10-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 2)

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 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 no.)

1075 FIRST AVENUE, KING OF PRUSSIA, PA 19406, (610) 265-3229

(Address of principal executive offices, including zip code, telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share

(Title of Class)

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant as of the close of business on July 3, 2003, was approximately $85,457,281.⁽¹⁾ There were 41,044,160 shares of the registrant’s Common Stock outstanding as of the close of business on August 19, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

(Specific sections incorporated are identified under applicable items herein)

None.

⁽¹⁾ This amount equals the number of outstanding shares of the registrant’s Common Stock reduced by the number of shares that may be deemed beneficially owned by the registrant’s officers, directors and stockholders owning in excess of 10% of the registrant’s Common Stock, multiplied by the last reported sale price for the registrant’s Common Stock on July 3, 2003. This information is provided solely for record keeping purposes of the Securities and Exchange Commission and shall not be construed as an admission that any officer, director or 10% stockholder of the registrant is an affiliate of the registrant or is the beneficial owner of any such shares. Any such inference is hereby disclaimed.

GSI COMMERCE, INC.

ANNUAL REPORT ON FORM 10-K/A

FOR THE FISCAL YEAR ENDED JANUARY 3, 2004

TABLE OF CONTENTS

		Page
	PART II
ITEM 7:	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	1
ITEM 8:	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	13
	PART IV
ITEM 15:	EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K	14
SIGNATURES		18

Explanatory Note

We are amending our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2004, as amended on May 3, 2004, solely to restate our consolidated statement of cash flows for the fiscal year ended January 3, 2004 and to make a conforming change to Management’s Discussion and Analysis. We reclassified $900,000 representing principal payments on a note receivable from cash flows from operating activities to cash flows from investing activities. We also reclassified amortization of a discount on a note receivable of $180,000 from changes in notes receivable to amortization of discount on note receivable in our consolidated statement of cash flows for the fiscal year ended January 3, 2004. These changes had no effect on the net decrease in cash and cash equivalents for the fiscal year ended January 3, 2004. We also updated Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources, to reflect these changes. For further information, see Liquidity and Capital Resources on page 12 and Note 22 of the Consolidated Financial Statements on page F-29.

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.

PART II

ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

All statements made in this Annual Report on Form 10-K/A Amendment No. 2, 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, our ability to develop and maintain relationships with strategic partners and suppliers, 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 in Item 1 of this Annual Report on Form 10-K originally filed on March 18, 2004 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, 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, bulk 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 fiscal 2002 to fiscal 2003 was due to the addition of new partners in fiscal 2003, increases in sales from partners’ e-commerce businesses that we operated for the entirety of both periods and increases in sales from partners’ e-commerce businesses that were operated for part of fiscal 2002 and all of fiscal 2003, offset, in part, by a decrease in revenue from Ashford.com’s business which we no longer operate. We expect that the new partners added during fiscal 2003 will have a greater impact on net revenues in fiscal 2004 than 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.

• We experienced significant improvement in the area of operating expenses in fiscal 2003, due to our continued expense control efforts and the cessation of the operations of Ashford.com. For fiscal 2003, operating expenses increased $7.6 million from $92.8 million in fiscal 2002 to $100.4 million in fiscal 2003, but decreased by over 1,200 basis points as a percentage of net revenues from 53.8% in fiscal 2002 to 41.5% in fiscal 2003. Operating expenses for fiscal 2002 included $4.6 million in charges related to the restructuring costs and net loss on the sale of assets of the Ashford.com business.

• We expect to achieve profitability in fiscal 2004. For fiscal 2003, we reported a net loss of $12.1 million or $0.30 per share, based on 39.6 million weighted average shares outstanding. This compares to a net loss of $33.8 million or $0.88 per share for fiscal 2002, based on 38.6 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.

• 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 for the acquisition of new partners in the future.

1

Results of Operations

Comparison of Fiscal 2002 and 2003

The following table sets forth the dollar amount and percentage of net revenues for certain line items of our statements of operations for fiscal 2002 and fiscal 2003 and the dollar and percentage change in these line items from fiscal 2002 to fiscal 2003.

	Fiscal 2002					Fiscal 2003					Fiscal 2003 vs Fiscal 2002
	$			%		$			%		$ Change			% Change
	(dollars in millions)
Net revenues from product sales	$	154.8		89.7	%	$	216.5		89.5	%	$	61.7		39.9	%
Service fee revenues		17.8		10.3	%		25.4		10.5	%		7.6		42.7	%
Net revenues		172.6		100	%		241.9		100	%		69.3		40.2	%
Cost of revenues from product sales		114.3		66.2	%		154.7		64.0	%		40.4		35.3	%
Gross profit		58.4		33.8	%		87.2		36.0	%		28.8		49.3	%
Sales and marketing expenses		49.8		28.9	%		58.2		24.1	%		8.4		16.9	%
Product development expenses		12.9		7.5	%		15.4		6.4	%		2.5		19.4	%
General and administrative expenses		15.0		8.7	%		13.4		5.5	%		(1.6	)	-10.7	%
Restructuring costs related to Ashford.com		1.7		1.0	%		0.1		0.0	%		(1.6	)	-94.1	%
Net loss on sale of Ashford.com assets		2.6		1.5	%		—		0.0	%		(2.6	)	-100.0	%
Stock-based compensation expense		0.4		0.2	%		1.9		0.8	%		1.5		375.0	%
Depreciation and amortization expenses		10.5		6.1	%		11.4		4.7	%		0.9		8.6	%
Interest expense		0.7		0.4	%		—		0.0	%		(0.7	)	-100.0	%
Interest income		(1.4	)	-0.8	%		(1.2	)	-0.5	%		(0.2	)	-14.3	%
Net loss		(33.8	)	-19.6	%		(12.1	)	-5.0	%		21.7		64.2	%

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, bulk sales, business-to-business and group sales and related outbound shipping charges, net of allowances for returns and discounts. Net revenues from product sales include the revenues of Ashford.com, Inc. from March 14, 2002, the date our acquisition of Ashford.com was completed.

The following table provides information about our net revenues from product sales by category for fiscal 2002 and fiscal 2003:

					Fiscal 2003 vs Fiscal 2002
	Fiscal 2002		Fiscal 2003		$ Change			% Change
	(dollars in thousands)
Net revenues from product sales:
Category:
Sporting goods	$	96,669	$	128,360	$	31,691		33	%
Ashford.com		21,617		1,034		(20,583	)	-95	%
Other		36,533		87,116		50,583		138	%
Total net revenues from product sales	$	154,819	$	216,510	$	61,691		40	%

        Net revenues from product sales increased $61.7 million, of which $31.7 million was due to an increase in sales in the sporting goods category and $50.6 million was due to an increase in sales in our other product categories, which include consumer electronics, general merchandise and licensed entertainment products, offset, in part, by a $20.6 million decrease in sales from our Ashford.com operations which we ceased during fiscal 2002. 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 both periods and increases in sales from partners’ e-commerce businesses that were operated for part of fiscal 2002 and all of fiscal 2003. Net revenues from product sales for fiscal 2002 and fiscal 2003 included $15.3 million and $23.6 million in shipping revenue, respectively.

2

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 $7.6 million primarily due to a $9.1 increase in fixed and variable service fees from partners for which we provided services. This increase was due primarily to the launch of new fee-based partners in the second half of fiscal 2003, offset, in part, by a $1.5 million decrease related to fixed service fees earned from services completed in fiscal 2002.

Net Revenues

We expect net revenues, which include net revenues from product sales and service fee revenues, to increase between $48.0 million and $63.0 million compared to fiscal 2003. We expect that service fee revenues will grow at a significantly higher rate in fiscal 2004 than in fiscal 2003 because we will operate for the entirety of fiscal 2004 a number of partners’ e-commerce businesses that were launched in fiscal 2003. We expect that net revenues from product sales will grow more slowly in fiscal 2004 than in fiscal 2003.

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 73.8% and 71.5% for fiscal 2002 and fiscal 2003, respectively. This decrease was due primarily to lower product costs in the sporting goods category in fiscal 2003, a $1.2 million charge in fiscal 2002 for inventory write downs as a result of the Ashford.com restructuring and the closure of our Kentucky retail store and lower margins associated with a $2.5 million bulk sale which occurred in fiscal 2002, offset, in part, by sales in the consumer electronics category, which have lower margins and which increased as a percentage of total product sales in fiscal 2003 compared to fiscal 2002. We anticipate that cost of revenues from product sales for fiscal 2004 as a percentage of net revenues from product sales will be approximately the same as fiscal 2003.

Gross Profit

The increase in gross profit dollars for fiscal 2003 compared to fiscal 2002 was due primarily to a $61.7 million increase in net revenues from product sales in fiscal 2003. The increase in gross profit percentage for fiscal 2003 compared to fiscal 2002 was due primarily to higher margins on sales in the sporting goods category in fiscal 2003, the increase in service fee revenues in fiscal 2003, inventory write downs in fiscal 2002 related to the Ashford.com restructuring and the closure of our Kentucky retail store and lower margins associated with a bulk sale in fiscal 2002, offset, in part, by increased sales in the consumer electronics category in fiscal 2003. We believe that gross profit as a percentage of net revenues will increase by a few percentage points in fiscal 2004 because service fee revenues, which have 100% gross profit margin, will represent a larger percentage of total net revenues.

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 $8.4 million primarily due to a $4.8 million increase in partner revenue share charges, a $3.1 million increase in personnel and related costs attributable to our fulfillment operations, which was primarily due to high processing volume in our fulfillment center, and a $2.0 million increase in credit card fees, offset, in part, by a $1.4 million decrease in

3

subsidized shipping and handling costs. The increases in partner revenue share charges and credit card fees were due principally to increased sales volume in fiscal 2003. We expect that sales and marketing expenses for fiscal 2004 will show a slight improvement as a percentage of net revenues.

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 $2.5 million primarily due to a $2.7 million increase in personnel and related costs, a $383,000 increase in web hosting costs due to the increased number of e-commerce businesses that we operated and maintained and a $273,000 increase in costs related to our use of temporary technical professionals, offset, in part, by a $342,000 decrease in communication and bandwidth costs, a $175,000 decrease related to the closing of our West Coast technology services office in the second quarter of fiscal 2002 and a $175,000 decrease in equipment and software maintenance costs. We expect that product development expenses for fiscal 2004 will increase between $6.0 million and $8.0 million compared to fiscal 2003, due principally to increases in personnel and related costs as we continue to invest in technology personnel, which we believe is critical to our ability to effectively launch new partners, deliver enhanced functionality for our partners’ e-commerce businesses and continue to improve the capacity, stability and security of the technology solution we provide to our partners.

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.

General and administrative expenses decreased $1.6 million primarily due to a $2.4 million decrease in bad debt expense and chargebacks related to lower direct response television sales for fiscal 2003 and the higher bad debt rate on such sales, a lower bad debt rate for sales through our partners’ e-commerce businesses and a $366,000 decrease in non-income taxes related primarily to Ashford.com, offset, in part, by a $1.3 million increase in personnel and related costs. The lower bad debt rate for sales through our partners’ e-commerce businesses was the result of order processing tools and credit card fraud verification initiatives that we implemented during fiscal 2003. We expect that general and administrative expenses for fiscal 2004 will remain relatively consistent as a percentage of net revenues.

Restructuring Costs Related to Ashford.com

Restructuring costs related to Ashford.com consist of charges attributable to the cessation of the operations of Ashford.com, including termination benefits, contractual obligations, asset impairments and other restructuring costs.

In conjunction with the sale of certain assets of Ashford.com, we also announced and implemented our plan to cease the operations of Ashford.com, which accounted for approximately $21.6 million and $1.0 million of our net revenues in fiscal 2002 and fiscal 2003, 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 the end of fiscal 2003, 71 employees had been terminated and actual termination benefits paid were $417,000.

Costs related to ongoing operations were not included in restructuring costs related to Ashford.com. In accordance with Emerging Issues Task Force, or EITF Issue No. 96-9, “Classification of Inventory Markdowns and Other Costs Associated with a Restructuring,” all inventory adjustments that resulted from the cessation of operations of Ashford.com were included in cost of revenues from product sales and were recorded in December 2002. As of the end of fiscal 2002, inventory write downs resulting from the restructuring totaled $1.2 million. No additional inventory write downs from the restructuring were recorded during fiscal 2003.

4

For fiscal 2002 and fiscal 2003, restructuring costs related to Ashford.com were as follows:

	Fiscal 2002		Fiscal 2003
	(in thousands)
Termination benefits	$	417	$	—
Contractual obligations		402		74
Asset impairments		849		—
Other restructuring costs		12		—
	$	1,680	$	74

Termination benefits were comprised of severance-related payments for all employees terminated in connection with the Ashford.com restructuring. The contractual obligations related to agreements entered into by Ashford.com prior to the sale of assets to Odimo Acquisition Corp. Asset impairments related to the closure of Ashford.com’s fulfillment center and offices. For assets held for disposal as of the end of fiscal 2002, we estimated the fair value based on expected salvage value less costs to sell, and the carrying amount of these assets held for disposal was not significant. Other restructuring costs included expenses which were directly attributable to the cessation of operations of Ashford.com.

Net Loss on Sale of Ashford.com Assets

We had a net loss on the sale of assets related to Ashford.com of $2.6 million for fiscal 2002. We had acquired these assets in March 2002. This net loss was due to a loss of $2.9 million on the sale in December 2002 of certain assets of Ashford.com to Odimo Acquisition Corp., offset, in part, by a gain of $379,000 on the sale in August 2002 of certain assets of a division of Ashford Corporate Gifts, Inc., which is a subsidiary of Ashford.com. We received $1.2 million in cash proceeds from the sale of this division.

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 increased $1.5 million primarily due to an increase of $1.4 million in charges related to options subject to variable accounting and an increase of $514,000 related to the amortization of deferred partner revenue share charges, offset, in part, by a decrease of $279,000 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 $53,000 in charges related to the net exercise of warrants during fiscal 2002. As of the end of fiscal 2003, we had an aggregate of $1.2 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 $857,000 and $1.4 million for fiscal 2002 and fiscal 2003, respectively. We are unable to determine what stock-based compensation will be in fiscal 2004 as stock-based compensation expense is directly affected by fluctuations in the price of our common stock.

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 increased $877,000 primarily due to additional assets to build, manage and operate our business, offset, in part, by an impairment charge of $645,000 in fiscal 2002. The impairment charge related to the disposal of furniture and computer hardware and software during the fourth quarter of fiscal 2002. We determined that these long-lived assets were no longer being used in our continuing operations and that, therefore, the carrying amounts of these assets were not recoverable. We expect that depreciation and amortization expenses for fiscal 2004 will decline approximately 50 basis points as a percentage of net revenues.

5

Other (Income) Expense

Interest income consists primarily of interest earned on cash, cash equivalents, short-term investments and marketable securities, and interest expense consists primarily of interest expense paid in connection with a mortgage note that we previously had on our corporate headquarters and interest expense on capital leases.

The decrease in interest income of $200,000 was due to lower interest rates and lower average balances of cash, cash equivalents, short-term investments and marketable securities during fiscal 2003 compared to fiscal 2002. We expect that interest income for fiscal 2004 will decline to between 0.1% and 0.2% of net revenues.

The decrease in interest expense of $749,000 was due primarily to the early retirement of a mortgage note on our corporate headquarters in November 2002. We had no debt during fiscal 2003. On March 16, 2004, we entered into an agreement to purchase a new corporate headquarters in King of Prussia, Pennsylvania for $17.0 million. We will be required to invest in the building in order to occupy it. If we finance the purchase of a new building and the improvements in fiscal 2004, we could incur up to $500,000 of interest expense in fiscal 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 the end of fiscal 2003, 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.

Comparison of Fiscal 2001 and 2002

The following table sets forth the dollar amount and percentage of net revenues for certain line items of our statements of operations for fiscal 2001 and fiscal 2002 and the dollar and percentage change in these line items from fiscal 2001 to fiscal 2002.

	Fiscal 2001					Fiscal 2002					Fiscal 2002 vs Fiscal 2001
	$			%		$			%		$ Change			% Change
	(dollars in millions)
Net revenues from product sales	$	98.3		95.8	%	$	154.8		89.7	%	$	56.5		57.5	%
Service fee revenues		4.3		4.2	%		17.8		10.3	%		13.5		314.0	%
Net revenues		102.6		100	%		172.6		100	%		70.0		68.2	%
Cost of revenues from product sales		67.6		65.9	%		114.3		66.2	%		46.7		69.1	%
Gross profit		35.0		34.1	%		58.4		33.8	%		23.4		66.9	%
Sales and marketing expenses		32.4		31.6	%		49.8		28.9	%		17.4		53.7	%
Product development expenses		8.6		8.4	%		12.9		7.5	%		4.3		50.0	%
General and administrative expenses		10.6		10.3	%		15.0		8.7	%		4.4		41.5	%
Restructuring costs related to Ashford.com		—		0.0	%		1.7		1.0	%		1.7		n/a
Net loss on sale of Ashford.com assets		—		0.0	%		2.6		1.5	%		2.6		n/a
Stock-based compensation expense		10.3		10.0	%		0.4		0.2	%		(9.9	)	-96.1	%
Depreciation and amortization expenses		6.7		6.5	%		10.5		6.1	%		3.8		56.7	%
Interest expense		0.6		0.6	%		0.7		0.4	%		0.1		16.7	%
Interest income		(3.0	)	-2.9	%		(1.4	)	-0.8	%		(1.6	)	-53.3	%
Other income		(0.5	)	-0.5	%		—		0.0	%		(0.5	)	-100.0	%
Net loss		(30.6	)	-29.8	%		(33.8	)	-19.6	%		(3.2	)	-10.5	%

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Net Revenues from Product Sales

The following table provides information about our net revenues from product sales by category for fiscal 2001 and fiscal 2002:

					Fiscal 2002 vs Fiscal 2001
	Fiscal 2001		Fiscal 2002		$ Change		% Change
	(dollars in thousands)
Net revenues from product sales:
Category:
Sporting goods	$	90,670	$	96,669	$	5,999	7	%
Ashford.com		—		21,617		21,617	n/a
Other		7,655		36,533		28,878	377	%
Total net revenues from product sales	$	98,325	$	154,819	$	56,494	57	%

Net revenues from product sales increased $56.5 million, of which $6.0 million was due to an increase in sales in the sporting goods category, $21.6 million was due to an increase in sales from our Ashford.com operations which we ceased during fiscal 2002 and $28.9 million was due to an increase 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 2002, increases in sales from partners’ e-commerce businesses that were operated for the entirety of both periods and increases in sales from partners’ e-commerce businesses that were operated for part of fiscal 2001 and all of fiscal 2002. Net revenues from product sales for fiscal 2001 and fiscal 2002 included $10.5 million and $15.3 million in shipping revenue, respectively.

Service Fee Revenues

Service fee revenues increased $13.5 million due to a $6.3 million increase in service fees from partners for which we provided services in fiscal 2001 and fiscal 2002 and a $7.2 million increase in service fees from new partners added in the second quarter of fiscal 2002.

Cost of Revenues from Product Sales

As a percentage of net revenues from product sales, cost of revenues from product sales was 68.7% and 73.8% for fiscal 2001 and fiscal 2002, respectively. This increase was due primarily to a $1.2 million charge for inventory write downs as a result of the Ashford.com restructuring and the closure of our Kentucky retail store, sales in new product categories, which have lower margins and represented a greater percentage of product sales, and lower margins associated with a $2.5 million bulk sale in fiscal 2002.

Gross Profit

The increase in gross profit dollars for fiscal 2002 compared to fiscal 2001 was due to an increase of $56.5 million in net revenues from product sales and an increase of $13.5 million in service fee revenues for fiscal 2002. The decrease in gross profit percentage for fiscal 2002 compared to fiscal 2001 was due primarily to inventory write downs in fiscal 2002 related to the Ashford.com restructuring and the closure of our Kentucky retail store, increased sales in new lower margin product categories and lower margins associated with a bulk sale in fiscal 2002, offset, in part, by the increase in service fee revenues for fiscal 2002.

Sales and Marketing Expenses

Sales and marketing expenses increased $17.4 million primarily due to a $10.2 million increase in personnel and related costs, of which $7.4 million was attributable to our merchandising, marketing and customer service departments and $2.2 million was attributable to our fulfillment operations, a $2.2 million increase in credit card fees, a $2.0 million increase in partner revenue share charges, a $1.9 million increase in subsidized shipping and handling costs, a $939,000 increase in occupancy costs and an $888,000 increase in professional fees, of which $700,000 was attributable to the write-off of unused pre-paid information technology consulting services, offset, in part, by a $2.3 million decrease in advertising costs relating to direct marketing campaigns.

Product Development Expenses

Product development expenses increased $4.3 million primarily due to a $2.3 million increase in equipment and software maintenance costs related to the increased number of e-commerce businesses that we operated and maintained, a $1.1 million increase in personnel and related costs due to increases in technical staffing, a $514,000 increase in communication costs and a $290,000 increase in occupancy costs.

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General and Administrative Expenses

General and administrative expenses increased $4.4 million primarily due to a $1.7 million increase in personnel and related costs, a $940,000 increase in bad debt expense and chargeback activity primarily related to increased sales through our partners’ e-commerce businesses, offset, in part, by lower direct response television sales in fiscal 2002 and the higher bad debt rate on such sales, an $857,000 increase in insurance related expenses and other administrative costs and a $614,000 increase in legal, audit and other professional fees.

Restructuring Costs Related to Ashford.com

In conjunction with the sale of certain assets of Ashford.com, we also announced and implemented our plan to cease the operations of Ashford.com, which accounted for approximately $21.6 million of our net revenues in fiscal 2002. 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 the end of fiscal 2002, two employees had been terminated and actual termination benefits paid were $0.

Costs related to ongoing operations were not included in restructuring costs related to Ashford.com. In accordance with EITF Issue No. 96-9, all inventory adjustments that resulted from the cessation of operations of Ashford.com were included in cost of revenues from product sales. As of the end of fiscal 2002, inventory write downs resulting from the restructuring totaled $1.2 million.

For fiscal 2002, restructuring costs related to Ashford.com were as follows:

	Fiscal 2002
	(in thousands)
Termination benefits	$	417
Contractual obligations		402
Asset impairments		849
Other restructuring costs		12
	$	1,680

Termination benefits were comprised of severance-related payments for all employees terminated in connection with the Ashford.com restructuring. The contractual obligations related to agreements entered into by Ashford.com prior to the sale of assets to Odimo Acquisition Corp. Asset impairments related to the closure of Ashford.com’s fulfillment center and offices. For assets held for disposal as of the end of fiscal 2002, we estimated the fair value based on expected salvage value less costs to sell, and the carrying amount of these assets held for disposal was not significant. Other restructuring costs included expenses which were directly attributable to the cessation of operations of Ashford.com.

Net Loss on Sale of Ashford.com Assets

We had a net loss on the sale of assets related to Ashford.com of $2.6 million for fiscal 2002. We had acquired these assets in March 2002. This net loss was due to a loss of $2.9 million on the sale in December 2002 of certain assets of Ashford.com to Odimo, offset, in part, by a gain of $379,000 on the sale in August 2002 of certain assets of a division of Ashford Corporate Gifts, Inc., which is a subsidiary of Ashford.com. We received $1.2 million in cash proceeds from the sale of this division.

Stock-Based Compensation Expense

Stock-based compensation expense decreased $9.9 million primarily due to a decrease of $6.8 million in charges related to the issuance of warrants during fiscal 2001, a decrease of $2.6 million in charges related to options subject to variable accounting and a decrease of $863,000 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 $521,000 related to the amortization of deferred partner revenue share charges. As of the end of fiscal 2002, we had an aggregate of $1.4 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 $336,000 and $857,000 for fiscal 2001 and fiscal 2002, respectively.

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Depreciation and Amortization Expenses

Depreciation and amortization expenses increased $3.8 million due primarily to a $2.8 million increase in depreciation expense related to the purchase of our Kentucky fulfillment center and the assets purchased to build, manage and operate our business, a $1.1 million increase in depreciation and amortization related to assets acquired as part of the Ashford.com acquisition and an impairment charge of $645,000, offset, in part, by a $710,000 decrease in amortization of goodwill related to our acquisition of Fogdog, Inc. The impairment charge related to the disposal of furniture and computer hardware and software during the fourth quarter of fiscal 2002. We determined that these long-lived assets were no longer being used in our continuing operations and that, therefore, the carrying amounts of these assets were not recoverable. The decrease in amortization was due to the discontinuance of amortization of goodwill in accordance with Statement of Financial Accounting Standards, or SFAS, No. 142, “Goodwill and Other Intangible Assets.”

Other (Income) Expense

The decrease in interest income of $1.6 million was due to lower interest rates and lower average balances of cash, cash equivalents, short-term investments and marketable securities during fiscal 2002 compared to fiscal 2001. The other income in 2001 related primarily to fees earned pursuant to the terms of a lease termination agreement.

Income Taxes

Since the sales of our discontinued operations, 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 the end of fiscal 2002, we had available net operating loss carryforwards of approximately $420.0 million which expire in the years 2003 through 2022. 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. Any otherwise recognizable deferred tax assets have been offset by a valuation allowance for the net operating loss carryforwards.

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 of $1.8 million, $2.7 million and $2.1 million on sales to this related party for fiscal 2001, fiscal 2002 and fiscal 2003, respectively. The terms of these sales are comparable to those with our other business-to-business partners. Included in accounts receivable as of the end of fiscal 2003 was $436,000 related to these sales. In the third quarter of fiscal 2003, we took a charge of $325,000 for the settlement of disputed amounts billed to QVC for product and shipping costs.

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 $484,000 in fiscal 2003 of which $414,000 related directly to products shipped and was charged to cost of revenues from product sales and $70,000 related to professional services provided and was charged to sales and marketing expense.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.

We have identified the following as critical accounting polices, which are defined as those that are reflective of significant judgments and uncertainties, are the most pervasive and important to the presentation of our financial condition and results of operations and could potentially result in materially different results under different assumptions and conditions.

Revenue Recognition

We recognize revenues from product sales or services provided when the following revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured.

We recognize revenue from product sales, net of estimated returns based on historical experience and current trends, upon shipment of products to customers. We ship the majority of products from our fulfillment center in Louisville, KY. In fiscal 2002, we also shipped products from Ashford.com’s jewelry and luxury goods fulfillment center that we formerly maintained in Houston, TX.

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We also rely upon certain vendors to ship products directly to customers on our behalf. We act as principal in these transactions, as orders are initiated directly through the e-commerce businesses that we operate, we take title to the goods at the shipping point and have the economic risk related to collection, customer service and returns.

We consider the criteria presented in EITF, No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” in determining the appropriate revenue recognition treatment. Generally, when we are the primary obligor in a transaction, have general inventory risk, have established the selling price, have discretion in supplier selection, have physical loss inventory risk after order placement or during shipping and have credit risk, or have several but not all of these indicators, we record revenue gross as a principal.

We pay a percentage of the revenues generated from the sale of products through the e-commerce businesses that we operate to our respective partners in exchange for the rights to use their brand names and the promotions and advertising that our partners agree to provide. We refer to these royalty payments as partner revenue share charges. We have considered the revenue reduction provisions addressed in EITF No. 00-25, “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products,” which was codified in EITF No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products,” and believe that the payment of partner revenue share charges, or the issuance of warrants or stock in lieu of cash partner revenue share charges, to our partners should not result in any reduction of revenues. EITF No. 00-25 addresses consideration paid to parties along a distribution chain. We purchase merchandise from our vendors, at our discretion, and we are responsible for paying those vendors. The amounts purchased and the prices paid to our vendors are not impacted by the revenue share provisions of our agreements with our partners. Accordingly, our partners and our vendors are not linked in the distribution chain and we believe that the provisions of EITF No. 00-25 do not apply.

We recognize revenue from services provided as the services are rendered. If we receive payments for services in advance, these amounts are deferred and then recognized over the service period.

Deferred revenue consists primarily of fees paid to us in advance as of the respective balance sheet date under an agreement to manage certain aspects of a partner’s overall e-commerce business, including fulfillment, technology and customer service. Deferred revenue also consists of amounts received from the sale of gift certificates redeemable through our partners’ e-commerce businesses.

Accounting for Inventory

Inventory, primarily consisting of sporting goods, athletic equipment, footwear, apparel and consumer electronics, is valued at the lower of cost or market. Inherent in this valuation are significant management judgments and estimates, including among others, assessments concerning obsolescence and shrinkage rates. Based upon these judgments and estimates, which are applied consistently from period to period, we record valuation allowances to adjust the carrying amount of our inventory. We record a charge for obsolescence based upon, among other factors, the amount of inventory which has an aging of greater than one year and the anticipated mark-downs required to sell the inventory in the normal course of business. We record a charge for inventory shrinkage for damages and other losses based on rates experienced in our fulfillment center.

Accounting for Long-Lived Assets

The ability to realize long-lived assets is evaluated periodically as events or circumstances indicate a possible inability to recover their carrying amount. Such evaluation is based on various analyses, including undiscounted cash flow and profitability projections that incorporate, as applicable, the impact on the existing business. The analyses necessarily involve significant management judgment. Any impairment loss, if indicated, is measured as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.

Accounting for Stock-Based Compensation

We account for stock options granted to employees under our incentive and non-incentive stock option plans using the intrinsic method prescribed in Accounting Principles Board 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 our stock at the date of the grant over the amount an employee must pay to acquire the stock.

We account for stock options and warrants issued to non-employees using the fair value method prescribed in SFAS No. 123, “Accounting for Stock-Based Compensation,” and in accordance with the provisions of 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 our common stock and the risk-free interest rate over the expected life of the option or warrant.

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We also record stock-based compensation as deferred partner revenue share charges are amortized. These deferred partner revenue share charges, which are included in other assets, have resulted from the exercise of a right to receive 1,600,000 shares of our common stock in lieu of future cash revenue share payments, and were $13.2 million and $11.8 million as of the end of fiscal 2002 and fiscal 2003, respectively. The deferred partner revenue share charges are amortized as the revenue share expense is incurred 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.

Accounting for Restructuring Costs

Restructuring costs, which include termination benefits, contractual obligations, asset impairments and other restructuring costs are recorded at estimated fair value. Key assumptions in calculating the restructuring costs included the timing of employee terminations and estimates of the expected salvage value of assets held for disposal. We review these reserves periodically and adjust them as necessary.

Liquidity and Capital Resources

Our principal source of liquidity is our cash, cash equivalents, short-term investments and marketable securities. Our cash, cash equivalents, short-term investments and marketable securities balances were $74.8 million and $69.5 million as of the end of fiscal 2002 and fiscal 2003, respectively.

In connection with our decision to focus on our e-commerce business in 1999, we raised approximately $80.0 million in gross proceeds through an equity financing with funds associated with SOFTBANK Holdings Inc., or SOFTBANK, in July 1999. We used part of the proceeds from this financing to repay the balance on our then outstanding lines of credit, reduce trade payables and provide operating capital related to our historical businesses. We also used part of the proceeds to acquire property and equipment and fund the working capital needs of our e-commerce business.

On April 20, 2000, we received $5.3 million in gross proceeds through a mortgage financing of our corporate headquarters and in November 2002, we pre-paid the $5.2 million outstanding principal balance remaining on the mortgage note. On April 27, 2000, we raised $25.0 million in gross proceeds through an equity financing with SOFTBANK and Rustic Canyon Ventures, LP, or Rustic Canyon. On September 13, 2000, we raised $14.9 million in gross proceeds, and on October 5, 2000, we raised $26.4 million in gross proceeds, through an equity financing with ITH. On July 20, 2001, we agreed to sell to ITH 3,000,000 shares of our common stock at $10.00 per share for an aggregate purchase price of $30.0 million. In addition, we issued to ITH a five-year warrant to purchase an aggregate of 300,000 shares of our common stock at an exercise price of $6.00 per share in consideration for certain corporate development services performed by ITH on behalf of us. We valued the warrant at approximately $2.1 million and charged stock-based compensation expense. The investment was completed on August 23, 2001. We have used the proceeds of these financings for additional working capital needs and general business purposes.

On September 13, 2001, we entered into a definitive merger agreement to acquire all of the outstanding shares of Ashford.com, Inc. The merger was consummated March 14, 2002. Under the terms of the agreement, Ashford.com stockholders received $0.125 and 0.0076 of a share of our common stock for each share of Ashford.com common stock for an aggregate of approximately $7.1 million in cash and 430,000 shares of common stock.

On December 6, 2002, Ashford.com and Odimo Acquisition Corp., a wholly owned subsidiary of Odimo Incorporated, entered into an Asset Purchase Agreement and related agreement for the sale of certain of the assets of Ashford.com to Odimo. The sale was completed on December 27, 2002. A second closing involving additional inventory was completed in March 2003. In conjunction with the sale of certain assets of Ashford.com, we also announced and implemented a plan to cease the operations of Ashford.com.

Under the terms of the sale, we sold certain inventory, trademarks, product images and descriptions and other intangibles to Odimo in exchange for (i) $1.1 million in cash, (ii) a $4.5 million, five year subordinated secured promissory note bearing interest at 7%, (iii) a right to receive 10% of Odimo’s consolidated earnings, before taking into consideration interest, taxes, depreciation, amortization and other non-cash expenses, for each of the five calendar years beginning January 1, 2003, up to a maximum aggregate payment of $2.0 million, (iv) 15,596,183 shares of Odimo’s Series D preferred stock and (v) a warrant to purchase an aggregate of 2,676,303 shares of Odimo’s Series D preferred stock at an exercise price of $.01 per share.

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.

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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. In addition, during fiscal 2000, we invested in the technology, equipment and personnel required to make our Kentucky fulfillment center fully operational, and in April 2002, we purchased our previously leased Kentucky fulfillment center for $8.8 million in cash. During fiscal 2002, we spent approximately $12.2 million on upgrades to our technology infrastructure, including upgrades to our server, storage and telecommunications hardware, as well as on technical enhancements to our existing software and on new software solutions, including for customer service, marketing, financial management, merchandise planning, fraud detection and enhanced search functionality. In addition, during fiscal 2002, we spent $1.7 million on the installation of a second, fully redundant data center to increase both our capacity as well as our reliability, $4.0 million on the expansion of our Kentucky fulfillment center to increase capacity and $1.2 million to acquire certain assets of and enhance a 500-seat customer contact center in Melbourne, Florida to expand our customer service capabilities. During fiscal 2003, we spent approximately $5.8 million on continued upgrades to our technology infrastructure and $1.3 million on warehouse equipment for our Kentucky fulfillment center. During fiscal 2004, we plan to relocate our corporate headquarters to a new building. On March 16, 2004, we entered into an agreement to purchase a new corporate headquarters in King of Prussia, Pennsylvania for $17.0 million. We will be required to invest in the building in order to occupy it. We expect to spend $3.0 to $5.0 million in building improvements and expect that we will finance a portion of the purchase price and improvements through a mortgage financing, although there can be no guarantee that we will find financing on favorable terms. We expect additional capital expenditures for fiscal 2004 to be between $15.0 and $20.0 million as we continue to improve our technology infrastructure and invest in our fulfillment and customer contact center operations. As of the end of fiscal 2003, we had working capital of $35.3 million and an accumulated deficit of $177.6 million.

We used approximately $5,000 in net cash for operating activities during fiscal 2003. Our principal sources of operating cash during fiscal 2003 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 fiscal 2003 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 fiscal 2003 resulted in a net cash outflow of $1.1 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 fiscal 2002. The decrease in accounts payable, accrued expenses and other was due primarily to lower payroll and related accruals at the end of fiscal 2003 compared to fiscal 2002, a decrease in accruals related to the operations of Ashford.com and a decrease in trade accounts payable due primarily to lower inventory levels at the end of fiscal 2003, offset, in part, by an increase in partner revenue share payments at the end of fiscal 2003, which was related to increased sales volume in fiscal 2003. The decrease in inventory was due primarily to an improvement in inventory turns from approximately 5.0 in fiscal 2002 to 6.5 in fiscal 2003 and the liquidation of the remaining inventory of Ashford.com. Our investing activities during fiscal 2003 consisted primarily of capital expenditures of $7.5 million. During fiscal 2003, we also purchased $16.0 million and sold $15.6 million of marketable securities, received $2.3 million in gross proceeds from sales of short-term investments and received $900,000 in principal payments on a note receivable. Our financing activities during fiscal 2003 consisted primarily of the receipt of $1.1 million in gross proceeds from exercises of common stock options and warrants. During fiscal 2003, we also received $349,000 in gross proceeds from the sale of common stock through our Employee Stock Purchase Plan and repaid $78,000 of capital lease obligations.

Operating activities provided net cash of approximately $9.6 million during fiscal 2002. Our principal sources of operating cash during fiscal 2002 were payments received from customers and fee-based partners. Changes in our operating assets and liabilities during fiscal 2002 resulted in a net cash inflow of $29.1 million. The most significant changes were increases in accounts payable, accrued expenses and other and deferred revenue as well as a decrease in accounts receivable and the change in inventory compared to fiscal 2001. The increase in accounts payable, accrued expenses and other was due primarily to increases in trade accounts payable, marketing and shipping expense accruals and amounts owed to partners, which were related to increased sales volume in fiscal 2002. The increase in deferred revenue was due primarily to an increase in service fees paid to us in advance by certain partners. The decrease in accounts receivable was due primarily to a net decrease in the receivable related to bulk sales to one entity during fiscal 2001 and fiscal 2002 and increases in our accounts receivable reserves. Inventory at the end of fiscal 2002 was $6.5 million higher than at the end of fiscal 2001. This increase was driven largely by an increase in inventory related to the consumer electronics category. The change in inventory for fiscal 2002 was a source of operating cash as the $12.0 million of inventory acquired from Ashford.com was sold through our e-commerce platform during fiscal 2002. Our principal uses of operating cash during fiscal 2002 were cash paid to product suppliers and employee compensation. During fiscal 2002, we incurred capital expenditures of $29.0 million, purchased $20.6 million and sold $9.1 million of marketable securities, paid $8.9 million for the acquisition of Ashford.com including acquisition costs and received $2.2 million in gross proceeds from the sale of Ashford.com assets. During fiscal 2002, we prepaid $5.2 million of a mortgage note on our corporate headquarters and we retired for $3.1 million a revolving credit facility that had been maintained by Ashford.com prior to our acquisition of Ashford.com. Also during fiscal 2002, our Board of Directors authorized, subject to certain business and market conditions, the purchase of up to $10.0 million of our common stock. Under this program we repurchased 73,000 shares of our common stock for an aggregate purchase price of $353,000.

We used approximately $14.1 million in net cash for operating activities during fiscal 2001. Our principal source of operating cash during fiscal 2001 was payments received from customers. Our principal uses of operating cash during fiscal 2001 were cash

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paid to product suppliers and employee compensation. Changes in our operating assets and liabilities during fiscal 2001 resulted in a net cash outflow of $440,000. The most significant changes were a decrease in accounts payable, accrued expenses and other and an increase in accounts receivable, offset, in part, by an increase in deferred revenue. The decrease in accounts payable, accrued expenses and other was due primarily to a decrease in accruals related to Fogdog which we acquired at the end of fiscal 2000. The increase in accounts receivable was due primarily to an increase in the receivable related to bulk sales to one entity during fiscal 2001, offset, in part, by a decrease in the receivable related to sales of one of our partner’s products sold primarily through its direct response television campaigns during fiscal 2001 and fiscal 2002. The increase in deferred revenue was due primarily to an increase in service fees paid to us in advance by new partners added during fiscal 2001. During fiscal 2001, we incurred capital expenditures of $8.4 million and received $947,000 in gross proceeds from sales of short-term investments. During fiscal 2001, we received $30.0 million in gross proceeds from the sale of shares of our common stock to ITH.

We had the following contractual obligations as of the end of fiscal 2003:

			Payments due by period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(in thousands)
Operating lease obligations	$	4,106	$	1,335	$	1,886	$	518	$	367
Purchase obligations(1)		20,885		20,885		—		—		—
Employment agreements		3,047		1,709		1,338		—		—
Advertising and media agreements		311		311		—		—		—
Partner revenue share payments		11,575		1,825		3,000		3,000		3,750
Long-term debt obligations		—		—		—		—		—
Capital lease obligations		—		—		—		—		—
Total contractual obligations	$	39,924	$	26,065	$	6,224	$	3,518	$	4,117

(1) Purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable pricing provisions and the approximate timing of the transactions. These obligations relate primarily to commitments to purchase inventory.

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.

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Our financial statements, supplementary data and related documents that are included in this Annual Report on Form 10-K/A Amendment No. 2 are listed in Item 15(a), Part IV, of this Report.

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PART IV

I TEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) 1. CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets as of December 28, 2002 and January 3, 2004	F-2
Consolidated Statements of Operations for the Fiscal Years Ended December 29, 2001, December 28, 2002 and January 3, 2004	F-3
Consolidated Statements of Stockholders’ Equity for the Fiscal Years Ended December 29, 2001, December 28, 2002 and January 3, 2004	F-4
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 29, 2001, December 28, 2002 and January 3, 2004	F-5
Notes to Consolidated Financial Statements	F-6

2. FINANCIAL STATEMENT SCHEDULES

All schedules have been omitted since the required information is included in the financial statements or the notes thereto or is not applicable or required.

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3. EXHIBITS

Exhibit Number	Description
3.1	Amended and Restated Certificate of Incorporation of Global Sports, Inc. (filed as Appendix B to GSI Commerce, Inc.’s Definitive Proxy Statement on Schedule 14A filed on April 27, 2001 and incorporated herein by reference)
3.2	Certificate of Amendment to Amended and Restated Certificate of Incorporation of Global Sports, Inc. (filed with GSI Commerce, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 29, 2002 and incorporated herein by reference)
3.3	Bylaws, as amended, of Global Sports, Inc. (filed with GSI Commerce, Inc.’s Registration Statement No. 33-33754 and incorporated herein by reference)
4.1	Form of Investor Warrant (filed with GSI Commerce, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 29, 2001 and incorporated herein by reference)
4.2	Form of Partner Warrant (filed with GSI Commerce, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 29, 2001 and incorporated herein by reference)
4.3	Warrant to Purchase 200,000 Shares of Common Stock dated January 30, 2002 (filed with GSI Commerce, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 29, 2001 and incorporated herein by reference)
4.4	Specimen Common Stock Certificate (filed with GSI Commerce, Inc.’s Quarterly Report on Form 10-Q for the Quarter ended June 29, 2002 and incorporated herein by reference)
4.5	Registration Rights Agreement, dated July 31, 1995, by and between Global Sports, Inc. and MR Acquisitions, Inc. (filed with GSI Commerce, Inc.’s Current Report on Form 8-K filed on July 31, 1995 and incorporated herein by reference)
4.6	Second Amended and Restated Registration Rights Agreement, dated as of September 13, 2000, by and between Global Sports, Inc., Interactive Technology Holdings, LLC, SOFTBANK Capital Advisors Fund LP and TMCT Ventures, L.P. (filed with GSI Commerce, Inc.’s Current Report on Form 8-K filed on September 13, 2000 and incorporated herein by reference)
4.7	Second Amendment to Second Amended and Restated Registration Rights Agreement, dated as of July 20, 2001, among Global Sports, Inc., SOFTBANK Capital Partners LP, SOFTBANK Capital Advisors Fund LP, Rustic Canyon Ventures, LP (f/k/a TMCT Ventures, LP) and Interactive Technology Holdings, LLC (filed with GSI Commerce, Inc.’s Current Report on Form 8-K filed on August 27, 2001 and incorporated herein by reference)
4.8	Third Amendment to Second Amended and Restated Registration Rights Agreement, dated as of July 25, 2003, among Global Sports, Inc. (n/k/a GSI Commerce, Inc.), SOFTBANK Capital Partners LP, SOFTBANK Capital Advisors Fund LP, Rustic Canyon Ventures, LP (f/k/a TMCT Ventures, LP) and Interactive Technology Holdings, Inc. (filed with GSI Commerce, Inc.’s Current Report on Form 8-K on July 29, 2003 and incorporated herein by reference)
10.1+	Global Sports, Inc.’s 1996 Equity Incentive Plan, amended and restated as of January 4, 2001 (filed as Appendix A to GSI Commerce, Inc.’s Definitive Proxy Statement on Schedule 14A filed on April 27, 2001 and incorporated herein by reference)
10.2+	Global Sports, Inc.’s 2000 Employee Stock Purchase Plan (filed with GSI Commerce, Inc.’s Preliminary Proxy Statement on Schedule 14A filed on March 22, 2000 and incorporated herein by reference)
10.3+	Global Sports, Inc.’s 1987 Stock Option Plan (filed with GSI Commerce, Inc.’s Registration Statement No. 33-19754-B and incorporated herein by reference)
10.4+	Global Sports, Inc.’s 1988 Stock Option Plan (filed with GSI Commerce, Inc.’s Registration Statement No. 33-27501 and incorporated herein by reference)
10.5+	Global Sports, Inc.’s 1990 Stock Option Plan (filed with GSI Commerce, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1990 and incorporated herein by reference)
10.6+	Global Sports, Inc.’s 1992 Stock Option Plan (filed with GSI Commerce, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 1991 and incorporated herein by reference)

15

Exhibit Number	Description
10.7+	Global Sports, Inc.’s 1993 Stock Option Plan (filed with GSI Commerce, Inc.’s Form S-8 Registration Statement filed on January 3, 1994 and incorporated herein by reference)
10.8+	Global Sports, Inc.’s 1995 Stock Option Plan (filed with GSI Commerce, Inc.’s Current Report on Form 8-K dated July 31, 1995 and incorporated herein by reference)
10.9+	Global Sports, Inc.’s 1995 Non-Employee Directors’ Stock Option Plan (filed with GSI Commerce, Inc.’s Proxy Statement on Schedule 14A filed on October 13, 1995 in connection with the 1995 Special Meeting in Lieu of Annual Meeting held on November 15, 1995 and incorporated herein by reference)
10.10+	Global Sports, Inc.’s Deferred Profit Sharing Plan and Trust (filed with GSI Commerce, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference)
10.11+	Employment Agreement, dated June 1, 2001, by and between Global Sports, Inc. and Michael G. Rubin (filed with GSI Commerce, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 and incorporated herein by reference)
10.12+	Employment Agreement, dated February 24, 1999, by and between Global Sports, Inc. and Michael R. Conn (filed with GSI Commerce, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and incorporated herein by reference)
10.13+	Letter Amendment, dated April 23, 2002, to the Employment Agreement, by and between Global Sports, Inc. and Michael R. Conn (filed with GSI Commerce, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 28, 2002 and incorporated herein by reference)
10.14+	Employment Agreement, dated August 9, 1999, by and between Global Sports, Inc. and Arthur H. Miller (filed with GSI Commerce, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference)
10.15+	Letter Amendment, dated April 23, 2002, to the Employment Agreement, by and between Global Sports, Inc. and Arthur H. Miller (filed with GSI Commerce, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 28, 2002 and incorporated herein by reference)
10.16+	Employment Agreement, dated February 9, 2000, by and between Global Sports, Inc. and Jordan M. Copland (filed with GSI Commerce, Inc.’s Annual Report on Form 10-K for the fiscal year ended January 1, 2000 and incorporated herein by reference)
10.17+	Employment Agreement, dated May 30, 2000, by and between Global Sports, Inc. and Mark Reese (filed with GSI Commerce, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 30, 2000 and incorporated herein by reference)
10.18+	Employment Agreement, dated April 23, 2002, by and between Global Sports, Inc. and Robert Liewald (filed with GSI Commerce, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 28, 2002 and incorporated herein by reference)
10.19+	Personal Services Agreement, dated June 12, 2001, by and between GSI West, Inc. and Damon Mintzer (filed with GSI Commerce, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 29, 2002 and incorporated herein by reference)
10.20+	Amendment Number 1, dated September 10, 2001, to Personal Services Agreement by and between GSI West, Inc. and Damon Mintzer (filed with GSI Commerce, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 29, 2002 and incorporated herein by reference)
10.21	License and E-Commerce Agreement, dated July 6, 2001, by and among Global Sports Interactive, Inc., The Sports Authority, Inc. and The Sports Authority Michigan, Inc. (filed with Amendment No. 1 to GSI Commerce, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 29, 2001 and incorporated herein by reference)
10.22*	First Amendment to the License and E-Commerce Agreement, dated as of July 6, 2001, by and between The Sports Authority, Inc., The Sports Authority Michigan, Inc. and GSI Commerce Solutions, Inc. made as of January 3, 2003 (filed with GSI Commerce, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 29, 2003 and incorporated herein by reference)
10.23	E-Commerce Agreement, dated as of August 10, 2001, by and among Global Sports, Inc., Bluelight.com, LLC and Kmart Corporation (filed with Amendment No. 1 to GSI Commerce, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 29, 2001 and incorporated herein by reference)

16

Exhibit Number	Description
10.24	First Amendment to the E-Commerce Agreement, dated as of August 10, 2001, by and among Global Sports Interactive, Inc., Bluelight.com, LLC and Kmart Corporation, dated as of December 14, 2001 (filed with GSI Commerce, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 28, 2002 and incorporated herein by reference)
10.25	Second Amendment to the E-Commerce Agreement, dated as of August 10, 2001, by and among Global Sports Interactive, Inc., Bluelight.com, LLC and Kmart Corporation, dated as of August 9, 2002 (filed with GSI Commerce, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 28, 2002 and incorporated herein by reference)
10.26*	Third Amendment to the E-Commerce Agreement, dated as of August 10, 2001, by and between GSI Commerce Solutions, Inc., Bluelight.com, LLC and Kmart Corporation made as of January 14, 2003 (filed with GSI Commerce, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 29, 2003 and incorporated herein by reference)
10.27	Fourth Amendment to the E-Commerce Agreement, dated as of August 10, 2001, by and between GSI Commerce Solutions, Inc., Bluelight.com, LLC and Kmart Corporation made as of March 7, 2003 (filed with GSI Commerce, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 29, 2003 and incorporated herein by reference)
10.28	Stock Purchase Agreement, dated as of July 20, 2001, by and among Global Sports, Inc., Michael G. Rubin and Interactive Technology Holdings, LLC (filed with GSI Commerce, Inc.’s Current Report on Form 8-K filed on August 27, 2001 and incorporated herein by reference)
10.29	Letter Agreement, dated as of July 20, 2001, among Global Sports, Inc., Interactive Technology Holdings, LLC, SOFTBANK Capital Partners LP and SOFTBANK Capital Advisors Fund LP (filed with GSI Commerce, Inc.’s Current Report on Form 8-K filed on August 27, 2001 and incorporated herein by reference)
10.30	Stock and Warrant Exchange Agreement, dated as of July 25, 2003, by and between GSI Commerce, Inc. and Interactive Technology Holdings, LLC (filed with GSI Commerce, Inc.’s Current Report on Form 8-K on July 29, 2003 and incorporated herein by reference)
10.31	E-Commerce Agreement, dated as of June 14, 2002, by and among GSI Commerce Solutions, Inc. and Palm, Inc. (filed with GSI Commerce, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 28, 2002 incorporated herein by reference)
10.32	Amendment No. 1 to E-Commerce Agreement, dated as of June 14, 2002 by and between GSI Commerce Solutions, Inc. and Palm, Inc., dated as of December 3, 2002 (filed with GSI Commerce, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 28, 2002 incorporated herein by reference)
21.1	List of Subsidiaries (filed with GSI Commerce, Inc.’s Annual Report on Form 10-K for the fiscal year ended January 3, 2004 incorporated herein by reference)
23.1	Independent Auditors’ Consent (Deloitte & Touche LLP)
24.1	Power of Attorney (filed with GSI Commerce, Inc.’s Annual Report on Form 10-K/A for the fiscal year ended January 3, 2004 incorporated herein by reference)
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

+ Management contract or compensatory plan or arrangement.

* 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 January 3, 2004, we furnished to the Securities and Exchange Commission a Current Report on Form 8-K under Item 12 dated October 29, 2003 regarding our results for the fiscal quarter ended September 27, 2003.

17

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf on the date indicated by the undersigned thereunto duly authorized.

Date: August 23, 2004	GSI COMMERCE, INC.
	By:	/s/ MICHAEL G. RUBIN
		Michael G. Rubin Chairman, Co-President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ MICHAEL G. RUBIN	Chairman, Co-President and Chief Executive Officer (principal executive officer)	August 23, 2004
Michael G. Rubin
/s/ JORDAN M. COPLAND	Executive Vice President and Chief Financial Officer (principal financial officer and principal accounting officer)	August 23, 2004
Jordan M. Copland
*	Director	August 23, 2004
Kenneth J. Adelberg
*	Director	August 23, 2004
M. Jeffrey Branman
*	Director	August 23, 2004
Ronald D. Fisher
*	Director	August 23, 2004
Harvey Lamm
*	Director	August 23, 2004
Mark S. Menell
*	Director	August 23, 2004
Michael S. Perlis
*	Director	August 23, 2004
Jeffrey F. Rayport

*By:	/s/ JORDAN M. COPLAND
	Jordan M. Copland Attorney-in-fact

18

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of GSI Commerce, Inc.:

We have audited the accompanying consolidated balance sheets of GSI Commerce, Inc. and subsidiaries (the “Company”) as of December 28, 2002 and January 3, 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended January 3, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 28, 2002 and January 3, 2004, and the results of its operations and its cash flows for each of the three years in the period ended January 3, 2004 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 22, the accompanying consolidated statement of cash flows for the fiscal year ended January 3, 2004 has been restated.

/s/ DELOITTE & TOUCHE LLP

Deloitte & Touche LLP

Philadelphia, Pennsylvania

March 16, 2004

(August 20, 2004 as to Note 22)

F-1

GSI COMMERCE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	December 28, 2002			January 3, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	61,004		$	57,558
Short-term investments		2,280			—
Marketable securities		11,543			11,912
Accounts receivable, net of allowance of $1,533 and $709, respectively		3,974			4,898
Inventory		24,306			22,910
Current portion — notes receivable		900			1,377
Prepaid expenses and other current assets		2,078			1,848
Total current assets		106,085			100,503
Property and equipment, net		48,669			44,840
Goodwill, net		13,453			13,453
Notes receivable		3,523			2,356
Other equity investments		2,159			2,159
Other assets, net of accumulated amortization of $1,250 and $2,644, respectively		13,684			12,272
Total assets	$	187,573		$	175,583
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	31,664		$	27,677
Accrued expenses and other		20,283			22,538
Deferred revenue		15,025			14,998
Current portion — capital lease obligations		78			—
Total current liabilities		67,050			65,213
Mandatorily redeemable preferred stock, Series A, $0.01 par value, 10,000 shares authorized; 200 and 0 shares issued as of December 28, 2002 and January 3, 2004, respectively; 0 shares outstanding as of December 28, 2002 and January 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 December 28, 2002 and January 3, 2004, respectively		—			—
Common stock, $0.01 par value, 90,000,000 shares authorized; 38,857,855 and 40,781,036 shares issued as of December 28, 2002 and January 3, 2004, respectively; 38,783,645 and 40,779,826 shares outstanding as of December 28, 2002 and January 3, 2004, respectively		389			408
Additional paid in capital		285,625			287,571
Accumulated other comprehensive income		57			—
Accumulated deficit		(165,547	)		(177,609	)
		120,524			110,370
Less: Treasury stock, at par		1			—
Total stockholders’ equity		120,523			110,370
Total liabilities and stockholders’ equity	$	187,573		$	175,583

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

F-2

GSI COMMERCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Fiscal Year Ended
	December 29, 2001			December 28, 2002			January 3, 2004
Revenues:
Net revenues from product sales	$	98,325		$	154,819		$	216,510
Service fee revenues		4,285			17,819			25,409
Net revenues		102,610			172,638			241,919
Cost of revenues from product sales		67,586			114,258			154,731
Gross profit		35,024			58,380			87,188
Operating expenses:
Sales and marketing, exclusive of $847, $532 and $1,527 reported below as stock-based compensation, respectively		32,390			49,757			58,226
Product development, exclusive of $461, $(44) and $42 reported below as stock-based compensation, respectively		8,590			12,933			15,414
General and administrative, exclusive of $8,974, $(87) and $366 reported below as stock-based compensation, respectively		10,638			14,971			13,392
Restructuring costs related to Ashford.com		—			1,680			74
Net loss on sale of Ashford.com assets		—			2,566			—
Stock-based compensation		10,282			401			1,935
Depreciation and amortization		6,662			10,509			11,386
Total operating expenses		68,562			92,817			100,427
Other (income) expense:
Other income		(502	)		—			—
Interest expense		608			749			—
Interest income		(3,049	)		(1,377	)		(1,177	)
Total other (income) expense		(2,943	)		(628	)		(1,177	)
Net loss	$	(30,595	)	$	(33,809	)	$	(12,062	)
Losses per share:
Basic and diluted—
Net loss	$	(0.90	)	$	(0.88	)	$	(0.30	)

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

F-3

GSI COMMERCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

	Common Stock																	Treasury Stock
	Shares		Dollars			Additional Paid in Capital			Accumulated Deficit			Comprehensive Loss			Accumulated Other Comprehensive Income			Shares		Dollars			Total
Consolidated balance at December 30, 2000	31,925		$	319		$	217,124		$	(101,143	)				$	—		—		$	—		$	116,300
Net loss										(30,595	)	$	(30,595	)										(30,595	)
Net unrealized gains on available-for-sale securities													—			—								—
Comprehensive loss												$	(30,595	)
Issuance of common stock in lieu of future cash revenue share payments	1,600			16			14,400																	14,416
Issuance of common stock to ITH, net of costs	3,000			30			29,970																	30,000
Issuance of options and warrants to purchase common stock in exchange for services							9,962																	9,962
Issuance of common stock upon exercise of options and warrants	958			10			5,722																	5,732
Issuance of common stock under Employee Stock Purchase Plan	191			2			683																	685
Contribution from stockholder							71																	71
Repurchase of warrants							(300	)																(300	)
Purchase of treasury stock							(4	)										1						(4	)
Consolidated balance at December 29, 2001	37,674		$	377		$	277,628		$	(131,738	)				$	—		1		$	—		$	146,267
Net loss										(33,809	)	$	(33,809	)										(33,809	)
Net unrealized gains on available-for-sale securities													57			57								57
Comprehensive loss												$	(33,752	)
Issuance of common stock in acquisition of Ashford.com, Inc.	430			4			6,877																	6,881
Issuance of options and warrants to purchase common stock in exchange for services							(452	)																(452	)
Issuance of common stock upon exercise of options and warrants	599			6			1,358																	1,364
Issuance of common stock under Employee Stock Purchase Plan	155			2			566																	568
Purchases of treasury stock							(352	)										73			(1	)		(353	)
Consolidated balance at December 28, 2002	38,858		$	389		$	285,625		$	(165,547	)				$	57		74		$	(1	)	$	120,523
Net loss										(12,062	)	$	(12,062	)										(12,062	)
Net unrealized losses on available-for-sale securities													(57	)		(57	)							(57	)
Comprehensive loss												$	(12,119	)
Issuance of common stock to ITH in exchange for warrants	1,650			16			(16	)																—
Issuance of options to purchase common stock in exchange for services							564																	564
Issuance of common stock upon exercise of options and warrants	208			2			1,051																	1,053
Issuance of common stock under Employee Stock Purchase Plan	149			2			347																	349
Retirement of treasury stock	(73	)		(1	)		—											(73	)		1			—
Other	(11	)		—			—																	—
Consolidated balance at January 3, 2004	40,781		$	408		$	287,571		$	(177,609	)				$	—		1		$	—		$	110,370

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

F-4

GSI COMMERCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Fiscal Year Ended
	December 29, 2001			December 28, 2002			January 3, 2004
							(as restated, see Note 22)
Cash Flows from Operating Activities:
Net loss	$	(30,595	)	$	(33,809	)	$	(12,062	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		6,662			10,509			11,386
Stock-based compensation		10,282			401			1,935
Non-cash restructuring costs related to Ashford.com		—			841			—
Net loss on sale of Ashford.com assets		—			2,566			—
Amortization of discount on note receivable		—			—			(180	)
Changes in operating assets and liabilities:
Accounts receivable, net		(2,533	)		4,693			(924	)
Inventory		1,423			3,978			1,396
Prepaid expenses and other current assets		(17	)		(329	)		230
Notes receivable		—			—			(30	)
Other assets, net		(893	)		861			—
Accounts payable and accrued expenses and other		(5,296	)		13,458			(1,729	)
Deferred revenue		6,876			6,431			(27	)
Net cash provided by (used in) operating activities		(14,091	)		9,600			(5	)
Cash Flows from Investing Activities:
Acquisition of property and equipment, net		(8,433	)		(29,039	)		(7,519	)
Reductions to goodwill		200			—			—
Proceeds from sale of Ashford.com assets		—			2,151			—
Net cash paid for acquisition of Ashford.com		—			(8,860	)		—
Payments received on note receivable		—			—			900
Purchases of marketable securities		—			(20,578	)		(15,976	)
Sales of marketable securities		—			9,092			15,550
(Purchases) sales of short-term investments		947			(38	)		2,280
Net cash used in investing activities		(7,286	)		(47,272	)		(4,765	)
Cash Flows from Financing Activities:
Repurchase of warrants		(300	)		—			—
Repayments of capital lease obligations		(282	)		(429	)		(78	)
Repayments of mortgage note		(35	)		(5,247	)		—
Retirement of Ashford.com revolving credit facility		—			(3,123	)		—
Purchases of treasury stock		(4	)		(353	)		—
Proceeds from sale of common stock and warrants		30,700			568			349
Proceeds from exercises of common stock options and warrants		5,111			1,364			1,053
Contribution from stockholder.		71			—			—
Net cash provided by (used in) financing activities		35,261			(7,220	)		1,324
Net increase (decrease) in cash and cash equivalents		13,884			(44,892	)		(3,446	)
Cash and cash equivalents, beginning of year		92,012			105,896			61,004
Cash and cash equivalents, end of year	$	105,896		$	61,004		$	57,558

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

F-5

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—DESCRIPTION OF BUSINESS

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, 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, bulk 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.

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES

The following summarize the Company’s significant accounting policies:

Fiscal Year: During 1999, the Company changed its fiscal year end date from a calendar year end to a year end date representing the Saturday closest to December 31, beginning with the fiscal year ended January 1, 2000. The fiscal year is named for the calendar year ending on that December 31. The effects on results of operations of the one fewer day in each of the fiscal years ended December 29, 2001 and December 28, 2002 and the six additional days in the fiscal year ended January 3, 2004 are not significant.

Basis of Consolidation: The financial statements presented include the accounts of the Company and all wholly and majority-owned subsidiaries. All significant inter-company balances and transactions among consolidated entities have been eliminated.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.

Fair Values: The estimated fair value amounts presented in these consolidated financial statements have been determined by the Company using available market information and appropriate methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. The estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Such fair value estimates are based on pertinent information available to management as of December 28, 2002 and January 3, 2004, and have not been comprehensively revalued for purposes of these consolidated financial statements since such dates.

Cash and Cash Equivalents: The Company considers all highly liquid investments with maturities at date of purchase of three months or less to be cash equivalents. The carrying value of cash equivalents approximates their current market value.

Short Term Investments: Short-term investments consist of certificates of deposit. The Company has classified these short-term investments as held-to-maturity and recorded them at amortized cost.

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 December 28, 2002, the Company recorded net unrealized gains on its marketable securities of $57,000. As of January 3, 2004, the aggregate amortized cost of the Company’s marketable securities approximated their aggregate fair value.

Inventory: Inventory, primarily consisting of sporting goods, athletic equipment, footwear and apparel, and consumer electronics is valued at the lower of cost (determined using the first-in, first-out method) or market. Inherent in this valuation are significant management judgments and estimates, including among others, assessments concerning obsolescence and shrinkage rates. Based upon these judgments and estimates, which are applied consistently from period to period, the Company records a valuation allowance to adjust the carrying amount of its inventory.

F-6

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Property and Equipment: Property and equipment are stated at cost, net of accumulated depreciation or amortization. Costs incurred to develop internal-use computer software during the application development stage, including those relating to developing partners’ Web sites, generally are capitalized. Costs of enhancements to internal-use computer software are capitalized, provided that these enhancements result in additional functionality. Depreciation or amortization is provided using the straight-line method over the estimated useful lives of the assets, which are generally:

• Four years for computer hardware and software;

• Three to ten years for furniture, and fulfillment center and office equipment;

• The lesser of fifteen years or lease term for leasehold improvements;

• Fifteen years for building improvements; and

• Thirty years for buildings.

Upon retirement or other disposition of these assets, the cost and related accumulated depreciation or amortization are removed from the accounts and the resulting gain or loss, if any, is recognized as a component of depreciation or amortization expense. Expenditures for maintenance and repairs are expensed as incurred.

Change in Accounting for Goodwill and Certain Other Intangibles: The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” as of July 1, 2001. The Company accounted for its acquisition of Ashford.com, Inc. (“Ashford.com”) under SFAS No. 141 (see Note 3).

Effective December 30, 2001, the Company adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under an impairment-only approach, goodwill and certain intangibles are not amortized into results of operations but instead, are reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than their fair value. SFAS No. 142 requires the Company to complete a two-step impairment test of goodwill. The first step, which was required to be completed by June 29, 2002, was to determine if an impairment existed. The second step, which was required to be completed by December 28, 2002 (if necessary), was to measure the impairment. As part of the impairment test, the Company obtained an independent, third-party valuation in order to determine if the fair value of its recorded goodwill was impaired. The valuation incorporated a variety of methodologies to estimate fair value, including comparing the Company’s market capitalization with that of publicly traded companies in similar lines of business, applying price multiples to the Company’s estimated future operating results and estimating discounted cash flows. The Company completed the first step of the impairment test during the three-month period ended June 29, 2002 and found no instances of impairment of its recorded goodwill. Therefore, the second step of the impairment test was not necessary during fiscal 2002. In addition, upon adoption of SFAS No. 142, the Company evaluated its goodwill and intangibles acquired prior to June 30, 2001 using the criteria in SFAS No. 141 and determined that no change in previously recognized goodwill was required.

In connection with the sale of certain assets of Ashford.com in December 2002, the Company disposed of $6.0 million of goodwill associated with the Ashford.com acquisition. The Company determined that its remaining $13.5 million of goodwill should be tested for impairment. As part of the impairment test, the Company obtained an independent, third-party valuation in order to determine if the fair value of its remaining recorded goodwill was impaired. The valuation incorporated a variety of methodologies to estimate fair value, including comparing the Company’s market capitalization with that of publicly traded companies in similar lines of business, applying price multiples to the Company’s estimated future operating results and estimating discounted cash flows. The Company completed the impairment test in December 2002 and found no instances of impairment of its remaining recorded goodwill. In accordance with the provisions of SFAS No. 142, the Company performed an annual impairment test of its recorded goodwill in December 2003 and found no instances of impairment.

F-7

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

The following is a reconciliation of reported net loss to net loss adjusted to reflect the impact of the discontinuance of the amortization of goodwill for the fiscal years ended December 29, 2001, December 28, 2002 and January 3, 2004:

	Fiscal Year Ended
	December 29, 2001			December 28, 2002			January 3, 2004
	(in thousands, except per share amounts)
Net loss:
Reported net loss	$	(30,595	)	$	(33,809	)	$	(12,062	)
Goodwill amortization		710			—			—
Adjusted net loss	$	(29,885	)	$	(33,809	)	$	(12,062	)
Losses per share—basic and diluted:
Reported net loss per share	$	(0.90	)	$	(0.88	)	$	(0.30	)
Goodwill amortization		0.02			—			—
Adjusted losses per share—basic and diluted	$	(0.88	)	$	(0.88	)	$	(0.30	)

Long-Lived Assets: The ability to realize long-lived assets is evaluated periodically as events or circumstances indicate a possible inability to recover their carrying amount. Such evaluation is based on various analyses, including undiscounted cash flow and profitability projections that incorporate, as applicable, the impact on the existing business. The analyses necessarily involve significant management judgment. Any impairment loss, if indicated, is measured as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.

During the three-month period ended September 27, 2003, the Company relocated its data centers. In conjunction with the relocation, the Company determined that certain capitalized costs associated with the data centers would no longer be used and, therefore, that the carrying amounts of these assets were not recoverable. The Company disposed of these assets during the three-month period ended September 27, 2003 and recorded an impairment charge of $284,000 which is included in depreciation and amortization expense.

During the three-month period ended December 28, 2002, the Company determined that certain long-lived assets were no longer being used in its continuing operations and, therefore, that the carrying amounts of these assets were not recoverable. The long-lived assets consisted of furniture and computer hardware and software. The Company disposed of these assets during the three-month period ended December 28, 2002 and recorded an impairment charge of $645,000 which is included in depreciation and amortization expense.

Notes Receivable: Notes receivable consists primarily of a $4.5 million, five year subordinated secured promissory note, with a stated interest rate of 7%, received in connection with the sale of certain assets of Ashford.com (see Note 3). The note is due in twenty consecutive quarterly principal payments of $225,000 each, beginning March 2003 through December 2007. Accrued interest on the note is payable with each quarterly principal payment. In order to determine the fair value of the note, the Company obtained an independent, third-party valuation. Based upon the valuation, the Company determined that the market interest rate of the note is 12.5% and therefore valued the note at approximately $4.0 million. The balance of the note due was $4.0 million and $3.1 million as of December 28, 2002 and January 3, 2004, respectively, with $900,000 classified as current as of December 28, 2002 and January 3, 2004, respectively. The Company recorded $0 and $313,000 of interest income on the note for the fiscal years ended December 28, 2002 and January 3, 2004, respectively. The $500,000 discount is being amortized over the term of the note and recorded as an increase in interest income. Amortization of the discount was $0 and $180,000 for the fiscal years ended December 28, 2002 and January 3, 2004, respectively.

Notes receivable also consists of a $376,000 full-recourse promissory note with a stated interest rate of 6.71%, received in connection with the acquisition of Ashford.com (see Note 3). The note was entered into by Ashford.com with a member of its Board of Directors in connection with the exercise of options to purchase Ashford.com’s common stock. The balance of the note due was $447,000 and $477,000 as of December 28, 2002 and January 3, 2004, respectively, with $0 and $477,000 classified as current as of December 28, 2002 and January 3, 2004, respectively. The Company recorded $24,000 and $30,000 of interest income on the note for

F-8

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

the fiscal years ended December 28, 2002 and January 3, 2004, respectively. The note was originally payable in full by April 2004 but due to the occurrence of an event of acceleration specified in the note, the entire unpaid principal sum of the note and accrued interest was due in March 2003. The Company is attempting to collect all amounts due under the note.

Other Equity Investments: Other equity investments consist of shares of, and warrants to purchase, Odimo Incorporated (“Odimo”) Series D preferred stock convertible into 19.9% of the fully diluted common shares of Odimo, received in connection with the sale of certain assets of Ashford.com (see Note 3). The Company does not have the ability to exercise significant influence over Odimo and, therefore, the investment is accounted for under the cost method. Under the cost method of accounting, investments in private companies are carried at cost and are adjusted only for other-than-temporary declines in fair value, distributions of earnings and additional investments. The initial cost of the Company’s investment was determined based on the fair value of the investment at the time of its acquisition. As an observable market price does not exist for equity securities of private companies, estimates of fair value of such securities are more subjective than for securities of public companies. In order to determine the fair value of the investment in Odimo, the Company obtained an independent, third-party valuation. The valuation incorporated a variety of methodologies to estimate fair value, including comparing the security with securities of publicly traded companies in similar lines of business, applying price multiples to estimated future operating results for Odimo and estimating discounted cash flows. Factors affecting the valuation included restrictions on control and marketability of Odimo’s equity securities and other information available to the Company, such as the Company’s knowledge of the industry and knowledge of specific information about Odimo. Using this valuation, the Company determined the estimated fair value of the investment to be approximately $2.2 million.

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 (see Note 7). The 1,600,000 shares of GSI common stock issued are subject to restrictions, including the prohibition of the transfer of such shares. These restrictions lapsed as to 10% of such shares on December 31, 2002, on March 31, 2003, on June 30, 2003, on September 30, 2003 and on December 31, 2003 and will lapse as to an additional 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 $14.1 million, $13.2 million and $11.8 million as of December 29, 2001, December 28, 2002 and January 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 $336,000, $857,000 and $1.4 million for the fiscal years ended December 29, 2001, December 28, 2002 and January 3, 2004, respectively.

Deferred Revenue: Deferred revenue consists primarily of fees paid in advance to the Company under agreements to manage some aspects of certain partners’ overall e-commerce businesses, including fulfillment, technology and customer service, existing at the balance sheet date. Deferred revenue also consists of amounts received from the sale of gift certificates redeemable through the Company’s partners’ e-commerce businesses.

Net Revenues from Product Sales: The Company derives its net revenues from product sales from the sale of goods through its partners’ e-commerce businesses, toll-free telephone number sales, bulk sales, business-to-business and group sales and related outbound shipping charges, net of allowances for returns and discounts. Other sources of revenue, including commissions from the sale of gift certificates to the Company’s retail partners’ land-based stores and the sale of advertising on the partners’ Web sites, were not significant for the fiscal years ended December 29, 2001, December 28, 2002 and January 3, 2004.

The Company recognizes revenues from product sales when the following revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable and collectibility is reasonably assured.

The Company recognizes revenue from product sales, net of estimated returns based on historical experience and current trends, upon shipment of products to customers. The Company ships the majority of products from its fulfillment center in Louisville, KY. During the fiscal year ended December 28, 2002, the Company also shipped products from Ashford.com’s jewelry and luxury goods fulfillment center that it formerly maintained in Houston, TX. The Company also relies upon certain vendors to ship products directly to customers on its behalf. The Company acts as principal in these transactions, as orders are initiated directly through the e-commerce businesses that the Company operates, the Company takes title to the goods at the shipping point and has the economic risk related to collection, customer service and returns.

F-9

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

The Company considers the criteria presented in Emerging Issues Task Force (“EITF”) No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” in determining the appropriate revenue recognition treatment. Generally, when the Company is the primary obligor in a transaction, has general inventory risk, establishes the selling price, has discretion in supplier selection, has physical loss inventory risk after order placement or during shipping, and has credit risk, or has several but not all of these indicators, the Company records revenue gross as a principal.

The Company pays to its partners a percentage of the revenues generated from the sale of products through the e-commerce businesses that the Company operates in exchange for the rights to use their brand names and the promotions and advertising that its partners agree to provide. The Company refers to these royalty payments as partner revenue share charges. The Company has considered the revenue reduction provisions addressed in EITF No. 00-25, “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products,” which was codified in EITF No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products,” and believes that the payment of partner revenue share charges, or the issuance of warrants or stock in lieu of cash partner revenue share charges, to its partners should not result in any reduction of revenues. EITF No. 00-25 addresses consideration paid to parties along a distribution chain. The Company purchases merchandise from its vendors, at its discretion, and is responsible for paying those vendors. The amounts purchased and the prices paid to the Company’s vendors are not in any way impacted by the revenue share provisions of the Company’s agreements with its partners. Accordingly, the Company’s partners and vendors are not linked in the distribution chain and the Company believes that the provisions of EITF No. 00-25 do not apply.

Service Fee Revenues: The Company derives its service fee revenues from fixed and variable fees earned in connection with the development and operation of its partners’ e-commerce businesses and the provision of marketing and other services. The Company recognizes revenues from services provided when the following revenue recognition criteria are met: persuasive evidence of an arrangement exists, services have been rendered, the fee is fixed or determinable and collectibility is reasonably assured. If the Company receives payments for services in advance, these amounts are deferred and then recognized over the service period. 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. The Company does not specifically record “Cost of service fee revenues” as these costs are incurred by the Company’s fee-based partners rather than by the Company. Operating expenses relating to service fee revenues consist primarily of personnel and other costs associated with the Company’s engineering, production and creative departments which are included in product development expense, as well as fulfillment costs and personnel and other costs associated with its marketing and customer service departments which are included in sales and marketing expense.

Cost of Revenues from Product Sales: Cost of revenues from product sales includes the cost of products sold and inbound freight related to these 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.

Sales and Marketing: Sales and marketing expenses include advertising and promotional expenses, including promotional free shipping and subsidized shipping and handling costs, online marketing fees, commissions to affiliates, 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 the Company’s partners in exchange for the use of the partners’ brands, the promotion of their 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 the Company operates for its partners and other programs and services provided to the customers of the e-commerce businesses that the Company operates for its partners. Partner revenue share charges were $3.6 million, $5.7 million and $10.5 million for the fiscal years ended December 29, 2001, December 28, 2002 and January 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 $960,000, $2.9 million and $1.5 million for the fiscal years ended December 29, 2001, December 28, 2002 and January 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

F-10

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

associated with its logistical support and vendor operations departments and third-party warehouse and fulfillment services costs. Fulfillment costs were $10.0 million, $12.5 million and $15.5 million for the fiscal years ended December 29, 2001, December 28, 2002 and January 3, 2004, respectively, and are included in sales and marketing expense.

Advertising: The Company expenses the cost of advertising, which includes on-line marketing fees, media, agency and production expenses, in accordance with the AICPA Accounting Standards Executive Committee’s Statement of Position (“SOP”) 93-7, “Reporting on Advertising Costs.” Advertising production costs are expensed the first time the advertisement runs. On-line marketing fees and media (television, radio and print) placement costs are expensed in the month the advertising appears. Agency fees are expensed as incurred. Advertising expense was $5.6 million, $3.4 million and $2.4 million for the fiscal years ended December 29, 2001, December 28, 2002 and January 3, 2004, respectively, and are included in sales and marketing expenses.

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

Costs incurred to develop internal-use computer software during the application development stage, including those relating to developing the Company’s partners’ Web sites, generally are capitalized. Costs of enhancements to internal-use computer software are also capitalized, provided that these enhancements result in additional functionality.

Restructuring Costs Related to Ashford.com: Restructuring costs related to Ashford.com, which include termination benefits, contractual obligations, asset impairments and other restructuring costs are recorded at estimated fair value. Key assumptions in calculating the restructuring costs related to Ashford.com included the timing of employee terminations and estimates of the expected salvage value of assets held for disposal. The Company reviews these reserves periodically and adjusts them as necessary.

Stock-Based Compensation: 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 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 significantly assumptions as to the expected life of the option or warrant, the expected volatility of our common stock and the risk-free interest rate over the expected life of the option or warrant.

The following table illustrates the pro forma net loss and losses per share for the fiscal years ended December 29, 2001, December 28, 2002 and January 3, 2004 as if compensation expense for stock options issued to employees had been determined consistent with SFAS No. 123:

	Fiscal Year Ended
	December 29, 2001			December 28, 2002			January 3, 2004
	(in thousands, except per share amounts)
Net loss, as reported	$	(30,595	)	$	(33,809	)	$	(12,062	)
Add: Stock-based compensation expense included in reported net loss		2,094			(21	)		462
Deduct: Total stock-based compensation determined under fair value based method for all awards		(10,034	)		(6,508	)		(5,030	)
Pro forma net loss	$	(38,535	)	$	(40,338	)	$	(16,630	)
Losses per share—basic and diluted:
Net loss per share, as reported	$	(0.90	)	$	(0.88	)	$	(0.30	)
Pro forma net loss per share	$	(1.13	)	$	(1.05	)	$	(0.42	)

F-11

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

The Company also records stock-based compensation as deferred partner revenue share charges are amortized. Stock-based compensation related to the amortization of deferred partner revenue share charges was $336,000, $857,000 and $1.4 million for the fiscal years ended December 29, 2001, December 28, 2002 and January 3, 2004, respectively.

Income Taxes: The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities and expected benefits of utilizing net operating loss carryforwards. The impact on deferred taxes of changes in tax rates and laws, if any, applied to the years during which temporary differences are expected to be settled, are reflected in the consolidated financial statements in the period of enactment. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

Reclassifications: Certain reclassifications have been made to the prior years’ consolidated financial statements to conform to those classifications used in the current year.

New Accounting Pronouncements

Certain Consideration Received from a Vendor: In November 2002, the EITF reached a consensus on EITF No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.” EITF No. 02-16 addresses the accounting of cash consideration received by a customer from a vendor, including vendor rebates and refunds. The consensus reached states that consideration received should be presumed to be a reduction of the prices of the vendor’s products or services and should therefore be shown as a reduction of cost of sales in the income statement of the customer. The presumption could be overcome if the vendor receives an identifiable benefit in exchange for the consideration or the consideration represents a reimbursement of a specific incremental identifiable cost incurred by the customer in selling the vendor’s product or service. If one of these conditions is met, the cash consideration should be characterized as a reduction of those costs in the income statement of the customer. The consensus reached also concludes that if rebates or refunds can be reasonably estimated, such rebates or refunds should be recognized as a reduction of the cost of sales based on a systematic and rational allocation of the consideration to be received relative to the transactions that mark the progress of the customer toward earning the rebate or refund. The effective date of this EITF is for fiscal periods beginning after December 15, 2002. The Company adopted the provisions of this EITF in the first quarter of fiscal 2003 and it did not have a significant impact on the Company’s financial position or results of operations.

Consolidation of Variable Interest Entities: In January 2003, the FASB issued Interpretation (“FIN”) No. 46 “Consolidation of Variable Interest Entities,” which requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns. In December 2003, the FASB then issued FIN No. 46(R) “Consolidation of Variable Interest Entities,” which replaced FIN No. 46. Application of FIN No. 46(R) is required in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special purpose entities for periods ending after December 15, 2003. The Company adopted the provisions of FIN No. 46 and FIN No. 46(R) effective during fiscal 2003 and it did not have a significant impact on the Company’s financial position or results of operations.

Derivative Instruments: In April 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS No. 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and should be applied prospectively. The Company adopted this statement in the third quarter of fiscal 2003 and it did not have a significant impact on the Company’s financial position or results of operations.

Certain Financial Instruments with Characteristics of both Liabilities and Equity: In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a freestanding financial instrument that is within its scope as a liability. SFAS No. 150 is effective for

F-12

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted this statement, including the deferral of certain effective dates as a result of the provisions of FASB Staff Position 150-3, “Effective Date, Disclosures, and Transition for Mandatorily Redeemable Noncontrolling Interests Under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” in the third quarter of fiscal 2003 and it did not have a significant impact on the Company’s financial position or results of operations.

Other-Than-Temporary Impairment of Certain Investments: In November 2003, the EITF reached a consensus on EITF No. 03-01, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments,” which establishes additional disclosure requirements for each category of investments in a loss position. Effective for fiscal years ending after December 15, 2003, companies must disclose the aggregate amount of unrealized losses and the aggregate related fair value of investments with unrealized losses, which are required to be segregated by those investments in a loss position for less than twelve months and those in a loss position for greater than twelve months. Certain qualitative disclosures should also be made regarding the information considered in reaching the conclusion that unrealized losses on investments are not other-than-temporary. The Company adopted the provisions of this consensus in fourth quarter of fiscal 2003 and it did not have a significant impact on the Company’s financial position or results of operations.

Sales Incentives Offered to Consumers by Manufacturers: In November 2003, the EITF reached a consensus on EITF No. 03-10, “Application of EITF No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers,” which addresses how a reseller should account for the redemption of a manufacturer’s coupon by a consumer at the reseller’s location. The final consensus eliminates the option that permitted resellers to report the value of the consideration received as a reduction in costs of goods sold, but rather requires that such consideration be recorded as revenue. EITF No. 03-10 is applicable to new arrangements, including modifications to existing arrangements, entered into during fiscal periods beginning after November 25, 2003. The Company adopted the provisions of this consensus in the fourth quarter of fiscal 2003 and it did not have a significant impact on the Company’s financial position or results of operations.

NOTE 3—ACQUISITIONS AND DISPOSITIONS

Ashford.com

On March 14, 2002, the Company completed its acquisition of all of the outstanding common stock of Ashford.com pursuant to a definitive merger agreement executed on September 13, 2001. During the three-month period ended September 28, 2002, the Company completed the disposition of a division of Ashford Corporate Gifts, Inc., which is a subsidiary of Ashford.com and in December 2002, the Company sold certain assets of Ashford.com to Odimo Acquisition Corp., a wholly owned subsidiary of Odimo. In conjunction with the sale of certain assets of Ashford.com, the Company also announced and implemented its plan to cease the operations of Ashford.com.

Acquisition of Ashford.com

As consideration for the purchase, the Company issued to the stockholders of Ashford.com $7.1 million in cash and approximately 430,000 shares of the Company’s common stock valued at $6.9 million based on a value of $16.00 per share, which was the average closing price of the Company’s common stock for the period from September 6, 2001 to September 18, 2001.

The acquisition was accounted for under SFAS No. 141 as a purchase, and the acquisition cost of $15.7 million was allocated to the assets acquired and the liabilities assumed based upon estimates of their respective fair values. A total of $8.8 million, representing the excess of the purchase price over fair value of the net assets acquired, was allocated to goodwill.

During the three-month period ended June 29, 2002, the Company obtained a third-party valuation relating to intangible assets acquired from Ashford.com that were initially classified as goodwill pending completion of the valuation. The Company reclassified certain other intangible assets from goodwill and included them in other assets, net. These other intangible assets acquired from Ashford.com consisted of Ashford.com’s customer base and trademarks. The Company recorded the customer base at $1.5 million and the trademarks at $1.6 million, respectively.

The customer base acquired had an estimated useful life of five years and was amortized using the straight-line method. The Company recorded amortization of $233,000 for the fiscal year ended December 28, 2002. The trademarks acquired had an indefinite useful life, and therefore, under SFAS No. 142, they would not have been amortized into results of operations but instead would have been reviewed for impairment and written down and charged to results of operations only in periods in which their recorded value was more than their fair value. These assets were sold in conjunction with the sale of certain assets of Ashford.com described below.

F-13

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

The Company’s consolidated results of operations incorporates Ashford.com’s results of operations commencing on the March 14, 2002 acquisition date.

Sale of Ashford.com Assets

During the three-month period ended September 28, 2002, the Company completed the disposition of a division of Ashford Corporate Gifts, Inc., which is a subsidiary of Ashford.com. The Company received $1.2 million in cash proceeds and recognized a gain on the sale of assets of $379,000.

In December 2002, Ashford.com entered into a definitive agreement with Odimo Acquisition Corp., a wholly owned subsidiary of Odimo to sell certain assets of Ashford.com, including Ashford.com’s trademark, URL, other intangible assets and selected inventory. Under the terms of the agreement, the Company received (i) $956,000 in cash, (ii) a $4.5 million, five year subordinated secured promissory note, valued at approximately $4.0 million, (iii) shares of, and warrants to purchase, Odimo’s Series D preferred stock convertible into 19.9% of the fully diluted common shares of Odimo, valued at approximately $2.2 million, and (iv) a right to receive 10% of Odimo’s consolidated EBITDA from 2003 to 2007 up to a maximum aggregate payment of $2.0 million. EBITDA represents earnings (or loss) before interest income/expense, taxes, depreciation and amortization and other non-cash expenses, including stock-based compensation. The sale was completed on December 27, 2002 and the Company recognized a loss on the sale of assets of $2.9 million.

Cessation of Ashford.com Operations

In conjunction with the sale of certain assets of Ashford.com, the Company also announced and implemented its plan to cease the operations of Ashford.com, which accounted for approximately $21.6 million and $1.0 million of the Company’s net revenues in the fiscal years ended December 28, 2002 and January 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 January 3, 2004, 71 employees had been terminated and actual termination benefits paid were $417,000.

Costs relating to ongoing operations were not included in restructuring costs related to Ashford.com. In accordance with EITF Issue No. 96-9, “Classification of Inventory Markdowns and Other Costs Associated with a Restructuring,” all inventory adjustments that resulted from the cessation of operations of Ashford.com are included in cost of revenues from product sales and were recorded in December 2002. As of December 28, 2002, inventory write downs resulting from the restructuring totaled $1.2 million. No additional inventory write downs from the restructuring were recorded during the fiscal year ended January 3, 2004.

For the fiscal years ended December 28, 2002 and January 3, 2004, restructuring costs related to Ashford.com were as follows:

	Fiscal Year Ended
	December 28, 2002		January 3, 2004
	(in thousands)
Termination benefits	$	417	$	—
Contractual obligations		402		74
Asset impairments		849		—
Other restructuring costs		12		—
	$	1,680	$	74

Termination benefits were comprised of severance-related payments for all employees terminated in connection with the Ashford.com restructuring. The contractual obligations related to agreements entered into by Ashford.com prior to the sale of assets to Odimo Acquisition Corp. Asset impairments relate to the closure of Ashford.com’s fulfillment center and offices. For assets held for disposal as of December 28, 2002, the Company estimated the fair value based on expected salvage value less costs to sell, and the carrying amount of these assets held for disposal was not significant. Other restructuring costs include expenses which were directly attributable to the cessation of operations of Ashford.com.

F-14

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

At January 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 December 28, 2002		Subsequent Accruals, net		Non-Cash Settlements and Other Adjustments		Payments			Balance at January 3, 2004		Due Within 12 Months		Due After 12 Months
Termination benefits	$	417	$	—	$	—	$	(417	)	$	—	$	—	$	—
Contractual obligations		402		74		—		(106	)		370		370		—
Other restructuring costs		12		—		—		(12	)		—		—		—
	$	831	$	74	$	—	$	(535	)	$	370	$	370	$	—

NOTE 4—MARKETABLE SECURITIES

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

	December 28, 2002
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Auction preferred stock	$	1,500	$	—	$	—		$	1,500
U.S. government agency securities		9,986		57		—			10,043
	$	11,486	$	57	$	—		$	11,543
	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

(1) The fair value of marketable securities with loss positions was $6.1 million and the gross unrealized losses on these marketable securities were $19,000 as of January 3, 2004. 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 January 3, 2004, by contractual maturity, are as follows:

	Amortized Cost		Estimated Fair Value
	(in thousands)
Due within one year	$	1,909	$	1,919
Due after one year through two years		10,003		9,993
	$	11,912	$	11,912

F-15

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

NOTE 5—PROPERTY AND EQUIPMENT

The major classes of property and equipment, at cost, as of December 28, 2002 and January 3, 2004 are as follows:

	December 28, 2002			January 3, 2004
	(in thousands)
Computer hardware and software	$	37,686		$	44,113
Building and building improvements		20,773			20,977
Furniture, warehouse and office equipment		4,822			6,712
Land		3,663			3,663
Leasehold improvements		421			413
Construction in progress		468			655
		67,833			76,533
Less: Accumulated depreciation and amortization		(19,164	)		(31,693	)
Property and equipment, net	$	48,669		$	44,840

NOTE 6—LEASES

Capital Leases

During the fourth quarter of fiscal 2000, the Company entered into various capital leases for computer hardware and furniture. As of January 3, 2004, no capital leases remained. The Company’s net investment in these capital leases as of January 3, 2004 was $347,000, which is included in property and equipment. Interest expense recorded on the capital leases for the fiscal years ended December 29, 2001, December 28, 2002 and January 3, 2004 was $116,000, $59,000 and $0, respectively.

Operating Leases

The Company leases its Melbourne, FL customer contact center as well as additional office space and certain fixed assets under noncancellable operating leases. The Company previously leased Ashford.com’s Houston, TX fulfillment center and offices that it formerly maintained and its former Louisville, KY retail store until the first quarter of fiscal 2003. The Company also previously leased its Louisville, KY fulfillment center until April 2002, at which time it was purchased by the Company. Rent expense under operating lease agreements was $1.8 million, $2.3 million and $1.3 million for the fiscal years ended December 29, 2001, December 28, 2002 and January 3, 2004, respectively.

Future minimum lease payments under operating leases as of January 3, 2004 are as follows:

	Operating Leases
	(in thousands)
2004	$	1,335
2005		1,194
2006		692
2007		259
2008		259
Total future minimum lease payments	$	3,739

F-16

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

NOTE 7—STOCKHOLDERS’ EQUITY

Preferred Stock:

On May 24, 2001, the stockholders approved an amendment to the Company’s Certificate of Incorporation that increased the maximum number of authorized shares of preferred stock, $.01 par value, by 4,000,000 to 5,000,000. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by stockholders, and may include voting rights (including the right to vote as a series on particular matters), preferences as to dividends and liquidation and conversion and redemption rights.

In connection with the acquisition of an off-price and action sports business on May 12, 1998, the Company issued 10,000 shares of mandatorily redeemable Series A preferred stock. The redemption price of these shares of preferred stock, which originally was contingent on certain sales and gross profit targets, ranged from a minimum of $.01 per share to a maximum of $50.00 per share, and the shares were redeemable over a five year period. During the fiscal year ended January 1, 2000, 2,000 shares were redeemed for $100,000.

In connection with the sale of the Company’s off-price and action sports division, the Company redeemed an additional 7,200 shares of series A preferred stock on May 26, 2000 for an aggregate redemption price of $360,000. The remaining 800 shares of Series A preferred stock which were outstanding as of December 30, 2000 were redeemable over a three year period for an aggregate redemption price of $8.00.

The Company redeemed an additional 400 shares of the Series A preferred stock during the fiscal year ended December 29, 2001 for an aggregate redemption price of $4.00, redeemed an additional 200 shares of the Series A preferred stock during the fiscal year ended December 28, 2002 for an aggregate redemption price of $2.00, and purchased the remaining 200 shares of the Series A preferred stock on August 19, 2002 for an aggregate purchase price of $2.00. There were no shares of series A preferred stock outstanding as of December 28, 2002.

The remaining 200 shares of Series A preferred stock held by the Company were retired during the three-month period ended September 27, 2003.

Common Stock:

On May 24, 2001, the stockholders approved an amendment to the Company’s Certificate of Incorporation that increased the maximum number of authorized shares of common stock, $.01 par value, by 30,000,000 to 90,000,000.

On July 25, 2003, the Company issued 1,650,000 shares of common stock to Interactive Technology Holdings, LLC (“ITH”) in exchange for warrants held by ITH to purchase 4,500,000 shares of the Company’s common stock. On the day immediately preceding the exchange, the closing price of a share of the Company’s common stock was $9.05. Of the warrants exchanged, 2,500,000 have an exercise price of $10.00 per share and expire between September 2005 and October 2005 and 2,000,000 have an exercise price of $8.15 per share and expire between September 2005 and October 2005. Under the Black-Scholes valuation methodology, the warrants were valued at approximately $23.0 million on the date of exchange. As the value of the warrants settled is in excess of the consideration given to ITH by the Company, the Company did not recognize any stock-based compensation expense relating to this exchange.

On August 23, 2001, pursuant to the terms of a stock purchase agreement entered into on July 20, 2001, the Company issued to Interactive Technology Holdings, LLC, a joint venture company formed by Comcast Corporation and QVC, Inc. (“ITH”), 3,000,000 shares of its common stock at a price of $10.00 per share, for an aggregate purchase price of $30.0 million. At the same time, ITH acquired 1,000,000 shares of the Company’s common stock from Michael G. Rubin, Chairman, President and Chief Executive Officer of the Company, at a price of $10.00 per share, for an aggregate purchase price of $10.0 million.

On July 20, 2001, a right to receive 1,600,000 shares of the Company’s common stock was exercised in lieu of future cash revenue share payments. On the day immediately preceding the exercise of the right, the closing price of a share of the Company’s common stock was $9.00, and the shares were valued at approximately $14.4 million. The 1,600,000 shares of GSI common stock issued are subject to restrictions which prohibit the transfer of such shares. These restrictions lapsed as to 10% of such shares on December 31, 2002 and will lapse as to an additional 10% of such shares on the last day of each quarter thereafter, becoming free of all such transfer restrictions on March 31, 2005.

F-17

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Employee Stock Purchase Plan:

In March 2000, the Company’s board of directors adopted, and in May 2000, the Company’s stockholders approved, the 2000 Employee Stock Purchase Plan (the “ESPP”). A total of 400,000 shares of common stock are authorized for issuance under the ESPP, plus an annual increase equal to the lesser of (i) 50,000 shares, or (ii) such smaller number of shares as determined by the board of directors; provided that the total aggregate number of shares issuable under the ESPP may not exceed 900,000 shares. The ESPP is implemented by the periodic offerings of rights to all eligible employees from time to time, as determined by the board of directors. The maximum period of time for an offering is 27 months. The purchase price per share at which common stock is sold in an offering is established by the board of directors prior to the commencement of the offering, but such price may not be less than the lower of (i) 85% of the fair market value of a share of common stock on the date the right to purchase such shares was granted (generally the first day of the offering) or (ii) 85% of the fair market value of a share of common stock on the applicable purchase date. As of December 28, 2002 and January 3, 2004, 399,201 shares and 548,948 shares, respectively, of common stock had been issued under the ESPP. Currently, there are no shares authorized for issuance under the ESPP by the board of directors.

Treasury Stock:

On August 20, 2003, the Company’s Board of Directors approved the retirement of 73,000 shares of treasury stock held by the Company. The treasury stock was retired during the three-month period ended September 27, 2003.

In June 2002, the Company’s Board of Directors authorized, subject to certain business and market conditions, the purchase of up to $10.0 million of the Company’s common stock. Under this program, the Company repurchased 73,000 shares on the open market during the fiscal year ended December 28, 2002.

During the fiscal year ended December 29, 2001, the Company repurchased 1,210 shares of the Company’s common stock from former employees of Fogdog.

NOTE 8—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.

F-18

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

The following table summarizes the stock option activity for the fiscal years ended December 29, 2001, December 28, 2002 and January 3, 2004:

	Fiscal Year Ended
	December 29, 2001				December 28, 2002				January 3, 2004
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
	(in thousands)				(in thousands)				(in thousands)
Outstanding, beginning of fiscal year	4,552		$	9.29	5,527		$	8.02	5,369		$	8.30
Granted	2,640			7.02	856			12.58	2,035			9.02
Exercised	(889	)		5.73	(270	)		4.73	(194	)		5.15
Cancelled	(776	)		16.21	(744	)		12.85	(494	)		12.12
Outstanding, end of fiscal year	5,527			8.02	5,369			8.30	6,716			8.37
Exercisable, end of fiscal year	1,972			8.82	2,594			8.35	3,837			8.39

The following table summarizes the warrant activity for the fiscal years ended December 29, 2001, December 28, 2002 and January 3, 2004:

	Fiscal Year Ended
	December 29, 2001				December 28, 2002				January 3, 2004
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
	(in thousands)				(in thousands)				(in thousands)
Outstanding, beginning of fiscal year	7,251		$	9.50	7,817		$	9.27	7,082		$	9.25
Granted	1,237			7.48	—			—	—			—
Exercised	(70	)		7.27	(330	)		9.32	(13	)		5.00
Cancelled	(601	)		7.93	(405	)		9.67	(6,266	)		9.46
Outstanding, end of fiscal year	7,817			9.27	7,082			9.25	803			7.68
Exercisable, end of fiscal year	7,567			9.50	6,882			9.44	603			9.40

During the fiscal year ended January 3, 2004, the Company granted to employees options to purchase an aggregate of 1,961,500 shares of the Company’s common stock at prices ranging from $2.34 to $12.34 per share and granted to directors options to purchase an aggregate of 73,750 shares of the Company’s common stock at prices ranging from $3.10 to $11.66 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 fiscal year ended January 3, 2004 was $3.48 and $5.42 per share, respectively. The weighted average fair value and the weighted average exercise price of the options granted with exercise prices above the then-current market prices of the underlying stock during the fiscal year ended January 3, 2004 was $5.78 and $10.00 per share, respectively. For the fiscal year ended January 3, 2004, the Company recorded $563,000 of stock-based compensation expense relating to options and restricted stock, $462,000 relating to employees and $101,000 relating to consultants.

        During the fiscal year ended December 28, 2002, the Company granted to employees options to purchase an aggregate of 807,470 shares of the Company’s common stock at prices ranging from $4.03 to $19.94 per share and granted to directors options to purchase an aggregate of 48,750 shares of the Company’s common stock at a price of $14.68 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 fiscal year ended December 28, 2002 was $8.66 and $12.45 per share, respectively. For the fiscal year ended December 28, 2002, the Company recorded a reduction of $508,000 in stock-based compensation expense relating to options and restricted stock, $21,000 relating to employees and $487,000 relating to consultants.

F-19

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

During the fiscal year ended December 28, 2002, warrants to purchase an aggregate of 634,557 shares of the Company’s common stock were net-exercised. There were no cash proceeds as a result of the net exercises, and the Company issued a net of 279,724 shares of its common stock. The Company recognized $53,000 of stock-based compensation expense for the fiscal year ended December 28, 2002 relating to these net exercises.

During the fiscal year ended December 29, 2001, the Company granted to employees options and restricted stock awards to purchase an aggregate of 2,385,600 shares of the Company’s common stock at prices ranging from $0.01 to $19.00 per share and granted to consultants options to purchase an aggregate of 255,050 shares of the Company’s common stock at prices ranging from $5.69 to $11.63 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 fiscal year ended December 29, 2001 was $4.59 and $7.12 per share, respectively. The weighted average fair value and the weighted average exercise price of the options granted with exercise prices below the then-current market prices of the underlying stock during the fiscal year ended December 29, 2001 was $10.44 and $1.00 per share, respectively. The weighted average fair value and the weighted average exercise price of the options granted with exercise prices above the then-current market prices of the underlying stock during the fiscal year ended December 29, 2001 was $3.02 and $6.94 per share, respectively. For the fiscal year ended December 29, 2001, the Company recorded $3.1 million of stock-based compensation expense relating to options and restricted stock, $2.1 million relating to employees and $1.0 million relating to consultants.

During the fiscal year ended December 29, 2001, the Company modified the vesting schedule or exercise price of 171,150 options. For those options repriced, the exercise prices were changed to $6.94 per share. Because these options were accelerated or repriced, they are subject to variable accounting, and the Company recognized $163,000 of stock-based compensation expense for the fiscal year ended December 29, 2001, which is included in the amount of stock-based compensation expense relating to options described above. The amount of stock-based compensation expense to be recognized in future periods is $0 as there is no future vesting or service period for the modified options.

During the fiscal year ended December 29, 2001, the Company granted to partners and consultants warrants to purchase an aggregate of 1,236,620 shares of the Company’s common stock at prices ranging from $2.50 to $17.15 per share. The weighted average fair value and the weighted average exercise price of the warrants granted with exercise prices at the then-current market prices of the underlying stock during the fiscal year ended December 29, 2001 was $9.74 and $13.40 per share, respectively. The weighted average fair value and the weighted average exercise price of the warrants granted with exercise prices below the then-current market prices of the underlying stock during the fiscal year ended December 29, 2001 was $6.81 and $4.75 per share, respectively. For the fiscal year ended December 29, 2001, the Company recorded $6.8 million of stock-based compensation expense relating to warrants.

On July 20, 2001, the Company issued to ITH a five-year warrant to purchase an aggregate of 300,000 shares of the Company’s common stock at an exercise price of $6.00 per share in consideration for certain corporate development services performed by ITH on behalf of the Company, which is included in the number of warrants granted to partners and consultants described above. The Company valued the warrant at approximately $2.1 million and recorded this amount as stock-based compensation expense, which is included in the amount of stock-based compensation expense relating to warrants for the fiscal year ended December 29, 2001 described above.

F-20

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

The following table summarizes information regarding options and warrants outstanding and exercisable as of January 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 – $ 5.30	1,583	6.64	$	3.45	1,000	$	3.73
$ 5.31 – $ 6.20	1,819	6.37		5.69	1,115		5.70
$ 6.38 – $10.00	2,973	5.63		9.08	1,465		8.59
$10.60 – $24.69	1,130	6.04		16.02	846		16.17
$30.56 – $74.54	14	2.78		38.59	14		38.59
$ 1.00 – $74.54	7,519	6.07		8.30	4,440		8.52

As of January 3, 2004, 599,041 shares of common stock were available for future grants under the Plans.

The fair value of options and restricted stock granted under the Plans during the fiscal years ended December 29, 2001, December 28, 2002 and January 3, 2004 were estimated on the date of grant using the Black-Scholes multiple option pricing model, with the following weighted average assumptions:

	Fiscal Year Ended
Assumption	December 29, 2001		December 28, 2002		January 3, 2004
Dividend yield	None		None		None
Expected volatility	99.00	%	102.00	%	104.00	%
Average risk free interest rate	3.75	%	3.59	%	2.63	%
Average expected lives	3.41 years		3.93 years		3.41 years

No warrants were granted or issued by the Company during the fiscal years ended December 28, 2002 and January 3, 2004. The fair value of warrants granted and issued during the fiscal year ended December 29, 2001 were estimated on the date of grant using the Black-Scholes multiple option pricing model, with the following range of assumptions:

Assumption	Fiscal Year Ended December 29, 2001
Dividend yield	None
Expected volatility	90.00%–119.00	%
Average risk free interest rate	3.58%–4.81	%
Average expected lives	1.00–5.00 years

F-21

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

NOTE 9—INCOME TAXES

The loss from continuing operations before income taxes and the related benefit from income taxes were as follows:

	Fiscal Year Ended
	December 29, 2001		December 28, 2002		January 3, 2004
	(in thousands)
Loss from continuing operations before income taxes:
Domestic	$	30,595	$	33,809	$	12,062
Foreign		—		—		—
Total	$	30,595	$	33,809	$	12,062
Benefit from income taxes:
Current:
Federal	$	—	$	—	$	—
State		—		—		—
Foreign		—		—		—
Total Current	$	—	$	—	$	—
Deferred:
Federal	$	—	$	—	$	—
State		—		—		—
Foreign		—		—		—
Total Deferred	$	—	$	—	$	—
Total:
Federal	$	—	$	—	$	—
State		—		—		—
Foreign		—		—		—
Total	$	—	$	—	$	—

For the fiscal years ended December 29, 2001, December 28, 2002 and January 3, 2004, the Company had no provision for federal and state income taxes.

F-22

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

The significant components of net deferred tax assets and liabilities as of December 29, 2001, December 28, 2002 and January 3, 2004 consisted of the following:

	Fiscal Year Ended
	December 29, 2001			December 28, 2002			January 3, 2004
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	58,345		$	171,089		$	174,249
Deferred revenue		3,334			6,106			6,104
Employee benefits		2,632			193			248
Inventory		692			1,152			1,149
Prepaid expenses		143			—			—
Depreciation		1,332			2,841			914
Provision for doubtful accounts		611			2,137			1,556
Gross deferred tax assets		67,089			183,518			184,220
Deferred tax liabilities:
Prepaid expenses		—			(166	)		—
Net deferred tax assets and liabilities		67,089			183,352			184,220
Valuation allowance		(67,089	)		(183,352	)		(184,220	)
Net deferred tax asset	$	—		$	—		$	—

Due to the uncertainty surrounding the realization of the Company’s tax attributes in future income tax returns, the Company has placed a valuation allowance against its otherwise recognizable deferred tax assets. As of January 3, 2004, the Company 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 the Company’s stock, as defined by Section 382 of the Internal Revenue Code. The Company expects that net operating losses of approximately $243.2 million will expire before they can be utilized.

The differences between the statutory federal income tax rate and the effective income tax rate are provided in the following reconciliation:

	Fiscal Year Ended
	December 29, 2001		December 28, 2002		January 3, 2004
Statutory federal income tax rate	(34.0	)%	(34.0	)%	(34.0	)%
Increase (decrease) in taxes resulting from:
Valuation allowance	32.9	%	33.7	%	33.4	%
Nondeductible amortization	0.8	%	—		—
Other	0.3	%	0.3	%	0.6	%
Effective income tax rate	0.0	%	0.0	%	0.0	%

NOTE 10—LOSSES PER SHARE

Losses per share 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 fiscal year. Outstanding common stock options and warrants have been excluded from the calculation of diluted losses per share because their effect would be antidilutive.

F-23

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

	Fiscal Year Ended
	December 29, 2001			December 28, 2002			January 3, 2004
	(in thousands)
Net loss	$	(30,595	)	$	(33,809	)	$	(12,062	)
Weighted average shares outstanding—basic and diluted		34,033			38,566			39,638
Outstanding common stock options having no dilutive effect		5,527			5,369			6,716
Outstanding common stock warrants having no dilutive effect		7,817			7,082			803

NOTE 11—COMPREHENSIVE LOSS

The following table summarizes the components of comprehensive loss:

	Fiscal Year Ended
	December 29, 2001			December 28, 2002			January 3, 2004
	(in thousands)
Net loss	$	(30,595	)	$	(33,809	)	$	(12,062	)
Other comprehensive income (loss):
Net unrealized gains (losses) on available-for-sale securities		—			57			(57	)
Other comprehensive income (loss)		—			57			(57	)
Comprehensive loss	$	(30,595	)	$	(33,752	)	$	(12,119	)

NOTE 12—SIGNIFICANT TRANSACTIONS/CONCENTRATIONS OF CREDIT RISK

Net revenues included $6.1 million, $2.5 million and $0 for the fiscal years ended December 29, 2001, December 28, 2002 and January 3, 2004, respectively, related to bulk sales to one entity. As of December 28, 2002 and January 3, 2004, the amount included in accounts receivable related to these bulk sales was $2.6 million and $0, respectively.

Net revenues included $19.1 million, $8.3 million and $0 for the fiscal years ended December 29, 2001, December 28, 2002 and January 3, 2004, respectively, from sales of one of the Company’s partner’s products sold primarily through its direct response television campaigns in addition to Web site and toll-free number sales. As of January 3, 2004, the amount included in accounts receivable related to these sales was $0.

As of December 28, 2002 and January 3, 2004, the Company had $9.5 million and $3.4 million, respectively, of operating cash and $63.0 million and $66.1 million, respectively, of cash equivalents and marketable securities invested with three financial institutions, which are potentially subject to credit risk. The composition of these investments are regularly monitored by management of the Company.

NOTE 13—MAJOR SUPPLIERS AND CUSTOMERS/ECONOMIC DEPENDENCY

During the fiscal year ended January 3, 2004, the Company purchased inventory from one supplier amounting to $50.4 million or 37% of total inventory purchased.

During the fiscal year ended December 28, 2002, the Company purchased inventory from one supplier amounting to $19.4 million or 20% of total inventory purchased.

F-24

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

During the fiscal year ended December 29, 2001, the Company purchased inventory from two suppliers amounting to $12.8 million and $8.7 million or 23% and 16% of total inventory purchased, respectively.

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

For the fiscal year ended December 28, 2002, net revenues included $23.6 million or 14% from Kmart Corporation (“Kmart”). The Company operates the e-commerce business for Bluelight.com (“Bluelight”), a subsidiary of Kmart. In March 2003, the Company and Bluelight modified their 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 the Company and Bluelight. The Company will, however, continue to receive a percentage of sales through the Kmart Web site for the services that the Company provides under this agreement.

No other customer accounted for more than 10% of net revenues for any period presented.

NOTE 14—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 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 currently in progress. 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.

F-25

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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 January 3, 2004, the Company had employment agreements with several of its employees for an aggregate annual base salary of $2.4 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 January 3, 2004, the Company was contractually committed for the purchase of future advertising totaling approximately $311,000 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 (see Note 2).

Partner Revenue Share Payments

As of January 3, 2004, the Company was contractually committed to minimum cash revenue share payments of $375,000 per fiscal quarter through July, 2011 and a minimum cash revenue share payment of $325,000 in July, 2004.

Partner Relationships

The Company operates e-commerce businesses for its partners pursuant to contractual agreements. The Company generally operates each of these e-commerce businesses based on one of three models, or a combination of those models — GSI-owned inventory model, partner-owned inventory model or business-to-business model.

GSI-Owned Inventory Model — The Company selects and purchases inventory from vendors, sells the inventory directly to customers through its e-commerce platform, records revenues generated from the sale of products through its e-commerce platform and generally pays a percentage of those revenues to the respective partners in exchange for the rights to use their brand names and logos and the promotions and advertising that the Company’s partners agree to provide. In addition, for its sporting goods partners, the Company centralizes inventory management across multiple partner businesses increasing the frequency of inventory turns and thus reducing obsolescence risk and financing costs. The Company has a buying and merchandising organization that buys and sources products in the following merchandise categories: sporting goods, consumer electronics, general merchandise and branded and unique licensed entertainment products. For products from its inventory, the Company establishes the prices for products that it offers through its e-commerce platform. For its retail partners, to the extent possible, the Company strategically prices these products to be consistent with the prices in its partners’ retail stores or other selling venues. Accordingly, the Company may maintain different pricing for the same products across its partners’ e-commerce platform and between the Company’s e-commerce platform and its partners’ retail stores and other selling venues.

Partner-Owned Inventory Model — The Company manages certain aspects of its partners’ overall e-commerce businesses in exchange for a combination of fixed and/or variable service fees usually calculated as a percentage of sales. The Company’s partners select the merchandise to be sold, buy and own all or a portion of the inventory and provide offline marketing support. The partner is the seller of the merchandise and establishes the prices.

Business-to-Business Model — The Company generally provides a product information database to these partners which they use to merchandise certain departments of their e-commerce businesses. These partners process orders on their Web sites and deliver the orders to the Company electronically. The Company then sells the products from its inventory or through its network of drop shippers and transfers title to the partners at a predetermined price. The orders are then sent to customers on behalf of these partners. These partners perform all of their own customer service.

F-26

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

NOTE 15—SAVINGS PLAN

The Company sponsors a voluntary defined contribution savings plan covering all U.S. employees. Company contributions to the plan for each employee may not exceed 3.0% of the employee’s annual salary. Total Company contributions were $269,000, $396,000 and $419,000 for the fiscal years ended December 29, 2001, December 28, 2002 and January 3, 2004, respectively.

NOTE 16—SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

	Fiscal Year Ended
	December 29, 2001		December 28, 2002			January 3, 2004
	(in thousands)
Cash paid during the year for interest.	$	608	$	749		$	—
Acquisition of Ashford.com:
Fair value of assets acquired (including goodwill)	$	—	$	27,575		$	—
Liabilities assumed		—		(11,834	)		—
Stock issued		—		(6,881	)		—
Cash paid		—		8,860			—
Cash acquired		—		—			—
Net cash paid for acquisition of Ashford.com	$	—	$	8,860		$	—
Noncash Investing and Financing Activities:
Net unrealized gains (losses) on available-for-sale securities	$	—	$	57		$	(57	)
Receipt of a promissory note in connection with the sale of certain assets of Ashford.com	$	—	$	3,976		$	—
Receipt of shares of, and warrants to purchase, Odimo’s Series D preferred stock in connection with the sale of certain assets of Ashford.com	$	—	$	2,159		$	—
Issuance of common stock upon exercises of options granted to employees of the discontinued operations	$	638	$	4		$	3
Issuance of common stock upon the exercise of a right in lieu of future cash partner revenue share payments	$	14,400	$	—		$	—

NOTE 17—BUSINESS SEGMENTS

The Company operates in one principal business segment which 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, 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, bulk 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. All of the Company’s net revenues and operating results are in the United States and Canada. Net revenues and operating results in Canada are not significant. All of the Company’s identifiable assets are in the United States.

NOTE 18—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 $1.8 million, $2.7 million and $2.1 million on sales to this related party for the fiscal years ended December 29, 2001, December 28, 2002 and January 3, 2004, respectively. The terms of these sales are comparable to those with other business-to-business partners of the Company. As of January 3, 2004, the amount included in accounts receivable was $436,000 related to these sales. In the three month period ended September 27, 2003, the Company took a charge of $325,000 for the settlement of disputed amounts billed to QVC for product and shipping costs.

F-27

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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 $484,000 for the fiscal year ended January 3, 2004 of which $414,000 related directly to products shipped and was charged to cost of revenues from product sales and $70,000 related to professional services provided and was charged to sales and marketing expense.

NOTE 19—NOTE PAYABLE

On April 20, 2000, the Company entered into a $5.3 million mortgage note collateralized by the land, building and improvements of its corporate headquarters which have a carrying value of $7.4 million. The mortgage note had a term of ten years and bore interest at 8.49% per annum. In November 2002, the Company pre-paid the $5.2 million outstanding principal balance remaining on the mortgage note. In connection with the early retirement of the mortgage note, the Company paid a $250,000 early termination fee, which is recorded in interest expense. The Company recorded $453,000, $690,000 and $0 of interest expense related to this note during the fiscal years ended December 29, 2001, December 28, 2002 and January 3, 2004, respectively.

NOTE 20—QUARTERLY RESULTS (UNAUDITED)

The following tables contain selected unaudited Statement of Operations information for each quarter of the fiscal years ended December 28, 2002 and January 3, 2004. The Company believes that the following information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.

	For the Fiscal Year Ended December 28, 2002
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
	(in thousands, except per share amounts)
Net revenues	$	31,925		$	33,069		$	32,323		$	75,321
Gross profit	$	11,570		$	12,670		$	12,066		$	22,074
Net loss	$	(5,305	)	$	(5,167	)	$	(8,565	)	$	(14,722	)
Losses per share—basic and diluted(1):
Net loss	$	(0.14	)	$	(0.13	)	$	(0.22	)	$	(0.38	)
Weighted average shares outstanding—basic and diluted		38,050			38,674			38,769			38,771

(1) The sum of the quarterly per share amounts may not equal per share amounts reported for year-to-date periods. This is due to changes in the number of weighted average shares outstanding and the effects of rounding for each period.

F-28

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

	For the Fiscal Year Ended January 3, 2004
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
	(in thousands, except per share amounts)
Net revenues	$	48,879		$	50,348		$	47,483		$	95,209
Gross profit	$	17,026		$	17,041		$	16,705		$	36,416
Net income (loss)	$	(5,483	)	$	(3,777	)	$	(5,545	)	$	2,743
Income (losses) per share—basic and diluted(1):
Net income (loss)	$	(0.14	)	$	(0.10	)	$	(0.14	)	$	0.07
Weighted average shares outstanding—basic		38,784			38,838			40,109			40,737
Weighted average shares outstanding—diluted		38,784			38,838			40,109			42,180

(1) The sum of the quarterly per share amounts may not equal per share amounts reported for year-to-date periods. This is due to changes in the number of weighted average shares outstanding and the effects of rounding for each period.

NOTE 21—SUBSEQUENT EVENT

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 and to obtain an option to purchase an additional parcel of land. The Company expects to close on the purchase in early May 2004. The Company has a thirty day period beginning on the signing date to investigate the property and may elect to terminate this agreement for any reason prior to the end of such thirty day period without any penalty or further obligation. The purchase price for the building is $17.0 million. The Company will be required to invest in the building in order to occupy it. The Company expects to spend $3.0 to $5.0 million in building improvements and expects that it will finance a portion of the purchase price and improvements through a mortgage financing, although there can be no guarantee that the Company will find financing on favorable terms.

NOTE 22—RESTATED CONSOLIDATED STATEMENT OF CASH FLOWS

The Company has restated its consolidated statement of cash flows for the fiscal year ended January 3, 2004 from that which was presented in 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. The Company has reclassified the portion of cash inflows representing principal payments on the Company’s notes receivable from cash flows from operating activities to cash flows from investing activities. This change had the effect of decreasing both net cash provided by operating activities and net cash used in investing activities for the fiscal year ended January 3, 2004 by $900,000. We also reclassified amortization of a discount on a note receivable of $180,000 from changes in notes receivable to amortization of discount on note receivable in our consolidated statement of cash flows for the fiscal year ended January 3, 2004. These changes had no effect on the net decrease in cash and cash equivalents for the fiscal year ended January 3, 2004.

F-29

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Concluded)

Presented below are the previously filed consolidated statement of cash flows for the fiscal year ended January 3, 2004, the revisions described above and the restated consolidated statement of cash flows for the fiscal year ended January 3, 2004:

GSI COMMERCE, INC. AND SUBSIDIARIES

RESTATED CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)

	Previously Filed Fiscal Year Ended January 3, 2004			Revisions			Restated Fiscal Year Ended January 3, 2004
Cash Flows from Operating Activities:
Net loss	$	(12,062	)	$			$	(12,062	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		11,386						11,386
Stock-based compensation		1,935						1,935
Non-cash restructuring costs related to Ashford.com		—						—
Net loss on sale of Ashford.com assets		—						—
Amortization of discount on note receivable		—			(180	)		(180	)
Changes in operating assets and liabilities:
Accounts receivable, net		(924	)					(924	)
Inventory		1,396						1,396
Prepaid expenses and other current assets		230						230
Notes receivable		690			(900	)		(30	)
					180
Other assets, net		—						—
Accounts payable and accrued expenses and other		(1,729	)					(1,729	)
Deferred revenue		(27	)					(27	)
Net cash provided by (used in) operating activities		895			(900	)		(5	)
Cash Flows from Investing Activities:
Acquisition of property and equipment, net		(7,519	)					(7,519	)
Reductions to goodwill		—						—
Proceeds from sale of Ashford.com assets		—						—
Net cash paid for acquisition of Ashford.com		—						—
Payments received on note receivable		—			900			900
Purchases of marketable securities		(15,976	)					(15,976	)
Sales of marketable securities		15,550						15,550
(Purchases) sales of short-term investments		2,280						2,280
Net cash used in investing activities		(5,665	)		900			(4,765	)
Cash Flows from Financing Activities:
Repurchase of warrants		—						—
Repayments of capital lease obligations		(78	)					(78	)
Repayments of mortgage note		—						—
Retirement of Ashford.com revolving credit facility		—						—
Purchases of treasury stock		—						—
Proceeds from sale of common stock and warrants		349						349
Proceeds from exercises of common stock options and warrants		1,053						1,053
Contribution from stockholder		—						—
Net cash provided by (used in) financing activities		1,324			—			1,324
Net increase (decrease) in cash and cash equivalents		(3,446	)		—			(3,446	)
Cash and cash equivalents, beginning of year		61,004			—			61,004
Cash and cash equivalents, end of year	$	57,558		$	—		$	57,558

F-30

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 333-49363, 333-47760, 333-54060, 333-54062, 333-53982, 333-65694, 333-66650, and 333-109043 of GSI Commerce, Inc. on Forms S-8 of our report dated March 16, 2004, August 20, 2004, as to Note 22 (which expresses an unqualified opinion and includes an explanatory paragraph relating to the restatement described in Note 22), appearing in the Annual Report on Form 10-K/A Amendment No. 2 of GSI Commerce, Inc. for the year ended January 3, 2004.

Philadelphia, Pennsylvania

August 25, 2004

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-K/A 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; and

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.

August 23, 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-K/A 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; and

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.

August 23, 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 Annual Report on Form 10-K/A for the period ended January 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 23, 2004

By:	/s/ Jordan M. Copland
	Jordan M. Copland
	Chief Financial Officer

August 23, 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.