s designated repair facility.

Notwithstanding any other provision of this Agreement, Palm will accept from GSI the return of defective or damaged Palm Products as identified through the Testing Specifications which GSI accepts from Customers in accordance with this Section 2.5.

2.6 Customer Service. GSI will be responsible for providing customer service to users of the Company Stores. The customer service provided to users of the Company Stores will be provided in the name of the applicable Company Store (unless otherwise required by law or privacy policy or not to be misleading) and will comply with [*]. GSI will provide customer service in a courteous and professional manner and in accordance with the customer satisfaction quality levels mutually agreed upon in writing by the Parties from time to time. The Company will provide GSI with a telephone number to be provided to individuals with inquiries related to technical product support, wireless services, and other matters not pertaining to the offering, sale or return of Merchandise through the Company Stores (“Other Customer Service Matters”). GSI will forward such inquiries to the telephone number provided by the Company through GSI’s interactive voice response system and the Company will be responsible for such inquiries. If GSI determines (based on the applicable reason codes recorded by GSI customer service personnel) that the total number of customer contacts by GSI concerning Other Customer Service Matters exceeds, during any fiscal quarter of a Fiscal Year, [*]% of the total number of customer service contacts by GSI concerning the Company Stores and Other Customer Service Matters (the “Threshold”), then the Company will pay GSI $[*] per customer service contact that includes Other Customer Service Matters in excess of the Threshold for the applicable fiscal quarter.

2.7 Web Site Transition Plan. Within a reasonable period of time prior to the Launch Date of each Company Store, the Parties shall mutually agree upon a transition plan to address (i) the transfer of account information from users of the Company’s prior e-commerce Web Site to GSI for use in connection with the Company Stores, (ii) procedures for the return of products purchased by users prior to the Launch Date of each Company Store who desire to return such products after such Launch Date, (iii) the redemption of gift cards, gift certificates, coupon and discount codes issued prior to the Launch Date of each Company Store, (iv) customer service requests received after the Launch Date of each Company Store which relate to events occurring prior to such Launch Date, and (v) such other transition matters as may be necessary to transition the operation of the prior Company e-commerce business to GSI as contemplated hereunder.

2.8 Seamless Operations. The Parties agree to work in good faith and use

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[*] efforts to perform their respective obligations hereunder as seamlessly as practicable under the Company’s brand. As a result of Persons perceiving the Company Stores as an extension of the Company, the Company agrees to provide GSI with reasonable prior notice of intended actions by the Company which may have a material impact on either of the Company Stores, the ability of GSI to perform its obligations hereunder, and/or the volume of Customers or callers accessing the Company Stores or customer service telephone support for the Company Stores.

2.9 Reporting. The Company will have access to a set of standard reports that GSI generally makes available to its other e-commerce partners. Reports will be exportable in formats mutually agreed upon by the Parties. The reports will include access to data concerning sales (including daily and weekly data for sales by dollar, sales by unit and returns), user traffic, performance of the Company Stores (including [*] reports setting forth [*]), and other relevant information for the Company Stores. Company to outline specific reports and data required for financial statement reporting.

Section 3. Merchandising; Cost of Merchandise

3.1 Assortment. Subject to the terms of this Agreement, GSI will offer, merchandise and sell on the Company Stores and the Wireless Products Store (i) [*], and (ii)[*]. From time to time Company may request GSI to carry Non-Palm Products which GSI, in its reasonable discretion based upon projected business volumes, does not wish to undertake the financial obligation to carry. Upon such request, GSI will offer the products for sale on a consignment basis to GSI and such products shall be Palm Products hereunder. GSI and the Company will work together to develop merchandising programs and to determine attractive bundles and promotions for the Company Stores. For all Palm Products that the Parties agree to offer for sale through the Company Stores and the Wireless Products Store, the Company will sell to GSI such quantities, styles and sizes of such products as may be reasonably requested by GSI. With respect to such Palm Products, the Company will provide to GSI, within a reasonable time prior to the projected inclusion of such Palm Products on the Company Stores and the Wireless Products Store, a report, in reasonable detail, which includes (i) UPC/Model #s for each product; (ii) suggested retail prices for each product that the Company generally provides to other retailers of such products (“SRP”); (iii) available colors and styles; (iv) any sales or inventory restrictions or limitations; (v) packaging dimensions and weight by product; and (vi) such other reasonably requested information.

3.2 Concept Shops. The Company Store will include concept shops which offer certain Palm Products and Non-Palm Products for sale to individuals who are affiliated with industries designated by the Company (the “Concept Shops”). GSI will use [*] efforts to include one (1) “Healthcare” Concept Shop in such Company Store by the Launch Date for such Company Store. Thereafter, the Parties will mutually agree upon additional Concept Shops. The Concept Shops will be accessible to individuals who provide their name, title, e-mail address and phone number and the name of the industry with which they are affiliated. The products offered for sale through the Concept Shops will include an assortment of Palm Products and Non-Palm Products designed to appeal to individuals affiliated with the industries designated by the Company.

3.3 Restrictions. Notwithstanding anything contained herein to the contrary, GSI will not be required to offer, sell, advertise or promote on either of the Company Stores, or display any links to Web Sites that offer, sell, advertise or promote, either directly or indirectly, any of the following: (i) any Merchandise which GSI knows or is informed by the Company is

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counterfeit, or the offer or sale of which GSI knows or is informed by the Company infringes the valid Intellectual Property Rights of third parties; (ii) any product or service that is unethical, immoral, obscene or offensive to good taste; or (iii) any product that GSI is prohibited from offering for sale on the Company Stores by any third party manufacturer, licensor or licensee of such product.

3.4 Gift Certificates. GSI will have the right to sell On-Line Gift Certificates through the Company Stores, the Wireless Products Store and Specialized Stores. GSI will pay to the Company a revenue share pursuant to Section 7 upon the redemption of On-Line Gift Certificates and not upon the initial sale of such On-Line Gift Certificates.

3.5 Product Descriptions. The Company will provide GSI with product description information (including UPC codes) for each Palm Product in formats reasonably requested by GSI from time to time. The Company will provide GSI with such additional product description information concerning Palm Products as may be reasonably requested by GSI, including information required to comply with applicable legal disclosure requirements. GSI will develop or obtain other product description information for Non-Palm Products. All product descriptions for use on the Company Stores must be reviewed by Palm prior to the Launch Dates for the Company Stores.

3.6 Purchase and Sale of Palm Products.

(a) Palm Products shall be sold to GSI at [*] a current copy of which has been provided to GSI (“Price List”). [*] Each revised Price List and price change notification will state an effective date. The current Price List will be deemed replaced by any subsequent Price List. The Company will deliver such Palm Products to GSI, at the Company’s expense, F.O.B. the Company’s warehouse, to a facility or facilities designated by GSI and based upon a mutually agreed upon delivery schedule, with title to the Palm Products passing from the Company to GSI upon delivery to the common carrier. The Company will use good faith efforts to deliver such Palm Products to GSI in a manner which minimizes GSI’s receiving cost, based upon specifications provided by GSI. GSI will confirm receipt of product within [*] of arrival at GSI facility and will have [*] to make a claim of shortage or damaged shipment.

(b) Each calendar quarter, GSI will have the right to return to the Company Palm Products with a value (as determined by the amount paid by GSI for such Palm Products) of up to [*]% of its aggregate net purchases of Palm Product from the Company in the [*] previous [*] (the “Return Allowance”) for a refund equal to the aggregate amount paid by GSI for such returned Palm Products; provided, however, that GSI must use good faith efforts to sell through its remaining inventory of Palm Products prior to returning to Company. Net purchases include products purchased net of [*], if any, during such applicable quarters. Once the Return Allowance has been reached, the Company will not be required to accept the return of Palm Products from GSI until additional purchases of Palm Products have been made by GSI. GSI will be responsible for the freight costs associated with returns; provided, however, that the Company will assist GSI as reasonably requested in filing any necessary claims with common carriers.

(c) Terms of sale are [*] from date of shipment. The Company will invoice GSI for the aggregate sale price of Palm Products shipped to GSI. Payment is not conditioned upon the Palm Products meeting any acceptance testing procedures GSI may

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have. If there is any dispute as to a part of a shipment, GSI will pay for the undisputed part of that shipment. GSI may not deduct any debit memos from payment(s) made to the Company on outstanding invoice(s), without prior written approval from the Company. Payments should be submitted to the appropriate address as stated on the invoice.

Section 4. Additional Web Stores.

4.1 Education Store. GSI will design and develop a Web Site which will offer certain Palm Products and Non-Palm Products for sale to educational institutions as defined by Palm in conducting its education business and to the faculty and students of such institutions (the “Education Store”). GSI will use commercially reasonable efforts to cause the Launch Date for the Education Store to coincide with the later of the Launch Dates for the Company Stores. Following the Launch Date for the Education Store, GSI will (i) host, maintain and operate the Education Store, and (ii) process orders and provide fulfillment and customer services for the Education Store. The Education Store will be accessible to representatives of educational institutions and to the faculty and students of such institutions who provide their name, title, e-mail address and phone number and the name of the educational institution with which they are associated. The products offered for sale through the Education Store will include an assortment of Palm Products and Non-Palm Products designed to appeal to various sectors of the education market. GSI will accept purchase orders, credit cards, checks and money orders for purchases through the Education Store.

4.2 Employee Store. GSI will design and develop a Web Site which will offer certain Palm Products for sale to employees of the Company (the “Employee Store”). GSI will use commercially reasonable efforts to cause the Launch Date for the Employee Store to be as soon as practicable after the Effective Date. Following the Launch Date for the Employee Store, GSI will (i) host, maintain and operate the Employee Store, and (ii) process orders and provide fulfillment and customer services for the Employee Store. The Employee Store will be accessible to employees of the Company through the unique Internet protocol address of the Company’s intranet Web Site. The Company will provide GSI with a unique employee identifier to be used by each employee of the Company. All Palm Products offered for sale through the Company Stores will be offered for sale through the Employee Store, other than warranty plans, Refurbished Products, parts and bundles. Each employee of the Company (as determined by such employee’s unique employee identifier) will not be permitted to purchase more than ten (10) of each handheld computing device offered for sale through the Employee Store during any calendar year. GSI will accept credit cards and checks for purchases through the Employee Store.

4.3 Canadian Store. GSI will design and develop a Web Site which will offer certain Palm Products and Non-Palm Products for sale to residents of Canada (the “Canadian Store”). GSI will use commercially reasonable efforts to cause the Launch Date for the Canadian Store to occur by October 1, 2003. Following the Launch Date for the Canadian Store, GSI will (i) host, maintain and operate the Canadian Store, and (ii) process orders and provide fulfillment and customer services for the Canadian Store. The products to be offered for sale through the Canadian Store will be mutually agreed upon by the Parties. The Canadian Store and customer service for the Canadian Store will be available in English and the selling prices for products and services offered for sale through the Canadian Store will be in displayed in Canadian currency with GSI will accepting such currency as payment for products and services. In addition, GSI will provide telephone customer service for the Canadian Store in French through a toll-free phone line. The exchange rate used for the Canadian Store will be updated on a daily basis to reflect the then current exchange rate for United States and Canadian currency as set

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forth in the Wall Street Journal. Notwithstanding the foregoing, in the event that Merchandise Revenue derived from the Canadian Store is less than [*]Dollars ($[*]) during any of the successive 12-month periods beginning on the one (1) year anniversary of the Launch Date for the Canadian Store, GSI may elect to provide notice to Company that it will cease operations such store unless Company reimburses GSI in an amount equal to [*]% of the difference between (A) [*]Dollars ($[*]) and (B) the Merchandise Revenue derived from the Canadian Store during such 12-month period. GSI must provide such notice within [*] after the end of any such 12-month period and Company shall have [*] after receipt of such notice to elect to make such payment to GSI. If Company elects not to make such payment, GSI may cease operation of the Canadian Store not less than [*] after the date by which Company was required to make such election.

Section 5. Promotion and Advertising.

5.1 Company Activities. At all times during the Term, the Company shall operate and maintain the Company Site and the Wireless Products Store. The Company will create and, following the Launch Date for the Company Stores, maintain on the Company Site during the Term the Company Stores Links in accordance with the requirements set forth on Schedule “A”. Following the Launch Date for each Company Store and continuing during the Term, the Company will [*]. From time to time, the Company may desire or agree to participate in joint promotions with GSI wherein discounts are provided to Customers on Non-Palm Products, value added services and/or shipping and handling services. If GSI and the Company agree upon any such joint promotions, then [*].

5.2 GSI Activities and Obligations. Upon request by the Company from time to time, GSI will provide data feeds to third parties with which the Company has entered into promotional and/or marketing agreements. Such data feeds shall include information concerning Merchandise then available for sale through the Company Stores. Such information may include product names, product descriptions, stock keeping unit numbers (“SKU”), product prices, shipping costs, availability and/or links to the Company Stores.

Section 6. Implementation.

6.1 Account Managers. Each Party will assign an account manager (which manager will be subject to change from time to time by the assigning Party upon written notice to the other Party) to oversee the performance of such Party’s obligations under this Agreement and to facilitate coordination of the Parties’ performance of their respective obligations. The account managers will meet with such frequency as may be mutually agreed upon during the Term to review the implementation of this Agreement and to explore methods for improving performance.

6.2 Cooperation. During the Term, the Parties will cooperate in good faith and use commercially reasonable efforts to (a) provide a positive customer experience between the Company Site and the Company Stores, and (b) maximize customers and revenues from or through the Company Stores.

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6.3 Personnel. Each Party will provide during the Term the appropriate resources and personnel to produce and promote the Company Stores. Each Party’s designated employees will be subject to change from time to time by such Party in its sole discretion upon notice to the other Party.

Section 7. Compensation and Expenses.

7.1 General. GSI will be the seller of all products and services sold through the Company Stores, the Wireless Products Store and the Specialized Stores. All revenues from the sale of products and/or services through the Company Stores, the Wireless Products Store and Specialized Stores will be [*]. For all products and/or services sold through the Company Stores, the Wireless Products Store and Specialized Stores, GSI will be responsible for (i) establishing the selling price for such products and services, (ii) determining whether any sales or use tax is payable to any governmental authority and, if so payable, the amount of any sales or use tax payable, and (iii) withholding, collecting and remitting to the appropriate governmental authority any sales or use tax that is payable. GSI agrees that as between the Parties, GSI will be solely and exclusively responsible to collect and pay such sales or use taxes where they may be due. At GSI’s direction, the Company will include information on the Wireless Products Store indicating that sales and/or use taxes will be collected in connection with Orders shipped to the jurisdictions specified from time to time by GSI. In the event that Wireless Plans are offered through the Company Stores, the Wireless Products Store and/or Specialized Stores, the Parties acknowledge and agree that the actual sale of such Wireless Plans shall not occur through the Company Stores, the Wireless Products Store or Specialized Stores and that, as between the Parties, the Company (itself or through its designee) shall be (i) the seller and/or agent of such Wireless Plans, (ii) responsible for establishing the selling price for such Wireless Plans, (iii) responsible for determining whether any sales or use tax is payable to any governmental authority in connection with the sale of such Wireless Plans and, if so payable, the amount of any sales or use tax payable, (iv) responsible for withholding, collecting and remitting to the appropriate governmental authority any sales or use tax that is payable in connection with the sale of such Wireless Plans, and (v) responsible for ensuring that the offer and sale of such Wireless Plans complies with all applicable laws. Except as expressly provided for elsewhere in this Agreement, each Party will be responsible for all costs and expenses incurred by such Party in performing its obligations under this Agreement.

7.2 Collection of Sales Proceeds. All proceeds from the sale of Merchandise and related services through the Company Stores, the Wireless Products Store and Specialized Stores will be collected and processed by GSI. Other than the periodic payments, if any, set forth in Section 7.3, GSI shall retain all amounts collected by GSI from transactions through the Company Stores, the Wireless Products Store and Specialized Stores.

7.3 Periodic Payments

(a) With respect to transactions occurring between the Launch Date and the date hereof, the Parties will make the following [*] payments:

(i) If (A) [*]% of [*] derived from the sale of Palm Products which are personal digital assistants shipped during the applicable period (“[*]”) exceeds (B) the [*] for Palm Products which are personal digital assistants shipped during such period, net of returns (“[*]”), then GSI will pay the Company an amount equal to (I) [*]% of [*], less (II) [*].

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(ii) If (A) [*] exceeds (B) [*]% of [*], then the Company will pay GSI an amount equal to (I) [*]PDA COGS, less (II) [*]% of [*].

(iii) If (A) [*]% of [*] derived from the sale of Palm Products other than personal digital assistants shipped during the applicable period (“[*]”) exceeds (B) the [*] for Palm Products other than personal digital assistants shipped during such period, net of returns (“[*]”), then GSI will pay the Company an amount equal to (I) [*]% of [*], less (II) [*].

(iv) If (A) [*] exceeds (B) [*]% of [*], then the Company will pay GSI an amount equal to (I) [*], less (II) [*]% of [*].

(v) In the event that, due to the quantity and type of Palm Products ordered via a Group Order placed between April 1, 2003 and the date hereof, GSI decides, in its sole discretion, to discount the selling price for such Palm Products by more than [*]percent ([*]%) off of the then current selling price on the Company Stores, but not more than [*]percent ([*]%), then GSI will pay the Company an amount equal to [*]% of [*] derived from all such Group Orders during the applicable period.

(vi) In the event that, due to the quantity and type of Palm Products ordered via a Group Order placed between April 1, 2003 and the date hereof, GSI decides, in its sole discretion, to discount the selling price for such Palm Products by more than [*]percent ([*]%) off of the then current selling price on the Company Stores, then GSI will pay the Company an amount equal to [*]% of Palm Revenue derived from all such Group Orders during the applicable period.

(vii) GSI will pay the Company an amount equal to [*]% of the amount, if any, by which [*] derived from the provision of shipping and handling services during the applicable period exceeds GSI’s carrier costs for providing shipping and handling services during such period.

(viii) The Company will pay GSI an amount equal to [*]Dollars ($[*]) for [*] by a Customer during the applicable period and approved by the applicable [*].

(b) With respect to transactions occurring between the date hereof and the Re-Launch Date, the Parties will make the following [*]payments:

(i) If (A) [*]% of [*] derived from the sale of Palm Products which are personal digital assistants shipped during the applicable period (“[*]”) exceeds (B) the [*] for Palm Products which are personal digital assistants shipped during such period, net of returns (“[*]”), then GSI will pay the Company an amount equal to (I) [*]% of [*], less (II) [*].

(ii) If (A) [*] exceeds (B) [*]% of [*], then the Company will pay GSI an amount equal to (I) [*], less (II) [*]% of [*].

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(iii) If (A) [*]% of [*] derived from the sale of Palm Products other than personal digital assistants shipped during the applicable period (“[*]”) exceeds (B) the [*] for Palm Products other than personal digital assistants shipped during such period, net of returns (“[*]”), then GSI will pay the Company an amount equal to (I) [*]% of [*], less (II) [*].

(iv) If (A) [*] exceeds (B) [*]% of [*], then the Company will pay GSI an amount equal to (I) [*], less (II) [*]% of [*].

(v) With respect to Group Orders where GSI does not discount the selling price for Palm Products included in such Group Orders by more than [*]percent ([*]%) off of the then current selling price on the Company Stores, GSI will pay the Company an amount equal to [*]% of [*] derived from all such Group Orders during the applicable period.

(vi) In the event that, due to the quantity and type of Palm Products ordered via a Group Order, GSI decides, in its sole discretion, to discount the selling price for such Palm Products by more than [*]percent ([*]%) off of the then current selling price on the Company Stores, but not more than [*]percent ([*]%), then GSI will pay the Company an amount equal to [*]% of [*] derived from all such Group Orders during the applicable period.

(vii) In the event that, due to the quantity and type of Palm Products ordered via a Group Order, GSI decides, in its sole discretion, to discount the selling price for such Palm Products by more than [*]percent ([*]%) off of the then current selling price on the Company Stores, then GSI will pay the Company an amount equal to [*]% of [*] derived from all such Group Orders during the applicable period.

(viii) The Company will pay GSI a [*] in an amount equal [*]% of [*] derived from Orders placed via a purchase order.

(ix) GSI will pay the Company an amount equal to [*]% of the amount, if any, by which [*] derived from the provision of shipping and handling services during the applicable period exceeds GSI’s carrier costs for providing shipping and handling services during such period.

(x) The Company will pay GSI an amount equal to [*]Dollars ($[*]) for [*] by a Customer during the applicable period and approved by the applicable [*].

(c) With respect to transactions occurring on and after the Re-Launch Date, the Parties will make the following [*]payments:

(i) For each Order shipped during the applicable period (other than Group Orders) where the Applicable Percentage (as defined below) of [*] from such Order exceeds the [*] associated with such Order, GSI will pay the Company an amount equal to (A) the Applicable Percentage of [*] from such Order, less (B) the [*] associated with such Order.

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Merchandise Revenue Derived From the Sale of Palm Products	Applicable Percentage
Until such time as Merchandise Revenue derived from the sale of Palm Products during the [*] period commencing on the Re-Launch Date (and each subsequent [*]) is equal to $[*]	[	*]%
During such time as Merchandise Revenue derived from the sale of Palm Products during the [*] commencing on the Re-Launch Date (and each subsequent [*] period) exceeds $[*] until such Merchandise Revenue is equal to $[*]	[	*]%
During such time as Merchandise Revenue derived from the sale of Palm Products during the [*] period commencing on the Re-Launch Date (and each subsequent [*] period) exceeds $[*] until such Merchandise Revenue is equal to $[*]	[	*]%
During such time as Merchandise Revenue derived from the sale of Palm Products during the [*] period commencing on the Re-Launch Date (and each subsequent [*] period) exceeds $[*] until such Merchandise Revenue is equal to $[*]	[	*]%
During such time as Merchandise Revenue derived from the sale of Palm Products during the [*] period commencing on the Re-Launch Date (and each subsequent [*] period) exceeds $[*]	[	*]%

(ii) For each Order shipped during the applicable period (other than Group Orders) where the [*] associated with such Order exceeds the Applicable Percentage of [*] from such Order, the Company will pay GSI an amount equal to (A) the [*] associated with such Order, less (B) the Applicable Percentage of [*] from such Order.

(iii) With respect to Group Orders where GSI does not discount the selling price for Palm Products included in such Group Orders by more than [*]percent ([*]%) off of the then current selling price on the Company Stores, and (A) [*]% of [*]derived from all such Group Orders exceeds (B) [*] associated with such Group Orders, then GSI will pay the Company an amount equal to (I) [*]% of [*] derived from all such Group Orders during the applicable period, less (II) [*] associated with such Group Orders.

(iv) With respect to Group Orders where GSI does not discount the selling price for Palm Products included in such Group Orders by more than [*]percent ([*]%) off of the then current selling price on the Company Stores, and (A) [*] associated with all such Group Orders exceeds (B) [*]% of [*] derived from such Group Orders, then the Company will pay GSI an amount equal to (I) [*] associated with all such Group Orders during the applicable period, less (II) [*]% of [*] derived from such Group Orders.

(v) In the event that, due to the quantity and type of Palm Products ordered via a Group Order, GSI decides, in its sole discretion, to discount the selling price for such Palm Products by more than [*]percent ([*]%) off of the then current selling price on the

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Company Stores, but not more than [*]percent ([*]%), and (A) [*]% of [*] derived from all such Group Orders exceeds (B) [*] associated with such Group Orders, then GSI will pay the Company an amount equal to (I) [*]% of [*] derived from all such Group Orders during the applicable period, less (II) [*] associated with such Group Orders.

(iv) In the event that, due to the quantity and type of Palm Products ordered via a Group Order, GSI decides, in its sole discretion, to discount the selling price for such Palm Products by more than [*]percent ([*]%) off of the then current selling price on the Company Stores, but not more than [*]percent ([*]%), and (A) [*] associated with all such Group Orders exceeds (B) [*]% of [*] derived from such Group Orders, then the Company will pay GSI an amount equal to (I) [*] associated with all such Group Orders during the applicable period, less (II) [*]% of [*] derived from such Group Orders.

(v) In the event that, due to the quantity and type of Palm Products ordered via a Group Order, GSI decides, in its sole discretion, to discount the selling price for such Palm Products by more than [*]percent ([*]%) off of the then current selling price on the Company Stores, and (A) [*]% of [*] derived from all such Group Orders exceeds (B) [*] associated with such Group Orders, then GSI will pay the Company an amount equal to (I) [*]% of [*] derived from all such Group Orders during the applicable period, less (II) [*] associated with such Group Orders.

(vi) In the event that, due to the quantity and type of Palm Products ordered via a Group Order, GSI decides, in its sole discretion, to discount the selling price for such Palm Products by more than [*]percent ([*]%) off of the then current selling price on the Company Stores, and (A) [*] associated with all such Group Orders exceeds (B) [*]% of [*] derived from such Group Orders, then the Company will pay GSI an amount equal to (I) [*] associated with all such Group Orders during the applicable period, less (II) [*]% of [*] derived from such Group Orders.

(vii) The Company will pay GSI a [*] fee in an amount equal to [*]% of [*] derived from Orders not placed via a purchase order.

(viii) The Company will pay GSI a [*] fee in an amount equal [*]% of [*] derived from Orders placed via a purchase order.

(ix) GSI will pay the Company an amount equal to [*]% of the amount, if any, by which [*] derived from the provision of shipping and handling services during the applicable period exceeds the lowest shipping rates quoted to GSI, after discounts or rebates, by Federal Express, USPS, UPS or similar carriers then used by GSI for shipment from the applicable GSI warehouse to the end Customer for Orders shipped during the applicable period.

(x) Between the Re-Launch Date and the Transition Date, the Company will pay GSI an amount equal to [*]Dollars ($[*]) for each [*] by GSI during the applicable period, regardless of whether [*] for such [*]. On and after the Transition Date, the Company will pay GSI an amount equal to [*]Dollars ($[*]) for each [*] by GSI during the applicable period, regardless of whether [*] for such [*].

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(xi) For sales of Palm Products to QVC, Inc. which are fulfilled by GSI hereunder where [*] from such sales exceeds the sum of (A) the [*] for such Palm Products, and (B) $[*] per Palm Product included in such sales, GSI will pay the Company an amount equal to the [*] from such sales, less the sum of (Y) the [*] for such Palm Products, and (Z) $[*] per Palm Product included in such sales.

(xii) For sales of Palm Products to QVC, Inc. which are fulfilled by GSI hereunder where the sum of (A) the [*] for such Palm Products, and (B) $[*] per Palm Product included in such sales exceeds [*] from such sales, the Company will pay GSI an amount equal to the sum of (Y) the [*] for such Palm Products, and (Z) $[*] per Palm Product included in such sales, less the [*] from such sales.

(d) With respect to transactions occurring on and after the Launch Date, the Parties will make the following [*]payments:

(i) GSI will pay the Company an amount equal to [*]% of the amount, if any, by which [*] derived from the sale of Non-Palm Products shipped during the applicable period exceeds the [*] for Non-Palm Products shipped during such period, net of returns.

(ii) GSI will pay the Company an amount equal to [*]% of the amount, if any, by which [*] derived from the provision of gift wrapping and other value added services during the applicable period exceeds GSI’s actual cost of providing such services (not including [*], but including [*] used in connection therewith) during the period.

(iii) GSI will pay the Company an amount equal to [*]% of [*] derived from the sale of Extended Warranties and Service Contracts during the period.

(iv) The Company will pay GSI an amount equal to [*] incurred by GSI in connection with retrieving defective Wireless Products from Customers and shipping replacement Wireless Products to such Customers.

(e) With respect to transactions occurring on and after the Re-Launch Date, the Parties will make the following [*] payments for each applicable successive [*] period beginning on the Re-Launch Date (or pro-rata portion thereof for any shorter period ending at the end of the Term):

(i) In the event that (A) the product (the “[*]”) obtained by multiplying (I) the total number of Orders (other than Group Orders) shipped during the applicable [*] period, and (II) $[*] exceeds (B) the product (the “[*]”) obtained by multiplying (I) 100% less the Applicable Percentage set forth in the table in Section 7.3(d)(i), as determined using the [*] derived from the sale of Palm Products during such [*] period, and (II) the [*] derived from Orders shipped during such [*] period, then the Company will pay GSI an amount equal to the difference between the [*] and the [*].

(f) The Company will pay GSI an amount equal to [*]Dollars ($[*]) on the Re-Launch Date in order to cover certain of GSI’s costs associated with the set up and

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maintenance of systems to accept and process Wireless Product orders captured on the Company Site or systems. Attached hereto as Schedule “H” is a preliminary draft of a statement of work for the wireless store integration prepared by the Company. The Parties will work together in good faith to mutually agree upon GSI’s obligations with respect to such integration; provided, however, in no event will GSI be required to comply with any of the terms set forth in the statement of work without its prior written consent. In addition, the Company may request additional services be provided with respect to Wireless Plan processing. GSI will provide such additional services it can reasonably provide for a mutually agreed upon amount.

7.4 Payments. GSI will account to the Company for the periodic payments due under Section 7.3 within [*] after the end of each period through a report, showing in reasonable detail, the calculation of such payments; provided, however, that the payment due under subsections 7.3(c)(i) and (ii) shall be estimated by GSI based on a mutually agreed upon Applicable Percentage intended to approximate the Applicable Percentage for the Company’s then current fiscal year; provided, however, that in the event the Parties do not mutually agree upon such estimated Applicable Percentage, then GSI shall use a good faith estimate of the Applicable Percentage, taking into consideration the forecasts provided by the Company. A final Company fiscal year end reconciliation setting forth the actual amounts payable by GSI to the Company or by the Company to GSI, as the case may be, under subsections 7.3(c)(i) and (ii) will be delivered by GSI to the Company within [*] following such fiscal year end. The Company may verify the accuracy of such reports in accordance with and pursuant to the terms of Section 7.5. If such calculation indicates that, on an aggregate basis, GSI is required to make a payment to the Company, then GSI will remit such payment to the Company along with such report. If such calculation indicates that, on an aggregate basis, the Company is required to make a payment to GSI, then the Company will issue a credit memo to GSI as soon as practicable following its receipt of such report, but in no event later than [*] following its receipt of such report. Upon receipt of any such credit memo, GSI may (i) deduct and set off the amount set forth in the credit memo against any amounts payable by GSI to the Company, including amounts payable for purchases of Palm Products, or (ii) notify the Company that the Company is required to pay GSI the amount set forth in the credit memo, in which case payment terms will be net [*] from the date of such notice. With respect to [*]payments due hereunder, GSI will forward to the Company a preliminary report each[*], on the last day of the Company’s fiscal [*]that estimates the [*]payments for such [*], provided that the Company has provided GSI with its fiscal calendar. The [*]payments will be calculated at [*]end based upon a mutually agreed upon method for projecting returns.

7.5 Records and Audit Rights. During the Term of this Agreement, and for a period of [*] thereafter, each Party will keep complete and accurate books and records sufficient to verify the amounts paid and payable by a Party to the other Party under this Agreement. Each Party will, upon at least [*] prior written request by the other Party, allow such Party, or a representative of such Party (unless the audited Party reasonably believes there is a conflict between such representative and the audited Party) to audit such books and records at the audited Party’s premises to the extent necessary to verify the amounts owed and charged pursuant to this Agreement; provided that (a) any such audit is conducted during normal business hours and in a manner designed to not unreasonably interfere with the audited Party’s ordinary business operations; (b) audits may not occur more frequently than [*]; and (c) each such audit may only cover [*] pursuant to this Section 7.5, if any. Notwithstanding the foregoing, if a discrepancy of more than [*]% is revealed during any audit, then the auditing Party shall be entitled to conduct an additional audit during the [*] in which the audit which revealed such discrepancy occurred. The audited Party will cooperate with the auditing Party and its representatives in the conduct of such audit.

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7.6 Interest. Either Party shall have the right to charge the other Party interest on any delinquent balance due under this Agreement that is more than [*] past due. This interest is computed on a daily basis for each day that the payment is delinquent, at the lesser of (i) [*]percent ([*]%) per annum or (ii) the maximum rate permitted by law.

Section 8. Customer Information and Privacy Policy.

8.1 Customer Information.

(a) The Company shall exclusively own all Customer Information; provided that during the Term, GSI shall have the right to use such Customer information as is reasonably necessary to perform its obligations hereunder. GSI will treat such Customer Information as Confidential Information of the Company, and, except as permitted hereunder, shall in no way use, sell, transfer or otherwise exploit the data for any purpose without express written consent of the Company. Each Party agrees to use all Customer Information in accordance with the privacy policy for the applicable Company Store, the Wireless Products Store or Specialized Store and all applicable laws, rules and regulations. .

(b) GSI shall deliver a data feed to the Company’s file transfer protocol account on a daily basis containing the following Customer Information regarding each Order placed through the Company Stores and Specialized Stores: the Order number, the email address, the billing address, the name of the Customer, the name of the Customer’s company (if provided), the Customer’s shipping address, the Merchandise ordered (including quantity, SKU and purchase price), the date of such Order and, if applicable, the promotion or discount code used in connection with such Order.

8.2 Privacy Policy. Prior to the Launch Date for each applicable Company Store, the Wireless Products Store or Specialized Store, the Parties will mutually agree upon the privacy policy for and that will be posted on such Company Store, the Wireless Products Store or Specialized Store. Each Party will abide by such privacy policy, as it may be amended from time to time. Any amendments to such privacy policy must be agreed upon by the Parties; provided, however, that if any amendment to the privacy policy is required by applicable law or to be factually accurate, then GSI or the Company, as the case may be, will amend the privacy policy to comply with such requirements.

8.3 Aggregate Information and Financial Information. Each Party will have an equal and undivided ownership interest in the Aggregate Information and Financial Information; provided, however, that personally identifiable Customer Information pertaining to Wireless Plans, Wireless Plan carriers and Wireless Plan service providers will remain the exclusive Confidential Information of the Company and such Customer Information shall not be deemed Aggregate Information or Financial Information. Each Party will treat such Aggregate Information and Financial Information as Confidential Information of the other Party hereunder; provided that each Party may use or disclose Aggregate Information and Financial Information in connection with its financial and statistical reports, so long as (a) such information is not separately identified as information of any of the Company Stores, the Wireless Products Store or Specialized Stores, and (b) such information is used or disclosed in a manner which is not specific to a Customer, does not refer or identify any specific Customer, and cannot be used, alone or in conjunction with any other information, to identify a particular Customer.

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Section 9. Proprietary Rights.

9.1 Ownership.

(a) The Company. As between the Parties, the Company reserves all right, title and interest in and to the “Company-Furnished Items” (as defined below), along with all Intellectual Property Rights associated with any of the foregoing (the “Company Intellectual Property”), and no title to or ownership of the Company Intellectual Property is transferred or, except as expressly set forth in Section 9.2, licensed to GSI or any other Person. GSI hereby assigns to the Company all right, title and interest that it may have or acquire in and to the Company Intellectual Property, and GSI will take, at the Company’s expense, any actions (including execution and delivery of affidavits and other documents) reasonably requested by the Company to effect, perfect or confirm the Company’s or its designee’s right, title and interest therein. As used herein, “Company-Furnished Item” means any Company Content or any Trademark or Look and Feel of the Company or its Affiliates, as the case may be, that (a) is owned or controlled (e.g., by license or otherwise) by the Company or its Affiliates, as the case may be, and (b) is furnished by the Company for use in connection with the activities contemplated by this Agreement. As used herein, “Company-Furnished Item” will also include, without limitation, any adaptation, modification, improvement or derivative work of any Company-Furnished Item that is developed by either Party or jointly by the Parties; provided, however, that the Company-Furnished Items do not include any GSI-Furnished Item (as defined below) or any adaptation, modification, improvement or derivative work of the Company Stores Functionality that is developed by either Party or jointly by the Parties. At the termination of the Agreement, GSI will return all Company-Furnished Items to the Company, and GSI shall have no further rights thereto.

(b) GSI. As between the Parties, GSI reserves all right, title and interest in and to the “GSI-Furnished Items” (as defined below), the “GSI-Owned Developments” (as defined below), and the Company Stores and Specialized Stores (other than the Company-Furnished Items included in the Company Stores and Specialized Stores), along with all Intellectual Property Rights associated with any of the foregoing (the “GSI Intellectual Property”), and no title to or ownership of the GSI Intellectual Property is transferred or licensed to the Company or any other Person. The Company hereby assigns and agrees to assign to GSI all right, title and interest to the GSI Intellectual Property, and the Company will take, at GSI’s expense, any actions (including execution and delivery of affidavits and other documents) reasonably requested by GSI to effect, perfect or confirm GSI’s or its designee’s right, title and interest therein. As used herein, “GSI-Furnished Item” means any GSI Content or any Technology or Trademark of GSI that (a) is owned or controlled (e.g., by license or otherwise) by GSI or its Affiliates, as the case may be, and (b) is furnished by GSI for use in connection with the activities contemplated by this Agreement. “GSI-Owned Development” means any Technology (including any adaptation, modification, improvement or derivative work of any GSI-Furnished Item) that is developed solely by GSI or jointly by the Parties for use on any of the Company Stores or Specialized Stores in connection with the activities contemplated by this Agreement or that is developed by GSI for use on the Web Sites that it operates, which may include the Company Stores and/or Specialized Stores. Notwithstanding the foregoing, neither the GSI-Furnished Items nor the GSI-Owned Developments will include (i) any Company-Furnished Item, (ii) any derivatives thereof, or (iii) any Joint Developments (as defined below). The GSI-Owned Developments will, however, include all adaptations, modifications, improvements or derivative works of the Company Stores Functionality that are developed by GSI or jointly by the Parties. At the termination of the Agreement, the Company shall return all

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GSI-Furnished Items to GSI, and the Company shall have no further rights thereto. For purposes of this Agreement, “Joint Development” means any Technology that is jointly developed through the significant efforts of each Party during the Term pursuant to mutually agreed upon terms expressly agreed upon in writing by the Parties.

9.2 Company License. The Company hereby grants to GSI, during the Term, a worldwide, non-transferable license to use the Company-Furnished Items supplied by the Company as is reasonably necessary to perform its obligations under this Agreement or to sublicense the Company-Furnished Items supplied by the Company to third parties in connection with advertising and promotion agreements and arrangements permitted under this Agreement (sublicense to be approved by Company); provided, however, that GSI will not use Trademarks of the Company or its Affiliates, including in any advertising, except in conformance with the reasonable use guidelines of the Company set forth on Schedule “G” attached to this Agreement. All goodwill arising out of any use of any of the Company’s or its Affiliate’s Trademarks by, through or under GSI will inure solely to the benefit of the Company or such Affiliate, as the case may be.

9.3 Non-Disparagement. Neither GSI nor any of its Affiliates will use the Trademarks of the Company or its Affiliates in a manner that disparages the Company or its Affiliates, as the case may be, or its products or services, or portrays the Company or its Affiliates, as the case may be or its products or services in a false, competitively adverse or poor light. GSI and its Affiliates will avoid knowingly taking any action that diminishes the value of such marks.

Section 10. Representations and Indemnification.

10.1 Representations. Each Party represents and warrants to the other that: (a) it has the full corporate right, power and authority to enter into this Agreement and perform its obligations hereunder; (b) its execution, delivery and performance of this Agreement, and the other Party’s exercise of such other Party’s rights under this Agreement, will not conflict with or result in a breach or violation of any of the terms or provisions or constitute a default under any material agreement by which it is bound; and (c) when executed and delivered, this Agreement will constitute its legal, valid and binding obligation enforceable against it in accordance with its terms.

10.2 Indemnity.

(a) GSI will defend, indemnify and hold harmless the Company and its Affiliates (and their respective employees, officers, directors and representatives) from and against any and all claims, costs, losses, damages, judgments and expenses (including reasonable attorneys’ fees) arising out of any third party claim, action, suit or proceeding (a “Claim”), to the extent it is based on (i) the creation, operation or content of the Company Stores and Specialized Stores (other than any items or materials supplied by the Company for use on the Company Stores, on the Specialized Stores or otherwise pursuant to this Agreement, including the Company Content), (ii) any actual or alleged breach of GSI’s representations, warranties and/or obligations as set forth in this Agreement, (iii) any actual or alleged infringement of any Intellectual Property Rights by any materials provided by GSI for use on the Company Stores, on the Specialized Stores or provided by GSI to the Company for its use under this Agreement; (iv) the offer, marketing (unless directed by the Company) or sale of any products (except for product liability, wrongful death or similar claims relating to products obtained from or through the Company or its Affiliates, including Palm Products) or services on

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the Company Stores or the Specialized Stores; and (v) for the payment of any sales taxes (including any fines or penalties assessed for non-payment) resulting from the sale of merchandise through the Company Stores or the Specialized Stores. Subject to Section 10.3, GSI will pay any award against the Company and its Affiliates (and their respective employees, officers, directors or representatives) and any costs and attorneys’ fees reasonably incurred by them resulting from any such Claim.

(b) The Company will defend, indemnify and hold harmless GSI and its Affiliates (and their respective employees, officers, directors and representatives) from and against any and all claims, costs, losses, damages, judgments and expenses (including reasonable attorneys’ fees) arising out of any third party Claim, to the extent it is based on (i) the creation, operation or content of the Company Site or the Wireless Products Store; (ii) any actual or alleged breach of the Company’s representations, warranties and/or obligations as set forth in this Agreement, (iii) any actual or alleged infringement of any Intellectual Property Rights by any materials provided by the Company to GSI for its use on the Company Stores, on the Specialized Stores or otherwise under this Agreement, or (iv) product liability, wrongful death or similar claims relating to products obtained from or through the Company or its Affiliates, including Palm Products. Subject to Section 10.3, the Company will pay any award against GSI and its Affiliates (and their respective employees, officers, directors or representatives) and any costs and attorneys’ fees reasonably incurred by them resulting from any such Claim.

10.3 Procedure. In case any claim, action, suit or proceeding is at any time brought against a Party or its Affiliates (or any of their respective employees, officers, directors or representatives) (an “Indemnified Party”) and such Indemnified Party is entitled to indemnification pursuant to Section 10.2, the party obligated to provide such indemnification (the “Indemnifying Party”) will defend such claim, action, suit or proceeding, at the sole expense of the Indemnifying Party, using counsel selected by the Indemnifying Party but subject to the Indemnified Party’s reasonable approval. If the Indemnifying Party fails to take timely action to defend such a Claim or proceeding after having received written notice from the Indemnified Party of such failure, the Indemnified Party may defend such a Claim at the Indemnifying Party’s expense. The Indemnifying Party will keep the Indemnified Party fully advised with respect to such Claims and the progress of any suits, and the Indemnified Party shall have the right to participate, at the Indemnified Party’s expense, in any suit instituted against it and to select attorneys to defend it, which attorneys will be independent of any attorneys chosen by the Indemnifying Party relating to such claim or related claim. The Indemnifying Party will not settle, compromise or otherwise enter into any agreement regarding the disposition of any claim against the Indemnified Party without the prior written consent and approval of the Indemnified Party, unless such settlement, compromise or disposition provides for a complete and unconditional release of the Indemnified Party. The obligations of the Indemnifying Party pursuant to this Section 10 shall survive expiration or earlier termination of this Agreement.

Section 11. Disclaimers and Limitations.

11.1 DISCLAIMER OF WARRANTIES. EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT, NEITHER PARTY MAKES, AND EACH PARTY HEREBY WAIVES AND DISCLAIMS, ANY REPRESENTATIONS OR WARRANTIES REGARDING THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT OR IMPLIED WARRANTIES ARISING OUT OF COURSE OF DEALING, COURSE OF PERFORMANCE OR USAGE OF TRADE. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, EACH PARTY SPECIFICALLY DISCLAIMS ANY

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REPRESENTATION OR WARRANTY REGARDING (A) THE AMOUNT OF SALES REVENUES THAT MAY OCCUR DURING THE TERM, AND (B) ANY ECONOMIC OR OTHER BENEFIT THAT IT MIGHT OBTAIN THROUGH ITS PARTICIPATION IN THIS AGREEMENT (OTHER THAN THE SPECIFIC SUMS TO BE PAID PURSUANT TO THIS AGREEMENT).

11.2 LIMITATION OF DAMAGES. EXCEPT TO THE EXTENT AWARDED TO A THIRD PARTY IN A JUDGMENT AGAINST WHICH A PARTY IS ENTITLED TO INDEMNIFICATION PURSUANT TO SECTION 10, OR TO THE EXTENT ARISING OUT OF AN INTENTIONAL BREACH OF THIS AGREEMENT, NEITHER PARTY WILL BE LIABLE (WHETHER IN CONTRACT, WARRANTY, TORT (INCLUDING, BUT NOT LIMITED TO, NEGLIGENCE), PRODUCT LIABILITY OR OTHER THEORY), TO THE OTHER PARTY OR ANY OTHER PERSON OR ENTITY FOR COST OF COVER OR FOR ANY INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL, PUNITIVE OR EXEMPLARY DAMAGES (INCLUDING DAMAGES FOR LOSS OF PROFIT, BUSINESS OR DATA) ARISING OUT OF THIS AGREEMENT.

Section 12. Exclusivity. Except as provided below, during the Term,[*] For purposes of this Section 12, “Affiliates” shall not be deemed to include PalmSource, Inc. [*]

Section 13. Term and Termination.

13.1 Term. The Term of this Agreement will commence on the Effective Date and, unless extended or earlier terminated as provided elsewhere in this Agreement, will end automatically on [*]. This Agreement shall automatically renew for additional [*] terms thereafter (each a “Renewal Term”), unless either Party provides advanced written notice to the other Party of its intent not to renew this Agreement, provided at least [*] prior to the end of the Initial Term or then current Renewal Term. The Initial Term and any and all Renewal Terms shall be referred to herein, collectively, as “Term”.

13.2 Termination for Breach. Without limiting any other rights or remedies (including, without limitation, any right to seek damages and other monetary relief and the rights under Sections 13.3 and 13.4) that either Party may have in law or otherwise, either Party may terminate this Agreement if the other Party fails to perform any of its material obligations hereunder; provided that (a) the non-breaching Party sends written notice to the breaching Party describing in reasonable detail the breach and stating its intention to terminate this Agreement unless such breach is cured, and (b) the breaching Party does not cure the breach, if such breach is capable of being cured, within [*] following its receipt of such notice; provided, however, that if the breaching party has [*] to cure the breach during such [*] period but has not cured the breach by the end of such [*] period, the non-breaching Party may not terminate this Agreement so long as the breaching Party continues to [*] to cure the breach, unless the breaching Party does not cure the breach within [*] following the end of the original [*] cure period. Notwithstanding the foregoing, (i) GSI will be deemed to have cured a breach premised upon failure to comply with [*]by fully complying with such obligation [*]after notice of default is received, and (ii.

13.3 Company Termination. The Company shall be entitled to terminate this Agreement immediately upon written notice to GSI if GSI institutes or has instituted against it any bankruptcy, reorganization, debt arrangement, assignment for the benefit of creditors, or other proceeding under any bankruptcy or insolvency law or dissolution, receivership, or liquidation proceeding (and, if such proceeding is instituted against it, such proceeding is not dismissed within [*]).

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13.4 GSI Termination.

(a) GSI shall be entitled to terminate this Agreement immediately upon written notice to the Company if the Company institutes or has instituted against it any dissolution or liquidation proceeding (and, if such proceeding is instituted against it, such proceeding is not dismissed within [*]).

(b) In the event that [*] during any of the five (5) [*] commencing on the Re-Launch Date is less than [*]Dollars ($[*]), then GSI may elect to terminate this Agreement upon not less than [*] notice to the Company. GSI must give such notice within [*] following the end of any such period (each, [*] of the Re-Launch Date) or such right to terminate will forever lapse with respect to such [*] and the Parties shall continue to perform under this Agreement.

13.5 Effect of Termination. Upon termination of this Agreement, each Party in receipt, possession or control of the other Party’s intellectual or proprietary property, information and materials (including any Confidential Information) pursuant to this Agreement must return to the other Party (or at the other Party’s written request, destroy) such property, information and materials. Sections 3.5, 7 through 11, 13 and 14 (together with all other provisions that reasonably may be interpreted as surviving termination or expiration of this Agreement) will survive the termination or expiration of this Agreement. Notwithstanding the foregoing, termination of this Agreement shall not relieve either Party from its obligation to pay any monies due to the other Party for any period prior to the effective date of termination. GSI will cooperate with Company’s reasonable requests to transition the services and materials described herein either to another party or to Company.

Section 14. Miscellaneous.

14.1 Press Releases. All voluntary public announcements concerning the transactions contemplated by this Agreement will be mutually acceptable to both the Company and GSI. Unless required by law, neither the Company nor GSI will make any public announcement or issue any press release concerning the transactions contemplated by this Agreement without the prior consent of the other Party. Notwithstanding the preceding sentences in this Section 14.1, (a) after the initial public announcement of a particular matter or transaction contemplated by this Agreement has been approved by the Parties, either Party’s subsequent reference to that particular matter or transaction will not require another approval from the other Party, and (b) each Party may make any public announcement or issue any press release that it is required by law to issue, provided such Party gives reasonable prior notice of such announcement or press release to the other Party.

14.2 Independent Contractors. The Parties are entering into this Agreement as independent contractors, and this Agreement will not be construed to create a partnership, joint venture or employment relationship between them. Neither Party will represent itself to be an employee or agent of the other or enter into any agreement or legally binding commitment or statement on the other’s behalf of or in the other’s name.

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14.3 Confidentiality.

(a) Each Party will protect the Confidential Information of the other Party from misappropriation and unauthorized use or disclosure, and at a minimum, will take precautions at least as great as those taken to protect its own confidential information of a similar nature. Without limiting the foregoing, the receiving Party will: (i) use such Confidential Information solely for the purposes for which it has been disclosed; and (ii) disclose such Confidential Information only to those of its employees, agents, consultants, and others who have a need to know the same for the purpose of performing this Agreement and who are informed of and agree to a duty of nondisclosure. The receiving Party may also disclose Confidential Information of the disclosing Party to the extent necessary to comply with applicable law or legal process, provided that the receiving Party uses reasonable efforts to give the disclosing Party prompt advance notice thereof. Upon request of the other Party, or in any event upon any termination or expiration of the Term, each Party will return to the other all materials, in any medium, which contain, embody, reflect or reference all or any part of any Confidential Information of the other Party.

(b) Neither Party will disclose this Agreement or the transactions contemplated herein, or make any filing of this Agreement or other agreements relating to the transactions contemplated herein, without the consent of the other; provided, however, that if a Party is required by applicable law to provide public disclosure of this Agreement or the transactions contemplated herein, such Party will use all reasonable efforts to coordinate the disclosure with the other Party before making such disclosure, including the submission to the Securities and Exchange Commission (and any other applicable regulatory or judicial authority) of an application for confidential treatment of certain terms (which terms will be agreed upon by the Parties) of this Agreement. Each Party will provide to the other for review a copy of any proposed disclosure of this Agreement or its terms and any application for confidential treatment prior to the time any such disclosure or application is made and the parties shall work together to mutually approve such disclosure or application.

14.4 Force Majeure. If either Party is unable to perform any of its obligations under this Agreement due to an event beyond the control of that Party, including natural disaster, acts of God, actions or decrees of governmental bodies, act of war, failure or discontinuance of the Internet or failure of communications lines or networks, that Party will use commercially reasonable efforts to resume performance of its obligations but will have no liability to the other Party for failure to perform its obligations under this Agreement for so long as it is unable to do so as a result of such event. However, during any such period when GSI is unable to operate the Company Stores and fulfill Orders, the Company shall not be prohibited from directly or indirectly selling Merchandise through the Internet.

14.5 Compliance with Laws. In its performance of this Agreement, each Party will comply in all material respects with all applicable laws, regulations, orders and other requirements, now or hereafter in effect, of governmental authorities having jurisdiction.

14.6 Insurance. Each Party will at its own expense obtain and maintain such policy or policies of insurance as are required by law or as are commercially reasonable for the transactions and business contemplated by this Agreement. In addition, certificates of insurance for insurance policies required below shall be furnished by GSI to the Company prior the Launch Date and not later than [*] prior to each policy renewal. Such insurance certificates shall be in form reasonably acceptable to the Company, but any acceptance of insurance certificates by the Company shall not limit or relieve GSI of the duties and

responsibilities with respect to maintaining insurance assumed by it under this Agreement. GSI shall, at its own expense, at all times during the term of this Agreement provide and maintain in effect those insurance policies and minimum limits of coverage as designated below, and any other insurance required by applicable law.

(a) GSI shall maintain workers’ compensation insurance as required by any applicable law or regulation and, in accordance with the provisions of all applicable laws. GSI shall maintain employer’s liability insurance in amounts not less than $[*] per illness or injury.

(b) GSI shall maintain commercial general liability insurance for bodily injury, property damage, personal injury, blanket contractual, independent contractors, severability of interest and advertising injury, as those terms are defined by its commercial general liability insurance policies, with limits of not less than $[*] each occurrence and $[*] in the aggregate. If GSI’s policy of commercial general liability insurance required under this Agreement is written on a claims-made basis, GSI shall provide “tail coverage” for claims made for a minimum of one year following the expiration or earlier termination of this Agreement (and such coverage shall be expressly set forth in the applicable certificate of insurance). GSI shall furnish certificates of insurance annually to the Company as evidence of this required insurance. The Company and any other additional insureds required to be named in GSI’s insurance policies under this Agreement, and their respective officers, directors, employees, agents and invitees, shall be included as additional insureds for the commercial general liability coverage required to be maintained by GSI under this Agreement.

(c) GSI shall maintain special purpose (all risk) property insurance providing coverage for GSI’s property and business interruption/loss of income/extra expense insurance in an amount not less than $[*].

(d) GSI shall maintain errors and omissions insurance providing coverage for GSI’s wrongful act(s) in GSI’s performance of technology services or result in the failure of GSI’s technology products to perform the function or serve the purpose intended. Such errors and omissions insurance shall be provided in amounts not less than $[*] per wrongful act.

14.7 Notices. Unless otherwise provided, all notices, consents or other communications required or permitted to be given under this Agreement must be in writing and shall be deemed to have been duly given (a) when delivered personally, (b) three business days after being mailed by first class mail, postage prepaid, or (c) one business day after being sent by a reputable overnight delivery service, postage or delivery charges prepaid, to the parties at their respective addresses stated on the signature page of this Agreement. Notices may also be given by electronic mail or facsimile and shall be effective on the date transmitted if confirmed within 24 hours thereafter by a signed original sent in the manner provided in the preceding sentence. Notices to GSI shall be sent to its address stated on the signature page of this Agreement to the attention of its General Counsel, with a copy sent simultaneously to the same address to the attention of its Chief Financial Officer. Notices to the Company shall be sent to its address stated on the signature page of this Agreement to the attention of its General Counsel, with a copy sent simultaneously to its Chief Financial Officer. Any party may change its address for notice and the address to which copies must be sent by giving notice of the new addresses to the other parties in accordance with this Section 14.7, except that any such change of address notice shall not be effective unless and until received.

14.8 Assignment. Neither Party may assign this Agreement or any of its rights or obligations hereunder, whether voluntarily, involuntarily, by operation of law or otherwise,

without the other Party’s prior written consent, except to (a) a wholly-owned subsidiary of such Party,; provided that such Party shall require, as a condition to such assignment, any assignee or successor to all or substantially all of its business or assets to assure and agree in writing to perform this Agreement and to be bound by all the terms and conditions of this Agreement in the same manner and to the same extent that such Party would be required to perform or would be bound if no assignment or succession had taken place. Subject to the foregoing, this Agreement will be binding on and enforceable by the Parties and their respective successors and permitted assigns.

14.9 Amendment. This Agreement may be amended, modified or supplemented by the Parties, provided that any such amendment, modification or supplement shall be in writing and signed by the Parties.

14.10 Waiver. No waiver by a Party with respect to this Agreement will be effective or enforceable against a Party unless in writing and signed by that Party. Except as otherwise expressly provided herein, no failure to exercise, delay in exercising, or single or partial exercise of any right, power or remedy by a Party, and no course of dealing between or among any of the Parties, will constitute a waiver of, or shall preclude any other or further exercise of the same or any other right, power or remedy.

14.11 Counterparts and Transmitted Copies. This Agreement may be executed in any number of counterparts, each of which when executed and delivered will be deemed an original, but all of which taken together will constitute but one and the same instrument, and it will not be necessary in making proof of this Agreement to produce or account for more than one original counterpart hereof. The Parties acknowledge that Transmitted Copies of this Agreement will be equivalent to original documents until such time (if any) as original documents are completely executed and delivered. “Transmitted Copies” means copies which are reproduced or transmitted via facsimile, or another process of complete and accurate reproduction and transmission.

14.12 Cost of Litigation. The prevailing Party in any legal action or proceeding arising out of or relating to this Agreement shall be entitled to an award of its reasonable attorneys’ fees in connection therewith.

14.13 Entire Agreement. This Agreement, together with the schedules to this Agreement, (a) represents the entire understanding between the Parties with respect to the subject matter hereof and supersedes all previous oral or written communications or agreements, and all contemporaneous oral communications and agreements, between the Parties and their respective Affiliates regarding such subject matter, and (b) may be amended or modified only by a written instrument signed by a duly authorized agent of each Party. No breach of this Agreement by either Party will affect the rights or obligations of either Party under any other agreement between the Parties.

14.14 Severability. If any provision of this Agreement is construed to be invalid, illegal or unenforceable, then the remaining provisions hereof will not be affected thereby and will be enforceable without regard thereto.

14.15 CHOICE OF LAW. THIS AGREEMENT WILL BE INTERPRETED, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS CHOICE OF LAW RULES.

14.16 Headings. The headings of sections and subsections of this Agreement are for convenience of reference only and are not intended to restrict, affect or otherwise influence the interpretation or construction of any provision of this Agreement.

14.17 References. All words used in this Agreement shall be construed to be of such number and gender as the context requires or permits. Unless a particular context clearly provides otherwise (i) the words “hereof” and “hereunder” and similar references refer to this Agreement in its entirety and not to any specific section or subsection hereof, and (ii) the word “including” shall mean including but not limited to.

14.18 Construction. The Parties agree that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement or any other agreements or documents delivered in connection with the transactions contemplated by this Agreement.

14.19 Other. Notwithstanding any other provision of this Agreement, if GSI determines that it may be required to collect or remit sales or use taxes in connection with sales to customers in any jurisdictions where the Company has nexus but GSI does not have nexus, then GSI will be permitted to assign this Agreement to an Affiliate of GSI without the Company’s prior written consent.

14.20 [*]

*******************

(SIGNATURES APPEAR ON FOLLOWING PAGE)

IN WITNESS WHEREOF, intending to be legally bound, the Parties hereby execute this Agreement on the date first written above.

GSI COMMERCE SOLUTIONS, INC.		PALMONE, INC. (FORMERLY PALM, INC.)
By:	/s/Michael Conn	By:	/s/ Richard Todd Bradley
	Name: Michael Conn		Name: Richard Todd Bradley
	Title: Senior Vice President		Title:
Address:	1075 First Avenue	Address:
	King of Prussia, PA 19406
Telephone:	(610) 265-3229	Telephone:
Facsimile:	(610) 265-2866	Facsimile:

Schedule “A”

Company Stores Links

At all times during the Term, the Company will include Company Stores Links on the Company Site as set forth below:

• Prominent links to the Company Store, or such other pages as the Parties may agree upon from time to time, located above-the-fold on the Home Page of the Company Site. Such links shall be at least as prominent as any and all other links to third party Web Sites which sell Palm Products.

• Unless otherwise mutually agreed upon by the Parties, the Company will include prominent links to each Company Store on the Company Site’s global navigation functionality. The Company shall not have links on its global navigation functionality which link to third party Web Sites which sell Palm Products; provided, however, that the Company shall be permitted to include a link to the Palm Source, Inc. Web Site on its global navigation functionality.

• At least one promotional link to the main Company Stores, or such other pages as the Parties may agree upon from time to time, located above the fold on the Home Page of the Company Site.

• Additional promotional links for product(s) offered on the Company Stores integrated throughout relevant sections of the Company Site.

Schedule “B”

Functionality and Features

• Search and Browse

• Shopping Cart

• Online Checkout with Secure Ordering

• E-mail Notification of Orders

• Order Tracking

• User Login/Registration

• Affiliate Program Management

• Frequently Asked Questions

• “Contact Us” via Phone and eMail

• [*]Deliver a personalized shopping experience for users based on user profiles.

• [*]

• Enable a customer to find and identify products, software or services based upon key word searches, product images, descriptions, sku #’s, and pricing.

Schedule “C”

[*]

·

·

Schedule “D”

Hosting of Site and Registration of URL Requirements

SSL Certificates

These certificates are used for secure e-commerce transactions. The certificates certify that the customer is giving their personal information to a site that indeed is an authorized representative of the store where they are shopping. Verisign is the certification body and will need to contact an officer within the company regarding our request for these SSL certificates as a third party.

Main store URL (domain):	___________________
Internic registrant company name for this domain:	___________________
Company address:	___________________

(Corporate contact must be an officer in the company named above who has sufficient authority to approve the validity of GSI’s request to represent the said company in e-commerce transactions)

Corporate contact:	___________________
Title:	___________________
Phone:	___________________
Fax:	___________________
Dun and Bradstreet number for above company:	___________________

DNS

DNS is the Internet address system which allows a customer to reach the new store via the desired URL such as www.store.com. This needs to be changed at least one week prior to the expected store launch so that the changes have been propagated to all DNS servers on the Internet. Our policy is to support your existing store ip address on our servers, so that even after the DNS has been updated to point to our servers, your existing site will still be reachable until we have launched the new store.

DNS Technical contact for main URL listed above:	___________________
Contact phone:	___________________
Contact e-mail address:	___________________

Secondary URLs that will be supported by GSI:

1.	___________________	Technical contact:	___________________
			___________________
2.	___________________	Technical contact:	___________________
			___________________
3.	___________________	Technical contact:	___________________
			___________________

List any additional on back.

E-mail Aliases

These are the e-mail aliases which customers will use associated with the e-commerce store such as customerssupport@domain.com. If your company uses this domain for mail, you need to add forwarding for the listed e-mail aliases below that will point to the corresponding mailbox on our servers.

E-mail aliases which need to be created on your mail server:

Your mail server	points to	Our mail server
contactus@store.com		storecustomersupport@gsicommerce.com
webmaster@store.com		storewebmaster@gsicommerce.com
info@store.com		storecustomersupport@gsicommerce.com
customerservice@store.com		storecustomersupport@gsicommerce.com
help@store.com		storecustomersupport@gsicommerce.com
customersupport@store.com		storecustomersupport@gsicommerce.com
specialoffers@store.com		storespecialoffers@gsicommerce.com
grandopening@store.com		storegrandopening@gsicommerce.com
newsletter@store.com		storenewsletter@gsicommerce.com
jobs@store.com		corporate e-mail address for jobs at your company

For example, if the main domain is palm.com, then the first e-mail alias mapping would be:

contactus@palm.com forwards to palmcustomersupport@gsicommerce.com

Who to contact for updating company e-mail server with new aliases:	___________________
Phone:	___________________
E-mail:	___________________

Your name Title Date

Schedule “E”

Order Processing and Fulfillment

• Order receipt, confirmation and processing (including high quantity Orders placed via purchase orders from educational institutions, government agencies and corporations)

• Establishment of terms and conditions of sale of Merchandise

• Fraud screening and credit checks (including, if appropriate, obtaining D&B reports)

• Credit card authorization and processing and collection of proceeds

• Invoicing for Orders placed via purchase orders accepted by GSI

• Inventory receipt, control and management

• Pick, pack and ship Orders

• Shipping management and tracking

• Returns processing

• Testing Returns for Palm Products which are not accessories or Wireless Products using good faith efforts to comply with the attached Testing Specifications

Schedule “F”

Testing Specifications

1. Introduction

This documentation describes the manual functional test procedure for the Palm viewers. This test is performed AFTER the unit has been assembled.

2. Requirements

· [*]

· [*]

3. Test Procedure

1. [*]

Appendix A - Beaming

[*]

Schedule “G”

Company Trademark Use Guidelines

GSI shall not, with respect to the Trademarks of the Company:

• alter the overall design, color or shape of any such Trademarks

• commingle or combine any such Trademarks with any other mark

• use any other mark that is confusingly similar to such Trademarks

• substitute designs or objects for letters in any Trademark

• use in conjunction with any illegal, immoral, obscene or pornographic activities

Schedule “H”

[*]

EX-10.5

Exhibit 10.5

PROMISSORY NOTE

$13,000,000.00 June 9, 2004

FOR VALUE RECEIVED, the undersigned, 935 HQ ASSOCIATES, LLC, a Delaware limited liability company (“Borrower”), whose address is 1075 First Avenue, King of Prussia, Pennsylvania 19406 (and whose taxpayer identification number is 51-0509051), promises to pay to the order of CIBC INC., a Delaware corporation (“Lender”), at the office of Lender at 622 Third Avenue, 10^th Floor, Attn: Real Estate Finance Group, New York, New York 10017, or at such other place as Lender may designate to Borrower in writing from time to time, the principal sum of THIRTEEN MILLION and 00/100 DOLLARS ($13,000,000.00) together with interest on so much thereof as is from time to time outstanding and unpaid, from the date of the advance of the principal evidenced hereby, at the Applicable Interest Rate (as hereinafter defined), in lawful money of the United States of America, which shall at the time of payment be legal tender in payment of all debts and dues, public and private.

PARTICULAR DEFINITIONS

The following terms, as used in this Note, shall have the following meaning, which meaning shall be applicable equally to the singular and the plural of the items defined:

(a) “Anticipated Repayment Date” shall mean July 1, 2014.

(b) “Initial Term Interest Rate” shall mean a rate of Six and Thirty-Two One-Hundredths percent (6.32%) per annum.

(c) “Maturity Date” shall mean July 1, 2034.

(d) “Monthly Payment Amount” shall mean the amount of $80,636.02.

Additional terms are defined in Section 3.05 of this Note.

ARTICLE I

TERMS AND CONDITIONS

1.01. Payment of Principal and Interest.

(a) Interest shall be computed hereunder based on a 360-day year and paid for the actual number of days elapsed for any whole or partial month in which interest is being calculated. In computing the number of days during which interest accrues, the day on which funds are initially advanced shall be included (regardless of the time of day such advance is made), and the day on which funds are repaid shall be included unless repayment is credited prior to close of business. Payments in federal funds immediately available in the place designated for payment received by Lender prior to 2:00 p.m. local time on a business day in the State of Lender’s principal office at said place of payment shall be credited prior to close of business, while other payments may, at the option of Lender, not be credited until immediately available to Lender in federal funds at the place designated for payment prior to 2:00 p.m. local time at said place of payment on a day on which Lender is open for business.

(b) Principal and interest shall be payable in equal consecutive monthly installments, each in the amount of the Monthly Payment Amount, on the first day of each calendar month (each such date, a “Payment Date”) until payment in full of this Note beginning on the first day of the second full calendar month following the date of this Note (or on the first day of the first full calendar month following the date hereof, in the event the advance of the principal amount evidenced by this Note is the first day of a calendar month). On the Maturity Date, the entire outstanding principal balance hereof, together with all accrued but unpaid interest thereon and all other sums due hereunder, shall be due and payable in full. So long as no Event of Default (as hereinafter defined) exists hereunder, each such monthly installment shall be applied first, to any amounts hereafter advanced by Lender hereunder or under any other Loan Document, second, to any late fees and other amounts payable to Lender, third, to the payment of accrued interest and last to reduction of principal.

(c) If the advance of the principal amount evidenced by this Note is made on a date other than the first day of a calendar month, then Borrower shall pay to Lender contemporaneously with the execution hereof interest at the Initial Term Interest Rate for a period from the date of such advance through and including the last day of such calendar month.

1.02. Prepayment.

(a) Voluntary Prepayment. Borrower may not voluntarily prepay this Note in whole or in part at any time prior to the expiration of the Lock-out Period. “Lock-out Period” shall mean the period of time from the date hereof to, but not including, the date that is three (3) months prior to the Anticipated Repayment Date (as previously defined). After the expiration of the Lock-out Period, Borrower may prepay this Note in whole only, provided, that (i) written notice of such prepayment is received by Lender not more than sixty (60) days and not less than thirty (30) days prior to the date of such prepayment, (ii) such prepayment is accompanied by all interest accrued hereunder and all other sums due hereunder and under the other Loan Documents (as defined in Section 1.04) and (iii) such prepayment (x) is received by Lender on a Payment Date (as defined in Article III), or (y) if not received on a Payment Date, is accompanied by a payment of interest, calculated at the Applicable Interest Rate, on the amount prepaid, based on the number of days from the date such prepayment is received through the next Payment Date.

(b) Involuntary Prepayment. Except as hereinafter provided in this subparagraph (b), in the event that any prepayment is received by Lender prior to the expiration of the Lock-out Period, or if a prepayment results from Lender’s exercise of its remedies hereunder, Borrower shall pay Lender a Yield Maintenance Charge (as defined below) in connection with such prepayment. Prepayments of this Note prior to the expiration of the Lock-out Period shall be permitted without notice, and without the imposition of a Yield Maintenance Charge or any other premium or penalty in connection with Lender’s application of insurance or condemnation proceeds on account of the Loan in accordance with the terms and provisions of the Security Instrument (as defined in Section 1.04 hereof), provided, however, if an Event of Default shall have occurred and be continuing at the time of the related casualty or condemnation, in addition to applying such proceeds as provided in the Security Instrument, Borrower shall pay a Yield Maintenance Charge to Lender. Lender, at its option, may elect to use such proceeds and Yield Maintenance Charge to economically defease an amount of the Loan equal to the proceeds applied as a prepayment, in the manner provided in Section 1.03 below. Any prepayment during the Lockout Period shall not reduce the Monthly Payment Amount payable hereunder unless such prepayment is accompanied by a Yield Maintenance Charge and Lender elects, in its sole discretion, to economically defease all or a portion of the Loan with the related proceeds. No tender of a prepayment of this Note with respect to which a Yield Maintenance Charge is due shall be effective unless such prepayment is accompanied by such Yield Maintenance Charge.

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(c) No principal amount repaid or defeased may be re-borrowed.

1.03. Defeasance.

(a) At any time during the Defeasance Period (as hereinafter defined), Borrower may obtain a release of the Security Property (as hereinafter defined) from the lien of the Security Instrument upon the satisfaction of the following conditions:

(1) not less than thirty (30) days’ prior written notice shall be given to Lender specifying a date (the “Defeasance Date”) on which the Defeasance Deposit (as hereinafter defined) is to be delivered;

(2) all accrued and unpaid interest and all other sums due under this Note and under the other Loan Documents up to the Defeasance Date, including, without limitation, all reasonable costs and expenses incurred by Lender or its agents in connection with such defeasance (including, without limitation, any legal fees and expenses incurred in connection with obtaining and reviewing the Defeasance Collateral (as hereinafter defined) and the preparation of the Defeasance Security Agreement (as hereinafter defined) and related documentation), shall be paid in full on or prior to the Defeasance Date;

(3) no Event of Default, and no event or condition that, with the giving of notice or passage of time or both, would constitute an Event of Default, shall exist either at the time Borrower gives notice of the Defeasance Date to Lender or on the Defeasance Date;

(4) on or before the Defeasance Date, Borrower shall pay to Lender the principal amount of the Loan to be defeased together with an additional amount such that the aggregate amount (the “Defeasance Deposit”) is sufficient to purchase (as set forth in Section 1.03(d) below) direct, non-callable and non-prepayable obligations of the United States of America or, at the option of Lender (and with the approval of each applicable Rating Agency, if a Secondary Market Transaction has then occurred (the two capitalized terms used above without definition shall have the respective meanings attributed thereto in the Security Instrument)), other securities considered “government securities” within the meaning of the Investment Company Act of 1940, as amended (the “Defeasance Collateral”) that provide for payments prior, but as close as possible, to all successive Payment Dates occurring after the Defeasance Date through and including the Anticipated Repayment Date, with each such payment being equal to or greater than (1) the Monthly Payment Amount and (2) with respect to the payment due on the Anticipated Repayment Date, the entire outstanding principal balance of this Note together with any interest accrued as of such date and all other amounts payable pursuant to the Loan Documents;

(5) the Defeasance Collateral shall be duly endorsed by the holder thereof as directed by Lender or accompanied by a written instrument of transfer in form and substance wholly satisfactory to Lender (including, without limitation, such instruments as may be required by the depository institution holding such securities to effectuate book-entry transfers and pledges through the book-entry facilities of such institution) in order to create a first priority security interest therein in favor of Lender in conformity with an applicable state and federal laws governing granting of such security interests;

(6) Borrower shall deliver the following to Lender on or prior to the Defeasance Date:

A. a pledge and security agreement, in form and substance satisfactory to Lender in its sole discretion, creating a first priority security interest in favor of Lender in the Defeasance Deposit and the Defeasance Collateral (the “Defeasance Security

3

Agreement”), which shall provide, among other things, that any excess received by Lender from the Defeasance Collateral over the amounts payable by Borrower hereunder shall be refunded to Borrower promptly after each monthly Payment Date;

B. a certificate of Borrower certifying that all of the requirements set forth in this Section 1.03 have been satisfied;

C. an opinion of counsel for Borrower in form and substance and delivered by counsel reasonably satisfactory to Lender in its sole discretion stating, among other things, (x) that Lender has a perfected first priority security interest in the Defeasance Deposit and the Defeasance Collateral, (y) that the Defeasance Security Agreement is enforceable against Borrower in accordance with its terms and (z) that the defeasance will not cause the Trust (as hereinafter defined) to fail to qualify as a “real estate mortgage investment conduit” (a “REMIC”), within the meaning of Section 860D of the Internal Revenue Code of 1986, as amended from time to time or any successor statute (the “Code”);

D. evidence in writing from each of the Rating Agencies (as defined in the Security Instrument) to the effect that such release will not result in a qualification, downgrade or withdrawal of any rating in effect immediately prior to the Defeasance Date for any securities issued in connection with a Secondary Market Transaction (as defined in the Security Instrument);

E. a certificate, in form reasonably acceptable to Lender, from a firm of independent certified public accountants acceptable to Lender, certifying that the Defeasance Collateral is sufficient to make the payments required by Paragraph 1.03(a)(4) above; and

F. such other certificates, opinions, documents or instruments as Lender may reasonably require.

All costs and expenses of satisfying the foregoing conditions and of the transactions contemplated by this Section 1.03, including, without limitation, the reasonable costs and expenses of Lender’s counsel, shall be paid by Borrower simultaneously with the defeasance of this Note.

(b) Upon a defeasance in accordance with Section 1.03(a), Borrower shall, at Lender’s request, assign all of Borrower’s obligations and rights under this Note to a special-purpose, bankruptcy-remote entity (“Successor Borrower”) to be formed, at Lender’s election, either by Borrower or by the Trust. In connection therewith, the Successor Borrower shall execute an assumption agreement in form and substance satisfactory to Lender in its sole discretion pursuant to which Successor Borrower shall assume Borrower’s obligations under this Note and the Defeasance Security Agreement. The sole asset of Successor Borrower shall be the Defeasance Collateral unless Successor Borrower is formed by the Trust, in which case the Trust may elect to have one entity serve as “Successor Borrower” with respect to other notes owned by the Trust. In connection with such assignment and assumption, Borrower and/or Successor Borrower shall deliver to Lender an opinion of counsel in form and substance and delivered by counsel satisfactory to Lender in its sole discretion stating, among other things, that such assumption agreement is enforceable against Borrower and Successor Borrower, as applicable, in accordance with its terms and that this Note, the Defeasance Security Agreement and any other documents executed in connection with such defeasance are enforceable against Borrower or Successor Borrower, as applicable, in accordance with their respective terms. Upon an assumption by Successor Borrower acceptable to Lender, Borrower shall be relieved of its obligations under this Note and the Defeasance Security Agreement and, to the extent such documents relate to the Security Property, the other Loan Documents.

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(c) Upon compliance with the requirements of Section 1.03(a) and (b), the Security Property shall be released from the lien of the Security Instrument and the other Loan Documents, and the Defeasance Collateral shall constitute the collateral that shall secure this Note. Lender will, at Borrower’s expense, execute and deliver any agreements reasonably requested by Borrower to release the Security Property from the lien of the Security Instrument.

(d) Lender, as attorney-in-fact of Borrower, shall cause the purchase of the Defeasance Collateral with the Defeasance Deposit, which purchase may be through an affiliate of Lender. Borrower shall be responsible for the payment of any brokerage or other transaction fees in connection with such purchase.

1.04. Security. The indebtedness evidenced by this Note and the obligations created hereby are secured by, inter alia, that certain Mortgage, Assignment of Leases and Rents and Security Agreement (as amended, consolidated, modified, severed or spread from time to time, the “Security Instrument”) from Borrower to Lender, dated on or about the date hereof, concerning property located in King of Prussia, Pennsylvania. The Security Instrument together with this Note, the Cash Management Agreement (as defined in Article III) and all other documents to or of which Lender is a party or beneficiary now or hereafter evidencing, securing, guarantying, modifying or otherwise relating to the indebtedness evidenced hereby, as amended or modified from time to time, are herein referred to collectively as the “Loan Documents”. All of the terms and provisions of the Loan Documents are incorporated herein by reference. Some of the Loan Documents are to be filed for record on or about the date hereof in the appropriate public records.

1.05. Exculpation. Notwithstanding anything in the Loan Documents to the contrary, but subject to the qualifications hereinbelow set forth, Lender agrees that (i) Borrower shall be liable upon the indebtedness evidenced hereby and for the other obligations arising under the Loan Documents to the full extent (but only to the extent) of the security therefor, the same being all properties (whether real or personal), rights, estates and interests now or at any time hereafter securing the payment of this Note and/or the other obligations of Borrower under the Loan Documents (collectively, the “Security Property”), (ii) if default occurs in the timely and proper payment of all or any part of such indebtedness evidenced hereby or in the timely and proper performance of the other obligations of Borrower under the Loan Documents, any judicial or other proceedings brought by Lender against Borrower shall be limited to the preservation, enforcement and foreclosure, or any thereof, of the liens, security titles, estates, assignments, rights and security interests now or at any time hereafter securing the payment of this Note and/or the other obligations of Borrower under the Loan Documents, and no attachment, execution or other writ of process shall be sought, issued or levied upon any assets, properties or funds of Borrower other than the Security Property except with respect to the liability described below in this section, and (iii) in the event of a foreclosure of such liens, security titles, estates, assignments, rights or security interests securing the payment of this Note and/or the other obligations of Borrower under the Loan Documents, no judgment for any deficiency upon the indebtedness evidenced hereby shall be sought or obtained by Lender against Borrower, except with respect to the liability described below in this section; provided, however, that, notwithstanding the foregoing provisions of this section, Borrower shall be fully liable, and subject to legal action, for all losses, costs and expenses incurred by Lender (including, without limitation, the fees and expenses of Lender’s counsel) by reason of:

(a) proceeds paid under any insurance policies (or paid as a result of any other claim or cause of action against any person or entity) by reason of damage, loss or destruction to all or any portion of the Security Property, to the full extent of such proceeds not previously delivered to Lender, but which, under the terms of the Loan Documents, should have been delivered to Lender;

(b) proceeds or awards resulting from the condemnation or other taking in lieu of condemnation of all or any portion of the Security Property, or any of them, to the full extent of such proceeds or awards not previously delivered to Lender, but which, under the terms of the Loan Documents, should have been delivered to Lender;

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(c) all tenant security deposits or other refundable deposits paid to or held by Borrower or any other person or entity in connection with leases of all or any portion of the Security Property which are not applied in accordance with the terms of the applicable lease or other agreement, to the full extent of such deposits;

(d) rent and other payments received from tenants under leases of all or any portion of the Security Property paid more than one month in advance, to the full extent of any such rents collected by Borrower and not remitted to Lender promptly upon the occurrence of an Event of Default;

(e) rents, issues, profits and revenues of all or any portion of the Security Property received or applicable to a period after the occurrence of any Event of Default or any event which, solely with the passage of time, would constitute an Event of Default hereunder, which are not paid to Lender, to the full extent of the rents, issues, profits and revenues not so applied;

(f) waste committed on the Security Property, damage to the Security Property as a result of the intentional misconduct or gross negligence of Borrower or any Indemnitor (as defined in the Security Instrument) or any holder of equity interests in Borrower or Indemnitor, or any person acting on behalf of, or at the direction of, Borrower or Indemnitor, or any removal of the Security Property in violation of the terms of the Loan Documents;

(g) failure to pay, or make deposits to the Impound Account (as defined in the Security Instrument) on account of, any valid taxes, assessments, mechanic’s liens, materialmen’s liens or other liens which could create liens on any portion of the Security Property which would be superior to the lien or security title of the Security Instrument or the other Loan Documents;

(h) failure by Borrower to pay, or make deposits to the Impound Account on account of, the premiums on insurance policies required under the Loan Documents to be maintained by Borrower or with respect to the Security Property;

(i) fraud or material misrepresentation or failure to disclose a material fact by Borrower or any Indemnitor, or any holder of equity interests in Borrower or Indemnitor, or any person acting on behalf of, or at the direction of, Borrower or Indemnitor; and

(j) the filing by Borrower of a voluntary bankruptcy petition, or the filing against Borrower of an involuntary bankruptcy petition by any general partner, managing member or other constituent entity of Borrower, by any indemnitor with respect to Borrower’s obligations under the Loan Documents, or by any affiliate of any of them.

Furthermore, notwithstanding anything to the contrary in the Loan Documents, in the event that: (A) Borrower fails to obtain Lender’s prior written consent to any subordinate financing or other voluntary lien encumbering the Security Property, if such consent is required by the Loan Documents; (B) Borrower fails to obtain Lender’s prior written consent to any assignment, transfer or conveyance of the Security Property or any interest therein, if such consent is required by Loan Documents; or (C) payment of the first full installment of the Monthly Payment Amount (together with all required reserves) is not paid when due, then the Loan shall be fully recourse to Borrower.

Nothing contained in this section shall (1) be deemed to be a release or impairment of the indebtedness evidenced by this Note or the other obligations of Borrower under the Loan Documents or the lien of the Loan Documents upon the Security Property, or (2) preclude Lender from foreclosing the Loan Documents in case of any default or from enforcing any of the other rights of Lender except as stated in this section, or (3) reduce, release, relieve, waive, limit or impair in any way whatsoever the Indemnity and Guaranty Agreement and/or the Hazardous Substances Indemnity Agreement each of even date executed and delivered in connection with the indebtedness evidenced by this Note or release,

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relieve, reduce, waive or impair in any way whatsoever, any obligation of any party to such Indemnity and Guaranty Agreement and Hazardous Substances Indemnity Agreement or (4) waive any right that Lender may have under Section 506 (a), 506 (b), 1111(b) or any other provisions of the U.S. Bankruptcy Code to file a claim for the full amount of the Loan or to require that all collateral shall continue to secure all of the indebtedness owing to Lender in accordance with the Loan Documents.

1.06. Event of Default. It is hereby expressly agreed that should any default occur in the payment of principal or interest as stipulated above and such payment is not made within seven (7) days of the date such payment is due (provided that no grace period is provided for the payment of principal and interest due on the Maturity Date), or should an “Event of Default” (as defined in the Security Instrument) occur, or should any other default occur under any of the Loan Documents which is not cured within any applicable grace or cure period, then an “Event of Default” shall exist hereunder, and in such event the indebtedness evidenced hereby, including all sums advanced or accrued hereunder or under any other Loan Document, and all unpaid interest accrued thereon, shall, at the option of Lender and without notice to Borrower, at once become due and payable and may be collected forthwith, whether or not there has been a prior demand for payment and regardless of the stipulated date of maturity.

1.07. Late Charges and Default Interest Rate. In the event that any payment is not received by Lender on the date when due (subject to the applicable grace period), then in addition to any default interest payments due hereunder, Borrower shall also pay to Lender a late charge in an amount equal to five percent (5.0%) of the amount of such overdue payment (the “Late Charge”); provided that the Late Charge shall not apply to the payment of principal due on the Maturity Date. So long as any Event of Default exists hereunder, regardless of whether or not there has been an acceleration of the indebtedness evidenced hereby, and at all times after maturity of the indebtedness evidenced hereby (whether by acceleration or otherwise), interest shall accrue on the outstanding principal balance of this Note at a rate per annum equal to four percent (4.0%) plus the Applicable Interest Rate, or if such increased rate of interest may not be charged or collected under applicable law, then at the maximum rate of interest, if any, which may be charged or collected from Borrower under applicable law (the “Default Interest Rate”), and such default interest shall be immediately due and payable. Borrower acknowledges that it would be extremely difficult or impracticable to determine Lender’s actual damages resulting from any late payment or Event of Default, and such late charges and default interest are reasonable estimates of those damages and do not constitute a penalty. Interest at the Default Rate shall continue to accrue on any judgment Lender may obtain against Borrower on this Note or the Security Instrument until Lender acquires record title to the Security Property or the judgment, including interest and costs, have been paid in full.

1.08. Cumulative Remedies. The remedies of Lender in this Note or in the Loan Documents, or at law or in equity, shall be cumulative and concurrent, and may be pursued singly, successively or together in Lender’s discretion. In the event this Note, or any part hereof, is collected by or through an attorney-at-law, Borrower agrees to pay all costs of collection including, but not limited to, reasonable attorneys’ fees.

ARTICLE II

GENERAL CONDITIONS

2.01. No Waiver: Amendment. No failure to accelerate the debt evidenced hereby by reason of default hereunder, acceptance of a partial or past due payment, or indulgences granted from time to time shall be construed (i) as a novation of this Note or as a reinstatement of the indebtedness evidenced hereby or as a waiver of such right of acceleration or of the right of Lender thereafter to insist upon strict compliance with the terms of this Note, or (ii) to prevent the exercise of such right of acceleration or any

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other right granted hereunder or by any applicable laws; and Borrower hereby expressly waives the benefit of any statute or rule of law or equity now provided, or which may hereafter be provided, which would produce a result contrary to or in conflict with the foregoing. No extension of the time for the payment of this Note or any installment due hereunder, made by agreement with any person now or hereafter liable for the payment of this Note shall operate to release, discharge, modify, change or affect the original liability of Borrower under this Note, either in whole or in part unless Lender agrees otherwise in writing. This Note may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought.

2.02. Waivers. Presentment for payment, demand, protest and notice of demand, protest and nonpayment and all other notices are hereby waived by Borrower. Borrower hereby further waives and renounces, to the fullest extent permitted by law, all rights to the benefits of any moratorium, reinstatement, marshalling, forbearance, valuation, stay, extension, redemption, appraisement, exemption and homestead now or hereafter provided by the Constitution and laws of the United States of America and of each state thereof, both as to itself and in and to all of its property, real and personal, against the enforcement and collection of the obligations evidenced by this Note or the other Loan Documents.

2.03. Limit of Validity. The provisions of this Note and of all agreements between Borrower and Lender, whether now existing or hereafter arising and whether written or oral, are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of demand or acceleration of the maturity of this Note or otherwise, shall the amount paid, or agreed to be paid (“Interest”), to Lender for the use, forbearance or detention of the money loaned under this Note exceed the maximum amount permissible under applicable law. If, from any circumstance whatsoever, performance or fulfillment of any provision hereof or of any agreement between Borrower and Lender shall, at the time performance or fulfillment of such provision shall be due, exceed the limit for Interest prescribed by law or otherwise transcend the limit of validity prescribed by applicable law, then ipso facto the obligation to be performed or fulfilled shall be reduced to such limit and if, from any circumstance whatsoever, Lender shall ever receive anything of value deemed Interest by applicable law in excess of the maximum lawful amount, an amount equal to any excessive Interest shall be applied to the reduction of the principal balance owing under this Note in the inverse order of its maturity (whether or not then due) or at the option of Lender be paid over to Borrower, and not to the payment of Interest. All Interest (including, but not limited to, any amounts or payments deemed to be Interest) paid or agreed to be paid to Lender shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full period until payment in full of the principal balance of this Note so that the Interest thereof for such full period will not exceed the maximum amount permitted by applicable law. This Section 2.03 will control all agreements between Borrower and Lender.

2.04. Use of Funds. Borrower hereby warrants, represents and covenants that the loan evidenced hereby is for business or commercial purposes only, and no advance of funds evidenced hereby shall be used by Borrower for personal, family or household purposes. The foregoing shall not, however, prohibit Borrower from distributing surplus proceeds (after payment from time to time of all amounts that Borrower is required to pay pursuant to the Loan Documents) to the owners of equity interests in Borrower.

2.05. Unconditional Payment. Borrower is and shall be obligated to pay principal, interest and any and all other amounts which become payable hereunder or under the other Loan Documents absolutely and unconditionally and without any abatement, postponement, diminution or deduction and without any reduction for counterclaim or setoff. In the event that at any time any payment received by Lender hereunder shall be deemed by a court of competent jurisdiction to have been a voidable preference or fraudulent conveyance under any bankruptcy, insolvency or other debtor relief law, then the obligation to make such payment shall survive any cancellation or satisfaction of this Note or return thereof to

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Borrower and shall not be discharged or satisfied with any prior payment thereof or cancellation of this Note, but shall remain a valid and binding obligation enforceable in accordance with the terms and provisions hereof, and such payment shall be immediately due and payable upon demand.

ARTICLE III

HYPERAMORTIZATION

3.01. Deposit of Rents and Profits. Upon the commencement of any Sweep Period (as defined in the Cash Management Agreement) prior to the Anticipated Repayment Date, Borrower shall thereafter cause the Rents and Profits (as defined in the Security Instrument) to be deposited in the applicable accounts required by the Cash Management Agreement and such sums shall be applied on the first day of each calendar month in the following listed order of priority:

(a) First, payments to the Impound Account (as defined in the Security Instrument) in accordance with the terms and conditions of the Security Instrument;

(b) Next, the payment of the Monthly Payment Amount;

(c) Next, payments of any other amounts due under the Loan Documents not expressly set forth below in this Section 3.01;

(d) Next, payments to the Replacement Reserve (as defined in the Security Instrument) in accordance with the terms and conditions of the Security Instrument; and

(e) Lastly, payment to Borrower of any excess amounts.

Notwithstanding any provision of this Note to the contrary, following an Event of Default, Lender reserves the right to (x) take such enforcement actions as it deems appropriate under the Loan Documents or otherwise under law or in equity and (y) apply sums received to the amounts owed under the Loan Documents at such times and in such amounts, order and manner as Lender shall in its sole discretion elect from time to time.

3.02. Amounts Outstanding at the Anticipated Repayment Date. In the event that Borrower does not pay to Lender on or before the Anticipated Repayment Date the outstanding principal balance of this Note together with all accrued and unpaid interest hereon and all other sums then due and payable hereunder and under the Loan Documents, the following shall apply:

(a) From and after the Anticipated Repayment Date, interest shall accrue on the unpaid principal balance from time to time outstanding on this Note at the Extended Term Rate. Interest accrued at the Extended Term Rate and not paid pursuant to this Section 3.02 shall be deferred and added to the outstanding principal balance of this Note (together with all accrued interest thereon) and shall earn interest at the Extended Term Rate to the extent permitted by applicable law (such accrued interest together with any interest accrued thereon is hereinafter defined as “Accrued Interest”). All of the outstanding principal balance, including any Accrued Interest, shall be due and payable on the Maturity Date.

(b) Borrower shall cause all Rents and Profits to be deposited directly into the applicable accounts required by the Cash Management Agreement and Borrower shall pay on the Anticipated Repayment Date and each Payment Date thereafter up to and including the Maturity Date, the following payments from Rents and Profits on or before such day in the listed order of priority:

(1) First, payments to the Impound Account in accordance with the terms and conditions of the Security Instrument;

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(2) Next, the payment of the Monthly Payment Amount to be applied first to the payment of interest computed at the Initial Term Interest Rate (as hereinafter defined) with the remainder applied to the reduction of the outstanding principal balance of this Note;

(3) Next, payments to Lender of any other amounts due under the Loan Documents not expressly set forth below in this Section 3.02(b);

(4) Next, payments to the Replacement Reserve, each in accordance with the terms and conditions of the Security Instrument;

(5) Next, payments for monthly Cash Expenses (as hereinafter defined), less management fees payable to affiliates of Borrower, pursuant to the terms and conditions of the related Approved Annual Budget (as hereinafter defined);

(6) Next, payment for monthly Net Capital Expenditures (as hereinafter defined), pursuant to the terms and conditions of the related Approved Annual Budget;

(7) Next, payment for Extraordinary Expenses (as hereinafter defined) approved by Lender, if any;

(8) Next, payments to Lender to be applied against the outstanding principal due under this Note (but not including any Accrued Interest) until such principal amount (not including any Accrued Interest) is paid in full;

(9) Next, payments to Lender for Accrued Interest; and

(10) Lastly, payment to the Borrower of any excess amounts.

(c) In the event that the Borrower must incur an Extraordinary Expense, then Borrower shall promptly deliver to Lender a reasonably detailed explanation of such proposed Extraordinary Expense for the Lender’s approval.

3.03. Payment of Monthly Payment Amount. Nothing in this Article III shall limit, reduce or otherwise affect Borrower’s obligations to make payments of the Monthly Payment Amount and/or payments to the Impound Account or the Replacement Reserve or any other sums due hereunder and under the other Loan Documents, whether or not Rents and Profits are available to make such payments.

3.04. Annual Budgets. For each fiscal year commencing with the fiscal year in which the Anticipated Repayment Date occurs, Borrower shall submit to Lender for Lender’s written approval an Annual Budget (as hereinafter defined) not later than sixty (60) days prior to the commencement of such fiscal year, in form satisfactory to Lender setting forth in reasonable detail budgeted monthly operating income and monthly operating capital and other expenses for the Property (as hereinafter defined). Each Annual Budget shall contain, among other things, limitations on management fees, third party service fees, and other expenses as Borrower may reasonably determine. Lender shall have the right to approve such Annual Budget (which approval shall not be unreasonably withheld), and in the event that Lender objects to the proposed Annual Budget submitted by Borrower, Lender shall advise Borrower of such objections within fifteen (15) days after receipt thereof (and deliver to Borrower a reasonably detailed description of such objections) and Borrower shall within three (3) days after receipt of notice of any such objections revise such Annual Budget and resubmit the same to Lender. Lender shall advise Borrower of any objections to such revised Annual Budget within ten (10) days after receipt thereof (and deliver to Borrower a reasonably detailed description of such objections) and Borrower shall revise the same in accordance with the process described in this subparagraph until the Lender approves an Annual Budget, provided, however, that if Lender shall not advise Borrower of its objections to any proposed Annual Budget within the applicable time period set forth in this paragraph, then such proposed Annual Budget shall be deemed approved by Lender. Until such time as Lender approves a proposed Annual Budget, the most recently Approved Annual Budget shall apply; provided that such Approved Annual Budget shall be adjusted to reflect actual increases in real estate taxes, insurance premiums and utilities expenses.

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3.05. Definitions. The following items, as used in this Note, shall have the following meaning which meaning shall be applicable equally to the singular and the plural of the items defined:

(a) “Annual Budget” shall mean an annual budget submitted by Borrower to Lender in accordance with the terms of Section 3.04 of this Note.

(b) “Applicable Interest Rate” shall mean from (a) the date of this Note through but not including the Anticipated Repayment Date, the Initial Term Interest Rate, and (b) from and after the Anticipated Repayment Date through and including the date this Note is paid in full, the Extended Term Rate.

(c) “Approved Annual Budget” shall mean each Annual Budget approved by Lender in accordance with the terms herein.

(d) “Capital Expenditures” shall mean for any period, the amount expended for items capitalized under generally accepted accounting principles, including expenditures for building improvements or major repairs.

(e) “Cash Expenses” shall mean for any period, the operating expenses for the Property (as defined in the Security Instrument and hereinafter referred to as the “Property”) as set forth in an Approved Annual Budget to the extent that such expenses are actually incurred by Borrower minus payments into the Impound Account and the Replacement Reserve.

(f) “Cash Management Agreement” shall mean that certain Cash Management Agreement of even date herewith executed by Borrower and Lender and, if applicable, any property manager retained by Borrower, in connection with this Note.

(g) “Defeasance Period” shall mean the period of time commencing on the date which is the earlier to occur of (i) two (2) years after the “startup day”, within the meaning of Section 860G(a)(9) of Code, of the REMIC that holds this Note (such REMIC is referred to as the “Trust”) and (ii) four (4) years after the date hereof, and ending on the Anticipated Repayment Date.

(h) “Extended Term Rate” shall mean a rate per annum equal to the greater of (i) the Initial Term Interest Rate plus three (3) percentage points or (ii) the Treasury Rate plus three (3) percentage points.

(i) “Extraordinary Expense” shall mean an extraordinary operating expense or capital expense not set forth in the Approved Annual Budget or allotted for in the Replacement Reserve.

(j) “Loan” shall mean the loan by Lender to Borrower evidenced, inter alia, by this Note and secured, inter alia, by the Security Instrument.

(k) “Net Capital Expenditures” shall mean for any period the amount by which Capital Expenditures during such period exceeds reimbursements for such items during such period from any fund (including, but not limited to, the Replacement Reserve) established pursuant to the Loan Documents.

(l) “Note” shall mean this Promissory Note, as amended from time to time.

(m) “Payment Date” shall mean with respect to any month shall be the first day of such month; provided, however, that if the first day of a given month shall not be a business day, then the Payment Date for such month shall be the next business day to occur after the first day of such month.

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(n) “Treasury Rate” shall mean, as of the Anticipated Repayment Date, the yield, calculated by linear interpolation (rounded to the nearest one-thousandth of one percent (i.e., 0.001%)) of the yields of noncallable United States Treasury obligations with terms (one longer and one shorter) most nearly approximating the period from the Anticipated Repayment Date to the Maturity Date, as determined by Lender on the basis of Federal Reserve Statistical Release H.15-Selected Interest Rates under the heading U.S. Governmental Security/Treasury Constant Maturities, or other recognized source of financial market information selected by Lender.

(o) “Yield Maintenance Charge” shall mean, as of any date, the greater of (1) the excess, if any, of the Defeasance Deposit over the outstanding principal balance of this Note, and (2) an amount equal to one percent (1%) of the outstanding principal balance of this Note.

ARTICLE IV

MISCELLANEOUS

4.01. Miscellaneous. This Note shall be interpreted, construed and enforced according to the laws of the State of Pennsylvania. The terms and provisions hereof shall be binding upon and inure to the benefit of Borrower and Lender and their respective heirs, executors, legal representatives, successors, successors-in-title and assigns, whether by voluntary action of the parties or by operation of law. As used herein, the terms “Borrower” and “Lender” shall be deemed to include their respective heirs, executors, legal representatives, successors, successors-in-title and assigns, whether by voluntary action of the parties or by operation of law. If Borrower consists of more than one person or entity, each shall be jointly and severally liable to perform the obligations of Borrower under this Note. All personal pronouns used herein, whether used in the masculine, feminine or neuter gender, shall include all other genders; the singular shall include the plural and vice versa. Titles of articles and sections are for convenience only and in no way define, limit, amplify or describe the scope or intent of any provisions hereof. Time is of the essence with respect to all provisions of this Note. This Note and the other Loan Documents contain the entire agreements between the parties hereto relating to the subject matter hereof and thereof and all prior agreements relative hereto and thereto which are not contained herein or therein are terminated.

4.02. BORROWER HEREBY IRREVOCABLY AUTHORIZES AND EMPOWERS ANY ATTORNEY OR ATTORNEYS OR THE PROTHONOTARY OR CLERK OF ANY COURT OF RECORD IN THE COMMONWEALTH OF PENNSYLVANIA, OR ELSEWHERE, TO APPEAR FOR BORROWER IN ANY SUCH COURT IN AN APPROPRIATE ACTION THERE BROUGHT OR TO BE BROUGHT AGAINST BORROWER AT THE SUIT OF LENDER ON THIS NOTE, AND THEREIN TO CONFESS JUDGMENT AGAINST BORROWER FOR ALL SUMS DUE FROM BORROWER TOGETHER WITH COSTS OF SUIT AND AN ATTORNEY’S FEE FOR COLLECTION EQUAL TO $25,000; AND FOR SO DOING THIS NOTE OR A COPY HEREOF VERIFIED BY AFFIDAVIT SHALL BE A SUFFICIENT WARRANT. THIS WARRANT OF ATTORNEY SHALL BE EFFECTIVE ONLY AFTER AN EVENT OF DEFAULT, BUT SHALL NOT BE EXHAUSTED BY ANY EXERCISE THEREOF.

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4.03. BORROWER HEREBY RELEASES LENDER AND SAID ATTORNEY OR ATTORNEYS FROM ALL PROCEDURAL ERRORS, DEFECTS AND IMPERFECTIONS WHATSOEVER IN ENTERING JUDGMENT BY CONFESSION AS AFORESAID OR IN ISSUING ANY PROCESS OR INSTITUTING ANY PROCEEDINGS RELATING THERETO AND HEREBY WAIVES ALL BENEFIT THAT MIGHT ACCRUE TO BORROWER BY VIRTUE OF ANY PRESENT OR FUTURE LAWS EXEMPTING THE SECURITY PROPERTY, AND ANY OTHER COLLATERAL FOR THIS NOTE, OR ANY PART OF THE PROCEEDS ARISING FROM ANY SALE OF ANY SUCH PROPERTY, FROM ATTACHMENT, LEVY OR SALE UNDER EXECUTION, OR PROVIDING FOR ANY STAY OF EXECUTION, EXEMPTION FROM CIVIL PROCESS OR EXTENSION OF TIME AND AGREES THAT SUCH PROPERTY MAY BE SOLD TO SATISFY ANY JUDGMENT ENTERED ON THIS NOTE OR THE MORTGAGE, IN WHOLE OR IN PART AND IN ANY ORDER AS MAY BE DESIRED BY LENDER.

4.04. BORROWER CONFIRMS TO LENDER THAT (I) BORROWER IS A BUSINESS ENTITY AND THAT ITS PRINCIPALS ARE KNOWLEDGEABLE IN BUSINESS MATTERS; (II) THE TERMS OF THIS NOTE, INCLUDING THE FOREGOING WARRANT OF ATTORNEY TO CONFESS JUDGMENT, HAVE BEEN NEGOTIATED AND AGREED UPON IN A COMMERCIAL CONTEXT; AND (III) IT HAS FULLY REVIEWED THE AFORESAID WARRANT OF ATTORNEY TO CONFESS JUDGMENT WITH ITS OWN COUNSEL AND IS KNOWINGLY AND VOLUNTARILY WAIVING CERTAIN RIGHTS IT WOULD OTHERWISE POSSESS, INCLUDING BUT NOT LIMITED TO, THE RIGHT TO ANY NOTICE OR A HEARING PRIOR TO THE ENTRY OF JUDGMENT BY LENDER PURSUANT TO THE AFORESAID WARRANT OF ATTORNEY.

[signature appears on following page]

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IN WITNESS WHEREOF, Borrower has executed this Note under seal as of the date first above written.

935 HQ ASSOCIATES, LLC,
a Delaware limited liability company
By:	GSI Commerce, Inc.,
a Delaware corporation,
its Managing Member
	By:	/s/ Jordan M. Copland
		Name: Jordan M. Copland
		Title: Executive Vice President

COMMONWEALTH OF PENNSYLVANIA

COUNTY OF Philadelphia

On this, the 9^th day of June, 2004 before me, a Notary Public, personally appeared Jordan M. Copland, known to me (or satisfactorily proven) to be the Executive Vice President of GSI Commerce, Inc., a Delaware corporation, the Managing Member of 935 HQ Associates, LLC, a Delaware limited liability company and acknowledged that being duly authorized to do so, executed the foregoing instrument on behalf of such limited partnership as general partner of such limited partnership for the purposes therein contained.

IN WITNESS WHEREOF, I have hereunto set my official hand and seal.

/s/ Sheldon Bender	[SEAL]
Name: Sheldon Bender
My commission expires: May 2, 2006

EX-10.6

Exhibit 10.6

MORTGAGE, ASSIGNMENT OF LEASES AND RENTS AND SECURITY AGREEMENT

935 HQ ASSOCIATES, LLC,

BORROWER

IN FAVOR OF

CIBC INC.,

LENDER

DATED: AS OF JUNE 9, 2004

Property Address

Street Address:	935 First Avenue, King of Prussia, Pennsylvania
Condominium Unit Number:	Unit 1 of First Avenue Corporate Center
County:	Montgomery
Commonwealth:	Pennsylvania

Record and Return to:

Winston & Strawn LLP

200 Park Avenue

New York, New York 10166

Attention: Emidio J. Scarfogliero

THIS MORTGAGE, ASSIGNMENT OF LEASES AND RENTS AND SECURITY AGREEMENT (this “Mortgage”) is made as of the 9th day of June, 2004, by 935 HQ ASSOCIATES, LLC, a Delaware limited liability company, as mortgagor (“Borrower”), whose address is 1075 First Avenue, King of Prussia, Pennsylvania 19406, in favor of CIBC INC., a Delaware corporation, as mortgagee (“Lender”), whose address is Attn: Real Estate Finance Group, 622 Third Avenue, 8th Floor, New York, New York 10017.

W I T N E S S E T H:

THAT FOR THE PURPOSES OF SECURING:

(1) A loan (the “Loan”) by Lender to Borrower in the original principal amount of Thirteen Million and 00/100 Dollars ($13,000,000.00), together with interest thereon evidenced by that certain promissory note (such promissory note, together with any and all renewals, modifications, consolidations and extensions thereof, is hereinafter referred to as the “Note”) of even date with this Mortgage, made by Borrower to the order of Lender in like amount;

(2) The full and prompt payment and performance of all of the provisions, agreements, covenants and obligations herein contained and contained in any other agreements, documents or instruments now or hereafter evidencing, guarantying, securing or otherwise relating to the indebtedness evidenced by the Note, whether executed or delivered by Borrower or by any indemnitor or guarantor with respect to any obligation of Borrower under the Loan Documents (each, hereinafter, an “Indemnitor”), as defined herein, or jointly and severally (the Note, this Mortgage, and such other agreements, documents and instruments, together with any and all renewals, amendments, extensions and modifications thereof, are hereinafter collectively referred to as the “Loan Documents”) excluding only the obligations pursuant to that certain Hazardous Substances Indemnity Agreement by Borrower and Indemnitor, jointly and severally, for the benefit of Lender (the “Hazardous Substances Indemnity”), and the payment of all other sums covenanted in the Loan Documents to be paid;

(3) Any and all additional advances made by Lender to protect or preserve the Property or the lien or security interest created hereby on the Property, or for Taxes and Other Charges (each as defined in Section 1.5) or Insurance Premiums (each as defined in Section 1.6) as hereinafter provided or for performance of any of Borrower’s obligations hereunder or under the other Loan Documents or for any other purpose provided herein or in the other Loan Documents (whether or not the original Borrower remains the owner of the Property at the time of such advances), and any and all costs and expenses incurred by Lender hereunder in performing the obligations required to be performed by Borrower or otherwise incurred by Lender pursuant to the terms of this Mortgage, together with interest on each such advance, cost or expense (which interest shall accrue at the Default Interest Rate (as defined in the Note) from the date such amounts are advanced or paid by Lender until the date repaid by Borrower); and

(4) Any and all other indebtedness now owing or which may hereafter be owing by Borrower to Lender, including, without limitation, all prepayment fees, however and whenever incurred or evidenced, whether express or implied, direct or indirect, absolute or contingent, or due or to become due, and all renewals, modifications, consolidations, replacements and extensions thereof;

(All of the sums referred to in Paragraphs (1) through (4) above are herein sometimes referred to as the “Obligations”)

and for and in consideration of the sum of Ten and no/100 Dollars ($10.00), and other valuable consideration, the receipt and sufficiency of which are hereby conclusively acknowledged, BORROWER

HEREBY IRREVOCABLY MORTGAGES, GRANTS, BARGAINS, SELLS, CONVEYS, TRANSFERS, PLEDGES, SETS OVER AND ASSIGNS, AND GRANTS A SECURITY INTEREST, TO LENDER, ITS SUCCESSORS AND ASSIGNS, in all of Borrower’s estate, right, title and interest in, to and under any and all of the following described property, whether now owned or hereafter acquired (collectively, the “Property”):

A. That certain unit of the condominium regime set forth in Exhibit A hereto (the “Unit”) of First Avenue Corporate Center, a Condominium in the Township of Upper Merion, Commonwealth of Pennsylvania (the “Condominium”), according to the Declaration of Condominium, recorded immediately prior to the recordation of this Mortgage in the Records of the City of Merion, Pennsylvania (the “Declaration”) together with appurtenant parking spaces and undivided percentage interests in and to the Common Elements (as defined in the Declaration), and all other rights, titles and hereditaments attributable to the Unit, all as more particularly described on Exhibit A attached hereto and incorporated herein by this reference collectively, (the “Real Estate”);

B. All structures, buildings and improvements of every kind and description now or at any time hereafter located or placed on the Real Estate, including, without limitation, any such structures, buildings and improvements constituting the Unit (collectively, the “Improvements”);

C. All furniture, furnishings, fixtures, goods, equipment, inventory or personal property owned by Borrower and now or hereafter located on, attached to or used in and about the Improvements, including, but not limited to, all machines, engines, boilers, dynamos, elevators, stokers, tanks, cabinets, awnings, screens, shades, blinds, carpets, draperies, lawn mowers, and all appliances, plumbing, heating, air conditioning, lighting, ventilating, refrigerating, disposal and incinerating equipment, and all fixtures and appurtenances thereto, and such other goods and chattels and personal property owned by Borrower as are now or hereafter used or furnished in operating the Improvements, or the activities conducted therein, and all building materials and equipment hereafter situated on or about the Real Estate or Improvements, and all warranties and guaranties relating thereto, and all additions thereto and substitutions and replacements therefor (exclusive of any of the foregoing owned or leased by tenants of space in the Improvements);

D. All easements, rights-of-way, strips and gores of land, vaults, streets, ways, alleys, passages, sewer rights, air rights and other development rights now or hereafter located on the Real Estate or under or above the same or any part or parcel thereof, and all estates, rights, titles, interests, tenements, hereditaments and appurtenances, reversions and remainders whatsoever, in any way belonging, relating or appertaining to the Real Estate and/or Improvements or any part thereof, or which hereafter shall in any way belong, relate or be appurtenant thereto, whether now owned or hereafter acquired by Borrower;

E. All water, ditches, wells, reservoirs and drains and all water, ditch, well, reservoir and drainage rights which are appurtenant to, located on, under or above or used in connection with the Real Estate or the Improvements, or any part thereof, whether now existing or hereafter created or acquired;

F. All minerals, crops, timber, trees, shrubs, flowers and landscaping features now or hereafter located on, under or above the Real Estate;

G. All cash funds, deposit accounts and other rights and evidence of rights to cash, now or hereafter created or held by Lender pursuant to this Mortgage or any other of the Loan Documents, including, without limitation, all funds now or hereafter on deposit in the Impound Account, as defined in Section 1.6, and in the reserves required pursuant to Section 1.28 and in the Letter of Credit Reserve (as defined in that certain Letter of Credit Agreement dated as of the date hereof between Borrower and Lender) (collectively, the “Reserves”);

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H. All leases (including, without limitation, (x) that certain Lease Agreement dated on or about June 9, 2004 between Borrower, as landlord, and GSI Commerce Solutions, Inc. (the “Primary Tenant”), as tenant, and guaranteed by GSI Commerce, Inc. (“GSI” or the “Primary Lease Guarantor”) pursuant to a Lease Guaranty dated as of the same date (the lease and guaranty, collectively, the “Primary Lease”) and (y) oil, gas and mineral leases), licenses, concessions and occupancy agreements of all or any part of the Real Estate or the Improvements now or hereafter entered into (each, a “Lease” and collectively, the “Leases”) and all rents, royalties, issues, profits, revenue, income and other benefits (collectively, the “Rents and Profits”) of the Real Estate or the Improvements, now or hereafter arising from the use or enjoyment of all or any portion thereof or from any present or future Lease or other agreement pertaining thereto or arising from any of the Contracts (as hereinafter defined) or any of the General Intangibles (as hereinafter defined) and all cash or securities deposited to secure performance by the tenants, lessees or licensees, as applicable (each, a “Tenant” and collectively, the “Tenants”), of their obligations under any such Leases, whether said cash or securities are to be held until the expiration of the terms of said Leases or applied to one or more of the installments of rent coming due prior to the expiration of said terms, subject to, however, the provisions contained in Section 1.9 hereinbelow;

I. All contracts and agreements now or hereafter entered into covering any part of the Real Estate or the Improvements (collectively, the “Contracts”) and all revenue, income and other benefits thereof, including, without limitation, management agreements, franchise agreements, service contracts, maintenance contracts, equipment leases, personal property leases and any contracts or documents relating to construction on any part of the Real Estate or the Improvements (including plans, drawings, surveys, tests, reports, bonds and governmental approvals) or to the management or operation of any part of the Real Estate or the Improvements and any and all warranties and guaranties relating to the Real Estate or the Improvements or any fixtures, equipment or personal property owned by Borrower and located on and/or used in connection with the Property;

J. All present and future monetary deposits given to any public or private utility with respect to utility services furnished to any part of the Real Estate or the Improvements;

K. All present and future funds, accounts, instruments, accounts receivable, documents, causes of action, claims, general intangibles (including without limitation, trademarks, trade names, servicemarks and symbols now or hereafter used in connection with any part of the Real Estate or the Improvements, all names by which the Real Estate or the Improvements may be operated or known, all rights to carry on business under such names, and all rights, interest and privileges which Borrower has or may have as developer or declarant under any covenants, restrictions or declarations now or hereafter relating to the Real Estate or the Improvements) and all notes or chattel paper now or hereafter arising from or by virtue of any transactions related to the Real Estate or the Improvements (collectively, the “General Intangibles”);

L. All water taps, sewer taps, certificates of occupancy, permits, licenses, franchises, certificates, consents, approvals and other rights and privileges now or hereafter obtained in connection with the Real Estate or the Improvements and all present and future warranties and guaranties relating to the Improvements or to any equipment, fixtures, furniture, furnishings, personal property or components of any of the foregoing now or hereafter located or installed on the Real Estate or the Improvements;

M. All building materials, supplies and equipment now or hereafter placed on the Real Estate or in the Improvements and all architectural renderings, models, drawings, plans, specifications, studies and data now or hereafter relating to the Real Estate or the Improvements;

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N. All right, title and interest of Borrower in any insurance policies or binders now or hereafter relating to the Property including any unearned premiums thereon;

O. All proceeds, products, substitutions and accessions (including claims and demands therefor) of the conversion, voluntary or involuntary, of any of the foregoing into cash or liquidated claims, including, without limitation, proceeds of insurance and condemnation awards and proceeds of refunds of any Taxes or Other Charges with respect to any period in which this Mortgage encumbers the Property; and

P. All other or greater rights and interests of every nature in the Real Estate or the Improvements and in the possession or use thereof and income therefrom, whether now owned or hereafter acquired by Borrower.

TO HAVE AND TO HOLD the Property unto Lender, its successors and assigns forever, for the purposes and uses herein set forth, PROVIDED ALWAYS, and this instrument is upon the express condition that, if Borrower pays to Lender the principal sum mentioned in the Note, the interest thereon and all other sums payable by Borrower to Lender as are secured hereby, in accordance with the provisions of the Note and this Mortgage, at the times and in the manner specified, without deduction, fraud or delay, and Borrower complies with all the terms and conditions contained herein and in the Note, then this Mortgage and the estate hereby granted shall cease and become void.

ARTICLE I

COVENANTS OF BORROWER

For the purpose of further securing the Obligations and for the protection of the security of this Mortgage, for so long as the Obligations or any part thereof remains unpaid, Borrower covenants and agrees as follows:

1.1 Warranties of Borrower. Borrower, for itself and its successors and assigns, does hereby represent, warrant and covenant to and with Lender, its successors and assigns, that:

(a) Organization and Existence. Borrower is duly organized and validly existing as a limited liability company in good standing under the laws of Delaware and is qualified to do business in the state of Pennsylvania and in all other jurisdictions in which Borrower is transacting business.

(b) Authorization. Borrower has the power and authority to execute, deliver and perform the obligations imposed on it under the Loan Documents and to consummate the transactions contemplated by the Loan Documents and has taken all necessary actions in furtherance thereof including, without limitation, that those partners or members of Borrower whose approval is required by the terms of Borrower’s organizational documents have duly approved the transactions contemplated by the Loan Documents and have authorized execution and delivery thereof by the respective signatories. To the best of Borrower’s knowledge, no other consent by any local, state or federal agency is required in connection with the execution and delivery of the Loan Documents.

(c) Valid Execution and Delivery. All of the Loan Documents requiring execution by Borrower have been duly and validly executed and delivered by Borrower.

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(d) Enforceability. All of the Loan Documents constitute valid, legal and binding obligations of Borrower and are fully enforceable against Borrower in accordance with their terms, subject only to bankruptcy laws and general principles of equity.

(e) No Defenses. The Note, this Mortgage and the other Loan Documents are not subject to any right of rescission, set-off, counterclaim or defense, nor would the operation of any of the terms of the Note, this Mortgage or any of the other Loan Documents, or the exercise of any right thereunder, render this Mortgage unenforceable, in whole or in part, or subject to any right of rescission, set-off, counterclaim or defense, including the defense of usury.

(f) Defense of Usury. Borrower knows of no facts that would support a claim of usury to defeat or avoid its obligation to repay the principal of, interest on, and other sums or amounts due and payable under, the Loan Documents.

(g) No Conflict/Violation of Law. The execution, delivery and performance of the Loan Documents by the Borrower will not cause or constitute a default under or conflict with the organizational documents of Borrower, any Indemnitor or any Constituent Entity (as defined in Section 1.27) of either of them. The execution, delivery and performance of the obligations imposed on Borrower under the Loan Documents will not cause Borrower to be in default, including after due notice or lapse of time or both, under the provisions of any agreement, judgment or order to which Borrower is a party or by which Borrower is bound.

(h) Compliance with Applicable Laws and Regulations. All of the Improvements and the use of the Property by the Borrower comply with, and shall remain in compliance with, all applicable statutes, rules, regulations and private covenants now or hereafter relating to the ownership, construction, use or operation of the Property, including all applicable health, fire and building codes, and all applicable statutes, rules and regulations pertaining to requirements for equal opportunity, anti-discrimination, fair housing, environmental protection, zoning and land use (collectively, “Applicable Laws”). To Borrower’s knowledge, there is no evidence of any illegal activities relating to controlled substances on the Property. All certifications, permits, licenses and approvals, including, without limitation, certificates of completion and occupancy permits required for the legal use, occupancy and operation of the Property for the use currently being made thereof have been obtained and are in full force and effect. All of the Improvements comply with all material requirements of any applicable zoning and subdivision laws and ordinances.

(i) Consents Obtained. All consents, approvals, authorizations, orders or filings with any court or governmental agency or body, if any, required for the execution, delivery and performance of the Loan Documents by Borrower have been obtained or made.

(j) No Litigation. There are no pending actions, suits or proceedings, arbitrations or governmental investigations against the Property, Borrower, any Indemnitor or any managing member or sole member of Borrower, whether pursuant to the Loan Documents or otherwise, an adverse outcome of which would materially affect the Borrower’s performance under the Note, the Mortgage or the other Loan Documents.

(k) Title. The Borrower has good and marketable fee simple title to the Property, subject only to those matters expressly listed as exceptions to title or subordinate matters in the title insurance policy accepted by Lender in connection with this Mortgage, excepting therefrom all preprinted and/or standard exceptions (the “Permitted Exceptions”). The possession of the Property has been peaceful and undisturbed and title thereto has not been disputed or questioned to the best of Borrower’s

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knowledge. Further, Borrower has full power and lawful authority to grant, bargain, sell, convey, assign, transfer and mortgage its interest in the Property in the manner and form hereby done or intended. Borrower will preserve its interest in and title to the Property and will forever warrant and defend the same to Lender against any and all claims whatsoever and will forever warrant and defend the validity and priority of the lien and security interest created herein against the claims of all persons and parties whomsoever, subject to the Permitted Exceptions. The foregoing warranty of title shall survive the foreclosure of this Mortgage and shall inure to the benefit of and be enforceable by Lender in the event Lender acquires title to the Property pursuant to any foreclosure.

(l) Permitted Exceptions. The Permitted Exceptions do not and will not materially and adversely affect (1) the ability of the Borrower to pay in full the principal and interest on the Note in a timely manner or (2) the use of the Property for the use currently being made thereof, the operation of the Property as currently being operated or the value of the Property.

(m) First Lien. Upon the execution by the Borrower and the recording of this Mortgage in the records of Montgomery County, and upon the execution and filing of UCC-1 financing statements or amendments thereto in the records of Montgomery County and the office of the Secretary of State of Delaware, the Lender will have a valid first lien on the Property and a valid security interest in all personal property encumbered hereby, subject to no liens, charges or encumbrances other than the Permitted Exceptions.

(n) ERISA. The Borrower has made and shall continue to make all required contributions to all employee benefit plans, if any, and the Borrower has no knowledge of any material liability which has been incurred by the Borrower which remains unsatisfied for any taxes or penalties with respect to any employee benefit plan or any multi-employer plan, and each such plan has been administered in compliance with its terms and the applicable provisions of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and any other federal or state law.

(o) Contingent Liabilities. Neither Borrower nor any Indemnitor has any known material contingent liabilities, except for contingent liabilities of any Indemnitor explicitly set forth on the financial statements of such Indemnitor that were delivered to Lender in connection with the Loan, or as were otherwise expressly disclosed to Lender in writing prior to the date hereof with respect to any Indemnitor.

(p) No Other Obligations. The Borrower has no material financial obligation under any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Borrower is a party or by which the Borrower or the Property is otherwise bound, other than (i) obligations incurred in the ordinary course of the operation of the Property that do not violate Section 1.27, and (ii) the Obligations.

(q) Fraudulent Conveyance. The Borrower (1) has not entered into the Loan or any Loan Document with the actual intent to hinder, delay, or defraud any creditor and (2) received reasonably equivalent value in exchange for its obligations under the Loan Documents. Giving effect to the Loans contemplated by the Loan Documents, the fair saleable value of the Borrower’s assets exceed and will, immediately following the execution and delivery of the Loan Documents, exceed the Borrower’s total liabilities, including, without limitation, subordinated, unliquidated, disputed or contingent liabilities. The fair saleable value of the Borrower’s assets is and will, immediately following the execution and delivery of the Loan Documents, be greater than the Borrower’s probable liabilities, including the maximum amount of its contingent liabilities or its debts as such debts become absolute and matured. The Borrower’s assets do not and, immediately following the execution and delivery of the Loan Documents will not, constitute unreasonably small capital to carry out its business as conducted or

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as proposed to be conducted. The Borrower does not intend to, and does not believe that it will, incur debts and liabilities (including, without limitation, contingent liabilities and other commitments) beyond its ability to pay such debts as they mature (taking into account the timing and amounts to be payable on or in respect of obligations of the Borrower).

(r) Investment Company Act. Neither Borrower nor any Indemnitor is (1) an “investment company” or a company “controlled” by an “investment company,” within the meaning of the Investment Company Act of 1940, as amended; (2) a “holding company” or a “subsidiary company” of a “holding company” or an “affiliate” of either a “holding company” or a “subsidiary company” within the meaning of the Public Utility Holding Company Act of 1935, as amended; or (3) subject to any other federal or state law or regulation which purports to restrict or regulate its ability to borrow money.

(s) Access/Utilities. The Property has adequate rights of access to public ways and is served by adequate water, sewer, sanitary sewer and storm drain facilities. All public utilities necessary to the continued use and enjoyment of the Property as presently used and enjoyed are located in the public right-of-way abutting the Property, and all such utilities are connected so as to serve the Property without passing over other property, other than by means of irrevocable easements set forth on the title report and survey delivered to Lender. All roads, and access to such roads, necessary for the full utilization of the Property for its current purpose have been completed and dedicated to public use and accepted by all governmental authorities or are the subject of access easements for the benefit of the Property without any further condition or cost to Borrower or Tenant.

(t) Taxes Paid. Borrower has filed all federal, state, county and municipal tax returns required to have been filed by Borrower, and has paid all taxes which have become due pursuant to such returns or to any notice of assessment received by Borrower, and Borrower has no knowledge of any basis for additional assessment with respect to such Taxes and Other Charges. Further, the Property is free from delinquent Taxes and Other Charges.

(u) Single Tax Lot. As of the date hereof, the Unit is part of a tax parcel which includes all of the Condominium. Borrower shall use best efforts and take all necessary actions in order for the Unit to be designated and assessed, within as short a period of time subsequent to the date hereof as is legally possible, as a single lot with no portion of said tax lot covering property other than the Unit.

(v) Special Assessments. Except as disclosed in the title insurance policy, there are no pending or, to the knowledge of the Borrower, proposed special or other assessments for public improvements or otherwise affecting the Property, nor, to the knowledge of the Borrower, are there any contemplated improvements to the Property that may result in such special or other assessments.

(w) Flood Zone. The Property is not located in a flood hazard area as defined by the Federal Insurance Administration.

(x) Seismic Exposure. The Real Estate is not located in Zone 3 or Zone 4 of the “Seismic Zone Map of the U.S.”.

(y) Misstatements of Fact. No statement of fact made in the Loan Documents contains any untrue statement of a material fact or omits to state any material fact necessary to make statements contained herein or therein not misleading. There is no fact presently known to the Borrower, any Indemnitor or any Constituent Entity of Borrower or any Indemnitor which has not been disclosed which adversely affects, or in the judgment of a reasonable person might adversely affect, the business, operations or condition (financial or otherwise) of the representing party. Further, and in clarification of the foregoing, all reports, certificates, affidavits, statements and other data furnished by or on behalf of

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Borrower, Indemnitor and each Constituent Entity of each of them to Lender, or their respective agents, in connection with the Loan are true and correct in all material respects and do not omit to state any fact or circumstance necessary to make the statements contained therein not misleading.

(z) Condition of Improvements. The Property has not been damaged by fire, water, wind or other cause of loss or any previous damage to the Property has been fully restored. The Improvements are structurally sound, in good repair and free of defects in materials and workmanship and have been constructed and installed in substantial compliance with the plans and specifications relating thereto. All major building systems located within the Improvements, including, without limitation, the heating and air conditioning systems and the electrical and plumbing systems, are in good working order and condition.

(aa) No Insolvency or Judgment. Neither Borrower, nor any Indemnitor, nor any managing member or sole member of Borrower, (a) has been or is currently the subject of or a party to any completed or pending bankruptcy, reorganization or insolvency proceeding; or (b) is currently the subject of any judgment unsatisfied of record or docketed in any court of the state in which the Property is located or in any other court located in the United States, other than, with respect to Indemnitor, any unsatisfied judgments in amounts of less than $25,000, none of which such judgments, either individually or in the aggregate, will impair the ability of Indemnitor to perform its obligations under the Loan Documents. The proposed Loan will not render the Borrower or any general partner or member of Borrower, as applicable, insolvent. As used in this Mortgage, the term “insolvent” means that the sum total of all of an entity’s liabilities (whether secured or unsecured, contingent or fixed, or liquidated or unliquidated) is in excess of the value of all such entity’s non-exempt assets, i.e., all of the assets of the entity that are available to satisfy claims of creditors.

(bb) No Condemnation. No part of any property subject to the Mortgage has been taken in condemnation or other like proceeding to an extent which would impair the value of the Property, the Mortgage or the Loan or the usefulness of such property for the purposes contemplated by the loan application relating to the Loan (the “Loan Application”), nor is any proceeding pending, threatened or known to be contemplated for the partial or total condemnation or taking of the Property.

(cc) No Labor or Materialmen Claims. All parties furnishing labor and materials have been paid in full and, except for such liens or claims insured against by the policy of title insurance to be issued in connection with the Loan, there are no mechanics’, laborers’ or materialmen’s liens or claims outstanding for work, labor or materials affecting the Property, whether prior to, equal with or subordinate to the lien of the Mortgage.

(dd) No Purchase Options. Excluding only the right of first offer held by Brandywine Operating Partnership L.P. (“Brandywine”), set forth in the Declaration, no tenant, person, party, firm, corporation or other entity has an option, right of first offer, or right of first refusal, to purchase the Property, any portion thereof or any interest therein. The right of first offer held by Brandywine is, and at all times shall be, subject and subordinate to the right of Lender to foreclose on the Property or to acquire title to the Property through deed-in-lieu of foreclosure.

(ee) Leases. The Property is not subject to any leases, subleases, licenses, concessions or other agreements related to the leasing or renting of the Property or any portion thereof, except as set forth on the Rent Roll (as defined herein). No person has any possessory interest in the Property or right to occupy the same, except pursuant to the Leases. Borrower hereby represents that: (i) Borrower has delivered a schedule (the “Rent Roll”) of all Leases affecting the Property, which accurately and completely sets forth in all material respects for each Lease, the following: the name of the Tenant, the Lease expiration date, extension and renewal provisions, the base rent payable, the security deposit

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held thereunder and any other material provisions of such Lease, which Rent Roll is true, correct and complete as of the date hereof; and (ii) the Borrower is the owner and holder of the landlord’s interest under the Leases, and there are no prior assignments of all or any portion of the Leases or any portion of the Rents and Profits which are presently outstanding and have priority over the assignment of leases and rents contained herein in Section 1.9 given by Borrower to Lender; and (iii) each Lease constitutes the legal, valid and binding obligation of Borrower and, to the best of Borrower’s knowledge and belief, is enforceable against the Tenant thereunder; and (iv) no default exists, or with the passing of time or the giving of notice or both would exist, under any Lease which would, in the aggregate, have a material adverse effect on Borrower or the Property; and (v) no Tenant has any offset or defense to the payment of rent under its Lease; and (vi) no Tenant has, as of the date hereof, paid rent under its Lease more than one (1) month in advance, and the rents under such Lease has not been waived, released, or otherwise discharged or compromised; and (vii) all work required to be performed by Borrower as of the date hereof under each Lease has been substantially performed as of the date hereof, all contributions to be made as of the date hereof by Borrower to the Tenant thereunder have been made and all other conditions precedent to each Tenant’s obligations thereunder have been satisfied; and (viii) Borrower has delivered to Lender true, correct and complete copies of all Leases described in the Rent Roll; and (ix) to the best of Borrower’s knowledge and belief, each Tenant is free from bankruptcy, reorganization or arrangement proceedings or a general assignment for the benefit of creditors; and (x) no Lease provides any party with the right to obtain a lien or encumbrance upon the Property superior to the lien of this Mortgage.

(ff) Appraisal. To the best knowledge of Borrower, all requirements and conditions of the appraisal of the Property submitted to Lender as part of the Loan Application, upon which the value of the Property was conditioned, have been fully satisfied.

(gg) Boundary Lines. Except as expressly reflected on the survey of the Property delivered to Lender in connection with the Loan, all of the Improvements which were included in determining the appraised value of the Property lie wholly within the boundaries and building restriction lines of the Property, and no improvements on adjoining properties encroach upon the Property, and no easements or other encumbrances upon the Real Estate encroach upon any of the Improvements, so as to affect the value or marketability of the Property except those which are insured against by title insurance.

(hh) Survey. The survey of the Property delivered to Lender in connection with this Mortgage, has been performed by a duly licensed surveyor or registered professional engineer in the jurisdiction in which the Property is situated, is certified to the Lender, its successors and assigns, and the title insurance company, and is in accordance with the most current minimum standards for title surveys as determined by the American Land Title Association, with the signature and seal of a licensed engineer or surveyor affixed thereto, and does not fail to reflect any material matter affecting the Property or the title thereto.

(ii) Forfeiture. There has not been and shall never be committed by Borrower or any other person in occupancy of or involved with the operation or use of the Property any act or omission affording the federal government or any state or local government the right of forfeiture as against the Property or any part thereof or any monies paid in performance of Borrower’s obligations under any of the Loan Documents.

(jj) Use of Rents and Profits. All Rents and Profits generated by or derived from the Property shall first be utilized solely for current expenses directly attributable to the ownership and operation of the Property, including, without limitation, current expenses relating to Borrower’s liabilities and obligations with respect to this Mortgage and the other Loan Documents, and none of the Rents and Profits generated by or derived from the Property shall be diverted by Borrower or utilized for any other purposes unless all such current expenses attributable to the ownership and operation of the Property have been fully paid and satisfied.

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(kk) No Broker. No financial advisors, brokers, underwriters, placement agents, agents or finders have been dealt with by the Borrower in connection with the Loan, except for any broker whose full commission was paid out of the proceeds of the Loan and is set forth in the written instructions from Borrower to Lender regarding disbursement of the proceeds of the Loan.

(ll) Conviction of Criminal Acts. Each of Borrower, any Indemnitor, and any managing member or sole member of Borrower, has never been convicted of a crime (which shall not include traffic violations) and is not currently the subject of any pending or, to Borrower’s knowledge, threatened criminal investigation or proceeding.

(mm) Security Agreements. There are no security agreements or financing statements affecting or encumbering any of the Property other than the security agreements and financing statements created in favor of Lender.

(nn) Homestead. The Property forms no part of any property owned, used or claimed by Borrower as a residence or business homestead and is not exempt from forced sale under the laws of the State in which the Real Estate is located. Borrower hereby disclaims and renounces each and every claim to all or any portion of the Property as a homestead.

(oo) Contracts. Borrower will comply with all of its obligations under all Contracts which are material to the operation of the Property in accordance with Borrower’s current practice, and with all material obligations under all other Contracts.

1.2 Defense of Title. If, while this Mortgage is in force, the title to the Property or the interest of Lender therein shall be the subject, directly or indirectly, of any action at law or in equity, or be attached directly or indirectly, or endangered, clouded or adversely affected in any manner, Borrower, at Borrower’s expense, shall take all necessary and proper steps for the defense of said title or interest, including the employment of counsel approved by Lender, the prosecution or defense of litigation, and the compromise or discharge of claims made against said title or interest. Notwithstanding the foregoing, in the event that Lender determines that Borrower is not adequately performing its obligations under this Section, Lender may, without limiting or waiving any other rights or remedies of Lender hereunder, take such steps with respect thereto as Lender shall deem necessary or proper; any and all costs and expenses incurred by Lender in connection therewith, together with interest thereon at the Default Interest Rate, shall be immediately paid by Borrower on demand.

1.3 Performance of Obligations. Borrower shall pay when due the principal of and the interest on the Note. Borrower shall also pay and perform all of the Obligations as and when due. Further, Borrower shall promptly and strictly perform and comply with all covenants, conditions, obligations and prohibitions required of Borrower in connection with any other document or instrument affecting title to the Property, or any part thereof, regardless of whether such document or instrument is superior or subordinate to this Mortgage.

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1.4 Insurance. Borrower shall, at Borrower’s expense, maintain (or cause Primary Tenant to maintain) in force and effect on the Property at all times while this Mortgage continues in effect the following insurance, to the extent that such insurance is not maintained for the Condominium by the unit owners association (the “Association”) in a manner satisfactory to Lender:

(a) Insurance against loss or damage to the Property by fire, windstorm, tornado and hail and against loss and damage by such other, further and additional risks as may be now or hereafter embraced by an “all-risk” form of insurance policy. The amount of such insurance shall be not less than one hundred percent (100%) of the full replacement (insurable) cost of the Improvements, furniture, furnishings, fixtures, equipment and other items (whether personalty or fixtures) included in the Property and owned by Borrower from time to time, without reduction for depreciation. The determination of the replacement cost amount shall be adjusted annually to comply with the requirements of the insurer issuing such coverage or, at Lender’s election, by reference to such indices, appraisals or information as Lender determines in its reasonable discretion. Full replacement cost, as used herein, means, with respect to the Improvements, the cost of replacing the Improvements without regard to deduction for depreciation, exclusive of the cost of excavations, foundations and footings below the lowest basement floor, and means, with respect to such furniture, furnishings, fixtures, equipment and other items, the cost of replacing the same, in each case, with inflation guard coverage to reflect the effect of inflation, or annual valuation. Each policy or policies shall contain a replacement cost endorsement and either an agreed amount endorsement (to avoid the operation of any co-insurance provisions) or a waiver of any co-insurance provisions, all subject to Lender’s approval. The deductible with respect to such insurance shall not exceed $50,000.00 per claim.

(b) Comprehensive Commercial General Liability Insurance for personal injury, bodily injury, death and property damage liability in amounts not less than $1,000,000.00 per occurrence and $2,000,000.00 in the aggregate, together with umbrella coverage in amounts not less than $5,000,000.00. During any construction on the Property, Borrower’s general contractor for such construction shall also provide the insurance required in this Subsection (b). Lender hereby retains the right to periodically review the amount of said liability insurance being maintained by Borrower and to require an increase in the amount of said liability insurance should Lender deem an increase to be reasonably prudent under then existing circumstances. No deductible shall be permitted with respect to such insurance.

(c) General boiler and machinery insurance coverage is required if steam boilers or other pressure-fired vessels are in operation at the Property. Minimum liability amount per accident must equal the lesser of the replacement (insurable) value of the Improvements housing such boiler or pressure-fired machinery or $2,000,000.00. The deductible with respect to such insurance shall not exceed $50,000.00 per claim.

(d) If the Property or any part thereof is identified by the Secretary of Housing and Urban Development as being situated in an area now or subsequently designated as having special flood hazards (including, without limitation, those areas designated as Zone A or Zone V), flood insurance in an amount equal to the lesser of: (i) the minimum amount required, under the terms of coverage, to compensate for any damage or loss on a replacement basis (or the unpaid balance of the Obligations if replacement cost coverage is not available for the type of building insured); or (ii) the maximum insurance available under the appropriate National Flood Insurance Administration program. The deductible with respect to such insurance shall not exceed $50,000.00 per occurrence.

(e) During the period of any construction on the Property or renovation or alteration of the Improvements, a so-called “Builder’s All-Risk Completed Value” or “Course of Construction” insurance policy in non-reporting form for any Improvements under construction, renovation or alteration in an amount approved by Lender and Worker’s Compensation Insurance covering all persons engaged in such construction, renovation or alteration. The deductible for such insurance, if any, shall be satisfactory to Lender.

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(f) Loss of rents or loss of business income insurance in amounts sufficient to compensate Borrower for all Rents and Profits during a period of not less than eighteen (18) months in which the Property may be damaged or destroyed. The amount of coverage shall be adjusted annually to reflect the Rents and Profits or income payable during the succeeding eighteen (18) month period. The deductible for such insurance, if any, shall be satisfactory to Lender.

(g) Any other insurance coverage required by Lender in connection with the making of the Loan and in effect as of the date hereof.

(h) Such other insurance on the Property or on any replacements or substitutions thereof or additions thereto as may from time to time be required by Lender against other insurable hazards or casualties which at the time are commonly insured against in the case of property similarly situated including, without limitation, Sinkhole, Mine Subsidence, Terrorism, Earthquake and Environmental insurance, due regard being given to the height and type of buildings, their construction, location, use and occupancy; provided, that, solely with respect to insurance against loss or damage to the Property resulting from Terrorism, Borrower shall maintain such insurance in an amount equal to the lesser of (x) the amount then required by Lender, and (y) the amount which is available for an annual premium equal to two hundred percent (200%) of the annual premium which Borrower is then currently paying for the “all-risk” insurance (but exclusive of terrorism coverage) required under Section 1.4(a) above with respect to the Property.

(i) It shall constitute a default under this Mortgage entitling Lender at its option to accelerate the entire unpaid balance of the indebtedness secured hereby if the Association or Borrower fail or refuse to maintain in full force and effect a policy or policies of insurance meeting the requirements of Section 1.4(a). Such policy or policies maintained by the Association (as opposed to directly by the Borrower) shall be written in the name of, and the proceeds thereof shall be payable to, the members of the Association, as trustees for each of the owners of the Condominium Units in the percentages established in the Declaration, and to the respective mortgagees of the owners of the Condominium Units, as their interests may appear. Said policy or policies shall provide for separate protection for each Condominium Unit and its attached, built-in, or installed fixtures and equipment to the full insurable replacement value thereof, with a separate loss payable endorsement in favor of the mortgagees of each Condominium Unit. Such policy or policies shall permit the waiver of subrogation and shall provide that the insurance company or companies will not look to the Association, or any owner of the Condominium Units for the recovery of any loss under said policy or policies. Such policy or policies shall not be cancelable except after 30 days written notice to Lender and the original or a duplicate of such policy or policies shall be deposited with Lender with evidence of the payment of premiums and with renewal policies to be deposited with Lender not later than 30 days prior to the expiration of existing policies. In the event that the policy or policies of insurance maintained by the Association insures the Premises only on a contingent or conditional basis which requires the individual owner of the Condominium Units to provide his own insurance on his Condominium Unit, then Borrower shall furnish to Lender an original policy of insurance meeting the requirements of this Section 1.4(a). Anything hereinabove to the contrary notwithstanding, in the event the Association, or Borrower, fail or refuse to provide insurance coverage as above provided, Lender at its election may obtain such insurance for its benefit as Lender and may add the premium therefor to the unpaid balance of the indebtedness secured hereby.

All such insurance shall (i) be with insurers authorized to do business in the state within which the Property is located and who have and maintain a rating of at least “AA” from Standard & Poors (or, alternatively, if the insurers maintain re-insurance with re-insurers maintaining such rating, Lender will not unreasonably withhold its consent to satisfying such required rating by means of a “cut-through” endorsement allowing recourse directly against a reinsurer maintaining such rating), (ii) contain the complete address of the Property (or a complete legal description), (iii) be for terms of at least one year, and (iv) be subject to the approval of Lender as to insurance companies, amounts, content, forms of policies, method by which premiums are paid and expiration dates.

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Borrower shall as of the date hereof deliver to Lender evidence that said insurance policies have been paid current as of the date hereof and certified copies of such insurance policies and original certificates of insurance signed by an authorized agent of the applicable insurance companies evidencing such insurance satisfactory to Lender. Borrower shall renew all such insurance and deliver to Lender certificates evidencing such renewals at least thirty (30) days before any such insurance shall expire. Without limiting the required endorsements to the insurance policies, Borrower further agrees that all such policies shall include a standard, non-contributory, mortgagee clause naming:

CIBC Inc., its successors and/or assigns, as their interests may appear

Attn: Real Estate Finance Group

622 Third Avenue, 8^th Floor

New York, New York 10017

(x) as an additional insured under all liability insurance policies, (y) as the first mortgagee on all property insurance policies and (z) as the loss payee on all loss of rents or loss of business income insurance policies. Borrower further agrees that all such insurance policies: (1) shall provide for at least thirty (30) days’ prior written notice to Lender prior to any cancellation or termination thereof and prior to any modification thereof which affects the interest of Lender; (2) shall contain an endorsement or agreement by the insurer that any loss shall be payable to Lender in accordance with the terms of such policy notwithstanding any act or negligence of Borrower which might otherwise result in forfeiture of such insurance; (3) shall waive all rights of subrogation against Lender; (4) in the event that the Real Estate or the Improvements constitutes a legal non-conforming use under applicable building, zoning or land use laws or ordinances, shall include an ordinance or law coverage endorsement which will contain Coverage A: “Loss Due to Operation of Law” (with a minimum liability limit equal to Replacement Cost With Agreed Value Endorsement), Coverage B: “Demolition Cost” and Coverage C: “Increased Cost of Construction” coverages; and (5) may be in the form of a blanket policy provided that, in the event that any such coverage is provided in the form of a blanket policy, Borrower hereby acknowledges and agrees that failure to pay any portion of the premium therefor which is not allocable to the Property or by any other action not relating to the Property which would otherwise permit the issuer thereof to cancel the coverage thereof, would require the Property to be insured by a separate, single-property policy. The blanket policy must properly identify and fully protect the Property as if a separate policy were issued for 100% of Replacement Cost at the time of loss and otherwise meet all of Lender’s applicable insurance requirements set forth in this Section 1.4. The delivery to Lender of the insurance policies or the certificates of insurance as provided above shall constitute an assignment of all proceeds payable under such insurance policies relating to the Property by Borrower to Lender as further security for the Obligations. In the event of foreclosure of this Mortgage, or other transfer of title to the Property in extinguishment in whole or in part of the Obligations, all right, title and interest of Borrower in and to all unearned insurance premiums and proceeds payable under such policies then in force concerning the Property shall thereupon vest in the purchaser at such foreclosure, or in Lender or other transferee in the event of such other transfer of title whether or not the damage to the Property occurred prior to such transfer of title. Approval of any insurance by Lender shall not be a representation of the solvency of any insurer or the sufficiency of any amount of insurance. In the event Borrower fails to provide, maintain, keep in force or deliver and furnish to Lender the policies of insurance required by this Mortgage or evidence of their renewal as required herein, Lender may, but shall not be obligated to, procure such insurance and Borrower shall pay all amounts advanced by Lender therefor, together with interest thereon at the Default Interest Rate from and after the date advanced by Lender until actually repaid by Borrower, promptly upon demand by Lender. Lender shall not be responsible for nor incur any liability for the insolvency of the insurer or other failure of the insurer to perform, even though Lender has caused the insurance to be placed with the insurer after failure of Borrower to furnish such insurance. Borrower shall

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not obtain insurance for the Property in addition to that required by Lender without the prior written consent of Lender, which consent will not be unreasonably withheld provided that (i) Lender is a named insured on such insurance, (ii) Lender receives complete copies of all policies evidencing such insurance, and (iii) such insurance complies with all of the applicable requirements set forth herein. To the extent that at any time Lender agrees to accept insurance from an insurer that is rated less than the foregoing, Lender may terminate its waiver and reassert the aforesaid minimum rating requirements upon any renewal of any insurance coverage, or at any time if the rating of any insurer is reduced or Lender determines that any other material adverse event has occurred with respect to the financial condition of such insurer.

1.5 Payment of Taxes. (a) Except to the extent provision is actually made therefor pursuant to Section 1.6 of this Mortgage, Borrower shall pay or cause to be paid all taxes, assessments, water rents, sewer rents, governmental impositions and other charges, including, without limitation, vault charges and license fees for the use of vaults, chutes and similar areas adjoining the Real Estate, now or hereafter levied or assessed or imposed against, or which are or may become a lien upon, the Property (“Taxes”), and all ground rents, maintenance charges and similar charges, now or hereafter levied or assessed or imposed against the Property or any part thereof (the “Other Charges”), and (b) Borrower shall furnish Lender with receipts (or if receipts are not immediately available, with copies of canceled checks evidencing payment with receipts to follow promptly after they become available) showing payment of such Taxes and Other Charges at least ten (10) days prior to the applicable delinquency date therefor. Notwithstanding the foregoing, Borrower may in good faith, by appropriate proceedings and upon notice to Lender, contest the validity, applicability or amount of any asserted Taxes or Other Charges so long as (x) such contest is diligently pursued, (y) Lender determines, in its subjective opinion, that such contest suspends the obligation to pay the Taxes or Other Charges and that nonpayment of such Taxes or Other Charges will not result in the sale, loss, forfeiture or diminution of the Property or any part thereof or any interest of Lender therein, and (z) prior to the earlier of the commencement of such contest or the delinquency date of the asserted Taxes or Other Charges, Borrower deposits in the Impound Account an amount determined by Lender to be adequate to cover the payment of such Taxes or Other Charges and a reasonable additional sum to cover possible interest, costs and penalties; provided, however, that Borrower shall promptly cause to be paid any amount adjudged by a court of competent jurisdiction to be due, with all interest, costs and penalties thereon, promptly after such judgment becomes final; and provided, further, that in any event each such contest shall be concluded, the Taxes or Other Charges, as the case may be, together with any applicable interest, costs and penalties, shall be paid prior to the date any writ or order is issued under which the Property may be sold, lost or forfeited.

1.6 Tax and Insurance Impound Account. (a) Borrower shall establish and maintain with Lender at all times while this Mortgage continues in effect an impound account (the “Impound Account”) for payment of Taxes and Other Charges and for the premiums on the insurance required to be maintained with respect to Borrower and the Property (“Insurance Premiums”) and as additional security for the Obligations. In addition to the initial deposit to the Impound Account required simultaneously with the execution hereof, commencing on the first Payment Date (as defined in the Note) and continuing thereafter on each Payment Date until the Note and all other Obligations are fully paid and performed, Borrower shall pay to Lender, for deposit to the Impound Account, an amount equal to one-twelfth (1/12) of the amount of the annual Taxes and Other Charges that will next become due and payable on the Property, plus one-twelfth (1/12) of the amount of the annual Insurance Premiums that will next become due and payable, each as estimated and determined by Lender. So long as no event occurs, and no state of facts exists, which, with the giving of notice and/or the passage of time, would constitute an Event of Default (as defined in Section 2.1 hereunder) (such event or state of facts, a “Default”) has occurred and is continuing, all sums in the Impound Account shall be held by Lender in the Impound Account to pay said Taxes and Other Charges, in periodic installments, and Insurance Premiums in one annual installment, in each case, before the same become delinquent. Borrower shall be responsible for ensuring

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the receipt by Lender, at least thirty (30) days prior to the respective due date for payment thereof, of all bills, invoices and statements for all Taxes and Other Charges, and all Insurance Premiums, and so long as no Event of Default has occurred and is continuing, Lender shall pay the governmental authority or other party entitled thereto directly to the extent funds are available for such purpose in the Impound Account. In making any payment from the Impound Account, Lender shall be entitled to rely on any bill, statement or estimate procured from the appropriate public office or insurance company or agent without any inquiry into the accuracy of such bill, statement or estimate and without any inquiry into the accuracy, validity, enforceability or contestability of any tax, assessment, valuation, sale, forfeiture, tax lien or title or claim thereof. The Impound Account shall not, unless otherwise explicitly required by applicable law, be or be deemed to be escrow or trust funds, but, at Lender’s option and in Lender’s discretion, may either be held in a separate account or be commingled by Lender with the general funds of Lender. No interest on the funds contained in the Impound Account shall be paid by Lender to Borrower. The Impound Account is solely for the protection of Lender and entails no responsibility on Lender’s part beyond the payment of Taxes and Other Charges, and of Insurance Premiums, following receipt of bills, invoices or statements therefor in accordance with the terms hereof and beyond the allowing of due credit for the sums actually received. Upon assignment of this Mortgage by Lender, any funds in the Impound Account shall be turned over to the assignee and upon such delivery any responsibility of Lender, as assignor, with respect thereto shall terminate. If the total funds in the Impound Account shall exceed the amount of payments actually applied by Lender for the purposes of the Impound Account, such excess may be credited by Lender on subsequent payments to be made hereunder or, at the option of Lender, refunded to Borrower. If at any time Lender determines that, with the making of all monthly deposits to the Impound Account when due, the Impound Account nonetheless would not contain sufficient funds to pay the next due periodic installments of all Taxes and Other Charges at least 30 days prior to the delinquency date thereof, or to pay the next due annual Insurance Premiums at least 30 days prior to the due date thereof, Borrower shall, within ten (10) days after receipt of written notice thereof, deposit with Lender the full amount of any such deficiency. If the Borrower shall fail to deposit with Lender the full amount of such deficiency as provided above, Lender shall have the option, but not the obligation, to make such deposit and all amounts so deposited by Lender, together with interest thereon at the Default Interest Rate from the date incurred by Lender until actually paid by Borrower, shall be immediately paid by Borrower on demand. At any time during the continuance of an Event of Default, Lender may, but shall not be obligated to, apply at any time the balance then remaining in the Impound Account against the Obligations in whatever order Lender shall subjectively determine. No such application of the Impound Account shall be deemed to cure any Default or Event of Default hereunder, and any such application shall not limit Borrower’s obligation to deposit any deficiency of which Lender gives notice. Upon full payment of the Obligations in accordance with its terms or at such earlier time as Lender may elect, the balance of the Impound Account then in Lender’s possession shall be paid over to Borrower and no other party shall have any right or claim thereto.

(b) NOTWITHSTANDING THE FOREGOING PROVISIONS OF THIS SECTION 1.6, so long as (i) Primary Tenant, or any assignee thereof approved by Lender, is the tenant under the Primary Lease, (ii) the Primary Lease remains in full force and effect and Primary Tenant is not in default (beyond any applicable notice and cure periods, if any) under the Primary Lease, (iii) Primary Tenant is required under the Primary Lease to maintain all of the insurance coverages as set forth in Section 1.4 of this Mortgage (collectively, the “Required Insurance”), (iv) Primary Tenant continues to maintain the Required Insurance, (v) no Event of Default has occurred hereunder and (vi) Borrower provides or causes to be provided to Lender certificates evidencing renewal of all insurance required to be maintained pursuant to Section 1.4 of this Mortgage not later than thirty (30) days before any such insurance shall expire, then Borrower shall not be required to make deposits of Insurance Premiums into the Impound Account as required by this Section 1.6.

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(c) As of the date hereof, the Unit lies within a real estate tax lot (the “Mixed Tax Lot”), a portion of which lot contain property other than the Unit (such other property, the “Adjacent Property”). Notwithstanding anything in Section 1.6(a) herein to the contrary, until such time as (x) the applicable governmental authorities issue a separate tax lot identification for the Unit (the “Separate Tax Lot”) so that no property other than the Unit lies within the Separate Tax Lot, (y) the Separate Tax Lot and the Adjacent Property are each assessed separately by the applicable governmental authorities and (z) a separate tax bill is issued for each of the Separate Tax Lot and the Adjacent Property ((x), (y) and (z) collectively, the “Tax Lot Conditions”), Lender shall have the right (the “Full Tax Option”), in its sole discretion, to require that Borrower deposit with Lender a reserve for the payment of Taxes and Other Charges pursuant to the provisions of Section 1.6(a) hereof for both the Unit and the Adjacent Property (i.e. Borrower shall reserve with respect to Taxes and Other Charges payable for the entire Mixed Tax Lot as if the Adjacent Property had been encumbered by the lien of the Mortgage). The amount of such Taxes and Other Charges reserved with respect to the Adjacent Property is hereinafter referred to as the “Adjacent Property Tax Amount”. In the event that Lender elects to exercise the Full Tax Option, then, provided that no Event of Default has occurred and is continuing, Lender shall, from time to time, disburse to Borrower the Adjacent Property Tax Amount collected with respect to any installment of Taxes and Other Charges payable in connection with the Unit and the Adjacent Property upon receipt by Lender of evidence satisfactory to Lender that all Taxes and Other Charges due in connection with such payment of Taxes and Other Charges with respect to both the Unit and the Adjacent Property have been fully and timely paid and that there are no other amounts outstanding or due with respect to Taxes and Other Charges for either the Unit or the Adjacent Property.

1.7 Condemnation and Casualty. Borrower shall give Lender prompt written notice of the occurrence of any casualty affecting, or the institution of any proceedings for eminent domain or for the condemnation of, the Property or any portion thereof. All insurance proceeds on the Property, and all causes of action, claims, compensation, awards and recoveries for any damage, condemnation or taking of all or any part of the Property or for any damage or injury to it for any loss or diminution in value of the Property, are hereby assigned to and shall be paid to Lender. Lender may participate in any suits or proceedings relating to any such proceeds, causes of action, claims, compensation, awards or recoveries and Lender is hereby authorized, in its own name or in Borrower’s name, to adjust any loss covered by insurance or any condemnation claim or cause of action, and to settle or compromise any claim or cause of action in connection therewith, and Borrower shall from time to time deliver to Lender any instruments required to permit such participation; provided, however, that so long as no Event of Default is continuing, Lender shall not have the right to participate in the adjustment of any loss which is not in excess of the lesser of (i) ten percent (10%) of the then outstanding principal balance of the Note and (ii) $500,000.00. Lender may, at Lender’s option, (y) if requested by Borrower and consented to by Lender, hold the balance of any of such proceeds to be used to reimburse Borrower for the cost of restoring and repairing the Property to the equivalent of its original condition or to a condition approved by Lender (the “Restoration”), or (z) apply the balance of such proceeds to the payment of the Obligations, whether or not then due. To the extent Lender, pursuant to Borrower’s request and in accordance with the terms hereof, determines to apply insurance or condemnation proceeds to Restoration, Lender shall do so in accordance with Lender’s then-current policies relating to the, as applicable, restoration of casualty damage on similar properties or restoration or rebuilding of properties that have been the subject of a partial condemnation. Lender shall not exercise its option to apply insurance proceeds or condemnation proceeds to the payment of the Obligations if all of the following conditions are met: (1) no Default or Event of Default has occurred and is continuing; (2) in the case of casualty, less than forty percent (40%) of the Improvements has been damaged, or in the case of a taking, less than twenty-five percent (25%) of the improvements has been taken; (3) Lender determines, in its reasonable discretion, that there will be sufficient funds to complete the Restoration (including, without limitation, by means of a deposit of any shortfall by Borrower with Lender prior to the commencement of the Restoration or promptly upon Lender’s determination that such a shortfall exists); (4) Lender determines, in its reasonable discretion, that the

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rental income from the Property after completion of the Restoration will be sufficient to meet all operating costs and other expenses, deposits to the Impound Account, deposits to reserves and loan repayment obligations relating to the Property and that the debt service coverage ratio for the Property after Restoration will be the same as on the closing date of the Loan and the ratio of the loan to value after Restoration will be the same as on the closing date of the Loan; (5) Lender determines, in its reasonable discretion, that (A) the Restoration will be completed before the earlier of (i) one year before the Anticipated Repayment Date of the Note or (ii) one year after the date of the loss or casualty and (B) the rent loss insurance or business interruption insurance referenced in Section 1.4(f) above will cover all payments due under the Loan during the completion of the Restoration; and (6) upon Lender’s request, Borrower provides Lender evidence of the availability during and after the Restoration of the insurance required to be maintained by Borrower pursuant to Section 1.4.

Unless Lender otherwise agrees in writing, any application of any awards or proceeds to the Obligations shall not extend or postpone the due date of any monthly installments referred to in the Note or the Loan Documents or change the amount of such installments. Borrower agrees to execute such further evidence of assignment of any awards or proceeds as Lender may require. Any reduction in the Obligations resulting from Lender’s application of any sums received by it hereunder shall take effect only when Lender actually receives such sums and elects to apply such sums to the Obligations and, in any event, the unpaid portion of the Obligations shall remain in full force and effect and Borrower shall not be excused in the payment thereof; provided that if Lender applies any awards or proceeds to the entire then-outstanding Obligations, any excess awards or proceeds after the satisfaction in full of the Obligations shall be paid to Borrower. Partial payments received by Lender, as described in the preceding sentence, shall be applied first to the final payment due under the Note and thereafter to installments due under the Note in the inverse order of their due date. If Borrower elects to effect a Restoration, Borrower shall promptly and diligently, at Borrower’s sole cost and expense and regardless of whether the insurance proceeds or condemnation award, as appropriate, shall be sufficient for the purpose, restore, repair, replace and rebuild the Property as nearly as possible to its value, condition and character immediately prior to such casualty or partial taking in accordance with the foregoing provisions and Borrower shall pay to Lender all reasonable costs and expenses of Lender incurred in administering said rebuilding, restoration or repair, provided the Lender makes such proceeds or award available for such purpose. Borrower agrees to execute and deliver from time to time such further instruments as may be requested by Lender to confirm the foregoing assignment to Lender of any award, damage, insurance proceeds, payment or other compensation. Lender is hereby irrevocably constituted and appointed the attorney-in-fact of Borrower (which power of attorney shall be irrevocable so long as any Obligations is outstanding, shall be deemed coupled with an interest, shall survive the voluntary or involuntary dissolution of Borrower and shall not be affected by any disability or incapacity suffered by Borrower subsequent to the date hereof), with full power of substitution, subject to the terms of this section, to settle for, collect and receive any such awards, damages, insurance proceeds, payments or other compensation from the parties or authorities making the same, to appear in and prosecute any proceedings therefor and to give receipts and acquittances therefor.

1.8 Mechanics’ Liens. Borrower shall pay when due all claims and demands of mechanics, materialmen, laborers and others for any work performed or materials delivered for the Real Estate or Improvements; provided, however, that, Borrower shall have the right to contest in good faith any such claim or demand, so long as it does so diligently, by appropriate proceedings and without prejudice to Lender, and provided that neither the Property nor any interest therein would be in any danger of sale, loss or forfeiture as a result of such proceeding or contest. In the event Borrower shall contest any such claim or demand, Borrower shall promptly notify Lender of such contest and thereafter shall, upon Lender’s request, promptly provide a bond, cash deposit or other security satisfactory to Lender to protect Lender’s interest and security should the contest be unsuccessful. If Borrower shall fail to immediately discharge or provide security against any such claim or demand as aforesaid, Lender may

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do so and any and all expenses incurred by Lender, together with interest thereon at the Default Interest Rate from the date incurred by Lender until actually paid by Borrower, shall be immediately paid by Borrower on demand.

1.9 Assignment of Leases and Rents and Profits. As additional and collateral security for the payment of the Obligations and cumulative of any and all rights and remedies herein provided for, Borrower hereby absolutely and presently assigns to Lender all existing and future Leases, and all existing and future Rents and Profits. Borrower hereby grants to Lender the sole, exclusive and immediate right, without taking possession of the Property, to demand, collect (by suit or otherwise), receive and give valid and sufficient receipts for any and all of said Rents and Profits, for which purpose Borrower does hereby irrevocably make, constitute and appoint Lender its attorney-in-fact with full power to appoint substitutes or a trustee to accomplish such purpose (which power of attorney shall be irrevocable so long as any Obligations is outstanding, shall be deemed to be coupled with an interest, shall survive the voluntary or involuntary dissolution of Borrower and shall not be affected by any disability or incapacity suffered by Borrower subsequent to the date hereof). Lender shall be without liability for any loss that may arise from a failure or inability to collect Rents and Profits, proceeds or other payments. However, until the occurrence of an Event of Default under this Mortgage, Borrower shall have a license to collect and receive the Rents and Profits when due and prepayments thereof for not more than one month prior to due date thereof. Upon the occurrence of an Event of Default, Borrower’s license shall automatically terminate without notice to Borrower and Lender may thereafter, without taking possession of the Property, collect the Rents and Profits itself or by an agent or receiver. From and after the termination of such license, Borrower shall be the agent of Lender in collection of the Rents and Profits and all of the Rents and Profits so collected by Borrower shall be held in trust by Borrower for the sole and exclusive benefit of Lender and Borrower shall, within one (1) business day after receipt of any Rents and Profits, pay the same to Lender to be applied by Lender as hereinafter set forth. Neither the demand for or collection of Rents and Profits by Lender, nor the exercise of Lender’s rights as assignee of the Leases, shall constitute any assumption by Lender of any obligations under any Lease or other agreement relating thereto. Lender is obligated to account only for such Rents and Profits as are actually collected or received by Lender. Borrower irrevocably agrees and consents that the respective payors of the Rents and Profits shall, upon demand and notice from Lender of an Event of Default hereunder, be required to pay said Rents and Profits to Lender without liability to determine the actual existence of any Event of Default claimed by Lender. Borrower hereby waives any right, claim or demand which Borrower may now or hereafter have against any such payor by reason of such payment of Rents and Profits to Lender, and any such payment shall discharge such payor’s obligation to make such payment to Borrower. All Rents and Profits collected or received by Lender shall be applied against all expenses of collection, including, without limitation, attorneys’ fees, against costs of operation and management of the Property and against the Obligations, in whatever order or priority as to any of the items so mentioned as Lender directs in its sole subjective discretion and without regard to the adequacy of its security. Neither the exercise by Lender of any rights under this Section nor the application of any Rents and Profits to the Obligations shall cure or be deemed a waiver of any Default or Event of Default hereunder. The assignment of Leases and of Rents and Profits hereinabove granted shall continue in full force and effect during any period of foreclosure or redemption with respect to the Property.

1.10 Leases.

(a) Entering Into Leases. Borrower may enter into a proposed Lease (which includes the renewal or extension of an existing Lease (a “Renewal Lease”)) without the prior written consent of Lender if such proposed Lease (i) provides for rental rates and terms comparable to existing local market rates and terms (taking into account the type and quality of the tenant) as of the date such Lease is executed by Borrower (unless, in the case of a Renewal Lease, the rent payable during such renewal, or a formula or other method to compute such rent, is provided for in the original Lease), (ii) is an arms-length

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transaction with a bona fide, independent third party tenant for occupancy by the lessee under such Lease, (iii) does not have a materially adverse effect on the value of the Property taken as a whole, (iv) is subject and subordinate to the Mortgage, and obligates the lessee thereunder to attorn to Lender, (v) does not contain any option or right of first refusal to purchase all or any portion of the Property, (vi) expressly provides that the portion of the Property demised thereby shall not be used for a “Prohibited Use” (as defined below) and (vii) is written on the standard form of lease which was either delivered to Lender simultaneously herewith or was subsequently approved by Lender, in either case with only immaterial variations from such standard form. As used in this Mortgage, a “Prohibited Use” shall mean (1) operation of a dry-cleaning business, except for a dry-cleaning business at which no on-site cleaning operations of any sort are undertaken (i.e., a so-called drop-off station); (2) operation of a gasoline station or automobile service or maintenance facility; (3) operation of a car wash; (4) operation of any other business that, in the ordinary course of operation, would be likely to result in the release of Hazardous Substances (as defined in Section 1.25 hereof); (5) the sale or display of obscene or pornographic material, the conduct of obscene, nude or semi-nude live performances, or similar purposes; and (6) the operation of a cabaret, dance hall or similar venue. All proposed Leases which do not satisfy the requirements set forth in this Section 1.10 (a) shall be subject to the prior approval of Lender, at Borrower’s expense (and, in conjunction therewith, Borrower shall provide Lender with such information as Lender shall reasonably request with respect to such proposed Lease and the Tenant thereunder). Promptly upon entering into any Lease without Lender’s approval pursuant to this Section 1.10 (a), Borrower shall promptly deliver to Lender a copy of such Lease, together with Borrower’s certification that such Lease satisfies all of the conditions of this Paragraph. Upon Lender’s request, Borrower shall deliver to Lender a true, correct and complete copy of each Lease then in effect.

(b) Covenants Regarding Leases. Borrower (i) shall observe and perform all the obligations imposed upon the lessor under each Lease, and shall not do or permit to be done anything to impair the value of any Lease in any material respect as security for the Obligations; (ii) upon request (which request is hereby deemed given with respect to any “Major Lease”, as defined below), shall promptly send copies to Lender of all notices of default which Borrower shall send or receive thereunder; (iii) shall enforce all of the material terms, covenants and conditions contained in each Lease upon the part of the Tenant thereunder to be observed or performed, (iv) shall not collect any of the Rents more than one (1) month in advance (it being acknowledged that security deposits shall not be deemed Rents collected in advance); (v) shall not execute any other assignment of the lessor’s interest in any of the Leases or the Rents and Profits (other than to Lender as security for the Obligations); and (vi) shall not consent to any assignment of or subletting under any Lease not in accordance with the terms of such Lease, in each case without the prior written consent of Lender. Within 30 days after Lender’s request therefor (which request shall not be made more than twice in any calendar year absent an Event of Default), Borrower shall deliver to Lender an estoppel certificate from each Tenant.

(c) Amendments to Leases. Provided no Event of Default exists hereunder, Borrower may, without the consent of Lender, amend, modify or waive the provisions of any Lease or terminate, reduce rents under, accept a surrender of space under, or shorten the term of, any Lease (including any guaranty, letter of credit or other credit support with respect thereto) (the foregoing, collectively, a “Lease Modification”) provided that (i) such Lease Modification (taking into account, in the case of a termination, reduction in rent, surrender of space or shortening of term, the planned alternative use of the affected space) does not have a materially adverse effect on the value of the Property taken as a whole, (ii) such Lease Modification is in the normal course of business and is consistent with sound and customary leasing and management practices for similar properties in the community in which the Property is located, and (iii) such Lease, as amended, modified or waived, is otherwise in compliance with the requirements of this Mortgage and any subordination agreement binding upon Lender with respect to such Lease. A termination of a Lease with a Tenant who is in default beyond applicable notice and grace periods shall not be considered an action which has a materially adverse effect

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on the value of the Property taken as a whole. Any Lease Modification which does not satisfy the requirements set forth in this Section 1.10 (c) shall be subject to the prior approval of Lender, at Borrower’s expense (and, in conjunction therewith, Borrower shall provide Lender with such information as Lender shall reasonably request with respect to such proposed Lease Modification and the Tenant under the Lease affected thereby). Promptly upon entering into any Lease Modification without Lender’s approval pursuant to this Section 1.10 (c), Borrower shall promptly deliver to Lender a copy of such instrument, together with Borrower’s certification that such instrument satisfies all of the conditions of this Paragraph.

(d) Major Leases. Notwithstanding anything contained herein to the contrary, Borrower shall not, without the prior written consent of Lender, enter into, renew, extend, amend, modify, waive any provisions of, terminate, reduce rents under, accept a surrender of space under, or shorten the term of, any Major Lease. The term “Major Lease” shall mean any Lease demising in the aggregate more than the lesser of (i) 15,000 rentable square feet or (ii) fifteen percent (15%) of the total rentable square feet at the Property.

(e) Security Deposits. All security deposits of tenants, whether held in cash or in any other form, shall not be commingled with any other funds of Borrower or any other person and, if cash, shall be deposited by Borrower at such commercial or savings bank or banks, or otherwise held in compliance with applicable law, as may be reasonably satisfactory to Lender. Any bond or other instrument which Borrower is permitted to hold in lieu of cash security deposits under any applicable legal requirements shall be maintained in full force and effect in the full amount of such deposits unless replaced by cash deposits as hereinabove described; shall be issued by an institution reasonably satisfactory to Lender; shall, if permitted pursuant to any applicable legal requirements, name Lender as payee or mortgagee thereunder or, at Lender’s option, be assigned or fully assignable to Lender; and shall, in all respects, comply with any applicable legal requirements and otherwise be reasonably satisfactory to Lender. Borrower shall, upon request, provide Lender with evidence reasonably satisfactory to Lender of Borrower’s compliance with the foregoing. Upon an Event of Default under this Mortgage, Borrower shall, immediately upon Lender’s request (if permitted by applicable law), deliver to Lender the security deposits (and any interest previously earned thereon and not disbursed to the person(s) lawfully entitled to receive same) with respect to all or any portion of the Property, to be held by Lender subject to the terms of the Leases.

(f) Tenant Financial Information. Borrower shall cause each Lease entered into on or after the date hereof which, if all Tenants paid all rents as and when due under their respective Leases, would yield one-third or more of the aggregate rental income of the Property (a “Major Income Lease”) to require the Tenant under such Lease to deliver to Borrower periodic operating statements with respect to (i) such Tenant’s operations at the Property, and (ii) the operations of such Tenant and, if applicable, any parent or affiliated entity of such Tenant which operates, or has subsidiaries that operate, comparable businesses (collectively, “Tenant Financial Information”). Notwithstanding the provisions of Section 1.10(a) above, any Major Income Lease entered into after the date hereof which does not require the Tenant to provide Tenant Financial Information upon request shall require the prior written approval of Lender. Borrower shall, from time to time promptly upon request of Lender, request Tenant Financial Information from the Tenant under each Major Income Lease (and use all commercially reasonable efforts to obtain such Tenant Financial Information), and promptly upon receipt thereof, deliver such Tenant Financial Information to Lender, provided, however, that (1) prior to a Secondary Market Transaction consisting of a securitization, Lender shall not require Borrower to request Tenant Financial Information more than three (3) times, and (2) following a Secondary Market Transaction consisting of a securitization, provided no Event of Default is continuing, Lender shall not request such information without reasonable cause (which reasonable cause shall include, without limitation, the occurrence of any default by the Tenant under a Major Income Lease or if such Tenant ceases to conduct its business in the premises demised by such Major Income Lease).

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1.11 Alienation and Further Encumbrances.

(a) Borrower acknowledges that Lender has relied upon the financial capability and operating experience of the principals of Borrower in connection with the closing of the loan evidenced by the Note. Accordingly, notwithstanding anything to the contrary contained in Section 5.6 hereof, neither the Property, nor any part thereof or interest therein, shall be sold, conveyed, disposed of, alienated, hypothecated, leased (except to Tenants under Leases which are not in violation of Section 1.10 hereof), assigned, pledged, mortgaged, further encumbered or otherwise transferred, nor Borrower shall be divested of its title to the Property or any interest therein, in any manner or way, whether voluntarily or involuntarily (any of the foregoing, a “Transfer”), except as expressly set forth in this Section 1.11, in each case without the prior written consent of Lender being first obtained, which consent may be withheld in Lender’s sole discretion. For the purposes of this Section 1.11, a “Transfer” shall also include (i) transfers of direct or indirect ownership interests in Borrower, and the creation of new or additional ownership interests in Borrower, or in any Constituent Entity of Borrower, in each case except as set forth in Section 1.11(c) below, (ii) an installment sales agreement with respect to the Property or any portion thereof, (iii) a Lease of all or substantially all of the Property other than for actual occupancy by a space tenant thereunder, (iv) any sale or assignment of any of Borrower’s right, title and interest in, to and under any Leases or Rents and Profits, other than to Lender, (v) if Borrower or any Constituent Entity of Borrower is a partnership or joint venture, the addition, change, removal or resignation of any general partner, or the transfer or pledge of any interest (whether as a general partner or limited partner) of any general partner in such partnership, and (vi) if Borrower or any Constituent Entity of Borrower is a limited liability company, the addition, change, removal or resignation of any manager, managing member or sole member, or the transfer or pledge of any interest (whether as a managing member or otherwise) of such manager, managing member or sole member in such limited liability company, or the transfer of control (as defined in Section 1.27) of such manager, managing member or sole member.

(b) Notwithstanding the foregoing provisions of this Section, Lender shall not unreasonably withhold its consent to the sale of the Property in its entirety (hereinafter, “Sale”) to a single-purpose entity with organizational documents containing provisions substantially similar to those set forth in Section 1.27 and otherwise acceptable to Lender (hereinafter, “Buyer”) provided that such Sale occurs after the earlier to occur of a Secondary Market Transaction (as defined herein) and the second (2^nd) anniversary of the date hereof, and each of the following terms and conditions are satisfied in connection with such Sale:

(1) No Default or Event of Default is then continuing;

(2) Borrower gives Lender written notice of the terms of such prospective Sale not less than thirty (30) days before the date on which such Sale is scheduled to close, accompanied by all information concerning the proposed Buyer as Lender would require in evaluating an initial extension of credit to a borrower and a non-refundable application fee in the amount of $2,500.00. Lender shall have the right to approve or disapprove the proposed Buyer in its reasonable discretion (it being acknowledged that Lender may, as a condition to approving any proposed Buyer, require confirmation in writing from each of the Rating Agencies (as defined herein) that such Sale will not result in a qualification, downgrade or withdrawal of any rating in effect immediately prior to such Sale for any securities issued in connection with a Secondary Market Transaction), and such approval, if given, may be given subject to such conditions as Lender may deem appropriate;

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(3) Borrower pays Lender, concurrently with the closing of such Sale, a non-refundable assumption fee in an amount equal to all out-of-pocket costs and expenses, including, without limitation, attorneys’ fees, incurred by Lender in connection with the Sale plus an amount equal to one percent (1.0%) of the then outstanding principal balance of the Note;

(4) Buyer assumes and agrees to pay the Obligations (subject to the provisions of Section 5.25 hereof) and, prior to or concurrently with the closing of such Sale, the Buyer executes, without any cost or expense to Lender, such documents and agreements as Lender shall reasonably require to evidence and effectuate said assumption and delivers such legal opinions as Lender may require;

(5) Borrower and the Buyer execute and cause to be filed in such public records as Lender deems appropriate, without any cost or expense to Lender, new financing statements or financing statement amendments and any additional documents reasonably requested by Lender;

(6) Borrower causes to be delivered to Lender, without any cost or expense to Lender, such endorsements to Lender’s title insurance policy, hazard insurance endorsements or certificates and other similar materials as Lender may deem necessary at the time of the Sale, all in form and substance satisfactory to Lender, including, without limitation, an endorsement or endorsements to Lender’s title insurance policy insuring the lien of this Mortgage, extending the effective date of such policy to the date of execution and delivery (or, if later, of recording) of the assumption agreement referenced above in subparagraph (4) of this Section, with no additional exceptions added to such policy and insuring that fee simple title to the Property is vested in the Buyer;

(7) Borrower executes and delivers to Lender, without any cost or expense to Lender, a release of Lender, its officers, directors, employees and agents, from all claims and liability relating to the transactions evidenced by the Loan Documents through and including the date of the closing of the Sale, which agreement shall be in form and substance satisfactory to Lender and shall be binding upon the Buyer;

(8) Subject to the provisions of Section 5.25 hereof, such Sale is not construed so as to relieve Borrower of any personal liability under the Note or any of the other Loan Documents for any acts or events occurring or obligations arising prior to or simultaneously with the closing of such Sale and Borrower executes, without any cost or expense to Lender, such documents and agreements as Lender shall reasonably require to evidence and effectuate the ratification of said personal liability. Borrower shall be released from and relieved of any personal liability under the Note or any of the other Loan Documents for any acts or events occurring or obligations arising after the closing of such Sale which are not caused by or arising out of any acts or events occurring or obligations arising prior to or simultaneously with the closing of such Sale; and

(9) Such Sale is not construed so as to relieve any Indemnitor of its obligations under any Loan Document, and a Constituent Entity of the Buyer approved by Lender in its sole discretion (a “Successor Indemnitor”) assumes the obligations of such Indemnitor and executes such documents as may be required by Lender to evidence such assumption. Each Indemnitor shall be released from and relieved of any of its obligations under any indemnity or guaranty executed in connection with the Loan for any acts or events occurring or obligations arising after the closing of such Sale which are not caused by or arising out of any acts or events occurring or obligations arising prior to or simultaneously with the closing of such Sale;

(10) Buyer has furnished to Lender all appropriate papers evidencing the Buyer’s capacity and good standing, and the authority of the signers to execute the assumption of the

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Loan Documents and the Obligations, which papers shall include certified copies of all documents relating to the organization and formation of the Buyer and of the entities, if any, which are Constituent Entities of the Buyer, all of which shall be satisfactory to Lender;

(11) Buyer shall assume the obligations of Borrower under any management agreements pertaining to the Property, or shall cause the new manager and management agreement to satisfy the requirements of Section 1.24 hereof; and

(12) Buyer shall furnish an opinion of counsel satisfactory to Lender that the acquisition of the Property and the assumption of the Loan Documents and Obligations by Buyer and, to the extent applicable, Successor Indemnitor, was validly authorized, and duly executed and delivered, and constitutes the legal, valid and binding obligations of Buyer and Successor Indemnitor, enforceable against each of them in accordance with their respective terms, and with respect to such other matters as Lender may reasonably require.

(c) Provided no Default shall then be continuing, the following direct or indirect transfers of interests in Borrower, or any Constituent Entity of Borrower, shall be permitted without the prior written consent of Lender:

(1) If Borrower (or any Constituent Entity of Borrower) is a corporation, any direct or indirect transfer of stock in such corporation, or the issuance of new stock in such corporation, which does not result in a change of control (as defined under Rule 405 under the Securities Act of 1933, as amended) of such corporation; provided that none of (A) the sale of all or substantially all of the assets of GSI, and/or the sale or transfer of 50% or more of the stock in GSI, through a merger, consolidation or otherwise, (B) the sale or transfer of stock in GSI on a nationally recognized stock exchange, or (C) the issuance or transfer of any stock or other securities of GSI, shall be prohibited or require the consent of Lender under this Section 1.11;

(2) If Borrower (or any Constituent Entity of Borrower) is a limited partnership, any direct or indirect transfer of limited partnership interests in such limited partnership, or the issuance of new limited partnership interests which results in the dilution of the existing limited partners, so that after giving effect to such transfer or issuance, (x) not more than 49% of the equity interests in such partnership have been transferred or issued from and after the date hereof and (y) the persons responsible for the management of the Borrower and the Property remain unchanged;

(3) If Borrower (or any Constituent Entity of Borrower) is a limited liability company, any direct or indirect transfer of membership interests in Borrower, or the issuance of new membership interests which results in the dilution of the existing members, so that after giving effect to such transfer or issuance, (x) not more than 49% of the equity interests in such limited liability company have been transferred or issued from and after the date hereof and (y) the persons responsible for the management of the Borrower and the Property remain unchanged; provided that none of (A) the sale of all or substantially all of the assets of GSI, and/or the sale or transfer of 50% or more of the stock in GSI, through a merger, consolidation or otherwise, (B) the sale or transfer of stock in GSI on a nationally recognized stock exchange, or (C) the issuance or transfer of any stock or other securities of GSI, shall be prohibited or require the consent of Lender under this Section 1.11; and

(4) Either (a) any transfer for estate planning purposes by the Indemnitor, or (b) any involuntary transfer caused by the death of a holder of ownership interests in Borrower, or in any general partner or managing member of Borrower, in each case so long as (y) Borrower is reconstituted, if required, following any such death and (z) either (i) those persons responsible for the management of the Borrower and the Property remain unchanged as a result of such death or estate planning or (ii) the person(s) to become responsible for management of the Borrower and the Property are approved by Lender.

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Borrower shall give Lender (i) prior written notice of any event set forth in Subparagraphs (1), (2) or (3) above, and (ii) prompt written notice after any event giving rise to a transfer set forth in Subparagraph (4) above, in each case together with copies of all documents, instruments and agreements effecting such transfer, all of which shall be certified by Borrower to be true, correct and complete.

1.12 Payment of Utilities, Assessments, Charges, Etc. Borrower shall pay when due all utility charges (e.g., for gas, electricity, water and sewer services and similar charges) which are incurred by Borrower or its agents, and all other assessments or charges of a similar nature, or assessments payable pursuant to any restrictive covenants, whether public or private, affecting the Real Estate and/or the Improvements or any portion thereof, whether or not such assessments or charges are or may become liens thereon.

1.13 Access Privileges and Inspections. Lender and the agents, representatives and employees of Lender shall, subject to the rights of tenants, have full and free access to the Real Estate and the Improvements and any other location where books and records concerning the Property are kept at all reasonable times and upon reasonable notice for the purposes of inspecting the Property and of examining, copying and making extracts from the books and records of Borrower relating to the Property. Borrower shall lend assistance to all such agents, representatives and employees of Lender, at no additional cost to Borrower so long as no Event of Default has occurred.

1.14 Waste; Alteration of Improvements. Borrower shall not commit, suffer or permit any waste on the Property nor take any actions that might invalidate any insurance carried on the Property. Borrower shall maintain the Property in good condition and repair. No part of the Improvements may be removed, demolished or materially altered, in each case, without the prior written consent of Lender, except as required (i) pursuant to Applicable Laws, (ii) to cause the Property not to be in violation of any Lease approved or deemed approved pursuant to Section 1.10 hereof or (iii) to perform the Initial Improvements (as defined in the Primary Lease); provided that the plans and specifications for the Initial Improvements shall be subject to Lenders review and approval. Without the prior written consent of Lender in each case, Borrower shall not commence construction of any improvements on the Real Estate other than improvements required for the maintenance or repair of the Property. If Lender’s approval is requested pursuant the terms of this Section 1.14 for the plans and specifications for the Initial Improvements, Lender’s approval shall be deemed withheld absent notice from Lender to the contrary unless Borrower complies with the following procedures: Borrower shall request such approval by delivering notice to Lender in accordance with Section 5.5 of this Mortgage, with the following legend on such request: THIS IS A REQUEST FOR CONSENT UNDER THE LOAN BY CIBC INC. TO 935 HQ ASSOCIATES, LLC. FAILURE TO RESPOND TO THIS REQUEST WILL RESULT IN THE REQUEST BEING DEEMED GRANTED. If, within five (5) business days of delivery of notice as aforesaid, Lender has not responded (either affirmatively or negatively) to Borrower with respect to such written request, then such request shall be deemed granted.

1.15 Zoning. Without the prior written consent of Lender in each case, Borrower shall not seek, make, suffer, consent to or acquiesce in any change in the zoning or conditions of use of the Real Estate or the Improvements. If, under applicable zoning provisions, the use of all or any part of the Real Estate or the Improvements is or becomes a nonconforming use, Borrower shall not cause or permit such use to be discontinued or abandoned without the prior written consent of Lender. Without Lender’s prior written consent, Borrower shall not file or subject any part of the Real Estate or the Improvements to any declaration of condominium or co-operative or convert any part of the Real Estate or the Improvements to a condominium, co-operative or other form of multiple ownership and governance.

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1.16 Financial Statements, Books and Records, and Informational Reporting. Borrower shall keep accurate books and records of account of the Property and its own financial affairs sufficient to permit the preparation of financial statements therefrom in accordance with generally accepted accounting principles. Lender and its duly authorized representatives shall have the right to examine, copy and audit Borrower’s records and books of account at all reasonable times. So long as this Mortgage continues in effect, Borrower shall provide to Lender, in addition to any other financial statements required hereunder or under any of the other Loan Documents, the following financial statements and information, all of which must be certified to Lender as being true and correct by Borrower or the person or entity to which they pertain, as applicable, be prepared in accordance with generally accepted accounting principles consistently applied and be in form and substance acceptable to Lender:

(a) copies of all tax returns filed by Borrower, within thirty (30) days after the date of filing;

(b) at any time when the Primary Lease is not in full force and effect, monthly operating statements for the Property (including a current Rent Roll containing the information set forth in Paragraph 1.1(ee) above), within ten (10) days after the end of each month during the first twelve (12) months of the term of the Loan or until the occurrence of a Secondary Market Transaction;

(c) quarterly operating statements for the Property, within thirty (30) days after the end of each calendar quarter;

(d) annual balance sheets for the Property and annual financial statements for Borrower (or for Indemnitor if Borrower’s financial statements are consolidated with those of Indemnitor), within ninety (90) days after the end of each calendar year, and, if Borrower’s financial statements are not consolidated with those of Indemnitor, annual financial statements of Indemnitor upon demand by Lender following the occurrence of an Event of Default;

(e) a current Rent Roll, containing the information set forth in Paragraph 1.1(ee) above, dated as of January 1 of each calendar year and certified by Borrower as being true, correct and complete, which shall be delivered to Lender on or before February 15 of each year; and

(f) such other information with respect to the Property, Borrower, the principals in Borrower, and each Indemnitor which may reasonably be requested from time to time by Lender, within a reasonable time after the applicable request.

If any of the aforementioned materials are not furnished to Lender within the applicable time periods, in addition to any other rights and remedies of Lender contained herein, Lender shall have the right, but not the obligation, to obtain the same by means of an audit by an independent certified public accountant selected by Lender, in which event Borrower agrees to pay, or to reimburse Lender for, any expense of such audit and further agrees to provide all necessary information to said accountant and to otherwise cooperate in the making of such audit.

1.17 Further Documentation. Borrower shall, on the request of Lender and at the expense of Borrower, promptly: (a) correct any defect, error or omission which may be discovered in the contents of this Mortgage or in the contents of any of the other Loan Documents; (b) execute, acknowledge, deliver and record or file such further instruments (including, without limitation, further mortgages, deeds of trust, security deeds, security agreements, financing statements, continuation statements and assignments of rents or leases) and promptly do such further acts as may be necessary, desirable or proper to carry out more effectively the purposes of this Mortgage and the other Loan

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Documents and to subject to the liens and security interests hereof and thereof any property intended by the terms hereof and thereof to be covered hereby and thereby, including specifically, but without limitation, any renewals, additions, substitutions, replacements or appurtenances to the Property; (c) execute, acknowledge, deliver, procure and record or file any document or instrument (including specifically any financing statement) deemed advisable by Lender to protect, continue or perfect the liens or the security interests hereunder against the rights or interests of third persons; and (d) furnish to Lender, upon Lender’s request, a duly acknowledged written statement and estoppel certificate addressed to such party or parties as directed by Lender and in form and substance supplied by Lender, setting forth all amounts due under the Note, stating whether any Default or Event of Default exists, stating whether any offsets or defenses exist against the Obligations, affirming that the Loan Documents are the legal, valid and binding obligations of Borrower, and containing such other matters as Lender may reasonably require.

1.18 Payment of Costs; Reimbursement to Lender. Borrower shall pay all reasonable costs and expenses of every character incurred in connection with the closing of the Loan or otherwise attributable or chargeable to Borrower as the owner of the Property, including, without limitation, appraisal fees, recording fees, documentary, stamp, mortgage or intangible taxes, brokerage fees and commissions, title policy premiums and title search fees, public records search fees, escrow fees and reasonable attorneys’ fees. If Borrower defaults in any such payment, which default is not cured within any applicable grace or cure period, Lender may pay the same and Borrower shall reimburse Lender on demand for all such costs and expenses incurred or paid by Lender, together with such interest thereon at the Default Interest Rate from and after the date of Lender’s making such payment until reimbursement thereof by Borrower. Further, Borrower shall promptly notify Lender in writing of any litigation or threatened litigation affecting the Property, or any other demand or claim which, if enforced, could impair or threaten to impair Lender’s security hereunder. Without limiting or waiving any other rights and remedies of Lender hereunder, if any action or proceeding of any kind (including, but not limited to, any bankruptcy, insolvency, arrangement, reorganization or other debtor relief proceeding) is commenced which might affect Lender’s interest in the Property or Lender’s right to enforce its security, or upon the occurrence of any other Event of Default, then Lender may, at its option, with or without notice to Borrower, make any appearances, disburse any sums and take any actions as may be necessary or desirable to protect or enforce the security of this Mortgage or to remedy such Event of Default (without, however, waiving any Default). Borrower agrees to pay on demand all expenses of Lender incurred with respect to the foregoing (including, but not limited to, reasonable fees and disbursements of counsel), together with interest thereon at the Default Interest Rate from and after the date on which Lender incurs such expenses until reimbursement thereof by Borrower. The necessity for any such actions and of the amounts to be paid shall be determined by Lender in its discretion. Lender is hereby empowered to enter and to authorize others to enter upon the Property or any part thereof for the purpose of performing or observing any such defaulted term, covenant or condition without thereby becoming liable to Borrower or any person in possession holding under Borrower. Borrower hereby acknowledges and agrees that the remedies set forth in this Section 1.18 shall be exercisable by Lender, and any and all payments made or costs or expenses incurred by Lender in connection therewith shall be secured hereby and shall be, without demand, immediately repaid by Borrower with interest thereon at the Default Interest Rate, notwithstanding the fact that such remedies were exercised and such payments made and costs incurred by Lender after the filing by Borrower of a voluntary case or the filing against Borrower of an involuntary case pursuant to or within the meaning of the Bankruptcy Reform Act of 1978, as amended, Title 11 U.S.C., or after any similar action pursuant to any other debtor relief law (whether statutory, common law, case law or otherwise) of any jurisdiction whatsoever, now or hereafter, in effect, which may be or become applicable to Borrower, Lender, any Indemnitor, the Obligations or any of the Loan Documents. Borrower hereby indemnifies and holds Lender harmless from and against all loss, cost and expenses with respect to any Default hereof, any liens (i.e., judgments, mechanics’ and materialmen’s liens, or otherwise), charges and encumbrances filed against the Property, and from any claims and demands for

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damages or injury, including claims for property damage, personal injury or wrongful death, arising out of or in connection with any accident or fire or other casualty on the Real Estate or the Improvements or any nuisance made or suffered thereon, including, in any case, attorneys’ fees, costs and expenses as aforesaid, whether at pretrial, trial or appellate level, and such indemnity shall survive payment in full of the Obligations. This Section shall not be construed to require Lender to incur any expenses, make any appearances or take any actions.

1.19 Security Interest and Security Agreement. This Mortgage is also a security agreement under the Uniform Commercial Code for any of the Property which, under applicable law, may be subject to a security interest under the Uniform Commercial Code, whether acquired now or in the future, including, without limitation, the Reserves, all products, and cash and non-cash proceeds thereof (collectively, “UCC Collateral”). Borrower hereby grants to Lender a security interest in the UCC Collateral. Borrower shall execute and deliver to Lender, upon Lender’s request, financing statements, continuation statements and amendments, in such form as Lender may require, to perfect or continue the perfection of this security interest. Borrower shall pay all costs of preparing and filing such statements, and all costs and expenses of any record searches for financing statements that Lender may require. Without the prior written consent of Lender, Borrower shall not create or permit to exist any other lien or security interest in any of the UCC Collateral. The name and address of Borrower (as Debtor under any applicable Uniform Commercial Code) and Lender (as Secured Party under any applicable Uniform Commercial Code) are as set forth on Page 1 of this Mortgage.

1.20 Easements and Rights-of-Way. Borrower shall not grant any easement or right-of-way with respect to all or any portion of the Real Estate or the Improvements without the prior written consent of Lender. The purchaser at any foreclosure sale hereunder may, at its discretion, disaffirm any easement or right-of-way granted in violation of any of the provisions of this Mortgage and may take immediate possession of the Property free from, and despite the terms of, such grant of easement or right-of-way. If Lender consents to the grant of an easement or right-of-way, Lender agrees to grant such consent provided that Lender is paid a standard review fee together with all other expenses, including, without limitation, attorneys’ fees, incurred by Lender in the review of Borrower’s request and in the preparation of documents effecting the subordination.

1.21 Compliance with Laws. Borrower shall at all times comply with all Applicable Laws, even if such compliance shall require structural changes to the Property. Borrower may, upon providing Lender with security reasonably satisfactory to Lender, proceed diligently and in good faith to contest the validity or applicability of any Applicable Law so long as the Property shall not be subject to any lien, charge, fine or other liability, and shall not be in danger of being forfeited, lost or closed, during or as a result of such contest. Borrower shall not alter the Property in any manner that would materially increase Borrower’s responsibilities for compliance with Applicable Laws without the prior approval of Lender. Borrower shall not use or occupy, or allow the use or occupancy of, the Property in any manner which violates any Lease or any Applicable Law or which constitutes a public or private nuisance or which makes void, voidable or cancelable, any insurance then in force with respect thereto. Borrower shall, from time to time, upon Lender’s request, provide Lender with evidence reasonably satisfactory to Lender that the Property complies with all Applicable Laws.

1.22 Additional Taxes. In the event of the enactment after this date of any law of the state where the Property is located or of any other governmental entity deducting from the value of the Property for the purpose of taxation any lien or security interest thereon, or imposing upon Lender the payment of the whole or any part of the Taxes or Other Charges herein required to be paid by Borrower, or changing in any way the laws relating to the taxation of mortgages or security agreements or debts secured by mortgages or security agreements or the interest of the Lender or secured party in the property covered thereby, or the manner of collection of such Taxes or Other Charges, so as to adversely affect this

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Mortgage or the Obligations or Lender, then, and in any such event, Borrower, upon demand by Lender, shall pay such Taxes or Other Charges, or reimburse Lender therefor; provided, however, that if in the opinion of counsel for Lender (a) it might be unlawful to require Borrower to make such payment, or (b) the making of such payment might result in the imposition of interest beyond the maximum amount permitted by law, then and in either such event, Lender may elect, by notice in writing given to Borrower, to declare all of the Obligations to be and become due and payable in full thirty (30) days from the giving of such notice.

1.23 Borrower’s Waivers. To the full extent permitted by law, Borrower shall not at any time insist upon, plead, claim or take the benefit or advantage of any law now or hereafter in force providing for any appraisement, valuation, stay, moratorium or extension, or any law now or hereafter in force providing for the reinstatement of the Obligations prior to any sale of the Property to be made pursuant to any provisions contained herein or prior to the entering of any decree, judgment or order of any court of competent jurisdiction, or any right under any statute to redeem all or any part of the Property so sold. Borrower, for Borrower and Borrower’s successors and assigns, and for any and all persons ever claiming any interest in the Property, to the full extent permitted by law, hereby knowingly, intentionally and voluntarily with and upon the advice of competent counsel: (a) waives, releases, relinquishes and forever forgoes all rights of valuation, appraisement, stay of execution, reinstatement and notice of election or intention to mature or declare due the Obligations (except such notices as are specifically provided for herein); (b) waives, releases, relinquishes and forever forgoes all right to a marshalling of the assets of Borrower, including the Property, to a sale in the inverse order of alienation, or to direct the order in which any of the Property shall be sold in the event of foreclosure of the liens and security interests hereby created and agrees that any court having jurisdiction to foreclose such liens and security interests may order the Property sold as an entirety; and (c) waives, releases, relinquishes and forever forgoes all rights and periods of redemption provided under applicable law. To the full extent permitted by law, Borrower shall not have or assert any right under any statute or rule of law pertaining to the exemption of homestead or other exemption under any federal, state or local law now or hereafter in effect, the administration of estates of decedents or other matters whatever to defeat, reduce or affect the right of Lender under the terms of this Mortgage to a sale of the Property, for the collection of the Obligations without any prior or different resort for collection, or the right of Lender under the terms of this Mortgage to the payment of the Obligations out of the proceeds of sale of the Property in preference to every other claimant whatever. Further, Borrower hereby knowingly, intentionally and voluntarily, with and upon the advice of competent counsel, waives, releases, relinquishes and forever forgoes all present and future statutes of limitations as a defense to any action to enforce the provisions of this Mortgage or to collect any of the Obligations the fullest extent permitted by law. Borrower covenants and agrees that upon the commencement of a voluntary or involuntary bankruptcy proceeding by or against Borrower, Borrower shall not seek a supplemental stay or otherwise shall not seek pursuant to 11 U.S.C. §105 or any other provision of the Bankruptcy Reform Act of 1978, as amended, or any other debtor relief law (whether statutory, common law, case law, or otherwise) of any jurisdiction whatsoever, now or hereafter in effect, which may be or become applicable, to stay, interdict, condition, reduce or inhibit the ability of Lender to enforce any rights of Lender against any Indemnitor of the secured obligations or any other party liable with respect thereto by virtue of any indemnity, guaranty or otherwise.

1.24 Management.

(a) The management of the Property shall be by either (1) Borrower or an entity affiliated with Borrower approved by Lender for so long as Borrower or said affiliated entity is managing the Property in a first class manner; or (2) a professional property management company approved by Lender, and in either case pursuant to a written agreement approved by Lender. Borrower represents that, as of the date hereof, Borrower has not retained either a property manager or a leasing agent for the Property. In no event shall any manager be removed, replaced or retained, or any management agreement

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entered into, modified or amended in any material respect, in each case without the prior written consent of Lender, which shall not unreasonably be withheld or delayed. After an Event of Default hereunder or a default under any management contract then in effect, which default is not cured within any applicable grace or cure period, Lender shall have the right to terminate, or to direct Borrower to terminate, such management contract upon thirty (30) days’ notice and to retain, or to direct Borrower to retain, a new management agent approved by Lender. It shall be a condition of Lender’s consent to any management agreement, whether with an affiliate of Borrower or a professional property management company, that such manager enter into an agreement with Lender whereby the manager acknowledges and agrees to the aforesaid rights of Lender, and as to such other matters as Lender may require. Lender shall not withhold its consent to Brandywine Realty Services Corporation (“Brandywine Services”) serving as the property manager for the Association pursuant to a management contract between Brandywine Services and the Association.

(b) Without limiting the restrictions set forth in Section 1.24(a) pertaining to the management agreement for the Property, Borrower may not terminate any other Contract that is material to the operation of the Property, or enter into any amendment thereto that makes the terms thereof materially less favorable to Borrower, in each case without the prior written consent of Lender, which shall not unreasonably be withheld or delayed, provided, however, that if the other party to such Contract is in default thereunder, and Borrower can replace the goods or services provided on terms not materially disadvantageous to Borrower, then the prior written consent of Lender shall not be required to terminate such Contract. Borrower shall perform its obligations under each Contract and each of the General Intangibles, except where Borrower’s failure to do so would not have a material adverse effect on Borrower or the Property. Borrower represents that its interest under each Contract, and each General Intangible, is not subject to any claim, setoff, lien, deduction or encumbrance of any nature, other than that created by this Mortgage. At any time during the continuance of an Event of Default, Lender may (but shall not be obligated to) take such action as Lender may determine to be reasonably necessary to protect the rights of Borrower under any or all of the Contracts and/or the General Intangibles. Should Lender, or Lender’s designee, acquire the Property (whether pursuant to exercise of Lender’s remedies hereunder or by transfer in lieu thereof), Lender may elect to assume Borrower’s interests under any or all of the Contracts or General Intangibles as Lender shall determine, and Borrower shall cause to be terminated, without obligation to Lender or the successor owner of the Property, such other Contracts and/or General Intangibles as Lender may direct.

1.25 Hazardous Waste and Other Substances.

(a) Borrower hereby represents and warrants to Lender that, as of the date hereof, except as disclosed in writing to Lender: (i) to the best of Borrower’s knowledge, information and belief, except as expressly set forth in the environmental report prepared for Lender in connection with the Loan (the “Environmental Report”), the Property is not in violation of any local, state or federal law, rule or regulation pertaining to environmental regulation, contamination or clean-up (collectively, “Environmental Laws”), including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C. §9601 et seq. and 40 CFR §302.1 et seq.), the Resource Conservation and Recovery Act of 1976 (42 U.S.C. §6901 et seq.), the Federal Water Pollution Control Act (33 U.S.C. §1251 et seq. and 40 CFR § 116.1 et seq.), those relating to lead based paint, and the Hazardous Materials Transportation Act (49 U.S.C. §1801 et seq.), and the regulations promulgated pursuant to said laws, all as amended; (ii) to the best of Borrower’s knowledge, information and belief, except as expressly set forth in the Environmental Report, no hazardous, toxic or harmful substances, wastes, materials, pollutants or contaminants (including, without limitation, asbestos, lead based paint, polychlorinated biphenyls, petroleum products, flammable explosives, radioactive materials, infectious substances or raw materials which include hazardous constituents) or any other substances or materials which are included under or regulated by Environmental Laws, or any molds, spores or fungus or other

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harmful microbial matter (collectively, “Hazardous Substances”) are located on or have been handled, generated, stored, processed or disposed of on or released or discharged from the Property (including underground contamination) except for those substances used by Borrower or Tenants in the ordinary course of their respective business and in compliance with all Environmental Laws; (iii) the Property is not subject to any private or governmental lien or judicial or administrative notice or action relating to Hazardous Substances; (iv) to the best of Borrower’s knowledge, information and belief, except as expressly set forth in the Environmental Report, there are no existing or closed underground storage tanks or other underground storage receptacles for Hazardous Substances on the Property; (v) Borrower has received no notice of, and to the best of Borrower’s knowledge and belief, there exists no investigation, action, proceeding or claim by any agency, authority or unit of government or by any third party which could result in any liability, penalty, sanction or judgment under any Environmental Laws with respect to any condition, use or operation of the Property nor does Borrower know of any basis for such a claim; and (vi) Borrower has received no notice of and, to the best of Borrower’s knowledge and belief, there has been no claim by any party that any use, operation or condition of the Property has caused any nuisance or any other liability or adverse condition on any other property nor does Borrower know of any basis for such a claim.

(b) Borrower shall keep or cause the Property to be kept free from Hazardous Substances (except those substances used by Borrower and Tenants in the ordinary course of their respective business and, in each case, in compliance with all Environmental Laws) and in compliance with all Environmental Laws, shall not install or use any underground storage tanks, shall expressly prohibit the use, generation, handling, storage, production, processing and disposal of Hazardous Substances by all Tenants and, without limiting the generality of the foregoing, during the term of this Mortgage, shall not install in the Improvements or permit to be installed in the Improvements asbestos-containing materials (“ACMs”) or any substance containing ACMs. Borrower shall, if required under applicable Environmental Laws, maintain all applicable Material Safety Data Sheets with respect to the Property, and make same available to Lender or Lender’s consultants upon reasonable notice.

(c) Borrower shall promptly notify Lender if Borrower shall become aware of the possible existence of any Hazardous Substances on the Property or if Borrower shall become aware that the Property is or may be in direct or indirect violation of any Environmental Laws. Further, immediately upon receipt of the same, Borrower shall deliver to Lender copies of any and all orders, notices, permits, applications, reports, and other communications, documents and instruments pertaining to the actual, alleged or potential presence or existence of any Hazardous Substances at, on, about, under, within, near or in connection with the Property. Borrower shall, promptly and when and as required by Environmental Laws, at Borrower’s sole cost and expense, take all actions as shall be necessary or advisable for the clean-up of any and all portions of the Property or other affected property, including, without limitation, all investigative, monitoring, removal, containment and remedial actions in accordance with all applicable Environmental Laws (and in all events in a manner satisfactory to Lender), and shall further pay or cause to be paid, at no expense to Lender, all clean-up, administrative and enforcement costs of applicable governmental agencies which may be asserted against the Property; in the event Borrower fails to take such actions, (1) Lender may, but shall not be obligated to, cause the Property or other affected property to be freed from any Hazardous Substances or otherwise brought into conformance with Environmental Laws and any and all costs and expenses incurred by Lender in connection therewith, together with interest thereon at the Default Interest Rate from the date incurred by Lender until actually paid by Borrower, shall be immediately paid by Borrower on demand, and (2) Borrower hereby grants to Lender and its agents and employees access to the Property and a license to remove any items deemed by Lender to be Hazardous Substances and to do all things Lender shall deem necessary to bring the Property in conformance with Environmental Laws. Borrower covenants and agrees, at Borrower’s sole cost and expense, to indemnify, defend (at trial and appellate levels, and with attorneys, consultants and experts acceptable to Lender), and hold Lender harmless from and against any and all liens, damages, losses,

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liabilities, obligations, settlement payments, penalties, assessments, citations, directives, claims, litigation, demands, defenses, judgments, suits, proceedings, costs, disbursements or expenses of any kind or of any nature whatsoever (including, without limitation, reasonable attorneys’, consultants’ and experts’ fees and disbursements actually incurred in investigating, defending, settling or prosecuting any claim, litigation or proceeding) which may at any time be imposed upon, incurred by or asserted or awarded against Lender or the Property, and arising directly or indirectly from or out of: (i) the presence, release or threat of release of any Hazardous Substances on, in, under or affecting all or any portion of the Property or any surrounding areas, regardless of whether or not caused by or within the control of Borrower; (ii) the violation of any Environmental Laws relating to or affecting the Property, whether or not caused by or within the control of Borrower; (iii) the failure by Borrower to comply fully with the terms and conditions of this Section 1.25; (iv) the breach of any representation or warranty contained in this Section 1.25; or (v) the enforcement of this Section 1.25, including, without limitation, the cost of assessment, containment and/or removal of any and all Hazardous Substances from all or any portion of the Property or any surrounding areas, the cost of any actions taken in response to the presence, release or threat of release of any Hazardous Substances on, in, under or affecting any portion of the Property or any surrounding areas to prevent or minimize such release or threat of release so that it does not migrate or otherwise cause or threaten danger to present or future public health, safety, welfare or the environment, and costs incurred to comply with the Environmental Laws in connection with all or any portion of the Property or any surrounding areas. The indemnity set forth in this Section 1.25(c) shall also include any diminution in the value of the security afforded by the Property or any future reduction in the sales price of the Property by reason of any matter set forth in this Section 1.25(c). Lender’s rights under this Section shall survive payment in full of the Obligations and shall be in addition to all other rights of Lender under this Mortgage, the Note and the other Loan Documents.

(d) Upon Lender’s request, at any time after the occurrence of an Event of Default hereunder or at such other time as Lender has reasonable grounds to believe that Hazardous Substances are or have been released, stored or disposed of on or around the Property or that the Property may be in violation of the Environmental Laws, Borrower shall provide, at Borrower’s sole cost and expense, an inspection or audit of the Property prepared by a hydrogeologist or environmental engineer or other appropriate consultant approved by Lender indicating the presence or absence of Hazardous Substances on the Property or an inspection or audit of the Improvements prepared by an engineering or consulting firm approved by Lender indicating the presence or absence of friable asbestos or substances containing asbestos on the Property. If Borrower fails to provide such inspection or audit within thirty (30) days after such request, Lender may order the same, and Borrower hereby grants to Lender and its employees and agents access to the Property and a license to undertake such inspection or audit. The cost of such inspection or audit, together with interest thereon at the Default Interest Rate from the date incurred by Lender until actually paid by Borrower, shall be immediately due and payable to Lender by Borrower on demand.

(e) The obligations of Borrower under this Mortgage (including, without limitation, this Section 1.25) with respect to Hazardous Substances shall not in any way limit the obligations of any party under the Hazardous Substances Indemnity

1.26 Indemnification; Subrogation.

(a) Borrower shall indemnify, defend and hold Lender harmless against: (i) any and all claims for brokerage, leasing, finders or similar fees which may be made relating to the Property or the Obligations, and (ii) any and all liability, obligations, losses, damages, penalties, claims, actions, suits, costs and expenses (including Lender’s reasonable attorneys’ fees, together with reasonable appellate counsel fees, if any) of whatever kind or nature which may be asserted against, imposed on or incurred by Lender in connection with the Obligations, this Mortgage, the Property, or any part thereof, or the

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exercise by Lender of any rights or remedies granted to it under this Mortgage; provided, however, that nothing herein shall be construed to obligate Borrower to indemnify, defend and hold harmless Lender from and against any and all liabilities, obligations, losses, damages, penalties, claims, actions, suits, costs and expenses enacted against, imposed on or incurred by Lender by reason of Lender’s willful misconduct or gross negligence.

(b) If Lender is made a party defendant to any litigation or any claim is threatened or brought against Lender concerning the Obligations, this Mortgage, the Property, or any part thereof, or any interest therein, or the construction, maintenance, operation or occupancy or use thereof, then Borrower shall indemnify, defend and hold Lender harmless from and against all liability by reason of said litigation or claims, including reasonable attorneys’ fees (together with reasonable appellate counsel fees, if any) and expenses incurred by Lender in any such litigation or claim, whether or not any such litigation or claim is prosecuted to judgment. If Lender commences an action against Borrower to enforce any of the terms hereof or to prosecute any breach by Borrower of any of the terms hereof or of any of the other Loan Documents, or to recover any sum secured hereby, Borrower shall pay to Lender its reasonable attorneys’ fees (together with reasonable appellate counsel fees, if any) and expenses. The right to such attorneys’ fees (together with reasonable appellate counsel fees, if any) and expenses shall be deemed to have accrued on the commencement of such action, and shall be enforceable whether or not such action is prosecuted to judgment. If Borrower breaches any term of this Mortgage, Lender may engage the services of an attorney or attorneys to protect its rights hereunder, and in the event of such engagement following any breach by Borrower, Borrower shall pay Lender reasonable attorneys’ fees (together with reasonable appellate counsel fees, if any) and expenses incurred by Lender, whether or not an action is actually commenced against Borrower by reason of such breach. All references to “attorneys” in this Subsection and elsewhere in this Mortgage shall include without limitation any attorney or law firm engaged by Lender and Lender’s in-house counsel, and all references to “fees and expenses” in this Subsection and elsewhere in this Mortgage shall include without limitation any fees of such attorney or law firm and any allocation charges and allocation costs of Lender’s in-house counsel.

(c) A waiver of subrogation shall be obtained by Borrower from its insurance carrier and, consequently, Borrower waives any and all right to claim or recover against Lender, its officers, employees, agents and representatives, for loss of or damage to Borrower, the Property, Borrower’s property or the property of others under Borrower’s control from any cause insured against or required to be insured against by the provisions of this Mortgage.

1.27 Single-Purpose Entity Covenants. Borrower hereby represents, warrants and covenants, as of the date hereof and until such time as the Obligations is paid in full, that without, in each case, the prior written consent of Lender (which may be withheld or conditioned by Lender in its sole and absolute discretion for any reason or for no reason):

(a) The sole purpose of Borrower has been, is and will be, to acquire, own, hold, maintain, and operate the Property, together with such other activities as may be necessary or advisable in connection with the ownership of the Property. Borrower has not engaged, and does not and shall not engage, in any business, and it has and shall have no purpose, unrelated to the Property. Borrower has not owned, does not own and shall not acquire, any real property or own assets other than those related to the Property and/or otherwise in furtherance of the limited purposes of Borrower.

(b) Neither Borrower, nor any general partner, manager or managing member (a “Controlling Entity”) of Borrower, as applicable, shall have the authority to perform any act in respect of Borrower in violation of any (a) applicable laws or regulations or (b) any agreement between Borrower and Lender (including, without limitation, the Loan Documents).

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(c) Borrower shall not:

(1) make any loans to the holder (directly or indirectly) of any equity interests in Borrower (collectively, the “Equity Holders”), any Affiliate (as defined below) of Borrower or of any Equity Holders;

(2) except as expressly permitted by the Lender in writing, sell, encumber (except with respect to the Lender) or otherwise transfer or dispose of all or substantially all of the properties of Borrower (a sale or disposition will be deemed to be “all or substantially all of the properties of Borrower” if the sale or disposition includes the Property or if the total value of the properties sold or disposed of in such transaction and during the twelve months preceding such transaction is sixty six and two thirds percent (66 ²/3%) or more in value of Borrower’s total assets as of the end of the most recently completed fiscal year of Borrower);

(3) to the fullest extent permitted by law, dissolve, wind-up, or liquidate Borrower;

(4) merge, consolidate or acquire all or substantially all of the assets of an Affiliate of same or other person or entity;

(5) change the nature of the business conducted by Borrower; or

(6) except as permitted by the Lender in writing, amend, modify or otherwise change the Organizational Documents (as defined below) of Borrower (which approval, after a Secondary Market Transaction with respect to the Loan, may be conditioned upon Lender’s receipt of confirmation from each of the applicable Rating Agencies that such amendment, modification or change would not result in the qualification, withdrawal or downgrade of any securities rating).

(d) Borrower shall not, and no Equity Holder or other person or entity on behalf of Borrower shall, without the prior written affirmative vote of one hundred percent (100%) of the members, partners or stockholders of Borrower: (1) institute proceedings to be adjudicated bankrupt or insolvent; (2) consent to the institution of bankruptcy or insolvency proceedings against it; (3) file a petition seeking, or consenting to, reorganization or relief under any applicable federal or state law relating to bankruptcy; (4) consent to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of Borrower or a substantial part of its property; (5) make any assignment for the benefit of creditors; (6) admit in writing its inability to pay its debts generally as they become due or declare or effect a moratorium on its debts; or (7) take any action in furtherance of any such action ((1) through (7) above, with respect to any individual or entity, collectively, a “Bankruptcy Action”).

(e) Borrower shall have no indebtedness or incur any liability other than (1) unsecured debts and liabilities for trade payables and accrued expenses incurred in the ordinary course of its business of operating the Property, provided, however, that such unsecured indebtedness or liabilities (y) are in amounts that are normal and reasonable under the circumstances, but in no event to exceed three percent (3%) of the original principal amount of the Loan and (z) are not evidenced by a note and are paid when due, but in no event for more than sixty (60) days from the date that such indebtedness or liabilities are incurred and (2) the Obligations. No indebtedness other than the Loan shall be secured (senior, subordinated or pari passu) by the Property.

(f) The following provisions shall apply only when Borrower is a limited liability company or a partnership. A Bankruptcy Action by or against any partner or member of Borrower, as applicable, shall not cause such partner or member of Borrower, as applicable, to cease to be a partner or

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member of Borrower and upon the occurrence of a Bankruptcy Action, Borrower shall continue without dissolution. Additionally, to the fullest extent permitted by law, if any partner or member of Borrower, as applicable, ceases to be a partner or member of Borrower, as applicable, such event shall not terminate Borrower and Borrower shall continue without dissolution.

(g) Borrower shall at all times observe the applicable legal requirements for the recognition of Borrower as a legal entity separate from any Equity Holders or Affiliates of Borrower or of any Equity Holder, including, without limitation, as follows:

(1) Borrower shall either (a) maintain its principal executive office separate from that of any Affiliate of Borrower or of any Equity Holder and shall conspicuously identify such office and numbers as its own, or (b) shall allocate by written agreement fairly and reasonably any rent, overhead and expenses for shared office space. Additionally, Borrower shall use its own separate stationery, invoices and checks which reflects its name, address, telephone number and facsimile number.

(2) Borrower shall maintain correct and complete financial statements, accounts, books and records and other entity documents separate from those of any Affiliate of Borrower or of any Equity Holder or any other person or entity. Borrower shall prepare unaudited quarterly and annual financial statements, and Borrower’s financial statements shall substantially comply with generally accepted accounting principles.

(3) Borrower shall maintain its own separate bank accounts, payroll and correct, complete and separate books of account.

(4) To the extent Borrower is required by applicable law to file tax returns, Borrower shall file or cause to be filed its own separate tax returns.

(5) Borrower shall hold itself out to the public (including any of its Affiliates’ creditors) under Borrower’s own name and as a separate and distinct entity and not as a department, division or otherwise of any Affiliate of Borrower or of any Equity Holder.

(6) Borrower shall observe all customary formalities regarding the existence of Borrower, including holding meetings and maintaining current and accurate minute books separate from those of any Affiliate of Borrower or of any Equity Holder.

(7) Borrower shall hold title to its assets in its own name and act solely in its own name and through its own duly authorized officers and agents. No Affiliate of Borrower or of any Equity Holder shall be appointed or act as agent of Borrower, other than as a property manager or leasing agent with respect to the Property.

(8) Investments shall be made in the name of Borrower directly by Borrower or on its behalf by brokers engaged and paid by Borrower.

(9) Except as required by Lender, Borrower shall not guarantee, pledge or assume or hold itself out or permit itself to be held out as having guaranteed, pledged or assumed any liabilities or obligations of any Equity Holder or any Affiliate of Borrower, nor shall it make any loan, except as permitted in the Loan Documents.

(10) Borrower is and will be solvent.

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(11) Assets of Borrower shall be separately identified, maintained and segregated. Borrower’s assets shall at all times be held by or on behalf of Borrower and if held on behalf of Borrower by another entity, shall at all times be kept identifiable (in accordance with customary usages) as assets owned by Borrower. This restriction requires, among other things, that (i) funds of Borrower shall be deposited or invested in Borrower’s name, (ii) funds of Borrower shall not be commingled with the funds of any Affiliate of Borrower or of any Equity Holder, (iii) Borrower shall maintain all accounts in its own name and with its own tax identification number, separate from those of any Affiliate of Borrower or of any Equity Holder, and (iv) funds of Borrower shall be used only for the business of Borrower.

(12) Borrower shall maintain its assets in such a manner that it is not costly or difficult to segregate, ascertain or identify its individual assets from those of any Affiliate of Borrower or of any Equity Holder.

(13) Borrower shall pay or cause to be paid its own liabilities and expenses of any kind, including but not limited to salaries of its employees, only out of its own separate funds and assets.

(14) Borrower shall at all times be adequately capitalized to engage in the transactions contemplated at its formation.

(15) Borrower shall not do any act which would make it impossible to carry on the ordinary business of Borrower.

(16) All data and records (including computer records) used by Borrower or any Affiliate of Borrower in the collection and administration of any loan shall reflect Borrower’s ownership interest therein.

(17) No funds of Borrower shall be invested in securities issued by, nor shall Borrower acquire the indebtedness or obligation of, an Affiliate of Borrower or of an Equity Holder.

(18) Borrower shall maintain an arm’s length relationship with each of its Affiliates and may enter into contracts or transact business with its Affiliates only on commercially reasonable terms that are no less favorable to Borrower than is obtainable in the market from a person or entity that is not an Affiliate of Borrower or of any Equity Holder.

(19) Borrower shall correct any misunderstanding that is known by Borrower regarding its name or separate identity.

(h) Any indemnification obligation of Borrower to the holder of any equity interest in Borrower shall (1) be fully subordinated to the Loan and (2) not constitute a claim against Borrower or its assets until such time as the Loan has been indefeasibly paid in accordance with its terms and otherwise has been fully discharged (or has been defeased in accordance with the Note).

(i) The following shall only apply if and when Borrower is a limited partnership. Each general partner of Borrower may not be an individual. Each general partner of Borrower shall at all times have as its sole purpose to act as the general partner of Borrower, and shall be engaged in no other business or have any other purpose. Additionally, any additional or substitute general partner of Borrower shall have organizational documents that (1) include covenants substantially similar to the foregoing provisions of this Section 1.27, inclusive of all single purpose/bankruptcy remote provisions, and (2) are acceptable to the Lender.

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(j) Borrower shall cause the Organizational Documents of Borrower to include, at all times, requirements substantially similar to the foregoing, in a manner satisfactory to Lender. At any time when Borrower is a limited partnership, the Organizational Documents of the general partner shall include provisions substantially similar to those set forth in Section 1.27(i) above.

(k) As used in this Mortgage:

(1) “Affiliate” means any person or entity which directly or indirectly through one or more intermediaries controls, is controlled by or is under common control with a specified person or entity. For purposes of the definition of “Affiliate”, the terms “control”, “controlled”, or “controlling” with respect to a specified person or entity shall include, without limitation, (i) the ownership, control or power to vote ten percent (10%) or more of (x) the outstanding shares of any class of voting securities or (y) beneficial interests, of any such person or entity, as the case may be, directly or indirectly, or acting through one or more persons or entities, (ii) the control in any manner over the general partner(s) or the election of more than one director or trustee (or persons exercising similar functions) of such person or entity, or (iii) the power to exercise, directly or indirectly, control over the management or policies of such person or entity.

(2) “Constituent Entity” shall mean, with respect to any entity, (i) with respect to any limited partnership, (x) any general partner of such limited partnership and (y) any limited partner of such partnership which owns (or is owned by any person or entity owning, holding or controlling, directly or indirectly) the right to receive 50% or more of the income, distributable funds or losses of such partnership; (ii) with respect to any general partnership or joint venture, any partner or venturer in such general partnership or joint venturer; (iii) with respect to any corporation, (x) any officer or director of such corporation, and (y) any person or entity which owns or controls 50% or more of any class of stock of such corporation; and (iv) with respect to any limited liability company, (x) any manager of such limited liability company, (y) any managing member of such limited liability company, or the sole member of any limited liability company having only one (1) member, and (z) any non-managing member of such limited liability company which owns (or is owned by any person or entity owning, holding or controlling, directly or indirectly) the right to receive 50% or more of the income, distributable funds or losses of such limited liability company. For all purposes of this Mortgage unless expressly noted, “control” and “controlled by” shall have the meanings assigned to them in Rule 405 under the Securities Act of 1933, as amended.

(3) “Organizational Documents” shall mean, with respect to any entity, the documents customarily used to form an entity and provide for its governance, as the same may be amended from time to time, including, without limitation, (a) with respect to a corporation, the articles of incorporation or certificate of incorporation or charter, and the by-laws; (b) with respect to a limited liability company, the articles of organization and the operating agreement; (c) with respect to a limited partnership, the certificate of limited partnership and the limited partnership agreement; and (d) with respect to a general partnership, the agreement of partnership.

1.28 Reserve Accounts and Disbursement Requests. At Lender’s option, as additional security for the indebtedness secured hereby, Borrower shall establish and maintain the reserve accounts required by this Section 1.28, subject to the security interest therein as more fully set forth in Section 1.19 hereof.

(a) Replacement Reserve. Borrower agrees that it will perform all repairs and replacements necessary to maintain the Property in good working order, in accordance with its condition as of the date hereof. Simultaneously herewith, and on each Payment Date until the Note is paid in full, Borrower shall pay to Lender the sum of $1,808.00 to be held in a reserve fund (the “Replacement

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Reserve”) subject to this Mortgage, for payment of certain repairs and replacements at the Property which, under generally accepted accounting principles, are categorized as capital expenses and not as operating expenses (the “Repairs”). Borrower shall perform all Repairs in a good and workmanlike manner, in accordance with all applicable codes and regulations, and each case in a manner satisfactory to Lender and as necessary to maintain the Property in good condition and in compliance with all applicable laws, ordinances, rules and regulations. So long as no Default shall exist and be continuing, Lender shall, to the extent funds are available for such purpose in the Replacement Reserve, disburse to Borrower the amount paid or incurred by Borrower in performing the Repairs as required above upon satisfaction of the requirements set forth in Section 1.29 of this Mortgage. Lender may, at Borrower’s expense, make or cause to be made an inspection of the Property to determine the need, as determined by Lender in its reasonable judgment, for further Repairs of the Property. In the event that such inspection reveals that further Repairs are required, Lender shall provide Borrower with a written description of the required Repairs, and Borrower shall complete such Repairs to Lender’s reasonable satisfaction within ninety (90) days after Lender’s notice, or such later date as may be approved by Lender in its discretion.

(b) Common Charges Reserve. Borrower agrees that it will perform all obligations necessary to maintain the Unit in good standing with the Condominium Association, in accordance with the Declaration and the rules promulgated thereunder. Simultaneously herewith, as additional security for the Obligations, Borrower shall pay to Lender an amount equal to six (6) times the current amount of the monthly common charges and assessments (“Common Charges”) payable with respect to the Unit, to be held in a reserve fund (the “Common Charges Reserve”) subject to this Mortgage. Borrower shall increase the amount in the Common Charges Reserve from time to time as the Common Charges are increased, so that the balance of the Common Charges Reserve at all times is not less than six (6) times the then-current monthly Common Charges. So long as Borrower maintains the Common Charges Reserve, Borrower shall not be required to make deposits into the Impound Account on account of Common Charges.

1.29 Disbursements from the Property Reserve Accounts. So long as no Event of Default shall have occurred and be continuing under this Mortgage, all sums in each of the Replacement Reserve (the foregoing, collectively, the “Property Reserve Accounts”) shall be held by Lender in the respective Property Reserve Account as set forth above for the purposes set forth in Section 1.28. So long as no Event of Default has occurred and is continuing, Lender shall disburse to Borrower, from the appropriate Property Reserve Account for the purposes set forth in Section 1.28, an amount equal to the actual expenses incurred to date by Borrower, less any prior disbursements to Borrower from any of the Property Reserve Account for such expenditure, but only to the extent that such expense is one for which, pursuant to Section 1.28, the proceeds of a Property Reserve Account may be disbursed. Disbursements shall be made to Borrower within ten (10) days following Lender’s receipt of each of the following:

(a) a written request from Borrower for such disbursement, accompanied by a certification by Borrower, in the form therefor then utilized by Lender or Lender’s servicing agent;

(b) copies of invoices, receipts or other evidence satisfactory to Lender verifying payment of the costs and expenses for which Borrower is requesting such disbursement;

(c) for disbursement requests in connection with a single project, or group of related projects, for which Borrower is seeking reimbursement of $10,000 or more, affidavits, lien waivers or other evidence reasonably satisfactory to Lender showing that all materialmen, laborers, contractors, suppliers and other parties who have or might claim statutory or common law liens, or who have furnished labor, materials or supplies to or in connection with the Property, have been paid all amounts due;

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(d) for disbursement requests in connection with a single project, or group of related projects, for which Borrower is seeking reimbursement of $20,000 or more, a certification from an inspecting architect or other third party acceptable to Lender, verifying that the any work for which Borrower is requesting a disbursement has been properly completed and that the cost of such work bears a reasonable relationship to the costs incurred therefor;

(e) a copy of the certificate of occupancy for the Improvements if, as a result of any work undertaken by Borrower, it was necessary to receive an amendment to the existing certificate of occupancy (or similar instrument) issued with respect to the Improvements, or to obtain a new certificate of occupancy for the Improvements, or a certification of Borrower that no such amended or new certificate of occupancy is required; and

(f) payment of an administrative fee of $150.00 per request.

Lender shall not be required to make an advance from each Property Reserve Account more frequently than once in any thirty (30) day period. In making any disbursement from a Property Reserve Account, Lender shall be entitled to rely on the disbursement request from Borrower without any inquiry into the accuracy, validity or contestability of any amount set forth therein. The Reserves shall not, unless otherwise explicitly required by applicable law, be or be deemed to be escrow or trust funds. Lender may, at its discretion, hold the Reserves either in a separate account or commingled by Lender with any other funds in the possession or control of Lender. The Reserves are solely for the protection of Lender, and entail no responsibility on Lender’s part beyond making disbursements upon strict satisfaction of the requirements of Section 1.28 and this Section 1.29 and beyond the allowing of due credit for the sums actually received. To the extent that any funds in any of the Reserves are invested in any investment suitable for the investment of escrows and reserves established under mortgage loans included in a Secondary Market Transaction in which some or all of the securities issued thereby are rated “AAA” (or the equivalent rating) by one or more Rating Agencies, as the standards therefor are established from time to time (or if Lender reasonably determines that no such standards exist, such investments as are otherwise acceptable to Lender, in the exercise of prudent lending standards), Borrower shall bear the risk of loss of such investments. In the event that the amounts on deposit in any of the Property Reserve Account are insufficient to reimburse Borrower for amounts otherwise properly requested, Lender shall not be obligated or authorized to transfer funds from other Reserves, and Borrower shall pay the amount of such deficiency. Upon assignment of this Mortgage by Lender, any funds in the Reserves shall be turned over to the assignee, and any responsibility of the assignor with respect thereto shall terminate.

1.30 Interest-Bearing Reserves. Lender shall cause funds in the Replacement Reserve and the Letter of Credit Reserve (as defined in that certain Letter of Credit Agreement dated as of the date hereof between Borrower and Lender) (referred to in this Section 1.30 as the “Interest-Bearing Reserve”) to be deposited into an interest bearing account of the type customarily maintained by Lender or its servicing agent for the investment of similar reserves, which account may not yield the highest interest rate then available. Interest payable on such amounts shall be computed based on the daily outstanding balance in the Interest-Bearing Reserve. Such interest shall be calculated on a simple, non-compounded interest basis based solely on contributions made to the Interest-Bearing Reserve by Borrower. All interest earned on amounts contributed to the Interest-Bearing Reserve shall be retained by Lender and added to the balance in such Interest-Bearing Reserve and shall be disbursed for payment of the items for which other funds in such Interest-Bearing Reserve are to be disbursed. Borrower acknowledges that all Reserves other than the Interest-Bearing Reserves shall not accrue or bear interest for the benefit of Borrower, and no interest shall be payable thereon by Lender.

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1.31 Condominium Provisions.

(a) Borrower shall comply with all terms, conditions and covenants of the Declaration and all by-laws, rules and regulations promulgated or otherwise existing with respect to the Condominium (collectively, the “Rules”) as those are in force and effect.

(b) Borrower shall not, without Lender’s prior written consent, modify, amend, supplement or in any other manner change the terms, conditions and covenants of the Declaration or the Rules so as to affect, alter or impair the lien of this Mortgage or the security therefor, or in a manner which materially increases the obligations or diminishes the rights of Lender, nor may Borrower waive or consent to the waiver of any enforcement of the provisions thereof with respect to another unit owner.

(c) Borrower shall promptly deliver to Lender a true and full copy of each and every notice of default or notice requiring the performance of any act by Borrower received by Borrower with respect to any obligation of Borrower under the provisions of the Declaration or the Rules.

(d) Borrower shall not, except with the prior written consent of Lender (i) institute any action or proceeding for partition of the property of which the Premises are a part; (ii) vote for or consent to any modification of, amendment to or relaxation in the enforcement of any provision of the Declaration or the Rules which affects, alters or impairs the lien of this Mortgage or the security therefor, or which materially increases the obligations or diminishes the rights of Lender; (iii) in the event of damage to or destruction of the Unit or any of them, vote in opposition to a motion to repair, restore, or rebuild.

(e) In each and every case in which, under the provisions of the Declaration or the Rules, the consent or the vote of the owners of Units is required, Borrower shall not vote or give such consent so as to impair the lien of this Mortgage or the security therefor without, in each and every case, the prior written consent of Lender.

(f) Borrower shall promptly pay, as the same become due and payable, all common charges or other payments for maintenance and reserve funds (“Common Charges”) and all assessments (“Assessments”) as required by the Declaration or the Rules or any resolutions adopted pursuant thereto, and shall promptly upon demand exhibit to Lender receipts for all such payments. In the event that Borrower fails to make such payments as the same become due and payable, Lender may from time to time at its option, but without any obligation to do so and without notice to or demand upon Borrower, make such payments, and the same shall be added to the debt secured hereby, and shall bear interest until repaid at the Default Interest Rate (as defined in the Note); provided, however, that the failure of the Borrower to make any such payment to the maintenance fund or to exhibit such receipts shall, at the election of Lender constitute a breach of covenant under this Mortgage entitling Lender to accelerate the indebtedness secured hereby.

(g) In the event of the failure of Borrower to perform any of its obligations relating to the Real Estate under the Declaration or Rules within a period of ten (10) business days (unless the Association requires sooner performance) after notice from the Association or from Lender, or in the case of any such default which cannot with due diligence be cured or remedied within such period, if Borrower fails to proceed promptly after such notice to cure or remedy the same with due diligence, then in any such case, Lender may from time to time at its option, but without any obligation so to do, cure or remedy any such default of Borrower (Borrower hereby authorizing Lender to enter upon the Real Estate as may be necessary for such purposes), and all sums expended by Lender for such purposes, including reasonable counsel fees, shall be added to the debt secured hereby, shall become due and payable and shall bear interest until repaid at the Default Interest Rate (as defined in the Note) and shall be added to the indebtedness secured hereby; provided, however, that the failure of Borrower to keep or perform any such notice, or, in the case in which such cannot be kept or performed within such ten (10) day period,

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provided Borrower has commenced to cure such default and is diligently pursuing same to completion, such additional time as is needed to so complete, shall, at the election of Lender, constitute a breach of covenant under this Mortgage entitling Lender to accelerate the indebtedness secured hereby.

(h) Upon the occurrence of an Event of Default hereunder, Lender may by notice to Borrower require the resignation of Borrower’s designees to the Association, if any, and the appointment in lieu thereof of Lender’s designees.

(i) Borrower shall, at the option of Lender exercisable at any time after the occurrence of an Event of Default hereunder, pay to Lender at the time of each payment of an installment of interest or principal under the Note, an additional amount sufficient to discharge the obligations under clause (f) when they become due. The determination of the amount so payable and of the fractional part thereof to be deposited with Lender in an Impound Account. Nothing herein contained shall be deemed to affect any right or remedy or Lender under any provisions of this Mortgage or of any statute or rule of law to pay any such amount and to add the amount so paid, together with interest at the Default Interest Rate, (as defined in the Note) to the indebtedness hereby secured.

1.32 Completion of Initial Improvements. All of the following conditions (collectively, the “Completion Conditions”) shall be satisfied, and Borrower shall deliver to Lender evidence acceptable to Lender that same have been satisfied, on or before October 31, 2004 (as same may be extended pursuant to Section 1.33 below, the “Completion Date”):

(a) all work in connection with the Initial Improvements (as defined in the Primary Lease) shall have been substantially completed in accordance with all applicable plans and specifications and in compliance with all applicable laws, and Lender shall have received written confirmation from Lender’s Consultant (as defined below) of same.;

(b) a permanent certificate of occupancy shall have been issued with respect to 100% of the premises demised to Primary Tenant pursuant to the Primary Lease (the “Primary Leased Premises”);

(c) all tenant improvement allowances due and owing by Borrower to the tenant under the Primary Lease shall have been paid by Borrower;

(d) Primary Tenant shall be in occupancy and conducting business in all or substantially all of the Primary Leased Premises;

(e) Primary Tenant shall be paying rent under the Primary Lease;

(f) Primary Tenant shall provide Lender with an estoppel confirming the foregoing matters and otherwise reasonably acceptable to Lender;

(g) Borrower shall deliver to Lender an updated as-built survey, in form and substance reasonably acceptable to Lender, for the Property;

(h) all contractors performing work or providing services in connection with the construction of the Initial Improvements shall have been paid in full and Borrower shall provide Lender with copies of final lien waivers from all such contractors whose total contract price in connection with such work is $10,000 or more; and

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(i) no default shall have occurred and be continuing under the Primary Lease.

Upon the substantial completion of the Initial Improvements, Borrower shall notify Lender of same and request that an engineer or other professional consultant selected by Lender (“Lender’s Consultant”) inspect the Initial Improvements to confirm that the Initial Improvements have been substantially completed in accordance with all applicable plans and specifications and in compliance with all applicable laws (the “Final Inspection”). Borrower shall pay all costs incurred by Lender (including, without limitation, the reasonable fees of Lender’s Consultant) in connection with the Final Inspection. In addition to the Final Inspection, Lender’s Consultant, on behalf of Lender, may make periodic inspections (at Borrower’s reasonable expense) of the Property to evaluate the progress of the construction of the Initial Improvements; provided that, so long as no Event of Default has occurred, Borrower shall only be required to reimburse Lender for the costs incurred by Lender in connection with up to one (1) such periodic inspection in any calendar month (provided that in all events, Borrower shall pay all of Lender’s costs in connection with the Final Inspection).

Other than as expressly set forth in the preceding paragraph, all costs incurred by Lender in connection with this Section 1.32 (including, without limitation, reasonable attorneys’ fees) shall be paid by Borrower to Lender upon demand therefor by Lender to Borrower.

1.33 Extension of Completion Date. Borrower may extend the Completion Date for up to two (3) additional periods of one (1) month each (each such period being an “Extension Term”), provided that on or before the then-current Completion Date (prior to the extension of same then being requested), Borrower submits to Lender a written notice (an “Extension Notice”) of its election to so extend the Completion Date together with a payment to Lender of a fee in an amount equal to one-third of one percent (0.33%) of the original principal amount of the Loan; and (2) no Default or Event of Default shall exist under the Note, this Mortgage or any of the other Loan Documents, as of either the date on which the Extension Notice is submitted to Lender or the date on which the extension is to become effective. Notwithstanding anything herein to the contrary, in no event shall the Completion Date be extended pursuant to this Section 1.33 and no Extension Notice shall be effective unless as of the date on which the Extension Notice is submitted to Lender and the date on which the extension is to become effective, Lender determines (in its reasonable discretion) that the parties responsible under the Primary Lease for the construction of the Initial Improvements are diligently pursuing the completion of same and Borrower is diligently pursuing the satisfaction of all of the Completion Conditions.

ARTICLE II

EVENTS OF DEFAULT

2.1 Events of Default. The occurrence of any of the following shall be an “Event of Default” hereunder:

(a) Borrower fails to punctually perform any covenant, agreement, obligation, term or condition of the Note, this Mortgage or any other Loan Document which requires payment of any money to Lender, and (1) in the case of any Monthly Payment Amount due under the Note or any payment to any Reserve required under this Mortgage, such failure continues beyond the applicable grace period set forth in the Note with respect to the Monthly Payment Amount, (2) in the case of any other amount due from Borrower to Lender, such failure continues for the applicable period set forth therein or, if no period is set forth, for seven (7) days after such payment becomes due or, if due on demand, is demanded.

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(b) Borrower (i) fails to provide insurance as required by Section 1.4 hereof or (ii) fails to perform any covenant, agreement, obligation, term or condition set forth in Section 1.5 hereof .

(c) Borrower fails to perform any other covenant, agreement, obligation, term or condition set forth herein other than those otherwise described in this Section 2.1 and, to the extent such failure or default is susceptible of being cured, the continuance of such failure or default for thirty (30) days after written notice thereof from Lender to Borrower; provided, however, that if such default is susceptible of cure but such cure cannot be accomplished with reasonable diligence within said period of time, and if Borrower commences to cure such default promptly after receipt of notice thereof from Lender, and thereafter prosecutes the curing of such default with reasonable diligence, such period of time shall be extended for such period of time as may be necessary to cure such default with reasonable diligence, but not to exceed an additional sixty (60) days.

(d) Any representation or warranty made herein, in or in connection with the Loan Application or any commitment relating to the Loan, or in any of the other Loan Documents to Lender, by Borrower, by any Indemnitor or by any Constituent Entity of Borrower or any Indemnitor, is determined by Lender to have been false or misleading in any material respect at the time made.

(e) A Transfer, except as expressly permitted by Section 1.11 hereof.

(f) A default occurs under any of the other Loan Documents which has not been cured within any applicable grace or cure period therein provided.

(g) Borrower, any Indemnitor, any Constituent Entity of Borrower or any Indemnitor or Primary Tenant or any guarantor of the Primary Lease, becomes insolvent, or shall make a transfer in fraud of creditors, or shall make an assignment for the benefit of creditors, shall file a petition in bankruptcy, shall voluntarily be adjudicated insolvent or bankrupt or shall admit in writing the inability to pay debts as they mature, shall petition or apply to any tribunal for or shall consent to or shall not contest the appointment of a receiver, trustee, custodian or similar officer for Borrower, any Indemnitor, any such Constituent Entity, Primary Tenant or any such guarantor of the Primary Lease, or for a substantial part of the assets of Borrower, any such Indemnitor, any such Constituent Entity, Primary Tenant or any such guarantor of the Primary Lease, or shall commence any case, proceeding or other action under any bankruptcy, reorganization, arrangement, readjustment or debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect.

(h) A petition is filed or any case, proceeding or other action is commenced against Borrower, against any Indemnitor, against any Constituent Entity of Borrower or any Indemnitor or against Primary Tenant or any guarantor of the Primary Lease, seeking to have an order for relief entered against it as debtor or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts or other relief under any law relating to bankruptcy, insolvency, arrangement, reorganization, receivership or other debtor relief under any law or statute of any jurisdiction whether now or hereafter in effect or a court of competent jurisdiction enters an order for relief against Borrower, against any Indemnitor, against any Constituent Entity of Borrower or any Indemnitor or against Primary Tenant or any guarantor of the Primary Lease, as debtor, or an order, judgment or decree is entered appointing, with or without the consent of Borrower, of any Indemnitor or of any Constituent Entity of Borrower or any Indemnitor or of Primary Tenant or any guarantor of the Primary Lease, a receiver, trustee, custodian or similar officer for Borrower, for any such Indemnitor or for any such Constituent Entity or for Primary Tenant or any guarantor of the Primary Lease, or for any substantial part of any of the properties of Borrower, any such Indemnitor, any such Constituent Entity or Primary Tenant or any guarantor of the Primary Lease, and if any such event shall occur, such petition, case, proceeding, action, order, judgment or decree shall not be dismissed within sixty (60) days after being commenced.

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(i) The Property or any part thereof shall be taken on execution or other process of law (other than by eminent domain) in any action against Borrower.

(j) Borrower abandons all or a portion (other than a de minimis portion) of the Property.

(k) The holder of any lien or security interest on the Property (without implying the consent of Lender to the existence or creation of any such lien or security interest), whether superior or subordinate to this Mortgage or any of the other Loan Documents, declares a default and such default is not cured within any applicable grace or cure period set forth in the applicable document or such holder institutes foreclosure or other proceedings for the enforcement of its remedies thereunder.

(l) The Property, or any part thereof, is subjected to actual or threatened waste or to removal, demolition or material alteration so that the value of the Property is materially diminished thereby, and Lender determines that it is not adequately protected from any loss, damage or risk associated therewith.

(m) Any dissolution, termination, partial or complete liquidation, merger or consolidation of Borrower, any Indemnitor or any Constituent Entity of Borrower or any Indemnitor, without the prior written consent of Lender.

(n) If Borrower shall fail to perform any of its obligations with respect to the Association, the Declaration, the Rules or the Condominium as set forth in Section 1.31 or if for any reason all or any portion of the land subject to the Declaration is withdrawn from condominium ownership; or if by reason of damage or destruction of all or any portion of the Improvements the Association or the owners of the Condominium units do not duly and promptly resolve to proceed with the repair or restoration of any such damage or destruction; or if by reason of the failure of Borrower to perform any act, as for example notification to the Association under the Declaration or the Rules, Lender shall not be entitled to the protective provisions under the Declaration or the Rules.

(o) The Completion Conditions have not been satisfied on or before the Completion Date.

ARTICLE III

REMEDIES

3.1 Remedies Available. If there shall occur an Event of Default under this Mortgage, then the Property shall be subject to sale and this Mortgage shall be subject to foreclosure, all as provided by law, and Lender may, at its option and by or through a trustee, nominee, assignee or otherwise, to the fullest extent permitted by law, exercise any or all of the following rights, remedies and recourses, either successively or concurrently:

(a) Acceleration. Accelerate the maturity date of the Note and declare any or all of the Obligations to be immediately due and payable without any presentment, demand, protest, notice, or action of any kind whatever (each of which is hereby expressly waived by Borrower), whereupon the same shall become immediately due and payable. Upon any such acceleration, payment of such accelerated amount shall constitute a prepayment of the principal balance of the Note and any applicable prepayment fee provided for in the Note shall then be immediately due and payable.

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(b) Entry on the Property. Either in person or by agent, with or without bringing any action or proceeding, or by a receiver appointed by a court and without regard to the adequacy of its security, enter upon and take possession of the Property, or any part thereof, without force or with such force as is permitted by law and without notice or process or with such notice or process as is required by law unless such notice and process is waivable, in which case Borrower hereby waives such notice and process, and do any and all acts and perform any and all work which may be desirable or necessary in Lender’s judgment to complete any unfinished construction on the Real Estate (including, without limitation, the Initial Improvements), to preserve the value, marketability or rentability of the Property, to increase the income therefrom, to manage and operate the Property or to protect the security hereof and all sums expended by Lender therefor, together with interest thereon at the Default Interest Rate, shall be immediately due and payable to Lender by Borrower on demand.

(c) Collect Rents and Profits. With or without taking possession of the Property, sue or otherwise collect the Rents and Profits, including those past due and unpaid.

(d) Appointment of Receiver. Upon, or at any time prior to or after, initiating the exercise of any power of sale, instituting any judicial foreclosure or instituting any other foreclosure of the liens and security interests provided for herein or any other legal proceedings hereunder, make application to a court of competent jurisdiction for appointment of a receiver for all or any part of the Property, as a matter of strict right and without notice to Borrower and without regard to the adequacy of the Property for the repayment of the Obligations or the solvency of Borrower or any person or persons liable for the payment of the Obligations, and Borrower does hereby irrevocably consent to such appointment, waives any and all notices of and defenses to such appointment and agrees not to oppose any application therefor by Lender, but nothing herein is to be construed to deprive Lender of any other right, remedy or privilege Lender may now have under the law to have a receiver appointed, provided, however, that, the appointment of such receiver, trustee or other appointee by virtue of any court order, statute or regulation shall not impair or in any manner prejudice the rights of Lender to receive payment of the Rents and Profits pursuant to other terms and provisions hereof. Any such receiver shall have all of the usual powers and duties of receivers in similar cases, including, without limitation, the full power to hold, develop, rent, lease, manage, maintain, operate and otherwise use or permit the use of the Property upon such terms and conditions as said receiver may deem to be prudent and reasonable under the circumstances as more fully set forth in Section 3.3 below. Such receivership shall, at the option of Lender, continue until full payment of all of the Obligations or until title to the Property shall have passed by foreclosure sale under this Mortgage or deed in lieu of foreclosure.

(e) Foreclosure. Immediately commence an action to foreclose this Mortgage or to specifically enforce its provisions or any of the Obligations pursuant to the statutes in such case made and provided and sell the Property or cause the Property to be sold in accordance with the requirements and procedures provided by said statutes in a single parcel or in several parcels at the option of Lender.

(1) In the event foreclosure proceedings are filed by Lender, all expenses incident to such proceeding, including, but not limited to, attorneys’ fees and costs, shall be paid by Borrower and secured by this Mortgage and by all of the other Loan Documents securing all or any part of the indebtedness evidenced by the Note. The Obligations and all other obligations secured by this Mortgage, including, without limitation, interest at the Default Interest Rate (as defined in the Note), any prepayment charge, fee or premium required to be paid under the Note in order to prepay principal (to the extent permitted by applicable law), reasonable attorneys’ fees and any other amounts due and unpaid to Lender under the Loan Documents, may be bid by Lender in the event of a foreclosure sale hereunder. In the event of a judicial sale pursuant to a foreclosure decree, it is understood and agreed that Lender or its assigns may become the purchaser of the Property or any part thereof.

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(2) Lender may, by following the procedures and satisfying the requirements prescribed by applicable law, foreclose on only a portion of the Property and, in such event, said foreclosure shall not affect the lien of this Mortgage on the remaining portion of the Property foreclosed.

(f) Rights under the Uniform Commercial Code. Exercise any or all of the remedies of a secured party under the Uniform Commercial Code against the UCC Collateral, either separately or together, and in any order, without in any way affecting the availability of Lender’s other remedies. Furthermore, to the extent permitted by law, in conjunction within, addition to or in substitution for the rights and remedies available to Lender pursuant to any applicable Uniform Commercial Code: in the event of a foreclosure sale with respect to the portions of the Property which are not UCC Collateral, the Property (including the UCC Collateral) may, at the option of Lender, be sold as a whole or in parts, as determined by Lender in its sole discretion; and (2) it shall not be necessary that (x) Lender take possession of the UCC Collateral, or any part thereof, prior to the time that any sale pursuant to the provisions of this Section is conducted, or (y) the UCC Collateral, or any part thereof, be present at the location of such sale; and (3) Lender may appoint or delegate any one or more persons as agent to perform any act or acts necessary or incident to any sale held by Lender, including the sending of notices and the conduct of the sale, but in the name and on behalf of Lender.

(g) Other. Exercise any other right or remedy available hereunder, under any of the other Loan Documents or at law or in equity.

3.2 Application of Proceeds. To the fullest extent permitted by law, the proceeds of any sale under this Mortgage shall be applied to the extent funds are so available to the following items in such order as Lender in its discretion may determine:

(a) To payment of the costs, expenses and fees of taking possession of the Property, and of holding, operating, maintaining, using, leasing, repairing, improving, marketing and selling the same and of otherwise enforcing Lender’s right and remedies hereunder and under the other Loan Documents, including, but not limited to receivers’ fees, court costs, attorneys’, accountants’, appraisers’, managers’ and other professional fees, title charges and transfer taxes.

(b) To payment of all sums expended by Lender under the terms of any of the Loan Documents and not yet repaid, together with interest on such sums at the Default Interest Rate.

(c) To payment of the Obligations and all other obligations secured by this Mortgage, including, without limitation, interest at the Default Interest Rate and, to the extent permitted by applicable law, any prepayment fee, charge or premium required to be paid under the Note in order to prepay principal, in any order that Lender chooses in its sole discretion.

The remainder, if any, of such funds shall be disbursed to Borrower or to the person or persons legally entitled thereto.

3.3 Right and Authority of Receiver or Lender in the Event of Default; Power of Attorney. Upon the occurrence of an Event of Default hereunder, and entry upon the Property pursuant to Section 3.1(b) hereof or appointment of a receiver pursuant to Section 3.1(d) hereof, and under such terms and conditions as may be prudent and reasonable under the circumstances in Lender’s or the receiver’s sole discretion, all at Borrower’s expense, Lender or said receiver, or such other persons or entities as they shall hire, direct or engage, as the case may be, may do or permit one or more of the following,

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successively or concurrently: (a) enter upon and take possession and control of any and all of the Property; (b) take and maintain possession of all documents, books, records, papers and accounts relating to the Property; (c) exclude Borrower and its agents, servants and employees wholly from the Property; (d) manage and operate the Property; (e) preserve and maintain the Property; (f) make repairs and alterations to the Property; (g) complete any construction or repair of the Improvements (including, without limitation, the Initial Improvements), with such changes, additions or modifications of the plans and specifications or intended disposition and use of the Improvements as Lender may in its sole discretion deem appropriate or desirable to place the Property in such condition as will, in Lender’s sole discretion, make it or any part thereof readily marketable or rentable; (h) conduct a marketing or leasing program with respect to the Property, or employ a marketing or leasing agent or agents to do so, directed to the leasing or sale of the Property under such terms and conditions as Lender may in its sole discretion deem appropriate or desirable; (i) employ such contractors, subcontractors, materialmen, architects, engineers, consultants, managers, brokers, marketing agents, or other employees, agents, independent contractors or professionals, as Lender may in its sole discretion deem appropriate or desirable to implement and effectuate the rights and powers herein granted; (j) execute and deliver, in the name of Lender as attorney-in-fact and agent of Borrower or in its own name as Lender, such documents and instruments as are necessary or appropriate to consummate authorized transactions; (k) enter into such Leases, whether of real or personal property, under such terms and conditions as Lender may in its sole discretion deem appropriate or desirable; (l) collect and receive the Rents and Profits from the Property; (m) eject Tenants or repossess personal property, as provided by law, for breaches of the conditions of their Leases; (n) sue for unpaid Rents and Profits, payments, income or proceeds in the name of Borrower or Lender; (o) maintain actions in forcible entry and detainer, ejectment for possession and actions in distress for rent; (p) compromise or give acquittance for Rents and Profits, payments, income or proceeds that may become due; (q) delegate or assign any and all rights and powers given to Lender by this Mortgage; and (r) do any acts which Lender in its sole discretion deems appropriate or desirable to protect the security hereof and use such measures, legal or equitable, as Lender may in its sole discretion deem appropriate or desirable to implement and effectuate the provisions of this Mortgage. This Mortgage shall constitute a direction to and full authority to any Tenant, lessee, or other third party who has heretofore dealt or contracted or may hereafter deal or contract with Borrower or Lender, at the request of Lender, to pay all amounts owing under any Lease, contract or other agreement to Lender without proof of the Event of Default relied upon. Any such Tenant, lessee or third party is hereby irrevocably authorized to rely upon and comply with (and shall be fully protected by Borrower in so doing) any request, notice or demand by Lender for the payment to Lender of any Rents and Profits or other sums which may be or thereafter become due under its Lease, contract or other agreement, or for the performance of any undertakings under any such Lease, contract or other agreement, and shall have no right or duty to inquire whether any Event of Default under this Mortgage, or any default under any of the other Loan Documents, has actually occurred or is then existing. Borrower hereby constitutes and appoints Lender, its assignees, successors, transferees and nominees, as Borrower’s true and lawful attorney-in-fact and agent, with full power of substitution in the Property, in Borrower’s name, place and stead, to do or permit any one or more of the foregoing described rights, remedies, powers and authorities, successively or concurrently, and said power of attorney shall be deemed a power coupled with an interest and irrevocable so long as any Obligations is outstanding. Any money advanced by Lender in connection with any action taken under this Section 3.3, together with interest thereon at the Default Interest Rate from the date of making such advancement by Lender until actually paid by Borrower, shall be a demand obligation owing by Borrower to Lender.

3.4 Occupancy After Foreclosure. In the event there is a foreclosure sale hereunder and at the time of such sale, Borrower or Borrower’s representatives, successors or assigns, or any other persons claiming any interest in the Property by, through or under Borrower (except tenants of space in the Improvements subject to Leases entered into prior to the date hereof), are occupying or using the Property, or any part thereof, then, to the extent not prohibited by applicable law, each and all shall, at the

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option of Lender or the purchaser at such sale, as the case may be, immediately become the tenant of the purchaser at such sale, which tenancy shall be a tenancy from day-to-day, terminable at the will of either landlord or tenant, at a reasonable rental per day based upon the value of the Property occupied or used, such rental to be due daily to the purchaser. Further, to the extent permitted by applicable law, in the event the tenant fails to surrender possession of the Property upon the termination of such tenancy, the purchaser shall be entitled to institute and maintain an action for unlawful detainer of the Property in the appropriate court of the county in which the Real Estate is located.

3.5 Notice to Account Debtors. Lender may, at any time after an Event of Default hereunder, notify the account debtors and obligors of any accounts, chattel paper, negotiable instruments or other evidences of indebtedness, to Borrower included in the Property to pay Lender directly. Borrower shall at any time or from time to time upon the request of Lender provide to Lender a current list of all such account debtors and obligors and their addresses.

3.6 Cumulative Remedies. All remedies contained in this Mortgage are cumulative and Lender shall also have all other remedies provided at law and in equity or in any other Loan Documents. Such remedies may be pursued separately, successively or concurrently at the sole subjective direction of Lender and may be exercised in any order and as often as occasion therefor shall arise. No act of Lender shall be construed as an election to proceed under any particular provisions of this Mortgage to the exclusion of any other provision of this Mortgage or as an election of remedies to the exclusion of any other remedy which may then or thereafter be available to Lender. No delay or failure by Lender to exercise any right or remedy under this Mortgage shall be construed to be a waiver of that right or remedy or of any Event of Default hereunder. Lender may exercise any one or more of its rights and remedies at its option without regard to the adequacy of its security.

3.7 Payment of Expenses. Borrower shall pay on demand all of Lender’s expenses incurred in any efforts to enforce any terms of this Mortgage, whether or not any lawsuit is filed and whether or not foreclosure is commenced but not completed, including, but not limited to, legal fees and disbursements, foreclosure costs and title charges, together with interest thereon from and after the date incurred by Lender until actually paid by Borrower at the Default Interest Rate. Furthermore, Borrower shall, and does hereby, indemnify Lender for, and hold Lender harmless from, any and all claims, actions, demands liabilities, loss or damage which may or might be incurred by Lender under this Mortgage or by the exercise of rights or remedies hereunder, and from any and all claims and demands whatsoever which may be asserted against Lender by reason of any alleged obligations or undertakings on Lender’s part with respect to the Property except as expressly set forth in the Loan Documents, other than those finally determined to have resulted solely from the gross negligence or willful misconduct of Lender. Should Lender incur any such liability, the amount thereof, including, without limitation, costs, expenses and attorneys’ fees, together with interest thereon at the Default Interest Rate from the date incurred by Lender until actually paid by Borrower, shall be immediately due and payable to Lender from Borrower on demand.

ARTICLE IV

[INTENTIONALLY OMITTED]

ARTICLE V

MISCELLANEOUS TERMS AND CONDITIONS

5.1 Time of Essence. Time is of the essence with respect to all provisions of the Loan Documents.

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5.2 Release of Mortgage. If all of the Obligations be paid and performed, then and in that event only, upon delivery and recordation of a written satisfaction of this Mortgage, all rights under this Mortgage shall terminate except for those provisions hereof which by their terms survive, and the Property shall become wholly clear of the liens, security interests, conveyances and assignments evidenced hereby, which shall be released by Lender in due form at Borrower’s cost. No release of this Mortgage or the lien hereof shall be valid unless executed by Lender.

5.3 Certain Rights of Lender. Without affecting Borrower’s liability for the payment of any of the Obligations, Lender may from time to time and without notice to Borrower: (a) release any person liable for the payment of the Obligations; (b) extend or modify the terms of payment of the Obligations; (c) accept additional real or personal property of any kind as security or alter, substitute or release any property securing the Obligations; (d) consent in writing to the making of any subdivision map or plat thereof; (e) join in granting any easement therein; or (f) join in any extension agreement of the Mortgage or any agreement subordinating the lien hereof.

5.4 Waiver of Certain Defenses. No action for the enforcement of the lien hereof or of any provision hereof shall be subject to any defense which would not be good and available to the party interposing the same in an action at law upon the Note or any of the other Loan Documents.

5.5 Notices. All notices, demands, requests or other communications to be sent by one party to the other hereunder or required by law shall be in writing and shall be deemed to have been validly given or served by delivery of the same in person to the intended addressee, or by depositing the same with Federal Express or another reputable private courier service for next business day delivery, with all charges prepaid, or by depositing the same in the United States mail, postage prepaid, certified mail, return receipt requested, in any event addressed to the intended addressee at its address set forth on the first page of this Mortgage or at such other address as may be designated by such party as herein provided. All notices, demands and requests shall be effective upon such personal delivery, or one (1) business day after being deposited with the private courier service, or three (3) business days after being deposited in the United States mail as required above. Rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was given as herein required shall be deemed to be receipt of the notice, demand or request sent. By giving to the other party hereto at least fifteen (15) days’ prior written notice thereof in accordance with the provisions hereof, the parties hereto shall have the right from time to time to change their respective addresses and each shall have the right to specify as its address any other address within the United States of America.

5.6 Successors and Assigns. The terms, provisions, indemnities, covenants and conditions hereof shall be binding upon Borrower and the successors and assigns of Borrower, including all successors in interest of Borrower in and to all or any part of the Property, and shall inure to the benefit of Lender, its successors and assigns, and shall constitute covenants running with the land. All indemnities in this Mortgage for the benefit of Lender shall inure to the benefit of Lender and each of its directors, officers, shareholders, partners, members, managers, employees and agents (including, without limitation, any servicers retained by Lender with respect to the Loan), and pledgees and participants of the Obligations, and their respective successors and assigns. All references in this Mortgage to Borrower or Lender shall be deemed to include each such party’s successors and assigns. If Borrower consists of more than one person or entity, each will be jointly and severally liable to perform the obligations of Borrower.

5.7 Severability. A determination that any provision of this Mortgage is unenforceable or invalid shall not affect the enforceability or validity of any other provision, and any determination that the application of any provision of this Mortgage to any person or circumstance is illegal or unenforceable shall not affect the enforceability or validity of such provision as it may apply to any other persons or circumstances.

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5.8 Interpretation. Within this Mortgage, words of any gender shall be held and construed to include any other gender, and words in the singular shall be held and construed to include the plural, and vice versa, unless the context otherwise requires. The headings of the sections and paragraphs of this Mortgage are for convenience of reference only, are not to be considered a part hereof and shall not limit or otherwise affect any of the terms hereof. In the event of any inconsistency between the provisions hereof and the provisions in any of the other Loan Documents, it is intended that the provisions of this Mortgage shall be controlling.

5.9 Waiver: Discontinuance of Proceedings. Lender may waive any single Event of Default by Borrower hereunder without waiving any other prior or subsequent Event of Default. Lender may remedy any Event of Default by Borrower hereunder without waiving the Event of Default remedied. Neither the failure by Lender to exercise, nor the delay by Lender in exercising, any right, power or remedy upon any Event of Default by Borrower hereunder shall be construed as a waiver of such Event of Default or as a waiver of the right to exercise any such right, power or remedy at a later date. No single or partial exercise by Lender of any right, power or remedy hereunder shall exhaust the same or shall preclude any other or further exercise thereof, and every such right, power or remedy hereunder may be exercised at any time and from time to time. No modification or waiver of any provision hereof nor consent to any departure by Borrower therefrom shall in any event be effective unless the same shall be in writing and signed by Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose given. No notice to nor demand on Borrower in any case shall of itself entitle Borrower to any other or further notice or demand in similar or other circumstances. Acceptance by Lender of any payment in an amount less than the amount then due on any of the Obligations shall be deemed an acceptance on account only and shall not in any way affect the existence of a Default or an Event of Default hereunder. In case Lender shall have proceeded to invoke any right, remedy or recourse permitted hereunder or under the other Loan Documents and shall thereafter elect to discontinue or abandon the same for any reason, Lender shall have the unqualified right to do so and, in such an event, Borrower and Lender shall be restored to their former positions with respect to the Obligations, the Loan Documents, the Property and otherwise, and the rights, remedies, recourses and powers of Lender shall continue as if the same had never been invoked.

5.10 Governing Law. This Mortgage will be governed by and construed in accordance with the laws of the State in which the Real Estate is located, provided that to the extent any of such laws may now or hereafter be preempted by Federal law, in which case such Federal law shall so govern and be controlling.

5.11 Counting of Days. The term “days” when used herein shall mean calendar days. If any time period ends on a Saturday, Sunday or holiday officially recognized by the state within which the Real Estate is located, the period shall be deemed to end on the next succeeding business day. The term “business day” when used herein shall mean a weekday, Monday through Friday, except a legal holiday or a day on which banking institutions in the State in which the Real Estate is located are authorized by law to be closed.

5.12 Relationship of the Parties. The relationship between Borrower and Lender is that of a borrower and a lender only and neither of those parties is, nor shall it hold itself out to be, the agent, employee, joint venturer or partner of the other party.

5.13 Application of the Proceeds of the Note. To the extent that proceeds of the Note are used to pay indebtedness secured by any outstanding lien, security interest, charge or prior encumbrance against the Property, such proceeds have been advanced by Lender at Borrower’s request and Lender shall be subrogated to any and all rights, security interests and liens owned by any owner or holder of such outstanding liens, security interests, charges or encumbrances, irrespective of whether said liens, security interests, charges or encumbrances are released.

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5.14 Unsecured Portion of Indebtedness. If any part of the Obligations cannot be lawfully secured by this Mortgage or if any part of the Property cannot be lawfully subject to the lien and security interest hereof to the full extent of such indebtedness, then all payments made shall be applied on said indebtedness first in discharge of that portion thereof which is unsecured by this Mortgage.

5.15 Cross Default. An Event of Default shall be a default under each of the other Loan Documents.

5.16 Interest After Sale. In the event the Property or any part thereof shall be sold upon foreclosure as provided hereunder, to the extent permitted by law, the sum for which the same shall have been sold shall, for purposes of redemption (pursuant to the laws of the state in which the Property is located), bear interest at the Default Interest Rate.

5.17 Construction of this Document. This document may be construed as a mortgage, security deed, deed of trust, chattel mortgage, conveyance, assignment, security agreement, pledge, financing statement, hypothecation or contract, or any one or more of the foregoing, as determined by Lender, in order to fully effectuate the liens and security interests created hereby and the purposes and agreements herein set forth.

5.18 No Merger. It is the desire and intention of the parties hereto that this Mortgage and the lien hereof do not merge in fee simple title to the Property. It is hereby understood and agreed that should Lender acquire any additional or other interests in or to the Property or the ownership thereof, then, unless a contrary intent is manifested by Lender as evidenced by an appropriate document duly recorded, this Mortgage and the lien hereof shall not merge in such other or additional interests in or to the Property, toward the end that this Mortgage may be foreclosed as if owned by a stranger to said other or additional interests.

5.19 Rights With Respect to Junior Liens. Any person or entity purporting to have or to take a junior mortgage or other lien upon the Property or any interest therein shall be subject to the rights of Lender to amend, modify, increase, vary, alter or supplement this Mortgage, the Note or any of the other Loan Documents and to extend the maturity date of the Obligations and to increase the amount of the Obligations and to waive or forebear the exercise of any of its rights and remedies hereunder or under any of the other Loan Documents and to release any collateral or security for the Obligations, in each and every case without obtaining the consent of the holder of such junior lien and without the lien or security interest of this Mortgage losing its priority over the rights of any such junior lien.

5.20 Lender May File Proofs of Claim. In the case of any receivership, insolvency, bankruptcy, reorganization, arrangement, adjustment, composition or other proceedings affecting Borrower or the principals or general partners or members in Borrower, or their respective creditors or property, Lender, to the extent permitted by law, shall be entitled to file such proofs of claim and other documents as may be necessary or advisable in order to have the claims of Lender allowed in such proceedings for the entire Obligations at the date of the institution of such proceedings and for any additional amount which may become due and payable by Borrower hereunder after such date.

5.21 Fixture Filing. To the extent permitted under applicable law, this Mortgage shall be effective from the date of its recording as a financing statement filed as a fixture filing with respect to all goods constituting part of the Property which are or are to become fixtures. This Mortgage shall also be effective as a financing statement covering minerals or the like (including oil and gas) and is to be filed

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for record in the Real Estate Records of the county where the Property is situated. The mailing address of Borrower and the address of Lender from which information concerning the security interests may be obtained are set forth above.

5.22 After-Acquired Property. All property acquired by Borrower after the date of this Mortgage which by the terms of this Mortgage shall be subject to the lien and the security interest created hereby, shall immediately upon the acquisition thereof by Borrower and without further mortgage, conveyance or assignment become subject to the lien and security interest created by this Mortgage. Nevertheless, Borrower shall execute, acknowledge, deliver and record or file, as appropriate, all and every such further mortgages, security agreements, financing statements, assignments and assurances, as Lender shall require for accomplishing the purposes of this Mortgage.

5.23 No Representation. By accepting delivery of any item required to be observed, performed or fulfilled or to be given to Lender pursuant to the Loan Documents, including, but not limited to, any officer’s certificates, balance sheet, statement of profit and loss or other financial statement, survey, appraisal or insurance policy, Lender shall not be deemed to have warranted, consented to, or affirmed the sufficiency, legality, effectiveness or legal effect of the same, or of any term, provision or condition thereof, and such acceptance of delivery thereof shall not be or constitute any warranty, consent or affirmation with respect thereto by Lender.

5.24 Counterparts. This Mortgage may be executed in any number of counterparts, each of which shall be effective only upon delivery and thereafter shall be deemed an original, and all of which shall be taken to be one and the same instrument, for the same effect as if all parties hereto had signed the same signature page. Any signature page of this Mortgage may be detached from any counterpart of this Mortgage without impairing the legal effect of any signatures thereon and may be attached to another counterpart of this Mortgage identical in form hereto but having attached to it one or more additional signature pages.

5.25 Exculpation. Notwithstanding anything to the contrary contained in this Mortgage, the liability of Borrower and its officers, directors, members and general partners for the Obligations and for the performance of the other agreements, covenants and obligations contained herein and in the other Loan Documents shall be limited as set forth in Section 1.05 of the Note.

5.26 Recording and Filing. Borrower will cause the Loan Documents and all amendments and supplements thereto and substitutions therefor to be recorded, filed, re-recorded and re-filed in such manner and in such places as Lender shall reasonably request, and will pay on demand all such recording, filing, re-recording and re-filing taxes, fees and other charges. Borrower shall reimburse Lender, or its servicing agent, for the costs incurred in obtaining a tax service company to verify the status of payment of Taxes and Other Charges on the Property.

5.27 Entire Agreement and Modification. This Mortgage and the other Loan Documents contain the entire agreements between the parties relating to the subject matter hereof and thereof and all prior agreements relative hereto and thereto which are not contained herein or therein are terminated. This Mortgage and the other Loan Documents may not be amended, revised, waived, discharged, released or terminated orally but only by a written instrument or instruments executed by the party against which enforcement of the amendment, revision, waiver, discharge, release or termination is asserted. Any alleged amendment, revision, waiver, discharge, release or termination which is not so documented shall not be effective as to any party.

5.28 Maximum Interest. The provisions of Section 2.03 of the Note are incorporated in this Mortgage by reference as if more fully set forth herein.

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5.29 Secondary Market Transaction.

(a) Cooperation. Borrower acknowledges that Lender may effectuate a Secondary Market Transaction. Borrower shall cooperate in good faith with Lender in effecting any such Secondary Market Transaction and shall cooperate in good faith to implement all requirements imposed by any Investor (as defined herein) or Rating Agency involved therein, including, without limitation, all structural or other changes to Borrower and/or the Obligations, and modifications to any Loan Documents; provided, however, that the Borrower shall not be required to modify any Loan Documents if such modification would (A) increase the interest rate payable under the Note, (B) shorten the period until the stated maturity of the Note, (C) modify the amortization of principal of the Note, or (D) modify any other material term of the Obligations. Borrower shall provide such information and documents relating to Borrower, any Indemnitor, the Property and any Tenants as Lender may reasonably request in connection with such Secondary Market Transaction. Borrower shall make available to Lender all information concerning its business and operations that Lender may reasonably request.

(b) Disclosure; Indemnification. Lender shall be permitted to share all information provided in connection with the Loan with the Investors, Rating Agencies, investment banking firms, accounting firms, law firms and other third-party advisory firms involved with the Loan Documents or the applicable Secondary Market Transaction. It is understood that the information provided to Lender in connection with the Loan may ultimately be incorporated into the offering documents for the Secondary Market Transaction and thus potential Investors may also see some or all of the information with respect to the Loan, the Property, Borrower and the holders of direct or indirect interests in Borrower. Borrower irrevocably waives any and all rights it may have under any applicable laws (including, without limitation, any right of privacy) to prohibit such disclosure. Lender and all of the aforesaid third-party advisors and professional firms shall be entitled to rely on the information supplied by, or on behalf of, Borrower. Borrower hereby indemnifies Lender as to any losses, claims, damages or liabilities that arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the information provided by or on behalf of Borrower, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated in such information, or necessary in order to make the statements in such information, or in light of the circumstances under which they were made, not misleading. Lender may publicize the existence of the Obligations in connection with its marketing for a Secondary Market Transaction or otherwise as part of its business development.

(c) Definitions: A “Secondary Market Transaction” shall be (1) any sale of the Mortgage, Note and other Loan Documents to one or more investors as a whole loan, (2) a participation of the Obligations to one or more investors, (3) a securitization of the Loan, (4) any other sale or transfer of the Obligations or any interest therein to one or more investors. “Rating Agency” shall mean any nationally-recognized statistical rating organization that has been designated by Lender to provide, or that provides, a rating on Borrower, the Loan or any securities evidencing an interest in, inter alia, a trust or other entity which is the holder of the Note. “Investor” shall mean any actual or potential purchaser, transferee, assignee, servicer, participant or investor in a Secondary Market Transaction.

5.30 SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL.

(a) BORROWER, TO THE FULL EXTENT PERMITTED BY LAW, HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY, WITH AND UPON THE ADVICE OF COMPETENT COUNSEL, (i) SUBMITS TO PERSONAL JURISDICTION IN THE STATE IN WHICH THE REAL ESTATE IS LOCATED OVER ANY SUIT, ACTION OR PROCEEDING BY ANY PERSON ARISING FROM OR RELATING TO THE NOTE, THIS MORTGAGE OR ANY OTHER OF THE LOAN DOCUMENTS, (ii) AGREES THAT ANY SUCH ACTION, SUIT OR PROCEEDING MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT

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JURISDICTION OVER THE COUNTY IN WHICH THE REAL ESTATE IS LOCATED, (iii) SUBMITS TO THE JURISDICTION OF SUCH COURTS, AND, (iv) TO THE FULLEST EXTENT PERMITTED BY LAW, AGREES THAT IT WILL NOT BRING ANY ACTION, SUIT OR PROCEEDING IN ANY OTHER FORUM (BUT NOTHING HEREIN SHALL AFFECT THE RIGHT OF LENDER TO BRING ANY ACTION, SUIT OR PROCEEDING IN ANY OTHER FORUM). BORROWER FURTHER CONSENTS AND AGREES TO SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER LEGAL PROCESS IN ANY SUCH SUIT, ACTION OR PROCEEDING BY REGISTERED OR CERTIFIED U.S. MAIL, POSTAGE PREPAID, TO THE BORROWER AT THE ADDRESS FOR NOTICES DESCRIBED IN SECTION 5.5 HEREOF, AND CONSENTS AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE IN EVERY RESPECT VALID AND EFFECTIVE SERVICE (BUT NOTHING HEREIN SHALL AFFECT THE VALIDITY OR EFFECTIVENESS OF PROCESS SERVED IN ANY OTHER MANNER PERMITTED BY LAW).

(b) LENDER AND BORROWER, TO THE FULL EXTENT PERMITTED BY LAW, HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY, WITH AND UPON THE ADVICE OF COMPETENT COUNSEL, WAIVE, RELINQUISH AND FOREVER FORGO THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO THE OBLIGATIONS OR ANY CONDUCT, ACT OR OMISSION OF LENDER OR BORROWER, OR ANY OF THEIR DIRECTORS, OFFICERS, PARTNERS, MEMBERS, EMPLOYEES, AGENTS OR ATTORNEYS, OR ANY OTHER PERSONS AFFILIATED WITH LENDER OR BORROWER, IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE.

5.31 State-Specific Provisions. The following provisions shall govern and control in the event of a conflict with any other provision of this Mortgage:

(a) Pursuant to 42 Pa. C.S.A. §8144, this Mortgage secures the unpaid balance of advances made, with respect to the Property, for the payment of taxes, assessments, maintenance charges, insurance premiums or costs incurred by Lender for the protection of the Property or the lien of this Mortgage, and expenses incurred by Lender by reason of an Event of Default, and the priority of the lien of such advances shall relate back to the date of recording of this Mortgage.

(b) Confession of Judgment. FOR THE PURPOSE OF OBTAINING POSSESSION OF THE PROPERTY UPON THE OCCURRENCE OF AN EVENT OF DEFAULT HEREUNDER, BORROWER HEREBY AUTHORIZES AND EMPOWERS ANY ATTORNEY OF ANY COURT OF RECORD IN THE COMMONWEALTH OF PENNSYLVANIA OR ELSEWHERE, AS ATTORNEY FOR BORROWER AND ALL PERSONS CLAIMING UNDER OR THROUGH BORROWER TO SIGN AN AGREEMENT FOR ENTERING IN ANY COMPETENT COURT AN ACTION IN EJECTMENT FOR POSSESSION OF THE PROPERTY AND TO APPEAR FOR AND CONFESS JUDGMENT AGAINST BORROWER AND AGAINST ALL PERSONS CLAIMING UNDER OR THROUGH BORROWER, IN FAVOR OF LENDER, FOR RECOVERY BY LENDER OF POSSESSION THEREOF, FOR WHICH THIS MORTGAGE, OR A COPY THEREOF VERIFIED BY AFFIDAVIT, SHALL BE A SUFFICIENT WARRANT; AND THEREUPON A WRIT OF POSSESSION MAY IMMEDIATELY ISSUE FOR POSSESSION OF THE PROPERTY, WITHOUT ANY PRIOR WRIT OR PROCEEDING WHATSOEVER AND WITHOUT ANY STAY OF EXECUTION. IF FOR ANY REASON AFTER SUCH ACTION HAS BEEN COMMENCED IT SHOULD BE DISCONTINUED, OR POSSESSION OF THE PROPERTY SHALL REMAIN IN OR BE RESTORED TO BORROWER, LENDER SHALL HAVE THE RIGHT FOR THE SAME EVENT OF DEFAULT OR ANY SUBSEQUENT EVENT OF DEFAULT TO BRING ONE OR MORE FURTHER ACTIONS AS ABOVE PROVIDED TO RECOVER POSSESSION OF THE PROPERTY. LENDER MAY BRING AN ACTION IN EJECTMENT AND CONFESS JUDGMENT THEREIN BEFORE OR

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AFTER THE INSTITUTION OF PROCEEDINGS TO FORECLOSE THIS MORTGAGE OR TO ENFORCE THE NOTE, OR AFTER ENTRY OF JUDGMENT THEREIN OR ON THE NOTE, OR AFTER A SHERIFF’S SALE OF THE PROPERTY IN WHICH LENDER IS THE SUCCESSFUL BIDDER; THE AUTHORIZATION TO PURSUE SUCH PROCEEDINGS FOR OBTAINING POSSESSION AND CONFESS JUDGMENT THEREIN IS AN ESSENTIAL PART OF THE REMEDIES FOR ENFORCEMENT OF THIS MORTGAGE AND THE NOTE, AND SHALL SURVIVE ANY EXECUTION SALE TO LENDER.

BORROWER CONFIRMS TO LENDER THAT (I) BORROWER IS A BUSINESS ENTITY AND THAT ITS PRINCIPALS ARE KNOWLEDGEABLE IN BUSINESS MATTERS; (II) THE TERMS OF THIS MORTGAGE, INCLUDING THE FOREGOING WARRANT OF ATTORNEY TO CONFESS JUDGMENT, HAVE BEEN NEGOTIATED AND AGREED UPON IN A COMMERCIAL CONTEXT; AND (III) IT HAS FULLY REVIEWED THE AFORESAID WARRANT OF ATTORNEY TO CONFESS JUDGMENT WITH ITS OWN COUNSEL AND IS KNOWINGLY AND VOLUNTARILY WAIVING CERTAIN RIGHTS IT WOULD OTHERWISE POSSESS, INCLUDING BUT NOT LIMITED TO, THE RIGHT TO ANY NOTICE OR A HEARING PRIOR TO THE ENTRY OF JUDGMENT BY LENDER PURSUANT TO THE AFORESAID WARRANT OF ATTORNEY.

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IN WITNESS WHEREOF, Borrower has executed this Mortgage as of the day and year first above written.

935 HQ ASSOCIATES, LLC,
a Delaware limited liability company
By:	GSI Commerce, Inc.,
a Delaware corporation,
its Managing Member

By:	/s/ Jordan Copland
Name:	Jordan Copland
Title:	Executive Vice President

The address of the within Lender is:

622 Third Avenue, 8th Floor

New York, New York 10017

/s/ Ingrid Hlawaty

On behalf of the Lender

COMMONWEALTH OF PENNSYLVANIA

COUNTY OF Philadelphia

On this, the 9^th day of June, 2004 before me, a Notary Public, personally appeared Jordan M. Copland, known to me (or satisfactorily proven) to be the Executive Vice President of GSI Commerce, Inc., a Delaware corporation, the sole member of 935 HQ Associates, LLC, a Delaware limited liability company and acknowledged that being duly authorized to do so, executed the foregoing instrument on behalf of such limited partnership as general partner of such limited partnership for the purposes therein contained.

IN WITNESS WHEREOF, I have hereunto set my official hand and seal.

/s/ Sheldon Bender	[SEAL]
Name: Sheldon Bender

My commission expires: May 2, 2006

EXHIBIT A

PROPERTY DESCRIPTION

ALL THAT CERTAIN unit in the property known, named and identified in the Declaration of Condominium of First Avenue Corporate Center, a Condominium (the “Declaration”), located in King of Prussia, Montgomery County, Commonwealth of Pennsylvania, which has heretofore been submitted to the provisions of the Pennsylvania Uniform Condominium Act, 68 P.S.A. §3101, et seq., by the recording in the Office of the Montgomery County Clerk of the Declaration, dated June , 2004, designated in such Declaration as Unit One as more fully described in such Declaration, together with a proportionate undivided interest in the Common Elements (as defined in such Declaration) of fifty percent (50%).

BEING a part of County Parcel No. 58-00-06853-00-1, to be separately assessed as a new tax parcel number upon recordation of the Declaration.

BEING part of the same premises which 935 First Avenue Associates a Pennsylvania limited partnership by Deed dated June 19, 2001 and recorded June 27, 2001 in Montgomery County in Deed Book 5365 page 311 granted and conveyed unto NSHE Keystone, LLC, a Delaware limited liability company in fee.

AND BEING part of the same premises which NSHE Keystone, LLC, a Delaware limited liability company by Quit Claim Deed dated December 20, 2001 and recorded May 22, 2002 in Montgomery County in Deed Book 5409 page 260 granted and conveyed unto Brandywine Operating Partnership, L.P., a Delaware limited partnership in fee.

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO RULE 13a-14(a) UNDER

THE SECURITIES EXCHANGE ACT OF 1934

I, Michael G. Rubin, Co-President and Chief Executive Officer of GSI Commerce, Inc., certify that:

1. I have reviewed this report on Form 10-Q of GSI Commerce, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) [Intentionally Omitted.]

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

August 9, 2004

By:	/s/ Michael G. Rubin
	Michael G. Rubin
	Co-President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO RULE 13a-14(a) UNDER

THE SECURITIES EXCHANGE ACT OF 1934

I, Jordan M. Copland, Chief Financial Officer of GSI Commerce, Inc., certify that:

1. I have reviewed this report on Form 10-Q of GSI Commerce, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) [Intentionally Omitted.]

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

August 9, 2004

By:	/s/ Jordan M. Copland
	Jordan M. Copland
	Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code), each of the undersigned officers of GSI Commerce, Inc. (the “Company”), does hereby certify with respect to the Quarterly Report on Form 10-Q for the period ended July 3, 2004 (the “Report”) that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

By:	/s/ Michael G. Rubin
Michael G. Rubin
Co-President and Chief Executive Officer

August 9, 2004

By:	/s/ Jordan M. Copland
Jordan M. Copland
Chief Financial Officer

August 9, 2004

The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code) and is not being filed as part of the Report or as a separate disclosure document.