Amendment No. 3 to Form S-3 Registration Statement

S-3/A 1 ds3a.htm AMENDMENT NO. 3 TO FORM S-3 REGISTRATION STATEMENT Amendment No. 3 to Form S-3 Registration Statement

As filed with the Securities and Exchange Commission on May 25, 2005

Registration No. 333-124737

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 3 TO FORM S-3

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

GSI COMMERCE, INC.

(Exact name of Registrant as specified in its charter)


Delaware		04-2958132
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification number)

GSI Commerce, Inc.

935 First Avenue

King of Prussia, PA 19406

(610) 265-3229

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Arthur H. Miller

Executive Vice President and General Counsel

GSI Commerce, Inc.

935 First Avenue

King of Prussia, PA 19406

Telephone: (610) 265-3229

Facsimile: (610) 265-1730

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copy to:

Francis E. Dehel, Esquire

Melissa Palat Murawsky, Esquire

Blank Rome LLP

One Logan Square

Philadelphia, PA 19103

Telephone: (215) 569-5500

Facsimile: (215) 832-5532

Andrew J. Pitts, Esquire

Cravath, Swaine & Moore LLP

Worldwide Plaza

825 Eighth Avenue

New York, NY 10019

Telephone: (212) 474-1000

Facsimile: (212) 474-3700

As soon as practicable after the effective date of the Registration Statement.

(Approximate Date of Commencement of Proposed Sale to the Public)

If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: ¨

If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. ¨

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.


PROSPECTUS (Subject to Completion)
Issued May 25, 2005

3,103,500 Shares

LOGO

COMMON STOCK

We are offering 1,500,000 shares of our common stock. The selling stockholders identified in this prospectus are offering 1,603,500 shares of our common stock; 1,513,500 of the shares of common stock being sold by the selling stockholders are currently issued and outstanding and 90,000 of the shares of common stock being sold by the selling stockholders pursuant to this prospectus are issuable upon exercise of options held by such selling stockholders. We will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

Our common stock is listed on the Nasdaq National Market under the symbol “GSIC.” On May 18, 2005, the last reported sale price of our common stock on the Nasdaq National Market was $14.97 per share.

Concurrent with this offering of shares of our common stock, we are also offering under a separate prospectus $50.0 million aggregate principal amount ($57.5 million if the underwriters’ option to purchase additional notes is exercised in full) of our convertible notes due 2025. The offering of shares of our common stock under this prospectus is not contingent on the consummation of the concurrent note offering.

Investing in our common stock involves risks. You should carefully read and consider “Risk Factors” beginning on page 9.

PRICE $ A SHARE


	Price to Public	Underwriting Discounts and Commissions	Proceeds, before Expenses, to GSI Commerce, Inc.	Proceeds to Selling Stockholders
Per share	$	$	$	$
Total	$	$	$	$

We and the selling stockholders have granted the underwriters the right to purchase up to an additional 465,525 shares (up to 232,763 shares from us and up to 232,762 shares from the selling stockholders) of our common stock to cover over-allotments.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Morgan Stanley & Co. Incorporated expects to deliver the shares of common stock to purchasers on or about , 2005.


Sole Bookrunning Manager				Co-Lead Manager
MORGAN STANLEY				Bear, Stearns & Co. Inc.



	Co-Managers
CIBC World Markets	Friedman Billings Ramsey	Pacific Crest Securities

, 2005

TABLE OF CONTENTS


		Page
Prospectus Summary		1
Risk Factors		9
Forward-Looking Statements		23
Use of Proceeds		24
Common Stock Price Range		24
Dividend Policy		24
Capitalization		25
Selected Consolidated Financial Data		26
Management’s Discussion and Analysis of Financial Condition and Results of Operations		28


		Page
Business		50
Management		59
Principal Stockholders		63
Selling Stockholders		66
Description of Material Indebtedness		68
Description of Capital Stock		71
Underwriters		75
Legal Matters		78
Experts		78
Additional Information		78
Incorporation By Reference		78
Index to Financial Statements		F-1

You should rely only on the information contained or incorporated by reference in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with information different from that contained in this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, offering to sell shares of common stock or seeking offers to buy shares of common stock in any jurisdiction where offers and sales are not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the common stock offered hereby. As used in this prospectus, “GSI,” “company,” “we,” “our,” “ours” and “us” refer to GSI Commerce, Inc. and its consolidated subsidiaries, except where the context otherwise requires or as otherwise indicted.

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.

PROSPECTUS SUMMARY

This summary highlights selected information about us and this offering. This summary is not complete and may not contain all of the information that is important to you. We encourage you to read this prospectus, including the information under the caption “Risk Factors,” the information we incorporate by reference, and the documents to which we refer you in their entirety. Our fiscal year ends on the Saturday nearest the last day of December. References to fiscal 2000, fiscal 2001, fiscal 2002, fiscal 2003 and fiscal 2004 refer to the years ended December 30, 2000, December 29, 2001, December 28, 2002, January 3, 2004 and January 1, 2005, respectively. References to fiscal 2005 refer to the year ending December 31, 2005.

Overview

We are a leading provider of e-commerce solutions that enable retailers, branded manufacturers, entertainment companies and professional sports organizations to operate e-commerce businesses. We began our e-commerce business in 1999 and initially targeted the sporting goods category. Since fiscal 2001, we have expanded into five additional categories: apparel, health and beauty, consumer electronics, entertainment and home. We either operate, or have agreements to operate, all or portions of the e-commerce businesses for approximately 50 partners, including Dick’s Sporting Goods^®, Estee Lauder/Gloss.com^®, Linens-n-Things^®, Major League Baseball^®, NASCAR^®, palmOne^®, Public Broadcasting System (PBS)^®, Polo.com^SM, RadioShack^®, and The Sports Authority^®. We provide solutions for our partners through our integrated e-commerce platform, which is comprised of three components: core technology, supporting infrastructure and partner services.

Industry Overview

Market Size and Opportunity

We believe consumer use of the Internet to make purchases will continue to increase. According to Forrester Research, online general merchandise sales (which excludes automobiles, groceries and travel) in the United States were estimated to be $79.0 billion and accounted for approximately 8.0 percent of total general merchandise sales in 2004. Forrester Research estimates that online general merchandise sales will grow at a 14.3 percent compounded annual growth rate to reach $176.1 billion and account for approximately 15.2 percent of total general merchandise sales in 2010.

Forrester Research also estimates that online general merchandise sales in the categories in which we currently operate were approximately $43.9 billion in 2004 and will grow at a 16.6 percent compounded annual growth rate to reach approximately $110.1 billion in 2010.

We believe the growing use of the Internet by consumers to purchase merchandise is driven by many factors including:

increased acceptance of e-commerce as a convenient means to shop, as illustrated by Jupiter Research’s estimate that 90.5 million consumers bought online in 2004, compared to 72.8 million consumers in 2003;

decreased concerns about the security and reliability of e-commerce;

technology innovations, such as broadband Internet access, that have enhanced the e-commerce shopping experience; and

increased recognition and support by retailers and manufacturers of the Internet as an important sales channel.

Need for “Partnered” E-Commerce Solutions

According to Forrester Research, it is strategically important for retailers to participate in multi-channel retailing (which includes e-commerce) to remain competitive. While retailers recognize the importance of e-commerce to their overall strategy, online sales were estimated to account for only 7.0 percent of total retail sales in 2004. Because online sales generally represent a small part of retailers’ businesses, we believe that the ability to operate an e-commerce business is not part of their core competency. We also believe that, as a result, many retailers struggle to justify making the level of investment in technology, infrastructure and expertise to support a high-quality e-commerce business. Our belief is supported by Forrester Research which has stated that there has been an increase in interest in hosted or partnered e-commerce solutions. By partnering, retailers can gain access to higher quality technology, infrastructure and expertise than many of them could justify investing in on their own.

Our Solution

We believe our solutions enable our partners to grow their e-commerce businesses more rapidly and more cost-effectively than they could on their own. We provide solutions for our partners through our integrated e-commerce platform, which is a comprehensive and integrated suite of core technology, supporting infrastructure and partner services. Our solutions focus on the needs of our partners, including promoting their brand identity and enabling them to remain focused on their core offline businesses. Because we operate multiple partners on the same integrated platform, we believe that we can provide our partners with a broader range of high quality e-commerce capabilities, expertise and infrastructure than our partners could justify building and maintaining on their own. We continually seek to enhance our capabilities to grow our partners’ e-commerce businesses and provide a high-quality customer experience. We structure our partner relationships to align our incentives with those of our partners, primarily by tying the financial benefit that we derive from our relationships to the performance of our partners’ e-commerce businesses.

The majority of our partners use all of the components of our e-commerce platform. While all of our partners’ e-commerce businesses, with the exception of our business-to-business partners, operate on the core technology component of our platform, each partner may select the specific elements of our supporting infrastructure and partner services that best fit their needs. We customize the design and operation of our partners’ e-commerce businesses, as well as develop features and functions requested by partners. We are able to offer features and functions developed for one partner across our entire partner base.

Our E-Commerce Platform

Our integrated e-commerce platform consists of three main components – core technology, supporting infrastructure and partner services. Using these components, we can develop, implement and support all aspects of a partner’s e-commerce business. These components include:


Core Technology	Supporting Infrastructure	Partner Services
· Web site administration	· Fulfillment	· Creative design, Web site usability, testing and enhancements

· Web infrastructure and hosting	· Drop shipping	· Channel integration

· Business intelligence	· Customer service	· Business-to-business (B-to-B) services

· E-commerce engine	· Buying	· Content development and imaging

· Order management		· E-commerce strategy

		· Online marketing

		· Customer relationship management (CRM)

Growth Strategy

Our objective is to grow our business by expanding the e-commerce businesses of our existing partners and by adding new partners. Key elements of our growth strategy include:

Grow Our Existing Partners’ Businesses

The financial benefit that we derive from our relationships with our partners is primarily tied to the performance of our partners’ e-commerce businesses. Accordingly, it is our strategy to grow our business by growing our partners’ e-commerce businesses. We implement this strategy by working closely with our partners to identify initiatives designed to grow their e-commerce businesses, which may include online and email marketing campaigns, shipping products to customers outside of the United States, multi-channel integration efforts and providing customized technology development.

We continuously seek to enhance our capabilities to improve our partners’ e-commerce businesses and enrich the overall customer experience. In addition, we plan to continue to invest in technology and infrastructure to improve the features and functions, speed, navigation, search and usability of our partners’ e-commerce businesses, as well as the customer service, fulfillment and other services we offer as part of our e-commerce platform. We also evaluate opportunities to acquire complementary or new businesses or assets as part of our continuing efforts to add value to our partners’ e-commerce businesses.

Expand Our Partner Base

We intend to grow our business by adding new partners that have strong brand franchises within the categories we target. We seek to attract new partners by providing solutions that enable partners to grow their e-commerce businesses more rapidly and cost-effectively than they could on their own. Because we provide our solutions through an integrated multi-partner platform, we are able to use the enhanced capabilities we have developed for our existing partners to attract new partners.

We began our e-commerce business in fiscal 1999 and initially targeted the sporting goods category. Since fiscal 2001, we have expanded into five additional categories: apparel, health and beauty, consumer electronics, entertainment and home. In fiscal 2004, we added nine new partners, including three partners in sporting goods, four partners in apparel, one partner in entertainment and one business-to-business partner. As of May 17, 2005, we have publicly announced the addition of five new partners in fiscal 2005, including two partners in sporting goods, one partner in apparel, one partner in consumer electronics and one partner in health and beauty.

Principal Executive Offices

We are a Delaware corporation organized in 1986. Our principal executive offices are located at 935 First Avenue, King of Prussia, PA 19406. Our telephone number is (610) 265-3229.

THE OFFERING


Common stock offered:

By GSI Commerce, Inc.		1,500,000 shares

By selling stockholders		1,603,500 shares

Total		3,103,500 shares

Common stock to be outstanding after this offering		43,454,915 shares

Over-allotment option		The underwriters have an option to purchase up to 232,763 additional shares of our common stock from us and up to 232,762 additional shares of our common stock from the selling stockholders to cover any over-allotments.

Use of proceeds		We intend to use the net proceeds from the shares sold by us, together with the net proceeds from the concurrent offering of convertible notes described below, for working capital and general corporate purposes, including possible acquisitions. We will not receive any of the proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds.”

Dividend policy		We do not expect to pay dividends on our shares of common stock in the foreseeable future.

Nasdaq National Market symbol		GSIC

Of the shares to be sold by selling stockholders in this offering, 1,513,500 shares of common stock are currently issued and outstanding and 90,000 shares of common stock are issuable upon exercise of options held by such selling stockholders.

The number of shares of common stock to be outstanding after this offering is based on 41,864,915 shares outstanding as of May 12, 2005 and assumes the exercise by certain selling stockholders of options to purchase 90,000 shares of common stock to be sold in this offering and, unless we indicate otherwise, excludes:

6,536,795 shares of common stock reserved for issuance upon exercise of outstanding options granted under our 1996 Equity Incentive Plan, also referred to as the 1996 plan, with a weighted average exercise price of $9.63 per share;

153,750 shares of common stock reserved for issuance upon exercise of outstanding options granted under other of our plans with a weighted average exercise price of $3.14 per share;

239,146 shares of common stock reserved for issuance upon vesting of outstanding restricted stock units awarded under our 1996 plan;

35,526 additional shares of common stock available for issuance under our 1996 plan;

815,250 shares of common stock reserved for issuance upon exercise of outstanding warrants which are exercisable at an average exercise price of $7.71 per share, of which 612,250 are currently exercisable;

232,763 shares of common stock that the underwriters have an option to purchase from us solely to cover over-allotments; and

an estimated shares of common stock that initially will be issuable upon conversion of our convertible notes that are being offered concurrently with this offering, assuming exercise of the underwriters’ over-allotment option in full.

In March 2005, our board of directors approved the 2005 Equity Incentive Plan, also referred to as the 2005 plan. The 2005 plan is being submitted as a proposal at our 2005 annual meeting of stockholders. If the 2005 plan is adopted by stockholders, the 2005 plan will replace, on a prospective basis, our 1996 plan and no new grants will be made from our 1996 plan. Any shares remaining available for issuance under the 1996 plan will be rolled into the 2005 plan. A maximum of 2,000,000 shares plus those shares remaining available for issuance under the 1996 plan will be available for issuance under the 2005 plan. The 2,000,000 shares that have been reserved for issuance under the 2005 plan are excluded from the number of shares of common stock to be outstanding after this offering as of May 12, 2005.

CONCURRENT OFFERING

Concurrently with this offering, we are also offering by separate prospectus $50.0 million aggregate principal amount of convertible notes due 2025 (plus up to an additional $7.5 million principal amount of notes available for purchase by the underwriters of the notes to cover over-allotments). We cannot assure you that we will complete the concurrent offering of our convertible notes. Completion of this offering of shares is not contingent upon completion of the convertible notes offering. See “Description of Material Indebtedness—Concurrent Offering of Convertible Notes Due 2025.”

RISK FACTORS

In evaluating an investment in our common stock, prospective investors should carefully consider, along with the other information set forth in this prospectus and incorporated by reference, the specific factors set forth under “Risk Factors” beginning on page 9.

SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables present portions of our financial statements and are not complete. You should read the following summary consolidated financial data together with our unaudited condensed consolidated financial statements and our audited consolidated financial statements and related notes to our financial statements included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The summary statement of operations data for the years ended December 28, 2002, January 3, 2004 and January 1, 2005 and the balance sheet data as of January 3, 2004 and January 1, 2005 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary statement of operations data for the years ended December 30, 2000 and December 29, 2001 and balance sheet data as of December 30, 2000, December 29, 2001 and December 28, 2002 are derived from our audited consolidated financial statements that are not included in this prospectus. The summary statement of operations data for the three months ended April 3, 2004 and April 2, 2005 and the balance sheet data as of April 2, 2005 are derived from our unaudited condensed consolidated financial statements included in this prospectus and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly the results of operations and financial positions for those periods. Our results for the three months ended April 2, 2005 are not necessarily indicative of the results to be expected for the full year. Historical results are not necessarily indicative of the results to be expected in the future.


	Fiscal Year Ended										Three Months Ended
	December 30, 2000		December 29, 2001		December 28, 2002		January 3, 2004		January 1, 2005		April 3, 2004		April 2, 2005
	(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Net revenues from product sales	$	41,808	$	98,325	$	154,819	$	216,510	$	274,988	$	56,878	$	76,652
Service fee revenues		1,000		4,285		17,819		25,409		60,344		9,390		14,706

Net revenues		42,808		102,610		172,638		241,919		335,332		66,268		91,358
Cost of revenues		29,567		67,586		114,258		154,731		203,135		41,508		57,626

Gross profit	$	13,241	$	35,024	$	58,380	$	87,188	$	132,197	$	24,760	$	33,732

Operating expenses:
Sales and marketing, exclusive of $1,486, $847, $532, $1,527, $2,720, $494 and $189 reported below as stock-based compensation, respectively		37,730		32,390		50,965		59,613		78,919		17,449		20,911
Product development, exclusive of $0, $461, $(44), $42, $350, $49 and $(30) reported below as stock-based compensation, respectively		7,292		8,590		11,833		14,124		20,181		4,483		6,589
General and administrative, exclusive of $3,497, $8,974, $(87), $366, $530, $84 and $(389) reported below as stock-based compensation, respectively		8,730		10,638		14,863		13,295		18,217		3,920		5,225
Restructuring costs related to Ashford.com(1)		—		—		1,680		74		—		—		—
Net loss on sale of Ashford.com assets		—		—		2,566		—		—		—		—
Stock-based compensation		4,983		10,282		401		1,935		3,600		627		(230	)
Depreciation and amortization		8,074		6,662		10,509		11,386		10,944		2,599		3,122

Total operating expenses	$	66,809	$	68,562	$	92,817	$	100,427	$	131,861	$	29,078	$	35,617


	Fiscal Year Ended															Three Months Ended
	December 30, 2000			December 29, 2001			December 28, 2002			January 3, 2004			January 1, 2005			April 3, 2004			April 2, 2005
	(in thousands, except per share data)
Other (income) / expense:
Other (income) / expense		—			(502	)		—			—			620			—			(99	)
Interest expense		407			608			749			—			538			—			233
Interest income		(1,815	)		(3,049	)		(1,377	)		(1,177	)		(1,162	)		(290	)		(343	)

Total other (income) / expense	$	(1,408	)	$	(2,943	)	$	(628	)	$	(1,177	)	$	(4	)	$	(290	)	$	(209	)

(Loss) / income from continuing operations before income taxes		(52,160	)		(30,595	)		(33,809	)		(12,062	)		340			(4,028	)		(1,676	)
Benefit from income taxes		—			—			—			—			—			—			—

(Loss) / income from continuing operations		(52,160	)		(30,595	)		(33,809	)		(12,062	)		340			(4,028	)		(1,676	)

Discontinued operations:
Loss on disposition of discontinued operations		(5,850	)		—			—			—			—			—			—

Net (loss) / income	$	(58,010	)	$	(30,595	)	$	(33,809	)	$	(12,062	)	$	340		$	(4,028	)	$	(1,676	)

Earnings (losses) per share—basic:
(Loss) / income from continuing operations	$	(2.37	)	$	(0.90	)	$	(0.88	)	$	(0.30	)	$	0.0 1		$	(0.10	)	$	(0.04	)
(Loss) / income on disposition of discontinued operations		(0.27	)		—			—			—			—			—			—

Net (loss) / income	$	(2.64	)	$	(0.90	)	$	(0.88	)	$	(0.30	)	$	0.01		$	(0.10	)	$	(0.04	)

Earnings (losses) per share—diluted:
(Loss) / income from continuing operations	$	(2.37	)	$	(0.90	)	$	(0.88	)	$	(0.30	)	$	0.01		$	(0.10	)	$	(0.04	)
(Loss) / income on disposition of discontinued operations		(0.27	)		—			—			—			—			—			—

Net (loss) / income	$	(2.64	)	$	(0.90	)	$	(0.88	)	$	(0.30	)	$	0.01		$	(0.10	)	$	(0.04	)

Weighted average common shares outstanding:
Basic		22,028			34,033			38,566			39,638			41,073			40,868			41,662

Diluted(2)		22,028			34,033			38,566			39,638			42,369			40,868			41,662

Number of common shares outstanding		31,925			37,673			38,784			40,780			41,583			40,973			41,772


	As of
	December 30, 2000		December 29, 2001		December 28, 2002		January 3, 2004		January 1, 2005		April 2, 2005
	(in thousands)
BALANCE SHEET DATA:
Total assets	$	160,173	$	190,765	$	187,573	$	175,583	$	231,896	$	194,733
Total long-term debt		5,750		5,208		—		—		13,564		13,410
Working capital		80,805		93,702		39,035		35,290		29,692		26,098
Stockholders’ equity		116,300		146,267		120,523		110,370		117,538		118,561

(1)

In conjunction with the sale of certain assets of Ashford.com, we announced a plan to liquidate the remaining inventory, close the Houston, Texas fulfillment center and office and terminate 71 employees. The costs associated with this plan were $1,680 in fiscal 2002, $74 in fiscal 2003 and $0 in 2004. See Note 3 to our audited consolidated financial statements included elsewhere in this prospectus.

(2)

For fiscal years 2000, 2001, 2002 and 2003, options and warrants are not included in the diluted weighted average common shares outstanding because the effect would be anti-dilutive. In fiscal 2004 and 2005, options and warrants are included in the diluted weighted average common shares outstanding. See Notes 7 and 8 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus and Notes 8 and 10 to our audited consolidated financial statements included elsewhere in this prospectus.

RISK FACTORS

Any investment in our common stock involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information contained in this prospectus. If any of the following risks occur, our business could be materially harmed. In these circumstances, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock. The risks described below are not the only ones facing our company. Additional risks not necessarily known to us or that we currently deem immaterial may also impair our business operations.

Risks Related to Our Business

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

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

We have an accumulated deficit and may incur additional losses.

Although we recorded a profit in fiscal 2004, we incurred losses over the prior five fiscal years and in the first quarter of fiscal 2005 while operating our business. As of the end of fiscal 2004, we had an accumulated deficit of $177.3 million and as of the end of the first quarter of fiscal 2005, we had an accumulated deficit of $178.9 million. We may not generate sufficient revenue and gross profit from our existing partners, add an appropriate number of new partners or adequately control our expenses. If we fail to do this, we may not be able to maintain profitability.

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

enhance our fulfillment capabilities;

further improve our order processing systems and capabilities;

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

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

improve our marketing, customer relationship management and design capabilities;

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

continue our business development, sales and marketing activities; and

make strategic or opportunistic acquisitions of complementary or new businesses or assets.

If we incur expenses at a greater pace than our revenues, we could incur additional losses.

Our growth may be limited if we do not generate sufficient cash to fund our operations. We may in the future need additional debt or equity financing to execute our business and continue our growth. Such additional financing may not be available on satisfactory terms or it may not be available when needed, or at all.

our growth, either internally or externally, may limit our growth potential and our ability to execute our business strategy. If we issue securities to raise capital, our existing stockholders may experience dilution or the new securities may have rights senior to those of our common stock.

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

We have experienced and expect to continue to experience seasonal fluctuations in our revenues. These seasonal patterns have caused and will continue to cause quarterly fluctuations in our operating results. Our results of operations historically have been seasonal primarily because consumers increase their purchases on our partners’ e-commerce businesses during the fourth quarter holiday season.

In anticipation of increased sales activity during our fourth fiscal quarter, we incur additional expenses by hiring a significant number of temporary employees to supplement our permanent staff. Our fourth fiscal quarter has accounted for and is expected to continue to account for a disproportionate percentage of our total annual revenues. For each of fiscal 2004 and fiscal 2003 approximately 40.0% of our annual net revenues were generated in our fiscal fourth quarter. Since fiscal 1999, we have not generated net income in any fiscal quarter other than a fiscal fourth quarter. If our revenues are below seasonal expectations during the fourth fiscal quarter, our operating results could be below the expectations of securities analysts and investors. Due to the nature of our business, it is difficult to predict the seasonal pattern of our sales and the impact of this seasonality on our business and financial results. In the future, our seasonal sales patterns may become more pronounced, may strain our personnel, customer service operations, fulfillment operations and shipment activities and may cause a shortfall in revenues compared to expenses in a given period.

In addition, if too many consumers access our partners’ e-commerce businesses within a short period of time due to increased holiday or other demand, we may experience system interruptions that make our partners’ e-commerce businesses unavailable or prevent us from transmitting orders to our fulfillment operations, which may reduce the volume of goods we sell as well as the attractiveness of our partners’ e-commerce businesses to consumers. In anticipation of increased sales activity during our fourth fiscal quarter, we and our partners increase our inventory levels. If we and our partners do not increase inventory levels for popular products in sufficient amounts or are unable to restock popular products in a timely manner, we and our partners may fail to meet customer demand which could reduce the attractiveness of our partners’ e-commerce businesses. Alternatively, if we overstock products, we may be required to take significant inventory markdowns or write-offs, which could reduce profits.

We have expanded into new categories and may expand into additional new categories in the future. If we do not successfully execute the expansion of our operations into these new categories, our growth could be limited.

While we have operated in e-commerce since 1999, we did not expand beyond the sporting goods category until 2001. Today our operations have expanded into categories including apparel, health and beauty, consumer electronics, entertainment and home. Each category in which we operate requires unique capabilities and increases the complexity of our business. If we are unable to generate sufficient revenue in a category, we may not be able to cover the incremental staffing and expenses required to support the unique capabilities required by that category. If we do expand into new categories, there can be no assurance that we will do so successfully.

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

predict consumers’ tastes and avoid overstocking or understocking products. If we or our partners fail to identify and respond to changes in merchandising and consumer preferences, sales on our partners’ e-commerce businesses could suffer and we or our partners could be required to mark down unsold inventory. This would depress our profit margins. In addition, any failure to keep pace with changes in consumers’ tastes could result in lost opportunities which could reduce sales.

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

We cannot be assured that inventory loss and theft, or “shrinkage,” and merchandise returns will not increase in the future. If merchandise returns are significant, or our shrinkage rate increases, our revenues and costs of operations could be adversely affected.

Our growth depends, in part, on our ability to add and launch new partners on a timely basis and on favorable terms.

One of the principal components of our growth strategy is to add new partners. If we are unable to add our targeted number of new partners or if we are unable to add new partners on favorable terms, our growth may be limited. If we are unable to add and launch new partners within the time frames projected by us, we may not be able to achieve our targeted results in the expected periods. In addition, our ability to add new partners depends on the quality of the services we provide and our reputation. To the extent that we have difficulties with the quality of the services we provide or have operational issues that adversely affect our reputation, it could adversely impact our ability to add new partners. Because competition for new partners is intense, we may not be able to add new partners on favorable terms, or at all.

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

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

We enter into contracts with our partners. We derived 62% of our revenue in fiscal 2004 from five partners. If we do not maintain good working relationships with our partners, particularly our large partners, or perform as required under these agreements, it could adversely affect our business.

The contracts with our partners establish complex relationships between our partners and us. We spend a significant amount of time and effort to maintain our relationships with our partners and address the issues that from time to time may arise from these complex relationships. For fiscal 2004, sales to customers through one of our partner’s e-commerce businesses accounted for 27% of our revenue, sales through another one of our partner’s e-commerce businesses accounted for 13% of our revenue and sales through our top five partners’ e-commerce businesses accounted for 62% of our revenue. For fiscal 2003, sales to customers through one of our partner’s e-commerce businesses accounted for 28% of our revenue, sales to customers through another one of our partner’s e-commerce businesses accounted for 17% of our revenue, and sales through our top five partners’ e-commerce businesses accounted for 70% of our revenue. Our partners could decide not to renew their agreements at the end of their respective terms. Additionally, if we do not perform as required under these agreements or if we breach these agreements, our partners could seek to terminate their agreements prior to the end of their respective terms or seek damages from us. Loss of our existing partners, particularly our major partners, could adversely affect our business, financial condition and results of operations.

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

For the e-commerce businesses for which we own inventory, we primarily purchase products from the manufacturers and distributors of the products. For the e-commerce businesses for which our partners own inventory, our partners typically purchase products from the manufacturers and distributors of products or source their own products. If we or our partners are unable to develop and maintain relationships with these manufacturers, distributors or sources we or our partners may be unable to obtain or continue to carry a sufficient assortment and quantity of quality merchandise on acceptable commercial terms and our partners’ e-commerce businesses and our business could be adversely impacted. We do not have written contracts with some of our suppliers. During the first quarter of fiscal 2005, 48.7% of the total amount of inventory we purchased was from one manufacturer. During the first quarter of fiscal 2004, 36.9% of the total amount of inventory we purchased was from the same manufacturer. During fiscal 2004, 43.1% of the total amount of inventory we purchased was from the same manufacturer and during fiscal 2003, 37.7% of the total amount of inventory we purchased was from the same manufacturer. While we have a contract with this manufacturer, this manufacturer and other manufacturers could stop selling products to us or our partners and may ask us or our partners to remove their products or logos from our partners’ Web sites. If we or our partners are unable to obtain products directly from manufacturers, especially popular brand manufacturers, we or our partners may not be able to obtain the same or comparable merchandise in a timely manner or on acceptable commercial terms.

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

We have entered into marketing and promotional agreements with online services, search engines, directories and other Web sites to provide content, advertising banners and other links to our partners’ e-commerce businesses. We expect to rely on these agreements as significant sources of traffic to our partners’ e-commerce businesses and to generate new customers. If we are unable to maintain these relationships or enter into new agreements on acceptable terms, our ability to attract new customers could be harmed. Further, many of the parties with which we may have online advertising arrangements provide advertising services for other marketers of goods. As a result, these parties may be reluctant to enter into or maintain relationships with us. Failure to achieve sufficient traffic or generate sufficient revenue from purchases originating from third parties may limit our partners’ and our ability to maintain market share and revenue.

If we experience problems in our fulfillment operations, our business could be adversely affected.

Although we operate our own fulfillment centers, we rely upon multiple third parties for the shipment of our products. We also rely upon certain vendors to ship products directly to consumers. As a result, we are subject to the risks associated with the ability of these vendors and other third parties to successfully and in a timely manner fulfill and ship customer orders. The failure of these vendors and other third parties to provide these services, or the termination or interruption of these services, could adversely affect the satisfaction of consumers, which could result in reduced sales by our partners’ e-commerce businesses.

Under some of our partner agreements, we maintain the inventory of our partners in our fulfillment centers. Our failure to properly handle and protect such inventory could adversely affect our relationship with our partners.

A disruption in our operations could materially and adversely affect our business, results of operations and financial condition.

Any disruption to our operations, including system, network, telecommunications, software or hardware failures, and any damage to our physical locations, could materially and adversely affect our business, results of operations and financial condition.

Our operations are subject to damage or interruption from:

fire, flood, hurricane, tornado, earthquake or other natural disasters;

power losses, interruptions or brown-outs;

Internet, telecommunications or data network failures;

physical and electronic break-ins or security breaches;

computer viruses;

acts of terrorism; and

other similar events.

If any of these events occur, it could result in interruptions, delays or cessations in service to customers of our partners’ e-commerce businesses and adversely impact our partners’ e-commerce businesses. These events could also prevent us from fulfilling orders for our partners’ e-commerce businesses. Our partners might seek significant compensation from us for their losses. Even if unsuccessful, this type of claim likely would be time consuming and costly for us to address and damaging to our reputation.

Our primary data centers are located at two facilities of a third-party hosting company. We do not control the security, maintenance or operation of these facilities, which are also susceptible to similar disasters and problems.

Our insurance policies may not cover us for losses related to these events, and even if they do, may not adequately compensate us for any losses that we may incur. Any system failure that causes an interruption of the availability of our partners’ e-commerce businesses could reduce the attractiveness of our partners’ e-commerce businesses to consumers and result in reduced revenues, which could materially and adversely affect our business, results of operations and financial condition.

If we do not respond to rapid technological changes, our services and proprietary technology and systems may become obsolete.

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

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

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

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

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

lack of access and ease of use;

congestion of traffic on the Internet;

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

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

governmental regulation;

uncertainty regarding intellectual property ownership;

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

increases in the cost of accessing the Internet.

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

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

Our future success depends heavily upon the general public’s willingness to use the Internet as a means to purchase goods. The failure of the Internet to continue to develop as an effective commercial tool would seriously damage our future operations. If consumers are unwilling to use the Internet to conduct business, our business may not continue to grow. The Internet may not succeed as a medium of commerce because of security risks and delays in developing elements of the needed Internet infrastructure, such as a reliable network, high-speed modems, high-speed communication lines and other enabling technologies.

Third parties may have the technology or know-how to breach the security of customer transaction data and confidential information stored on our servers. Any breach could cause customers to lose confidence in the security of our partners’ e-commerce businesses and choose not to purchase from those businesses. Our security measures may not effectively prevent others from obtaining improper access to the information on our partners’ e-commerce businesses. If someone is able to circumvent our security measures, he or she could destroy or steal valuable information or disrupt the operation of our partners’ e-commerce businesses. Concerns about the security and privacy of transactions over the Internet could inhibit our growth.

We and/or our partners may be unable to protect our and their proprietary technology and intellectual property rights or keep up with that of our competitors.

Our success depends to a significant degree upon the protection of our intellectual property rights in the core technology and other components of our e-commerce platform including our software and other proprietary information, and material, and our ability to develop technologies that are as good as or better than that of our competitors. We may be unable to deter infringement or misappropriation of our software and other proprietary information and material, detect unauthorized use or take appropriate steps to enforce our intellectual property rights. In addition, the failure of our partners to protect their intellectual property rights, including their trademarks and domain names, could impair our operations. Our competitors could, without violating our intellectual property rights, develop technologies that are as good as or better than our technology. Protecting our intellectual property and other proprietary rights can be expensive. Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and consequently harm our operating results. Our failure to protect our intellectual property rights in our software and other information and material or to develop technologies that are as good as or better than that of our competitors could put us at a disadvantage to our competitors. These failures could have a material adverse effect on our business.

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

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

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

The market for the development and operation of e-commerce businesses is continuously evolving and is intensely competitive. Increased competition could result in fewer successful opportunities to partner, price reductions, reduced gross margins and loss of market share, any of which could seriously harm our business, results of operations and financial condition. We primarily compete with companies that can offer a full range of e-commerce services similar to the services we provide through our e-commerce platform, such as the Services Division of Amazon^®, Digital River^®, Commerce5^SM, Foot Locker^® (principally in the sporting goods category) and ValueVision Media^®. We also compete with companies that provide some components of an e-commerce solution similar to those that we offer through our e-commerce platform, including Web site developers, third-party consultants and third-party fulfillment and customer service providers. In addition, we compete with companies that provide components of an e-commerce solution that allow others to develop and operate their e-commerce business in-house. We also compete with online and offline businesses of a variety of retailers and manufacturers in our targeted categories.

Many of our current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we have. They may be able to secure merchandise from vendors on more favorable terms and may be able to adopt more aggressive pricing policies. They may also receive investments from or enter into other commercial relationships with larger, well-established companies with greater financial resources. Competitors in both the retail and e-commerce services industries also may be able to devote more resources to technology development and marketing than we do.

We currently do not offer e-commerce services outside of the United States and Canada. Some of our competitors offer international e-commerce services and our existing and potential partners may find these competitors more attractive for that reason.

Competition in the e-commerce industry may intensify. Other companies in the retail and e-commerce service industries may enter into business combinations or alliances that strengthen their competitive positions. Additionally, there are relatively low barriers to entry into the e-commerce market. As various Internet market segments obtain large, loyal customer bases, participants in those segments may expand into the market segments in which we operate. In addition, new and expanded Web technologies may further intensify the competitive nature of online retail. The nature of the Internet as an electronic marketplace facilitates competitive entry and comparison shopping and renders it inherently more competitive than conventional retailing formats. This increased competition may reduce our sales, our ability to operate profitably, or both.

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

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

We may be liable if third parties misappropriate our customers’ personal information. Additionally, we are limited in our ability to use and disclose customer information.

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

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

We do not carry insurance against the risk of credit card fraud and other fraud, so the failure to adequately control fraudulent transactions could increase our expenses. To date, we have not suffered material losses due to fraud. However, we may in the future suffer losses as a result of orders placed with fraudulent credit card data. Under current credit card practices, we are liable for fraudulent credit card transactions because we do not obtain a cardholder’s signature. With respect to checks and installment sales, we generally are liable for fraudulent transactions.

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

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

we and/or partners may have been or may be named in similar cases in other states. We do not believe that we are liable under existing laws and regulations for any failure to collect sales or other taxes relating to Internet sales in Illinois and intend to vigorously defend ourselves in this matter. However, we may incur substantial expenses in defending against this claim. In the event of a determination adverse to us, we may incur substantial monetary liability, and be required to change our business practices, either of which could have a material adverse effect on our business, financial position or results of operations.

Existing or future law or regulations could harm our business or marketing efforts.

We are subject to federal, state and local laws applicable to businesses in general and to e-commerce specifically. Due to the increasing growth and popularity of the Internet and e-commerce, many laws and regulations relating to the Internet and online retailing are proposed and considered at the federal, state and local levels. These laws and regulations could cover issues such as taxation, pricing, content, distribution, quality and delivery of products and services, electronic contracts, intellectual property rights, user privacy and information security.

For example, at least one state has enacted, and other states have proposed, legislation limiting the uses of personal information collected online or requiring collectors of information to establish procedures to disclose and notify users of privacy and security policies, obtain consent from users for use and disclosure of information, or provide users with the ability to access, correct and delete stored information. Even in the absence of such legislation, the Federal Trade Commission has settled several proceedings resulting in consent decrees in which Internet companies have been required to establish programs regulating the manner in which personal information is collected from users and provided to third parties. We could become a party to a similar enforcement proceeding. These regulatory and enforcement efforts could also harm our ability to collect demographic and personal information from users, which could be costly or adversely affect our marketing efforts.

The applicability of existing laws governing issues such as property ownership, intellectual property rights, taxation, libel, obscenity, qualification to do business and export or import matters could also harm our business. Many of these laws may not contemplate or address the unique issues of the Internet or online retailing. Some laws that do contemplate or address those unique issues, such as the Digital Millennium Copyright Act and the CAN-SPAM Act of 2003, are only beginning to be interpreted by the courts and their applicability and reach are therefore uncertain. These current and future laws and regulations could reduce our ability to operate efficiently.

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

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

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

In connection with the sale of certain assets of Ashford.com to Odimo Acquisition Corp., we received shares of Odimo common stock. Odimo recently became a public company and a well-established public market for its common stock does not exist. If Odimo fails to perform, the value of the Odimo common stock we hold may decrease below the amount at which we have valued this stock on our balance sheet and we may be required to take a charge to earnings.

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

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

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

compliance with international legal and regulatory requirements and tariffs;

managing fluctuations in currency exchange rates;

difficulties in staffing and managing foreign operations;

greater difficulty in accounts receivable collection;

potential adverse tax consequences;

uncertain political and economic climates;

potentially higher incidence of fraud;

price controls or other restrictions on foreign currency; and

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

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

In addition, if we expand internationally, we may face additional competition challenges. Local companies may have a substantial competitive advantage because of their greater understanding of, and focus on, the local customer. In addition, governments in foreign jurisdictions may regulate e-commerce or other online services in such areas as content, privacy, network security, copyright, encryption, taxation, or distribution. We also may not be able to hire, train, motivate and manage the required personnel, which may limit our growth in international market segments.

The uncertainty regarding the general economy may reduce our revenues.

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

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

Our success depends to a significant degree upon the contribution of our executive officers and other key personnel, particularly Michael G. Rubin, chairman of the board, co-president and chief executive officer. Although we have employment agreements with most of our executive officers and key personnel, these employees could terminate their employment with us at any time. Due to the competition for highly qualified personnel, we cannot be sure that we will be able to retain or attract executive, managerial or other key personnel. We have obtained key person life insurance for Mr. Rubin in the amount of $9.0 million. We have not obtained key person life insurance for any of our other executive officers or key personnel.

We may be unable to hire and retain skilled technical, operations, merchandising, sales, marketing and business management personnel which could limit our growth.

Our future success depends on our ability to continue to identify, attract, retain and motivate skilled technical, operations, merchandising, sales, marketing and business management personnel. We intend to continue to seek to hire a significant number of skilled personnel. Due to intense competition for these individuals from our competitors and other employers, we may not be able to attract or retain highly qualified personnel in the future. Our failure to attract and retain the experienced and highly trained personnel that are integral to our business may limit our growth.

There are limitations on the liabilities of our directors and executive officers. Under certain circumstances, we are obligated to indemnify our directors and executive officers against liability and expenses incurred by them in their service to us.

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

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential stockholders and partners could lose confidence in our financial reporting, which could harm our business, the trading price of our common stock and our ability to retain our current partners and obtain new partners.

Beginning in early fiscal 2004, we began a process to document and evaluate our internal controls over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal controls over financial reporting. In this regard, management has been dedicating internal resources, has engaged outside consultants and has adopted a detailed work plan to (i) assess and document the adequacy of internal controls over financial reporting, (ii) take steps to improve control processes, where appropriate, (iii) validate through testing that controls are functioning as documented and (iv) implement a continuous reporting and improvement process for internal control over financial reporting. If we fail to correct any issues in the design or operating effectiveness of internal controls over financial reporting or fail to prevent fraud, current and potential stockholders and partners could lose confidence in our financial reporting, which could harm our business, the trading price of our common stock and our ability to retain our current partners and obtain new partners.

A change in accounting standards for employee stock options is expected to have a material impact on our consolidated results of operations and earnings per share.

In December 2004, the Financial Accounting Standards Board, or FASB, issued Financial Accounting Standards Board Statement No. 123R “Share-Based Payment,” or FAS 123R. FAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. In addition, FAS 123R will cause unrecognized expense related to options vesting after the date of initial adoption to be recognized as a charge to results of operations over the remaining vesting period. In April 2005, the SEC delayed the initial adoption of FAS 123R from interim periods that begin after June 15, 2005, to annual periods that begin after June 15, 2005. We are continuing to evaluate the requirements of FAS 123R and expect that we will record substantial non cash compensation expenses. The adoption of FAS 123R is not expected to have a significant effect on our financial condition or cash flows but is expected to have a material impact on our consolidated results of operations and earnings per share.

Risks Related to Our Common Stock

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

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

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

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

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

our and our partners’ ability to obtain new customers at a reasonable cost or encourage repeat purchases;

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

our and our partners’ ability to offer an appealing mix of products or to sell products that we purchase;

our ability to adequately develop, maintain and upgrade our partners’ e-commerce businesses or the technology and systems we use to process customers’ orders and payments;

the timing and costs of upgrades and developments of our systems and infrastructure;

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

price competition that results in lower profit margins or losses;

the seasonality of our business, especially the importance of our fiscal fourth quarter to our business;

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

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

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

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

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

inflation of prices of fuel and gasoline and other raw materials that impact our costs;

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

our inability to manage inventory levels or control inventory shrinkage;

our inability to manage fulfillment operations or provide adequate levels of customer service or our inability to forecast the proper staffing levels in fulfillment and customer service;

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

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

unfavorable economic conditions in general or specific to the Internet or e-commerce, which could reduce demand for the products sold through our partners’ e-commerce businesses.

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

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

We are controlled by certain principal stockholders.

As of May 12, 2005 and after giving effect to this offering (including the exercise of options to purchase 90,000 shares of common stock by certain selling stockholders and assuming no exercise of the underwriters’ over-allotment option), Michael G. Rubin, our chairman, co-president and chief executive officer, will beneficially own 17.40%, entities affiliated with SOFTBANK Capital Partners LP, SOFTBANK Capital LP and SOFTBANK Capital Advisors Fund LP, or SOFTBANK, will beneficially own 18.76%, and entities affiliated with QVC, Inc., or QVC, will beneficially own 19.47% of our outstanding common stock, including warrants and options to purchase common stock, which are exercisable within 60 days of May 12, 2005. If they decide to act together, any two of Mr. Rubin, SOFTBANK, and QVC would be in a position to exercise considerable control, and all three would be in a position to exercise complete control, over most matters requiring stockholder approval, including the election or removal of directors, approval of significant corporate transactions and the ability generally to direct our affairs. Furthermore, pursuant to stock purchase agreements, SOFTBANK and QVC each have the right to designate up to two members of our board of directors. This concentration of ownership and SOFTBANK’s and QVC’s right to designate members to our board of directors may have the effect of delaying or preventing a change in control of us, including transactions in which stockholders might otherwise receive a premium over prevailing market prices for our common stock. See “Management—Right to Designate Directors.” Furthermore, Mr. Rubin has entered into voting agreements with each of SOFTBANK and QVC, and SOFTBANK and QVC have entered into voting agreements with each other. The parties to these voting agreements have agreed to support the election of the directors designated by each of the other parties. See “Management—Voting Agreements.”

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

Certain provisions of our amended and restated certificate of incorporation and bylaws and Delaware law may have the effect of discouraging, delaying or preventing transactions that involve any actual or threatened change in control. Under our amended and restated certificate of incorporation, our board of directors may issue preferred stock from time to time in one or more series with such terms, rights, preferences and designations as the board may determine and without any vote of the stockholders, unless otherwise required by law.

the date the stockholder becomes a 15% stockholder. In addition to discouraging a third party from seeking to acquire control of us, the foregoing provisions could impair the ability of existing stockholders to remove and replace our management and/or our board of directors.

Concurrent with this offering, we are also offering by separate prospectus $50.0 million principal amount of convertible notes due 2025 (plus up to an additional $7.5 million principal amount of notes available for purchase by the underwriters of the notes to cover over-allotments). Holders of the convertible notes will have the right to require us to repurchase the notes upon certain changes in control of us or termination of trading of our common stock on a national securities exchange or the Nasdaq National Market. These repurchase rights could discourage a third party from seeking to acquire control of us.

Because the ownership of more than a majority of our common stock is concentrated in a few large stockholders, a third party will not be able to acquire control of us without the agreement of some of these stockholders.

Because many investors consider a change of control a desirable path to liquidity, delaying or preventing a change in control of our company may reduce the number of investors interested in our common stock, which could depress our stock price.

See “— We are controlled by certain principal stockholders.”

The price of our common stock may fluctuate significantly.

Our common stock price can fluctuate as a result of a variety of factors, many of which are beyond our control. These factors include, among others:

our performance and prospects;

the performance and prospects of our partners;

the depth and liquidity of the market for our common stock;

investor perception of us and the industry in which we operate;

changes in earnings estimates or buy/sell recommendations by analysts;

general financial and other market conditions; and

general economic conditions.

In addition, the stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the market price of our common stock.

Conversion of the convertible notes will dilute the ownership interest of existing stockholders.

Concurrent with the offering, we are also offering by separate prospectus $50.0 million principal amount of our convertible notes due 2025 (plus up to an additional $7.5 million principal amount of notes available for purchase by the underwriters of the notes to cover over-allotments), which convertible notes will be convertible into shares of our common stock. Under certain circumstances, a maximum of shares of common stock could be issued upon conversion of the convertible notes (plus up to an additional shares of common stock if the over-allotment option is exercised in full), subject to adjustment to stock dividends, stock splits and similar events. The conversion of some or all of the notes will dilute the ownership interest of existing stockholders. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the notes may encourage short selling by market participants because the conversion of the notes could depress the price of our common stock.

Risk Related to Our Indebtedness

If our concurrent offering of our convertible notes due 2025 is successfully completed, resulting debt could adversely affect our financial condition. We are not prohibited from incurring additional debt.

Concurrently with this common stock offering, we are offering $50.0 million aggregate principal amount of our convertible notes due 2025 (plus up to an additional $7.5 million principal amount of notes available for purchase by the underwriters of the notes to cover over-allotments). We cannot assure you that we will successfully complete that offering on the contemplated terms, or at all.

Assuming the successful completion of the concurrent note offering (including the exercise of the underwriters’ option), we estimate that we will have approximately $72.0 million of indebtedness outstanding. Our indebtedness could have important consequences to you. For example, it could:

increase our vulnerability to general adverse economic and industry conditions;

limit our ability to obtain additional financing;

require the dedication of a substantial portion of our cash flow from operations to the payment of interest and principal on our indebtedness, thereby reducing the availability of such cash flow to fund our growth strategy, working capital, capital expenditures and other general corporate purposes;

limit our flexibility in planning for, or reacting to, changes in our business and the industry;

place us at a competitive disadvantage relative to competitors with less debt; and

make it difficult or impossible for us to pay the principal amount of the convertible notes at maturity, thereby causing an event of default under the convertible notes.

We may incur substantial additional debt in the future. The terms of the convertible notes will not prohibit us or our subsidiaries from doing so. If new debt is added, the related risks described above could intensify. See “Capitalization.”

Holders of our common stock will be subordinated to our convertible notes and other indebtedness

In the event of our liquidation or insolvency, holders of common stock would receive a distribution only after payment in full of all principal and interest due to holders of our convertible notes and other creditors, and there may be little or no proceeds to distribute to holders of common stock at such time.

FORWARD-LOOKING STATEMENTS

All statements made in this prospectus, 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 and our partners 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, the impact of FAS 123R, consumer spending, the financial markets and the industries in which we and our partners operate, changes affecting the Internet and e-commerce, our ability to develop and maintain relationships with strategic partners and suppliers and the timing of our establishment, extension or termination of our relationships with strategic partners, our ability to timely and successfully develop, maintain and protect our technology and product and service offerings and execute operationally, our ability to attract and retain qualified personnel, our ability to successfully integrate our acquisitions of other businesses, if any, and the performance of acquired businesses. More information about potential factors that could affect us is provided under “Risk Factors.” We expressly disclaim any intent or obligation to update these forward-looking statements, except as otherwise specifically stated by us.

USE OF PROCEEDS

We estimate that the net proceeds from the sale of the 1,500,000 shares of common stock by us will be approximately $ million, or approximately $ million if the underwriters exercise their over-allotment option in full, and after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders, although we will receive proceeds upon the exercise of options to purchase 90,000 shares of our common stock by certain selling stockholders.

We expect to use the net proceeds we receive from this offering and the expected $ million of net proceeds ($ million if the underwriters exercise their option to purchase additional convertible notes) from our concurrent debt offering of our convertible notes for working capital and general corporate purposes, including possible acquisitions. Pending such uses, the net proceeds from this offering will be invested in investment grade, interest-bearing instruments.

Consummation of this offering of shares of our common stock is not contingent upon consummation of the concurrent convertible notes offering.

COMMON STOCK PRICE RANGE

The following table sets forth the high and low sales prices of our common stock as reported on the Nasdaq National Market under the symbol “GSIC.”


	Common Stock Price
	High		Low
Fiscal 2003
First Quarter	$	3.99	$	1.55
Second Quarter	$	7.87	$	1.65
Third Quarter	$	12.53	$	5.80
Fourth Quarter	$	13.05	$	7.60
Fiscal 2004
First Quarter	$	13.47	$	8.81
Second Quarter	$	11.40	$	7.80
Third Quarter	$	9.95	$	7.04
Fourth Quarter	$	18.72	$	8.77
Fiscal 2005
First Quarter	$	18.00	$	12.21
Second Quarter (through May 18, 2005)	$	16.65	$	12.31

As of May 12, 2005, we had approximately 1,938 stockholders of record. The last reported sale price for our common stock on May 18, 2005, as reported on the Nasdaq National Market, was $14.97.

DIVIDEND POLICY

We have never declared or paid a cash dividend on our common stock. We currently intend to retain any future earnings for funding growth and, therefore, do not anticipate declaring or paying any cash dividends on our common stock for the foreseeable future.

CAPITALIZATION

The table below shows our capitalization as of April 2, 2005:

on an actual basis;

on an as adjusted basis, to reflect the sale by us and the selling stockholders of 3,103,500 shares of our common stock pursuant to this offering at an assumed public offering price of $14.36 per share (the last reported sale price of our common stock on the Nasdaq National Market on May 12, 2005) after deducting the estimated underwriting discounts and commissions and estimated offering costs (assuming the exercise of options to purchase 90,000 shares of common stock by certain selling stockholders and no exercise of the underwriters’ over-allotment option); and

on a further as adjusted basis, to reflect the issuance of $50.0 million aggregate principal amount of our convertible notes due 2025 (assuming no exercise of the underwriters’ over-allotment option).

You should read this table in conjunction with our financial statements and notes to those financial statements included elsewhere in this prospectus.


	April 2, 2005
	Actual			As Adjusted			Further As Adjusted
	(in thousands)
Cash and cash equivalents	$	10,736,000		$	31,343,196		$	79,236,350


Current portion of long-term debt		589,000			589,000			589,000
Long-term debt		13,410,000			13,410,000			63,410,000
Stockholders’ equity:
Preferred stock, $0.01 par value, 4,990,000 shares authorized, actual, as adjusted and further as adjusted; 0 shares issued and outstanding, actual, as adjusted and further as adjusted		—			—			—
Common stock, $0.01 par value, 90,000,000 shares authorized, actual, as adjusted and further as adjusted; 41,778,856 shares issued, actual; and 41,772,246 shares outstanding, actual; 43,368,856 shares issued as adjusted and further as adjusted; and 43,362,246 shares outstanding, as adjusted and further as adjusted		418,000			433,900			433,900
Additional paid-in capital		295,021,000			316,472,146			316,472,146
Accumulated other comprehensive income		2,067,000			2,067,000			2,067,000
Accumulated deficit		(178,945,000	)		(178,945,000	)		(178,945,000	)

Total stockholders’ equity		118,561,000			140,028,046			140,028,046

Total capitalization	$	132,560,000		$	154,027,046		$	204,027,046

SELECTED CONSOLIDATED FINANCIAL DATA

The following tables present portions of our financial statements and are not complete. You should read the following selected consolidated financial data together with our unaudited condensed consolidated financial statements and our audited consolidated financial statements and related notes to our financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected statement of operations data for the years ended December 28, 2002, January 3, 2004 and January 1, 2005 and the balance sheet data as of January 3, 2004 and January 1, 2005 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected statement of operations data for the years ended December 30, 2000 and December 29, 2001 and balance sheet data as of December 30, 2000, December 29, 2001 and December 28, 2002 are derived from our audited consolidated financial statements that are not included in this prospectus. The selected statement of operations data for the three months ended April 3, 2004 and April 2, 2005 and the balance sheet data as of April 2, 2005 are derived from our unaudited condensed consolidated financial statements included in this prospectus and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly the results of operations and financial positions for those periods. Our results for the three months ended April 2, 2005 are not necessarily indicative of the results to be expected for the full year. Historical results are not necessarily indicative of the results to be expected in the future.


	Fiscal Year Ended															Three Months Ended
	December 30, 2000			December 29, 2001			December 28, 2002			January 3, 2004			January 1, 2005			April 3, 2004			April 2, 2005
	(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Net revenues from product sales	$	41,808		$	98,325		$	154,819		$	216,510		$	274,988		$	56,878		$	76,652
Service fee revenues		1,000			4,285			17,819			25,409			60,344			9,390			14,706

Net revenues		42,808			102,610			172,638			241,919			335,332			66,268			91,358
Cost of revenues		29,567			67,586			114,258			154,731			203,135			41,508			57,626

Gross profit	$	13,241		$	35,024		$	58,380		$	87,188		$	132,197		$	24,760		$	33,732

Operating expenses:
Sales and marketing, exclusive of $1,486, $847, $532, $1,527, $2,720, $494 and $189 reported below as stock-based compensation, respectively		37,730			32,390			50,965			59,613			78,919			17,449			20,911
Product development, exclusive of $0, $461, $(44), $42, $350, $49 and $(30) reported below as stock-based compensation, respectively		7,292			8,590			11,833			14,124			20,181			4,483			6,589
General and administrative, exclusive of $3,497, $8,974, $(87), $366, $530, $84 and $(389) reported below as stock-based compensation, respectively		8,730			10,638			14,863			13,295			18,217			3,920			5,225
Restructuring costs related to Ashford.com(1)		—			—			1,680			74			—			—			—
Net loss on sale of Ashford.com assets		—			—			2,566			—			—			—			—
Stock-based compensation		4,983			10,282			401			1,935			3,600			627			(230	)
Depreciation and amortization		8,074			6,662			10,509			11,386			10,944			2,599			3,122

Total operating expenses	$	66,809		$	68,562		$	92,817		$	100,427		$	131,861		$	29,078		$	35,617

Other (income) / expense:
Other (income) / expense		—			(502	)		—			—			620			—			(99	)
Interest expense		407			608			749			—			538			—			233
Interest income		(1,815	)		(3,049	)		(1,377	)		(1,177	)		(1,162	)		(290	)		(343	)

Total other (income) / expense	$	(1,408	)	$	(2,943	)	$	(628	)	$	(1,177	)	$	(4	)	$	(290	)	$	(209	)

(Loss) / income from continuing operations before income taxes		(52,160	)		(30,595	)		(33,809	)		(12,062	)		340			(4,028	)		(1,676	)
Benefit from income taxes		—			—			—			—			—			—			—

(Loss) / income from continuing operations		(52,160	)		(30,595	)		(33,809	)		(12,062	)		340			(4,028	)		(1,676	)


	Fiscal Year Ended														Three Months Ended
	December 30, 2000			December 29, 2001			December 28, 2002			January 3, 2004			January 1, 2005		April 3, 2004			April 2, 2005
	(in thousands, except per share data)
Discontinued operations:
Loss on disposition of discontinued operations		(5,850	)		—			—			—			—		—			—

Net (loss) / income	$	(58,010	)	$	(30,595	)	$	(33,809	)	$	(12,062	)	$	340	$	(4,028	)	$	(1,676	)

Earnings (losses) per share—basic:
(Loss) / income from continuing operations	$	(2.37	)	$	(0.90	)	$	(0.88	)	$	(0.30	)	$	0.01	$	(0.10	)	$	(0.04	)
(Loss) / income on disposition of discontinued operations		(0.27	)		—			—			—			—		—			—

Net (loss) / income	$	(2.64	)	$	(0.90	)	$	(0.88	)	$	(0.30	)	$	0.01	$	(0.10	)		(0.04	)

Earnings (losses) per share—diluted:
(Loss) / income from continuing operations	$	(2.37	)	$	(0.90	)	$	(0.88	)	$	(0.30	)	$	0.01	$	(0.10	)		(0.04	)
(Loss) / income on disposition of discontinued operations		(0.27	)		—			—			—			—		—			—

Net (loss) / income	$	(2.64	)	$	(0.90	)	$	(0.88	)	$	(0.30	)	$	0.01	$	(0.10	)	$	(0.04	)

Weighted average common shares outstanding:
Basic		22,028			34,033			38,566			39,638			41,073		40,868			41,662

Diluted(2)		22,028			34,033			38,566			39,638			42,369		40,868			41,662

Number of common shares outstanding		31,925			37,673			38,784			40,780			41,583		40,973			41,772



	As of
	December 30, 2000		December 29, 2001		December 28, 2002		January 3, 2004		January 1, 2005		April 2, 2005
	(in thousands)
BALANCE SHEET DATA:
Total assets	$	160,173	$	190,765	$	187,573	$	175,583	$	231,896	$	194,733
Total long-term debt		5,750		5,208		—		—		13,564		13,410
Working capital		80,805		93,702		39,035		35,290		29,692		26,098
Stockholders’ equity		116,300		146,267		120,523		110,370		117,538		118,561

(1)

(2)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview and Executive Summary

We are a leading provider of e-commerce solutions that enable retailers, branded manufacturers, entertainment companies and professional sports organizations to operate e-commerce businesses. We provide solutions for our partners through our integrated e-commerce platform, which is comprised of three components: core technology, supporting infrastructure and partner services. Through our platform, we provide Web site administration, Web infrastructure and hosting, business intelligence, an e-commerce engine, order management, fulfillment, drop shipping, customer service, buying, creative design, Web site usability, testing and enhancement services, channel integration, business-to-business (B-to-B) services, content development and imaging, e-commerce strategy, online marketing and customer relationship management (CRM).

Based on forecasts of Forrester Research, we expect online general merchandise sales in the United States to expand at approximately a 14.3% compounded annual growth rate from 2004 through 2010. While we expect the opportunity for partnered e-commerce to continue to grow, we also anticipate competition to continue to be intense. We compete with traditional, in-house solutions as well as a variety of third-party vendors that provide e-commerce software or partial e-commerce solutions. To satisfy our existing partners and to continue to attract new partners, we offer what we believe is a comprehensive and compelling value proposition that includes the provision of expertise and infrastructure to enable our partners to grow their e-commerce businesses and to use their e-commerce businesses as a channel to complement and enhance their offline businesses. We have built and continue to develop expertise in integrated online technology, marketing and retailing, which we deliver across a shared technology, supporting infrastructure and partner services platform. To differentiate our solution in the marketplace, we continually add new services and functions to our platform. As part of our continuing efforts to add value to our platform, we evaluate opportunities to acquire complementary or new businesses or assets.

We grow our business by expanding the e-commerce businesses of our existing partners and by adding new partners. In fiscal 2004, we added nine new partners. As of May 17, 2005, we have publicly announced the addition of five new partners in fiscal 2005.

Generally, we launch the website of a new partner within three to six months after entering into a contract with such new partner. During the period in which we are planning and developing a new partner’s Web site, we incur development and launch expenses without any accompanying revenues. We anticipate that new Web sites typically will contribute to our income from operations in their first full year of operation.

We derive virtually all of our revenues from sales of products by us through our partners’ e-commerce businesses and service fees earned by us in connection with the development and operation of our partners’ e-commerce businesses. Our revenue growth in the first quarter of fiscal 2005 as compared to the first quarter of fiscal 2004, as well as our revenue growth in fiscal 2004 as compared to fiscal 2003 was due to an increase in revenues from product sales in both our sporting goods and other categories, as well as an increase in service fee revenues. These increases in the first quarter of fiscal 2005 as compared to the first quarter of fiscal 2004 were driven by the addition of new partners in fiscal 2004 and the first quarter of fiscal 2005. These increases in fiscal 2004 as compared to fiscal 2003 were driven by the addition of new partners in fiscal 2004, growth in sales from partners’ e-commerce businesses that were operated for part of fiscal 2003 and all of fiscal 2004 and growth in sales from partners’ e-commerce businesses that we operated for the entirety of both periods.

Our gross profit increased in the first quarter of fiscal 2005 as a result of sales growth. Our gross margin decreased in the first quarter of fiscal 2005 as compared to the first quarter of fiscal 2004 as a result of a shift in sales from sporting goods to customer electronics, which carry a lower gross margin

than product sales of sporting goods. Our gross profit increased in fiscal 2004 as a result of sales growth and an increase in gross margin. The gross margin increase was a result of service fees representing a greater percentage of net revenues in fiscal 2004 than in fiscal 2003. We specifically do not record cost of service fee revenue. The cost of sales of the merchandise on which we earn service fees are costs incurred by our service-fee partners because they are the owners and sellers of the merchandise. Accordingly, our gross margin on service revenues is 100%. Our gross margin on products has typically been impacted by the mix of products sold between our sporting goods and other categories as well as within our sporting goods category.

Operating expenses as a percentage of net revenues decreased from 43.9% in first quarter of fiscal 2004 to 38.9% in first quarter of fiscal 2005, primarily as a result of sales and marketing expenses increasing at a slower rate than net revenues. Operating expenses as a percentage of net revenues decreased from 41.5% in fiscal 2003 to 39.3% in fiscal 2004, primarily as a result of sales and marketing expenses increasing at a slower rate than net revenues.

Fiscal 2004 was our first profitable year since entering the e-commerce business in fiscal 1999. We had net income of $0.3 million or $0.01 per share on a fully diluted basis.

Since mid-2004, we have broadened our management team by adding a co-president and chief operating officer and a new chief information officer.

In fiscal 2004, we acquired and occupied a new 104,000-square foot headquarters building in King of Prussia, Pennsylvania. We continue to own and use our former headquarters building in King of Prussia, Pennsylvania for a portion of our operations. In fiscal 2004, we also entered into a lease for a 400,000-square foot fulfillment center in Shepherdsville, Kentucky. This is our second fulfillment facility. We own our other fulfillment facility in Louisville, Kentucky. We do not expect to add any significant new facilities in 2005.

We generate cash from operations primarily in our fourth fiscal quarter due to the seasonality of our business. In our first fiscal quarter, we typically use cash from operations to satisfy accounts payable and accrued expenses incurred in the fourth fiscal quarter of our prior fiscal year. We typically have not generated cash from operations in our second and third fiscal quarters.

Certain reclassifications to our prior year’s consolidated financial statements were made to conform those statements to our fiscal 2004 presentation. These reclassifications were made to reflect certain communications costs previously classified in product development expenses to sales and marketing expenses and general and administrative expenses.

In December 2004, the Financial Accounting Standards Board, or FASB, issued Financial Accounting Standards Board Statement No. 123R “Shared-Based Payment”, or FAS 123R. FAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. In addition, FAS 123R will cause unrecognized expense related to options vesting after the date of initial adoption to be recognized as a charge to results of operations over the remaining vesting period. In April 2005, the SEC delayed the initial adoption of 123R from interim periods that begin after June 15, 2005 to annual periods. We are continuing to evaluate the requirements of FAS 123R and expect that the adoption of FAS 123R will have a material impact on our consolidated results of operations and earnings per share. In light of our anticipated adoption of FAS 123R, we and our compensation committee are reevaluating our current incentive compensation strategies.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the restatement discussed in Note 17 of our unaudited condensed consolidated financial statements that are included in this prospectus and Note 22 to our audited consolidated financial statements that are included in this prospectus.

Results of Operations

Comparison of the Three-Month Periods Ended April 3, 2004 and April 2, 2005

Net Revenues


	First Qtr Fiscal 2004				First Qtr Fiscal 2005				First Qtr Fiscal 2005 vs. First Qtr Fiscal 2004
	$		%		$		%		$ Change		% Change
	(dollars in millions)
Net revenues from product sales—sporting goods	$	33.5	50.5	%	$	39.8	43.5	%	$	6.3	18.8	%
Net revenues from product sales—other		23.4	35.3			36.9	40.4	%		13.5	57.7

Net revenues from product sales		56.9	85.8	%		76.7	83.9	%		19.8	34.8	%
Service fee revenues		9.4	14.2			14.7	16.1			5.3	56.6

Net revenues	$	66.3	100.0	%	$	91.4	100.0	%	$	25.1	37.9	%

Net Revenues from Product Sales. Net revenues from product sales are derived from the sale of products by us through our partners’ e-commerce businesses. Net revenues from product sales are net of allowances for returns and discounts and include outbound shipping charges and other product related services such as gift wrapping and monogramming.

Net revenues from product sales increased $19.8 million in the first quarter of fiscal 2005. Of this increase, $6.3 million was due to an increase in sales in our sporting goods category and $13.5 million was due to an increase in sales in our other product category, which includes increased sales of consumer electronics and licensed entertainment products.

Service Fee Revenue. Service fee revenues are derived from service fees earned in connection with the development and operation of our partners’ e-commerce businesses. Service fees primarily consist of variable fees based on the value of merchandise sold or gross profit generated through our partners’ e-commerce businesses. To a lesser extent, service fees include fixed periodic payments by partners for the development and operation of their e-commerce businesses and fees related to the provision of marketing, design, development and other services.

Service fee revenues increased $5.3 million for the first quarter of 2005, due primarily to the launch of new fee-based partners in fiscal 2004.

Cost of Revenues

Cost of revenues consists of cost of revenues from product sales and cost of service fee revenues. 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. We specifically do not record cost of service fee revenue. The cost of the sales of the merchandise on which we earn service fees are incurred by our service-fee partners because they are the owners and sellers of the merchandise. The following table shows cost of revenues for the first quarter of fiscal 2004 and first quarter of fiscal 2005, the percentages that such costs bear to total net revenues and the period over period changes in cost of revenues:


	First Qtr Fiscal 2004				First Qtr Fiscal 2005				First Qtr Fiscal 2005 vs. First Qtr Fiscal 2004
	$		%		$		%		$ Change		% Change
	(dollars in millions)
Cost of revenues from product sales	$	41.5	62.6	%	$	57.6	63.1	%	$	16.1	38.8	%
Cost of revenues from service fee revenues		—	—			—	—			—	—

Cost of revenues	$	41.5	62.6	%	$	57.6	63.1	%	$	16.1	38.8	%

As a percentage of net revenues, cost of revenues increased from 62.6% in the first quarter of fiscal 2004 to 63.1% in the first quarter of fiscal 2005. The change in cost of revenues as a percentage of net revenues resulted from lower margins in our other product category. Cost of revenues from product sales as a percentage of net revenues from product sales increased from approximately 72.9% in the first quarter of fiscal 2004 to approximately 75.1% in the first quarter of fiscal 2005.

Gross Profit

Gross profit consists of gross profit from product sales and gross profit from service fees. Because we do not record cost of service fee revenues, net revenues from service fees and gross profit from service fees are the same. The following table shows gross profit for the first quarter of fiscal 2004 and the first quarter of fiscal 2005, the percentages that such gross profit bears to product sales, service fees and total net revenues and the period over period changes in gross profit:


	First Qtr Fiscal 2004								First Qtr Fiscal 2005								First Qtr Fiscal 2005 vs. First Qtr Fiscal 2004
	$		% of product sales		% of service fees		% of net revenue		$		% of product sales		% of service fees		% of net revenue		$ Change		% Change
	(dollars in millions)
Gross profit from product sales	$	15.4	27.1	%	—		—		$	19.0	24.8	%	—		—		$	3.6	23.8	%
Gross profit from service fees		9.4	—		100.0	%	—			14.7	—		100.0	%	—			5.3	56.6	%

Gross profit	$	24.8	—		—		37.4	%	$	33.7	—		—		36.9	%	$	8.9	35.9	%

The increase in gross profit for the first quarter of fiscal 2005 was due to a $5.3 million increase in service fee revenues and a $3.6 million increase in gross profit from product sales. The decrease in gross profit as a percentage of net revenues in first quarter of fiscal 2005 was largely driven by greater than planned product sales in the other category, which is primarily electronics, which carry a lower gross margin than product sales of sporting goods. Gross profit from product sales represented 62.1% of total gross profit in first quarter of fiscal 2004 and 56.4% in first quarter of fiscal 2005. Gross profit from service fee revenues represented 37.9% of total gross profit in first quarter of fiscal 2004 and 43.6% in first quarter of fiscal 2005. The gross profit on product

sales decreased from 27.1% in first quarter of fiscal 2004 to 24.8% in first quarter of fiscal 2005 due primarily to a shift in sales to consumer electronics from sporting goods.

Operating Expenses

Operating expenses primarily consist of sales and marketing expenses, product development expenses, general and administrative expenses, stock-based compensation expense and depreciation and amortization expenses. The following table shows operating expenses for first quarter of fiscal 2004 and the first quarter of fiscal 2005, the percentages that such expenses bear to net revenues and the period over period changes in operating expenses:


	First Qtr Fiscal 2004				First Qtr Fiscal 2005					First Qtr Fiscal 2005 vs. First Qtr Fiscal 2004
	$		%		$			%		$ Change			% Change
	(dollars in millions)
Sales and marketing expenses	$	17.5	26.4	%	$	20.9		22.9	%	$	3.4		19.4	%
Product development expenses		4.5	6.8	%		6.6		7.2	%		2.1		46.7	%
General and administrative expenses		3.9	5.9	%		5.2		5.7	%		1.3		33.3	%
Stock-based compensation expense		0.6	0.9	%		(0.2	)	(0.2	)%		(0.8	)	(133.3	)%
Depreciation and amortization expenses		2.6	3.9	%		3.1		3.4	%		0.5		19.2	%

Total operating expenses	$	29.1	43.9	%	$	35.6		38.9	%	$	6.5		22.3	%

Sales and Marketing Expenses. Sales and marketing expenses include fulfillment costs, customer service costs, credit card fees, net partner revenue share charges, net advertising and promotional expenses incurred by us on behalf of our partners’ e-commerce businesses and payroll related to the buying, business management and marketing functions of our company. Net partner revenue share charges 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, net of amounts reimbursed to us by our partners. Net advertising and promotional expenses include promotional free shipping and subsidized shipping and handling costs and are net of amounts reimbursed to us by our partners.

Sales and marketing expenses increased $3.4 million from the first quarter of fiscal 2005 primarily due to a $1.6 million increase in payroll and related costs principally in our fulfillment operations, a $1.1 million increase in credit card fees, a $0.5 million increase in online marketing and a $0.2 million increase in subsidized shipping costs related to increased promotional shipping activity. The increases in these costs were principally caused by higher sales volumes in the first quarter of fiscal 2005.

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 $2.1 million in the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004 primarily due to a $1.6 million increase in staffing and related costs, and a $0.5 million increase in communication, web hosting and equipment maintenance costs. The increases in these costs were necessary to support new partner launches, deliver enhanced functionality for our partners’ e-commerce businesses and continue to improve the capacity, stability and security of our e-commerce platform.

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

General and administrative expenses increased $1.3 million from the first quarter of fiscal 2005 primarily due to a $1.0 million increase in payroll and related costs to support the growth of our business, a $0.2 million increase in occupancy costs due to the purchase of our new headquarters and a $0.1 million increase in other general and administrative expenses.

Stock-Based Compensation. Stock-based compensation expense consists of the amortization of deferred compensation expense for options granted to employees and certain non-employees, including options subject to variable accounting (the expense for which may fluctuate from period to period based on the closing market price of our stock), the value of options or warrants granted to certain partners and investors and amortization of deferred partner revenue share charges. Deferred partner revenue share charges, which are included in other assets, relate to a partner’s exercise of a right to receive shares of our common stock in lieu of future cash revenue share payments.

Stock-based compensation expense decreased $0.8 million for the first quarter of fiscal 2005 primarily due to a $0.9 million decrease in the amortization of deferred compensation expense relating to options subject to variable accounting as well as a $0.1 million increase in deferred partner revenue share charges resulting from higher product sales from the partner’s e-commerce business. As of the end of first quarter of fiscal 2005, we had an aggregate of $1.5 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 $0.4 million for the first quarter of fiscal 2004 and $0.5 million for first quarter of fiscal 2005.

Depreciation and Amortization Expense. Depreciation and amortization expenses relate primarily to the depreciation of our corporate headquarters and Louisville, 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 $0.5 million for the first quarter of fiscal 2005 primarily due to additional assets to build, manage and operate our business, offset in part, by certain previously purchased assets becoming fully depreciated in fiscal 2004.

Other (Income) Expense

Other (income) expense consists of expenses related to a minority interest held by a third party in a joint venture with us and losses and gains on the disposition of assets. Interest expense consists primarily of interest expense paid in connection with a mortgage note that we have on our new corporate headquarters and interest expense on capital leases, and interest income consists primarily of interest earned on cash, cash equivalents, short-term investments and marketable securities. The following table shows other (income) expense, interest expense and interest income for the first quarter of fiscal 2004 and for the first quarter of fiscal 2005, the percentages that such amounts bear to net revenues and the period over period changes in each of other (income) expense, interest expense and interest income:


	First Qtr Fiscal 2004					First Qtr Fiscal 2005					First Qtr Fiscal 2005 vs. First Qtr Fiscal 2004
	$			%		$			%		$ Change			% Change
	(dollars in millions)
Other (income) expense	$	—		—		$	(0.1	)	(0.1	)%	$	(0.1	)	N/A
Interest expense		—		—			0.2		0.3			0.2		N/A
Interest income	$	(0.3	)	(0.5	)%	$	(0.3	)	(0.3	)%	$	—		—	%

The $0.1 million increase in other (income) expense in the first quarter of fiscal 2005 was primarily due to a minority interest held by a third party in a joint venture with us.

The increase in interest expense of $0.2 million for the first quarter of fiscal 2005 was due primarily to the mortgage on our new corporate headquarters.

Income Taxes

We have not had any taxable income since we entered the e-commerce business in fiscal 1999. Prior year net operating losses generated have been carried back to offset income taxes paid in prior years. The remaining net operating losses were used in part to offset fiscal 2004 taxable income with the remainder carried forward. As of April 2, 2005, we had available net operating loss carryforwards of approximately $443.0 million which expire in the years 2005 through 2024. The use of certain net operating loss carryforwards is 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 $245.0 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 2003 and 2004

Net Revenues

We derive virtually all of our revenues from sales of products by us through our partners’ e-commerce businesses and service fees earned by us in connection with the development and operation of our partners’ e-commerce businesses. The following table shows net revenues by source for fiscal 2003 and fiscal 2004, the percentages that such revenues bear to total net revenues and the period over period changes in net revenues:


	Fiscal 2003				Fiscal 2004				Fiscal 2004 vs. Fiscal 2003
	$		%		$		%		$ Change		% Change
	(dollars in millions)
Net revenues from product sales—sporting goods	$	128.4	53.1	%	$	165.4	49.3	%	$	37.0	28.8	%
Net revenues from product sales—other		88.1	36.4	%		109.6	32.7	%		21.5	24.4	%

Net revenues from product sales		216.5	89.5	%		275.0	82.0	%		58.5	27.0	%
Service fee revenues		25.4	10.5	%		60.3	18.0	%		34.9	137.5	%

Net revenues	$	241.9	100.0	%	$	335.3	100.0	%	$	93.4	38.6	%

Net revenues from product sales increased $58.5 million in fiscal 2004. Of this increase, $37.0 million was due to an increase in sales in our sporting goods category and $21.5 million was due to an increase in sales in our other product category, which includes increased sales of consumer electronics and licensed entertainment products. The increases in the sporting goods and other categories were due to the addition of new partners in fiscal 2004, growth in sales from partners’ e-commerce businesses that were operated for part of fiscal 2003 and all of fiscal 2004 and growth in sales from partners’ e-commerce businesses that were operated for the entirety of both periods. Net revenues from product sales included shipping revenue of $23.6 million for fiscal 2003 and $34.0 million for fiscal 2004. Net revenues from product sales in the sporting goods category represented 59.3% of total net revenues from product sales in fiscal 2003 and 60.1% in fiscal 2004. Net revenues from product sales in the other category represented 40.7% of total net revenues from product sales in fiscal 2003 and 39.9% in fiscal 2004.

Service Fee Revenues. Service fee revenues are derived from service fees earned by us in connection with the development and operation of our partners’ e-commerce businesses. Service fees primarily consist of variable fees based on the value of merchandise sold or gross profit generated through our partners e-commerce businesses. To a lesser extent, service fees include fixed periodic payments by partners for the development and operation of their e-commerce businesses and fees related to the provision of marketing, design, development and other services.

Service fee revenues increased $34.9 million in fiscal 2004 primarily due to the addition of new partners in fiscal 2004, increases in sales from partners’ e-commerce businesses that were operated for part of fiscal 2003 and all of fiscal 2004 and increases in sales from partners’ e-commerce businesses that were operated for the entirety of both periods.

Cost of Revenues

Cost of revenues consists of cost of revenues from product sales and cost of service fee revenues. 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. We specifically do not record cost of service fee revenue. The cost of the sales of the merchandise on which we earn service fees are incurred by our service-fee partners because they are the owners and sellers of the merchandise. The following table shows cost of revenues for fiscal 2003 and fiscal 2004, the percentages that such costs bear to total net revenues and the period over period changes in cost of revenues:


	Fiscal 2003				Fiscal 2004				Fiscal 2004 vs. Fiscal 2003
	$		%		$		%		$ Change		% Change
	(dollars in millions)
Cost of revenues from product sales	$	154.7	64.0	%	$	203.1	60.6	%	$	48.4	31.3	%
Cost of revenues from service fee revenues		—	—			—	—			—	—

Cost of revenues	$	154.7	64.0	%	$	203.1	60.6	%	$	48.4	31.3	%

As a percentage of net revenues, cost of revenues improved from 64.0% in fiscal 2003 to 60.6% in fiscal 2004. The improvement in cost of revenues as a percentage of net revenues resulted from the increase in service fee revenues, which have no associated cost of revenues, exceeding the increase in cost of revenues from product sales. Cost of revenues from product sales as a percentage of net revenues from product sales increased from approximately 71.5% in fiscal 2003 to approximately 73.9% in fiscal 2004.

Gross Profit

Gross profit consists of gross profit from product sales and gross profit from service fees. Because we do not record cost of service fee revenues, net revenues from service fees and gross profit from service fees are the same. The following table shows gross profit for fiscal 2003 and fiscal 2004, the percentages that such gross profit bears to product sales, service fees and total net revenues and the period over period changes in gross profit:


	Fiscal 2003								Fiscal 2004								Fiscal 2004 vs. Fiscal 2003
	$		% of product sales		% of service fees		% of net revenue		$		% of product sales		% of service fees		% of net revenue		$ Change		% Change
Gross profit from product sales	$	61.8	28.5	%	—		—		$	71.9	26.1	%	—		—		$	10.1	16.3	%
Gross profit from service fees		25.4	—		100.0	%	—			60.3	—		100.0	%	—			34.9	137.5	%

Gross profit	$	87.2	—		—		36.0	%	$	132.2	—		—		39.4	%	$	45.0	51.6	%

The increase in gross profit for fiscal 2004 was due to a $34.9 million increase in service fee revenues and a $10.1 million increase in gross profit from product sales. The increase in gross profit as a percentage of net revenues in fiscal 2004 was due to the growth in service fees exceeding the decline in gross profit from product sales as a percentage of product sales. Gross profit from product sales represented 70.9% of total gross profit in fiscal 2003 and 54.4% in fiscal 2004. Gross profit from service fee revenues represented 29.1% of total gross profit in fiscal 2003 and 45.6% in fiscal 2004. The gross profit on product sales decreased from 28.5% in fiscal 2003 to 26.1% in fiscal 2004 due primarily to a shift in sales to consumer electronics from sporting goods.

Operating Expenses

Operating expenses primarily consist of sales and marketing expenses, product development expenses, general and administrative expenses, stock-based compensation expense and depreciation and amortization expenses. The following table shows operating expenses for fiscal 2003 and fiscal 2004, the percentages that such expenses bear to net revenues and the period over period changes in operating expenses:


	Fiscal 2003				Fiscal 2004				Fiscal 2004 vs. Fiscal 2003
	$		%		$		%		$ Change			% Change
	(dollars in millions)
Sales and marketing expenses	$	59.6	24.6	%	$	78.9	23.5	%	$	19.3		32.4	%
Product development expenses		14.1	5.8	%		20.2	6.0	%		6.1		42.9	%
General and administrative expenses		13.3	5.5	%		18.2	5.4	%		4.9		37.0	%
Restructuring costs related to Ashford.com		0.1	—			—	—			(0.1	)	NM
Stock based compensation expense		1.9	0.8	%		3.6	1.1	%		1.7		86.0	%
Depreciation and amortization expenses		11.4	4.7	%		10.9	3.3	%		(0.4	)	(3.9	)%

Total operating expenses	$	100.4	41.5	%	$	131.9	39.3	%	$	31.4		31.3	%

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, net of amounts reimbursed to us by our partners. Net advertising and promotional expenses include promotional free shipping and subsidized shipping and handling costs and are net of amounts reimbursed to us by our partners.

Sales and marketing expenses increased $19.3 million in fiscal 2004 compared to fiscal 2003 primarily due to a $7.9 million increase in payroll and related costs principally in our customer service and fulfillment operations, a $2.0 million increase in subsidized shipping and handling costs, a $4.4 million increase in credit card fees, a $2.0 million increase in professional fees consisting principally of temporary labor, a $2.6 million increase in online marketing expenses and approximately $0.4 million increase in other administrative costs. The increases in these costs were principally caused by higher sales volumes in fiscal 2004.

Product development expenses increased $6.1 million in fiscal 2004 as compared to fiscal 2003 primarily due to a $3.1 million increase in personnel and related costs, a $2.1 million increase in costs related to our use of temporary technical professionals, a $0.6 million increase in communication costs due to the increased number of e-commerce businesses that we operated and maintained and $0.3 million in other product development costs. The increases in these costs were necessary to support new partner launches, deliver enhanced functionality for our partners’ e-commerce businesses and continue to improve the capacity, stability and security of our e-commerce platform.

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

General and administrative expenses increased $4.9 million in fiscal 2004 compared to fiscal 2003 primarily due to a $2.3 million increase in auditing, accounting, tax, legal and other professional fees, including fees related to our compliance with Section 404 of the Sarbanes Oxley Act, a $2.0 million increase in personnel and related costs incurred to support the growth of our business, and a $0.7 million increase in other general and administrative expenses.

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, including options subject to variable accounting (the expense for which may fluctuate from period to period), the value of options or warrants granted to certain partners and investors and amortization of deferred partner revenue share charges. Deferred partner revenue share charges, which are included in other assets, relate to a partner’s exercise of a right to receive shares of our common stock in lieu of future cash revenue share payments.

Stock-based compensation expense increased $1.7 million primarily due to a $1.3 million increase in the amortization of deferred compensation expense relating to options subject to variable accounting as well as a $0.4 million increase in deferred partner revenue share charges resulting from higher product sales from the partner’s e-commerce business. As of the end of fiscal 2004, we had an aggregate of $1.3 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 $1.4 million for fiscal 2003 and $1.8 million for fiscal 2004.

center, the depreciation and amortization of the capitalized costs for our purchased hardware and software and internally developed software (including a portion of the cost related to the employees that developed our internally developed software) and the depreciation of improvements, furniture and equipment at our current and former corporate headquarters, our fulfillment centers in Louisville, Kentucky and Shepherdsville, Kentucky and our customer service center in Melbourne, Florida.

Depreciation and amortization expenses decreased approximately $0.4 million primarily due to the acquisition of certain longer-lived property and equipment and certain shorter-lived property and equipment becoming fully depreciated.

Other (Income) Expense

Other (income) expense consists of expenses related to a minority interest held by a third party in a joint venture with us and losses and gains on the disposition of assets. Interest expense consists primarily of interest expense paid in connection with a mortgage note that we have on our new corporate headquarters and interest expense on capital leases, and interest income consists primarily of interest earned on cash, cash equivalents, short-term investments and marketable securities. The following table shows other (income) expense, interest expense and interest income for fiscal 2003 and fiscal 2004, the percentages that such amounts bear to net revenues and the period over period changes in each of other (income) expense, interest expense and interest income:


	Fiscal 2003					Fiscal 2004					Fiscal 2004 vs. Fiscal 2003
	$			%		$			%		$ Change		% Change
	(dollars in millions)
Other (income) expense	$	—		—	%	$	0.6		0.2	%	$	0.6	N/A
Interest expense		—		—			0.5		0.2			0.5	N/A
Interest income	$	(1.2	)	-0.5	%	$	(1.2	)	-0.3	%	$	—	(1.3	)%

The $0.6 million increase in other (income) expense in fiscal 2004 was primarily due to expenses of $0.4 million related to a minority interest held by a third party in a joint venture with us and a loss of $0.2 million on the disposition of assets in fiscal 2004.

The increase in interest expense of $0.5 million was due primarily to the mortgage on our new corporate headquarters.

Income Taxes

We have not had any taxable income since we entered the e-commerce business in fiscal 1999. Prior year net operating losses generated have been carried back to offset income taxes paid in prior years. The remaining net operating losses were used in part to offset fiscal 2004 taxable income with the remainder carried forward. As of the end of fiscal 2004, we had available net operating loss carryforwards of approximately $442.8 million which expire in the years 2005 through 2024. The use of certain net operating loss carryforwards is 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.

Comparison of Fiscal 2002 and 2003

Net Revenues

The following table shows net revenues by source for fiscal 2002 and fiscal 2003, the percentages that such revenues bear to total net revenues and the period over period changes in net revenues:


	Fiscal 2002				Fiscal 2003				Fiscal 2003 vs. Fiscal 2002
	$		%		$		%		$ Change			% Change
	(dollars in millions)
Net revenues from product sales—sporting goods	$	96.7	56.0	%	$	128.4	53.1	%	$	31.7		32.8	%
Net revenues from product sales—Ashford.com		21.6	12.5	%		1.0	0.4	%		(20.6	)	(95.4	)%
Net revenues from product sales—other		36.5	21.2	%		87.1	36.0	%		50.6		138.3	%

Net revenues from product sales		154.8	89.7	%		216.5	89.5	%		61.7		39.8	%
Service fee revenues		17.8	10.3	%		25.4	10.5	%		7.6		42.6	%

Net revenues	$	172.6	100.0	%	$	241.9	100.0	%	$	69.3		40.1	%

Net Revenues from Product Sales. In fiscal 2002 and fiscal 2003, net revenues from product sales included the revenues of Ashford.com, Inc. from March 14, 2002, the date our acquisition of Ashford.com was completed.

Net revenues from product sales increased $61.7 million. Of this increase, $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 category, which includes 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 and sold off remnant inventory in fiscal 2003. 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 part of fiscal 2002 and all of fiscal 2003 and increases in sales from partners’ e-commerce businesses that were operated for the entirety of both periods. Net revenues from product sales included shipping revenue of $15.3 million for fiscal 2002 and $23.6 million for fiscal 2003.

Service Fee Revenues. Service fee revenues increased $7.6 million primarily due to a $9.1 million 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.

Cost of Revenues

The following table shows cost of revenues for fiscal 2002 and fiscal 2003, the percentages that such costs bear to total net revenues and the period over period changes in cost of revenues:


	Fiscal 2002				Fiscal 2003				Fiscal 2003 vs. Fiscal 2002
	$		%		$		%		$ Change		% Change
	(dollars in millions)
Cost of revenues from product sales	$	114.3	66.2	%	$	154.7	64.0	%	$	40.5	35.4	%
Cost of revenues from service fee revenues		—	—			—	—			—	—

Cost of revenues	$	114.3	66.2	%	$	154.7	64.0	%	$	40.5	35.4	%

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.

Gross Profit

The following table shows gross profit for fiscal 2002 and fiscal 2003, the percentages that such gross profit bears to product sales, service fees and total net revenues and the period over period changes in gross profit:


	Fiscal 2002								Fiscal 2003								Fiscal 2003 vs. Fiscal 2002
	$		% of product sales		% of service fees		% of net revenue		$		% of product sales		% of service fees		% of net revenue		$ Change		% Change
Gross profit from product sales	$	40.6	26.2	%	—		—		$	61.8	28.5	%	—		—		$	21.2	52.3	%
Gross profit from service fees		17.8	—		100.0	%	—			25.4	—		100.0	%	—			7.6	42.6	%

Gross profit	$	58.4	—		—		33.8	%	$	87.2	—		—		36.0	%	$	28.8	49.3	%

The increase in gross profit for fiscal 2003 was due primarily to a $61.8 million increase in net revenues from product sales in fiscal 2003. The increase in gross profit percentage for fiscal 2003 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 lower-margin consumer electronics category in fiscal 2003. Gross profit from product sales represented 69.5% of total gross profit in 2002 and 70.9% in fiscal 2003. Gross profit from service fee revenue represented 30.5% of total gross profit in fiscal 2002 and 29.1% in fiscal 2003.

Operating Expenses

The following table shows operating expenses for fiscal 2002 and fiscal 2003, the percentages that such expenses bear to net revenues and the period over period changes in operating expenses:


	Fiscal 2002				Fiscal 2003				Fiscal 2003 vs. Fiscal 2002
	$		%		$		%		$ Change			% Change
	(dollars in millions)
Sales and marketing expenses	$	51.0	29.5	%	$	59.6	24.6	%	$	8.6		17.0	%
Product development expenses		11.8	6.9	%		14.1	5.8	%		2.3		19.4	%
General and administrative expenses		14.9	8.6	%		13.3	5.5	%		(1.6	)	(10.5	)%
Restructuring costs related to Ashford.com		1.7	1.0	%		0.1	—			(1.6	)	(95.5	)%
Net Loss on Sale of Ashford.com Assets		2.6	1.5	%		—	—			(2.6	)	NM
Stock based compensation expense		0.4	0.2	%		1.9	0.8	%		1.5		382.5	%
Depreciation and amortization expenses		10.5	6.1	%		11.4	4.7	%		0.9		8.3	%

Total operating expenses	$	92.8	53.8	%	$	100.4	41.5	%	$	7.6		8.2	%

fulfillment center, and a $2.0 million increase in credit card fees, offset, in part, by a $1.4 million decrease in 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.

Product Development Expenses. Product development expenses increased $2.3 million primarily due to a $2.7 million increase in personnel and related costs and a $0.3 million increase in costs related to our use of temporary technical professionals, offset, in part, by a $0.3 million decrease in communication and bandwidth costs, a $0.2 million decrease related to the closing of our West Coast technology services office in the second quarter of fiscal 2002 and a $0.2 million decrease in equipment and software maintenance costs.

General and Administrative Expenses. 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 which have a higher bad debt rate, a lower bad debt rate for sales through our partners’ e-commerce businesses and a $0.4 million 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.

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 of our net revenues in fiscal 2002 and $1.0 million of our net revenues in fiscal 2003. 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 $0.4 million.

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.

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


	Fiscal 2002		Fiscal 2003
	(in millions)
Termination benefits	$	0.4	$	—
Contractual obligations		0.4		0.1
Asset impairments		0.8		—
Other restructuring costs		0.1		—

	$	1.7	$	0.1

Termination benefits were comprised of severance-related payments for 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 $0.4 million on the sale in August 2002 of certain assets of a division of Ashford Corporate Gifts, Inc., 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 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 $0.5 million related to the amortization of deferred partner revenue share charges, offset, in part, by a decrease of $0.3 million 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 $0.1 million 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 $0.9 million for fiscal 2002 and $1.4 million for fiscal 2003.

Depreciation and Amortization Expenses. Depreciation and amortization expenses increased $0.9 million primarily due to additional assets to build, manage and operate our business, offset, in part, by an impairment charge of $0.6 million 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.

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 following table shows interest expense and interest income for fiscal 2002 and fiscal 2003, the percentages that such amounts bear to net revenues and the period over period changes in each of interest expense and interest income:


	Fiscal 2002					Fiscal 2003					Fiscal 2003 vs. Fiscal 2002
	$			%		$			%		$ Change			% Change
	(dollars in millions)
Interest income	$	(1.4	)	(0.8	)%	$	(1.2	)	(0.5	)%	$	0.2		(14.5	)%
Interest expense	$	0.7		0.4	%	$	—		—		$	(0.7	)	(100.0	)%

The decrease in interest income of $0.2 million 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.

The decrease in interest expense of $0.7 million 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.

Seasonality

We have experienced and expect to continue to experience seasonal fluctuations in our revenues. These seasonal patterns will cause quarterly fluctuations in our operating results. In particular, our fourth fiscal quarter has accounted for and is expected to continue to account for a disproportionate percentage of our total annual revenues. We believe that results of operations for a quarterly period may not be indicative of the results for any other quarter or for the full year. For additional information, see Note 20 to our audited consolidated financial statements included in this prospectus.

Liquidity and Capital Resources

Our principal sources of liquidity are our cash, cash equivalents, short-term investments and marketable securities. Our cash, cash equivalents, short-term investments and marketable securities balances were $69.5 million as of the end of fiscal 2003, $75.4 million as of the end of fiscal 2004 and $43.2 million as of the end of the first quarter of fiscal 2005.

Since our entry into the e-commerce business in 1999, we have primarily funded our operations with approximately $176.3 million in cash raised in equity financings. We also received an aggregate of $23.5 million in proceeds from the sales of our discontinued operations in fiscal 1999 and fiscal 2000 and $35.7 million in cash from the acquisition of Fogdog, Inc. in fiscal 2000. We used a portion of the cash from these transactions in connection with the exit from our discontinued operations and the balance for the working capital needs, to fund operating losses incurred prior to fiscal 2004 and for the general business purposes of our e-commerce business. We also used $7.1 million in cash in connection with our acquisition of Ashford.com, Inc. in March 2002 and received $1.0 million in cash and a secured note in the principal amount of $4.5 million in connection with our sale of certain assets of Ashford in December 2002 and March 2003. This note was repaid in full in August, 2004.

We have incurred substantial costs to develop our e-commerce platform and to recruit, train and compensate personnel for our creative, engineering, business development, marketing, merchandising, customer service, management information systems and administrative departments. During fiscal 2002, we spent approximately $8.8 million in cash to purchase our previously-leased fulfillment center in Louisville, Kentucky and 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 system capacity as well as our system reliability, $4.0 million on the expansion of our Louisville, Kentucky fulfillment center to increase capacity and $1.2 million to acquire certain assets of and enhance a 500-seat customer service 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 Louisville, Kentucky fulfillment center. During fiscal 2004, we spent approximately $21.1 million on the purchase and improvement to our new corporate headquarters in King of Prussia, Pennsylvania. Of this amount, we financed $13.0 million, secured through a ten year mortgage on the new corporate headquarters building. In addition, during fiscal 2004, we incurred $6.7 million in capital expenditures to continue to improve our technology infrastructure and open our second fulfillment center located in Shepherdsville, Kentucky.

During the first quarter of fiscal 2005, we spent approximately $2.7 million on continued upgrades to our technology infrastructure. During fiscal 2005, we expect to continue to further improve our technology infrastructure and our fulfillment and customer service operations.

We had working capital of $35.3 million as of the end of fiscal 2003, $29.7 million as of the end of fiscal 2004 and $26.1 million as of the end of the first quarter of fiscal 2005, and an accumulated deficit of $177.6 million as of the end of fiscal 2003, $177.3 million as of the end of fiscal 2004 and $178.9 million as of the end of the first quarter of fiscal 2005.

changes were a decrease in accounts payable, accrued expenses and other, offset, in part, by an increase in accounts receivable compared to the end of fiscal 2004. The decrease in accounts payable, accrued expenses and other was due primarily to a decrease in trade accounts payable due primarily to lower inventory levels at the end of the first quarter of fiscal 2005 and a decrease in amounts owed to partners, which were related to increased sales volume in the fourth quarter of fiscal 2004. Our investing activities during the first quarter of fiscal 2005 consisted primarily of the purchase of $9.2 million and sale of $32.0 million of marketable securities. During the first quarter of fiscal 2005, we also incurred capital expenditures of $5.3 million. Our financing activities during the first quarter of fiscal 2005 consisted of the receipt of $1.2 million in gross proceeds from exercises of common stock options.

We used approximately $16.0 million in net cash for operating activities during the first quarter of fiscal 2004. Our principal sources of operating cash during the first quarter of fiscal 2004 were payments received from customers and fee-based partners, which generally approximate our net revenues from product sales and our service fee revenues, respectively. Our principal uses of operating cash during the first quarter of fiscal 2004 were cash paid to product suppliers, which generally approximates our cost of revenues from product sales, employee compensation and partner revenue share payments. Changes in our operating assets and liabilities during the first quarter of fiscal 2004 resulted in a net cash outflow of $15.2 million. The most significant changes were a decrease in accounts payable, accrued expenses and other and an increase in accounts receivable compared to the end of fiscal 2003. The decrease in accounts payable, accrued expenses and other was due primarily to a decrease in trade accounts payable due primarily to lower inventory levels at the end of the first quarter of fiscal 2004 and a decrease in amounts owed to partners, which were related to increased sales volume in the fourth quarter of fiscal 2003. The increase in accounts receivable was due primarily to decreases in our accounts receivable reserves. Our investing activities during the first quarter of fiscal 2004 consisted primarily of the purchase of $8.7 million and sale of $8.5 million of marketable securities. During the first quarter of fiscal 2004, we also incurred capital expenditures of $2.4 million. Our financing activities during the first quarter of fiscal 2004 consisted of the receipt of $0.9 million in gross proceeds from exercises of common stock options.

Operating activities provided net cash of approximately $23.8 million during fiscal 2004. Our principal sources of operating cash during fiscal 2004 were payments received from customers and fee-based partners, which generally approximate our net revenues from product sales and our service fee revenues, respectively. Our principal uses of operating cash during fiscal 2004 were cash paid to product suppliers, which generally approximates our cost of revenues from product sales, employee compensation and partner revenue share payments. Changes in our operating assets and liabilities during fiscal 2004 resulted in a net cash inflow of $8.8 million. The most significant changes were an increase in accounts payable, accrued expenses and other, offset, in part, by an increase in inventory and accounts receivable compared to fiscal 2003. The increase in accounts payable, accrued expenses and other was due primarily to an increase in partner revenue share payments at the end of fiscal 2004, which was related to increased sales volume in fiscal 2004, higher payroll and related accruals at the end of fiscal 2004 compared to fiscal 2003 and an increase in trade accounts payable due primarily to higher inventory levels at the end of fiscal 2004. The increase in inventory was primarily to prepare for new consumer electronics product launches and to support the growth of our sporting goods business. The increase in accounts receivable was primarily due to higher partner receivables and increased term sales activity including our business-to-business channels. Our investing activities during fiscal 2004 consisted primarily of capital expenditures of $37.4 million. During fiscal 2004, we also purchased $64.1 million and sold $39.3 million of marketable securities and received $3.2 million of payments on notes receivable. Our financing activities during fiscal 2004 consisted primarily of the $13.0 million of proceeds from the mortgage note on our new corporate headquarters building and receipt of $5.1 million in gross proceeds from exercises of common stock options and warrants. During fiscal 2004, we also repaid $1.6 million of capital lease obligations and $0.1 million on the mortgage note.

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 $60.4 million and sold $59.8 million of marketable securities, received $2.3 million in gross proceeds from sales of short-term investments and received $0.9 million 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 $0.3 million in gross proceeds from the sale of common stock through our Employee Stock Purchase Plan and repaid $0.1 million 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 $81.4 million and sold $94.2 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 $0.4 million.

We had the following contractual obligations as of the end of fiscal 2004:


			Payments due by period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
			(in thousands)
Operating lease obligations	$	10,387	$	2,175	$	3,616	$	3,168	$	1,428
Purchase obligations(1)		42,384		42,384		—		—		—
Advertising and media agreements		130		130		—		—		—
Partner revenue share payments		37,050		7,450		11,700		13,000		4,900
Accrued Interest Expense		72		72		—		—		—
Long-term debt obligations		12,945		142		313		354		12,136
Capital lease obligations		1,725		912		813		—		—

Total contractual obligations	$	104,693	$	53,265	$	16,442	$	16,522	$	18,464

(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.

We had a profit of $0.3 million in fiscal 2004. During fiscal 2004, we sustained the cash requirements of our operations through our current cash, cash equivalents, short-term investments and marketable securities.

Prior to fiscal 2004, we financed our e-commerce operations primarily from the sale of equity securities. While we had net income of $0.3 million for fiscal 2004, we did not realize net income for the full years of fiscal 2001, fiscal 2002 or fiscal 2003. In order to fund our anticipated operating expenses and realize net income, our revenues must continue to increase significantly.

Assuming no exercise of any over-allotment options, we expect to raise net proceeds of $ from this offering and the sale of $50.0 million of our convertible notes due 2025. If we are unable to complete these offerings as contemplated, or if we raise fewer net proceeds than we anticipate, or if cash flows from operating activities are insufficient to fund our operations, then 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. 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.

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 centers in Louisville and Shepherdsville Kentucky. In fiscal 2002, we also shipped products from Ashford.com’s jewelry and luxury goods fulfillment center that we formerly maintained in Houston, Texas. 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 (determined using the weighted average 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, 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 centers.

Accounting for Long-Lived Assets

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.

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 $11.8 million as of the end of fiscal 2003 and $10.1 million as of the end of fiscal 2004. 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 our common stock that was issued upon exercise of the right.

In December 2004, the Financial Accounting Standards Board, or FASB, issued Financial Accounting Standards Board Statement No. 123R “Share-Based Payment”, or FAS 123R, which replaces Financial Accounting Standards Board Statement No. 123, “Accounting for Stock-Based Compensation,” or FAS 123, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” or APB 25. FAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Companies must adopt FAS 123R no later than the beginning of their next fiscal year that begins after June 15, 2005. In addition, FAS 123R will cause unrecognized expense (based on the amounts in our pro forma footnote disclosure) related to options vesting after the date of initial adoption to be recognized as a charge to results of operations over the remaining vesting period. We are required to adopt FAS 123R in our first quarter of fiscal 2006, beginning January 1, 2006. Under FAS 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. We have preliminarily decided to use the prospective method for transition as of the effective date of FAS 123R. The prospective method requires that compensation expense be recorded for all unvested stock options and share awards at the beginning of the first quarter of adoption of FAS 123R. We are continuing to evaluate the requirements of FAS 123R and we expect that the adoption of FAS 123R will have a material impact on our consolidated results of operations and earnings per share. In light of our anticipated adoption of FAS 123R, we and our compensation committee are reevaluating our current incentive compensation strategies. See Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus and Note 2 to our consolidated financial statements included elsewhere in this prospectus for an analysis of the impact on our income statement of recognizing share-based payments based on their fair value in accordance with SFAS No. 123.

Certain Related Party Transactions

In fiscal 2000 and 2001, Interactive Technology Holdings, LLC, a joint venture of Comcast Corporation and QVC, Inc., acquired 10,797,900 shares of our common stock and warrants to purchase 300,000 shares of our common stock, which accounted for approximately 26.0% of our outstanding common stock as of January 1, 2005. On January 31, 2005, ITH effected a distribution of all of its assets, including shares of our common stock, to entities affiliated with Comcast and QVC. As of May 12, 2005, QVC beneficially owned approximately 20.20% of our outstanding common stock. M. Jeffrey Branman, one of our directors, was the President of Interactive Technology Services, which served as financial advisor to ITH through its dissolution.

In fiscal 2000, we entered into a website development and distribution agreement with iQVC, a division of QVC, Inc., pursuant to which we provide technology, procurement and fulfillment services for QVC, including selling sporting goods, recreational and/or fitness related equipment and related products, apparel and footwear to QVC for resale through the QVC website. We recognized net revenues of $1.8 million in fiscal 2004 and $0.4 million in the first quarter of fiscal 2005 on sales to QVC under this website development and distribution agreement. 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 2004 was $0.1 million related to these sales. Included in accounts receivable as of the end of the first quarter of fiscal 2005 was $68,911 related to these sales.

In fiscal 2003, we entered into a services agreement with QVC, Inc. pursuant to which QVC provided shipping services to us in exchange for fees. The fees charged to us by QVC were determined through arms-length negotiations. We incurred fees of $1.1 million in fiscal 2004. Of those fees, $1.0 million related directly to products shipped and was charged to cost of revenues from product sales and the remaining $0.1 million related to fulfillment services provided and was charged to sales and marketing expense. We incurred fees of $25,442 in the three-month period ended April 2, 2005. Of those fees, $12,794 related directly to products shipped and was charged to cost of revenues from product sales and the remaining $12,648 related to fulfillment services provided and was charged to sales and marketing expense. On February 1, 2005, we provided a 60-day advance notice of termination to QVC, which terminated this agreement effective April 3, 2005.

Prior to February 2005, we were the beneficial owner of Series C and Series D Convertible Preferred Stock of Odimo Incorporated, referred to as Odimo, and warrants to acquire additional shares of Series C and Series D Convertible Preferred Stock of Odimo. These securities were acquired in connection with the sale of certain assets of our Ashford.com subsidiary in 2002.

In February 2005, Odimo completed an initial public offering through the issuance of 3,125,000 shares of its common stock. Effective upon completion of Odimo’s initial public offering, we exercised our warrants to acquire Series C and Series D Convertible Preferred Stock of Odimo and converted all of such shares, along with our already held shares of Series C and Series D Convertible Preferred Stock of Odimo, into an aggregate of 824,594 shares of common stock of Odimo. As of April 28, 2005, we beneficially owned approximately 11.5% of the outstanding common stock of Odimo Incorporated and SOFTBANK Capital Partners LLC and its affiliates collectively beneficially owned approximately 16.1% of the outstanding common stock of Odimo. As of May 12, 2005 and prior to the offering, SOFTBANK Capital Partners LLC and its affiliates collectively beneficially owned approximately 20.67% of our outstanding common stock. Ronald D. Fisher, our director, is vice-chairman of SOFTBANK Holdings Inc. and SOFTBANK Corp. and a managing general partner of SOFTBANK Capital Partners LP, all of which are affiliates of SOFTBANK Capital Partners LLC. Michael S. Perlis, our director, is also managing partner of SOFTBANK Capital Partners LP.

In exchange for Rustic Canyon Partners forfeiting its right to designate one member to our board of directors on June 25, 2004, our board of directors approved the issuance to Rustic Canyon Partners of a warrant to purchase 12,500 shares of our common stock with a term of five years and an exercise price equal to the closing price of our common stock as reported on the Nasdaq National Market on the date immediately preceding the date of the approval of such issuance. Mark S. Menell, our director, is a partner of Rustic Canyon Partners.

BUSINESS

Overview

Industry Overview

Market Size and Opportunity

We believe the growing use of the Internet by consumers to purchase merchandise is driven by many factors including:

decreased concerns about the security and reliability of e-commerce;

technology innovations, such as broadband Internet access, that have enhanced the e-commerce shopping experience; and

increased recognition and support by retailers and manufacturers of the Internet as an important sales channel.

Need for “Partnered” E-Commerce Solutions

According to Forrester Research, it is strategically important for retailers to participate in multi-channel retailing (which includes e-commerce) to remain competitive. While retailers recognize the importance of e-commerce to their overall strategy, online sales were estimated to account for only 7.0 percent of total retail sales in 2004. Because online sales generally represent a small part of retailers’ businesses, we believe that the ability to operate an e-commerce business is not part of their core competency. We also believe that, as a result, many retailers struggle to justify making the level of investment in technology, infrastructure and expertise to support a high-quality e-commerce business. Our belief is supported by Forrester Research, which has stated that there has been an increase in interest in hosted or partnered e-commerce solutions. By partnering, retailers can gain access to higher quality technology, infrastructure and expertise than many of them could justify investing in on their own.

Our Solution

Our E-Commerce Platform

Our integrated e-commerce platform consists of three main components — core technology, supporting infrastructure and partner services. Using these components, we can develop, implement and support all aspects of a partner’s e-commerce business. These components include:


Core Technology	Supporting Infrastructure	Partner Services
· Web site administration	· Fulfillment	· Creative design, Web site usability, testing and enhancements

· Web infrastructure and hosting	· Drop shipping	· Channel integration

· Business intelligence	· Customer service	· Business-to-business (B-to-B) services

· E-commerce engine	· Buying	· Content development and imaging

· Order management		· E-commerce strategy

		· Online marketing

		· Customer relationship management (CRM)

Core Technology

Web Site Administration. The display of our partners’ online product catalogs is administered through a proprietary content and catalog management tool. The tool allows for, among other things, the ability to:

create and edit Web site navigation, categorization and product categories;

create and edit product display characteristics including placement of images and descriptive copy as well as product and category sequencing;

present special merchandising features such as featured products, related products, collections, promotional ad spots and promotional offers;

support numerous types of promotional campaigns which can be customized based on customer purchasing data;

establish up-sell and cross-sell relationships, manage pre-sell and backordering and optimize search term mapping; and

activate and deactivate products based on inventory, sell-through, and other criteria.

Web Infrastructure and Hosting. The Web sites we operate are hosted in two separately located data centers. This configuration enhances Web site uptime performance and fail-over reliability. We own the hardware and software that we use at these data centers, although the data centers are physically located at Tier I data center facilities of a leading third party telecommunications company. We actively manage and monitor the operations and infrastructure of our data centers including communications, bandwidth, network, systems administration, load balancing, production support, security and data and storage requirements.

Business Intelligence. We offer partners access to a Web-based reporting portal, which provides customer, demand, fulfillment and behavioral information. These applications and tools provide partners with insightful business intelligence metrics and visibility into their e-commerce businesses. We also offer customized reporting tailored to a partner’s specific needs.

E-Commerce Engine. Our e-commerce engine is a combination of proprietary and third-party applications. The platform’s core shopping features and functions, including search, data gathering and checkout processes, are part of the engine. We regularly upgrade these applications to provide our partners with updated technology.

Order Management. We manage customer orders through an application that interacts with proprietary and third-party payment processing, warehouse management, customer service and data warehousing systems. We accept multiple forms of tender including credit cards, checks and gift certificates/cards and maintain an internal team focused on order review and fraud prevention, claims processing and sales recovery functions.

Supporting Infrastructure

Fulfillment and Drop Shipping. We offer a full range of order fulfillment services out of two locations—our 470,000 square foot company-owned fulfillment center located in Louisville, Kentucky, and our 400,000 square-foot leased fulfillment center located in Shepherdsville, Kentucky. We also integrate with approximately 400 third-party, drop-ship vendors as well as with certain partners who perform their own fulfillment. Fulfillment activities include inbound receiving and profiling of merchandise, storage, picking, packing and shipping and returns processing. We also offer a variety of value-added fulfillment services including customized package branding, gift wrapping, gift messaging, promotional inserts, and product customization such as monogramming and engraving. We maintain relationships with major carriers and seek to achieve cost efficiencies through rate shopping opportunities. We offer multiple forms of shipping methods to customers including standard and expedited options, with pricing based on order value, dimensional characteristics and periodic shipping promotions.

Customer Service. We operate an 82,000 square-foot leased customer service center in Melbourne, Florida. This facility is operated 24 hours per day, seven days per week and has 500 agent workstations. Our primary customer service activities include inbound contact management via phone and email. Our customer service workstations contain a variety of proprietary and third-party applications and informational tools that provide agents with access to customer information including service history, previous purchases and personal preferences. Service agents also have visibility into product information, inventory availability and order status. These service agent tools are integrated with our order management and fulfillment operations to provide a consistent experience across all customer touch points including our partners’ Web sites, direct mail circulars,

catalogs, promotional events and direct response television campaigns. In addition to partner level training, we use a variety of customer service practices and systems to improve quality and efficiency including skills-based call routing, interactive voice response, call monitoring, work flow planning, data tracking and forecasting.

Buying. We have a team of buyers that procure products to be sold on certain of our partners e-commerce businesses in the sporting goods, consumer electronics and licensed entertainment categories. Our buyers identify general category trends and themes, select suppliers of merchandise, pick specific products to be purchased, forecast quantities to purchase based on expected demand and negotiate terms with suppliers.

Partner Services

Creative Design, Web Site Usability, Testing and Enhancements. We collaborate with our partners to create an online shopping experience that reinforces their brand, maximizes conversion and encourages repeat buying. To develop an e-commerce site, we deploy a cross-functional team of art directors, graphic designers, information architects, technical writers, usability engineers, technical designers, project managers, quality assurance specialists and Web developers. These professionals develop user interfaces including the overall imagery and tone, home page presentation, page flow and navigation, the structure of category and product pages, effective messaging and consistent communication, an intuitive purchasing process and a full archive of online customer service information.

Channel Integration. As consumer adoption of multi-channel shopping grows, consumer expectations rise and retailers look for cost-effective methods to integrate their selling and distribution channels. We provide custom development efforts that create tools and functions which enable our partners to integrate their e-commerce businesses into their multi-channel retail offerings. Examples of our development efforts in multi-channel e-commerce include allowing a customer to purchase an item online and pick it up in store, accepting the private-label credit cards of our partners, integrating with our partners loyalty programs, integrating online and offline gift registries, in-store ordering systems, universal gift cards, interactive circulars and print advertising and catalog support.

Business-to-Business Services. We seek to use our leadership in sporting goods to establish B-to-B e-commerce relationships with companies wanting to sell sporting goods on their Web stores. In our B-to-B relationships, we typically provide our partners with a data feed of product information, including elements such as images, descriptions and availability, and fulfill customer orders taken by our partners through their Web stores.

Content Development and Imaging. We operate, and make available to our partners, an in-house, professional photography studio to create digital product images and color swatches. In addition, we employ a copywriting staff focused on developing product descriptions and related content such as buyers’ guides, sizing charts, product tours and comparison shopping tools.

E-Commerce Strategy. We use the e-commerce expertise that we have developed in operating multiple e-commerce businesses since 1999 to create strategies and initiatives designed to grow our partners’ e-commerce businesses. Each partner relationship is led by an online business manager who is responsible to help grow the partner’s online sales.

Online Marketing Services. Our online marketing team develops and manages programs for partners to increase online exposure, generate incremental revenue and drive new customer acquisition. The services of this team include the conceptualization, creation and management of advertising through highly trafficked portal relationships, affiliate programs, search engines and comparison-shopping sites.

campaigns based upon demographic, purchase and preference data gathered and segmented within our data warehouse. We also offer personalized shopping experiences through the use of real-time analytics to present product recommendations and associations based upon behavioral profiles and product affinity models.

Growth Strategy

Our objective is to grow our business by expanding the e-commerce businesses of our existing partners and by adding new partners. Key elements of our growth strategy include:

Grow Our Existing Partners’ Businesses

Expand Our Partner Base

Our Partners

We operate e-commerce businesses for our partners pursuant to contractual agreements. We generally operate e-commerce businesses for our partners based on one of three models or, in some circumstances, a combination of these models. We refer to these three models as the GSI Commerce-owned inventory model, the partner-owned inventory model and the business-to-business model.

electronics, and licensed entertainment products. Because we operate e-commerce businesses for our sporting good partners using a common pool of owned sporting goods inventory, we are able to offer a broad assortment while efficiently managing our inventory. Under the owned-inventory model, we establish the prices for products that we offer. To the extent possible, we strategically price products sold through a partner’s e-commerce business to be consistent with the pricing for the same products at that partner’s retail stores. Accordingly, prices for the same products may differ across our partners’ e-commerce businesses. Revenues generated from this model are recorded by us as product sales. We believe that we have strong relationships with our vendors and sources of unique products, and we regularly seek to add new vendors, brands and sources of unique products. During fiscal 2004, we purchased $80.4 million of inventory from one vendor, which accounted for 43.1% of the total amount of inventory we purchased.

Partner-Owned Inventory Model—We operate certain aspects of our partners’ e-commerce businesses in exchange for service fees, which primarily consist of variable fees based on the value of merchandise sold or gross profit generated through our partners’ e-commerce businesses. To a lesser extent, service fees include fixed periodic payments by partners for the development and operation of their e-commerce businesses and fees related to the provision of marketing, design, development and other services. Under the partner-owned inventory model, our 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. Revenues generated from partners in this model are recorded by us as service fees.

Business-to-Business Model—We generally provide a product information database, including product images, descriptions and availability to these partners, which they use to sell merchandise on their e-commerce sites. These partners process customer orders on their Web sites and deliver the orders to us electronically. We sell the products ordered to these partners from our inventory or through our network of drop shippers and transfer title to the partners at a predetermined price. We then send the orders to customers on behalf of these partners. These partners generally perform their own customer service. To date, this model has been deployed using GSI Commerce-owned sporting goods inventory. Revenues generated from sales by us to our partners in this model are recorded by us as product sales.

The following table sets forth as of May 17, 2005, partners for which we operate all or a portion of their e-commerce businesses or with which we have publicly announced agreements and the method in which we record revenues from such partners:


Sporting Goods		Health and Beauty
Atlanta Falcons^® (P) Bally Total Fitness^® (P) Blades Board and Skate^® (P) Carolina Panthers^® (P) CBS Sportsline^SM / MVP.com^® (P) City Sports^® (P) Denver Broncos^® (P) Dick’s Sporting Goods^® (P) Dunham’s Sports^® (P) Fogdog^® (P) FOX Sports^® (P) G.I. Joe’s^® (P) Houston Texans^® (P) MC Sports^® (P) Modell’s Sporting Goods^® (P) National Hockey League^® (P) NASCAR/Turner Sports^® (P) Olympia Sports^TM (P) Pro Golf International^TM (P) Rawlings^® (P) Reebok^® (P) Rockport^® (P) Russell Athletics^® (P) San Diego Chargers^® (P) San Francisco Forty Niners^® (P) Sport Chalet^® (P) The Sports Authority^® (including Gart Sports, Oshman’s and Sportmart) (P) adidas^® (S) Timberland^® (S) Major League Baseball (MLB)^® (P),(S)		Estee Lauder/Gloss.com^® (S)
		GNC^® Corporation (S)

		Entertainment
		Home Box Office^® (P)
		Comedy Central^® (P)
		Nickelodeon^® (P)
		Public Broadcasting System^SM (S)

		Consumer Electronics
		palmOne^® (P)
		RadioShack^® (S)
		Tweeter Home Entertainment^SM (S)

		Home
		Ace Hardware^® (S)
		Linens-n-Things^® (S)

		Apparel
		Aeropostale^® (S)
		Burberry^® (S)
		kate spade^® (S)
		Liz Claiborne^® (S)
		Polo.com^SM (S)
		Wilsons Leather^® (S)

		Business to Business
		Sears^® (P)
		Buy.com^® (P)
		Sports “R” Us^® (P)
		Kmart^® (P)
		QVC^® (P)

(P)—Product

Sales Based Partners

(S)—Service

Fee Based Partners

Competition

The market for the development and operation of e-commerce businesses is continuously evolving and intensely competitive. We primarily compete with companies that can offer a full range of e-commerce services similar to the services we provide through our e-commerce platform, such as the Services Division of Amazon^®, Digital River^®, Commerce5^SM, Foot Locker^® (principally in the sporting goods category) and ValueVision Media^®. We also compete with companies that provide some components of an e-commerce solution, primarily to allow others to develop and operate their e-commerce business in-house, including Web site developers, third-party consultants and third-party fulfillment and customer service providers. In addition, we compete with the online and offline businesses of a variety of retailers and manufacturers in our targeted categories.

We believe that we compete with these competitors primarily on the basis of the following:

ability to generate incremental revenue for our partners;

reputation and experience for providing a quality e-commerce solution;

client services orientation and brand-centric business model;

economic value for the services provided;

the comprehensive, flexible and customized nature of the solution provided; and

the quality of Web site design and development, technology, customer service and fulfillment offered.

Intellectual Property

We use our partners’ names, URLs, logos and other marks in connection with the operation and promotion of their e-commerce businesses. Our agreements with our partners generally provide us with licenses to use this intellectual property in connection with the operation of their e-commerce businesses. These licenses typically are coterminous with the respective agreements.

We also rely on technologies that we license from third parties. These licenses may not continue to be available to us on commercially reasonable terms in the future. As a result, we may be required to obtain substitute technology of lower quality or at greater cost, which could materially adversely affect our business, results of operations and financial condition.

To protect our proprietary rights in services and technology, we rely on various intellectual property laws and contractual restrictions. These include confidentiality, invention assignment and nondisclosure agreements with our partners, employees, contractors and suppliers. Despite these precautions, it may be possible for a third-party to copy or otherwise obtain and use our intellectual property without our authorization.

Government Regulation

We generally are not regulated other than pursuant to federal, state and local laws applicable to the Internet or e-commerce, or to businesses in general. Certain regulatory authorities have enacted or proposed specific laws and regulations governing the Internet and online retailing. These laws and regulations cover issues such as taxation, pricing, content, distribution, quality and delivery of products and services, electronic contracts, intellectual property rights, user privacy and information security.

The issues of user privacy and information security have been the focus of numerous laws and regulations. These laws and regulations impact our business because we store personal information regarding customers of a partner’s e-commerce business and provide this information to that partner and to certain third parties that we use to process credit cards, process and fulfill orders, detect fraud, send emails and evaluate and maintain the performance of our partners’ Web sites. Laws such as the CAN-SPAM Act of 2003 or other user privacy or security laws could restrict our and our partners’ ability to market products to our partners’ customers, create uncertainty in Web usage and reduce the demand for our products and services or require us to redesign our partners’ Web sites or the operation of their e-commerce businesses.

Laws and regulations that were enacted prior to the advent of the Internet also affect our business. These laws and regulations cover issues such as property ownership, intellectual property rights, taxation, libel, obscenity, qualification to do business and export or import matters. Because these laws and regulations do not contemplate or address the unique issues of the Internet and online retailing, we are not certain how our business may be affected by their potential application. Also, changes in these laws and regulations intended to address these issues could create uncertainty in e-commerce. This uncertainty could reduce demand for our services or increase the cost of doing business as a result of litigation costs or increased service delivery costs.

Employees

As of May 6, 2005, we employed 1,219 full-time employees and 83 part-time employees. None of our employees is covered by a collective bargaining agreement, and we consider our relationship with our employees to be good. Competition for qualified personnel in our industry is intense. We believe that our future success will depend, in part, on our continued ability to attract, hire and retain qualified personnel.

Legal Proceedings

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

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

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

We do not believe, based on current knowledge, that any of the foregoing claims are likely to have a material adverse effect on our business, financial position or results of operations. However, we are unable to provide assurances that no material adverse effect on our business will occur, and we may incur substantial expenses and devote substantial time to defend third-party claims whether or not such claims are meritorious. In the event of a determination adverse to us, we may incur substantial monetary liability and may be required to implement expensive changes in our business practices or enter into costly royalty or licensing agreements. Any of these could have a material adverse effect on our business, financial position or results of operations.

MANAGEMENT

The following table sets forth information regarding each of our executive officers and directors:


Name	Age(1)	Title
Michael G. Rubin	32	Chairman, Co-President and Chief Executive Officer
Robert J. Blyskal	50	Co-President and Chief Operating Officer
Michael R. Conn	34	Senior Vice President, Corporate Development
Jordan M. Copland	43	Executive Vice President and Chief Financial Officer
Stephen J. Gold	46	Executive Vice President and Chief Information Officer
Robert W. Liewald	56	Executive Vice President, Merchandising
Arthur H. Miller	52	Executive Vice President and General Counsel
Damon Mintzer	39	Executive Vice President, Sales; President and Chief Operating Officer of Global-QVC Solutions, Inc.
Kenneth J. Adelberg	52	Director
M. Jeffrey Branman	49	Director
Ronald D. Fisher	57	Director
Harvey Lamm	69	Director
Mark S. Menell	40	Director
Michael S. Perlis	52	Director
Jeffrey F. Rayport	45	Director

(1)

As of May 12, 2005

The following is a brief description of the business experience of our executive officers and directors for at least the past five years.

Michael G. Rubin has served as our chairman of the board and chief executive officer since July 1995, as our president from June 2000 through May 2004, and as co-president since May 2004.

Robert J. Blyskal has served as our co-president and chief operating officer since May 2004. From October 2003 until May 2004, Mr. Blyskal was a consultant to NeighborCare, Inc., a provider of pharmacy services to the long term care marketplace. From May 1993 to August 2003, he held several positions with Medco Health Solutions, Inc., a prescription benefits management company. Most recently he served as executive vice president, operations and technology of Medco Health Solutions, Inc. He has also held the positions of senior vice president, operations, chairman of the enterprise-wide business quality steering committee, vice president and general manager, national pharmacies of Medco Health Solutions, Inc. From May 1991 to November 1993, he served as senior vice president, service systems of Purolator Courier Ltd., an overnight courier company.

Michael R. Conn has served as our senior vice president, corporate development since July 2004 and as senior vice president, business development from February 1999 through July 2004. From June 1993 to February 1999, Mr. Conn served as vice president, research at Gruntal & Co. L.L.C., an investment banking firm based in New York, New York.

Jordan M. Copland has served as our executive vice president and chief financial officer since February 2000. From March 1999 to February 2000, Mr. Copland served as senior vice president and chief financial officer of Virgin Entertainment Group, Inc.’s U.S.-based megastore and global e-commerce businesses. From October 1990 to March 1999, Mr. Copland held a variety of positions within The Walt Disney Company, a worldwide entertainment company. Most recently Mr. Copland was vice president of finance and planning for the Disney Consumer Products division. He has also held various leadership and management positions within the consumer products division of Disney.

Stephen J. Gold has served as our executive vice president and chief information officer since February 2005. From November 2003 until February 2005, he served as corporate vice president and divisional chief information officer of Merck & Company, Inc., a pharmaceutical company. Prior thereto, he held various positions with Medco Health Solutions, Inc., a prescription benefits management company, from July 1993 to September 2003, when it was a subsidiary of Merck. Most recently, he served as senior vice president and chief information officer and senior vice president, electronic commerce.

Robert W. Liewald has served as our executive vice president, merchandising since July 1999 and worked as a consultant to us and to other companies in the sporting goods industry from June 1998 to July 1999. From January 1995 to June 1998, Mr. Liewald served as senior executive vice president of FILA USA, an athletic footwear and apparel manufacturer. From June 1972 to January 1995, Mr. Liewald held a variety of positions at Foot Locker, Inc., an athletic footwear and apparel retailer, most recently as senior vice president, corporate merchandiser.

Arthur H. Miller has served as our executive vice president and general counsel since September 1999. From January 1988 to September 1999, Mr. Miller was a partner at Blank Rome LLP, a law firm based in Philadelphia, PA. Mr. Miller joined Blank Rome in April 1983.

Damon Mintzer has served as our executive vice president, sales since July 2004 and as president and chief operating officer of Global-QVC Solutions, Inc., a wholly owned subsidiary of ours, since June 2001. From October 1999 to May 2001, Mr. Mintzer worked for WHN.com, a developer and operator of e-commerce businesses for entertainment companies. He first served as vice president of business development and then as senior vice president and general manager of one of WHN’s two business units. From 1998 to October 1999, Mr. Mintzer served as director of sales for the Asia Pacific region for Modus Media International, Inc., a supply chain services company. From 1995 to 1998, Mr. Mintzer served as director of business development for Modus Media International/Stream International, which was a subsidiary of R.R. Donnelley & Sons Co.

Kenneth J. Adelberg has been one of our directors since July 1995. Mr. Adelberg has served as president and chief executive officer of HiFi House Group of Companies, a privately-held consumer electronics retailer based in Broomall, PA, since 1987. Mr. Adelberg was a founding stockholder of US Wats, Inc., a publicly-traded company specializing in business telecommunications services, located in Bala Cynwyd, PA, which was established in 1989. Mr. Adelberg is a founding stockholder and director of Republic Bank, Philadelphia, PA, a publicly-traded bank which has been in operation since 1989. Mr. Adelberg is also a director of Trackpower, Inc. and Wireless Age Communications, Inc.

M. Jeffrey Branman has been one of our directors since October 2001. Mr. Branman served as president of Interactive Technology Services, a subsidiary of Comcast Corporation, a developer, manager and operator of broadband cable networks, from April 2000 through March 2005. Interactive Technology Services served as financial advisor to Interactive Technology Holdings, LLC, a joint venture of Comcast Corporation and QVC, Inc., until its liquidation in January 2005. From March 1996 to February 2000, Mr. Branman was senior vice president corporate development of Foot Locker, Inc. and chief executive officer of FootLocker.com, the internet and direct marketing subsidiary of Foot Locker.

Ronald D. Fisher has been one of our directors since March 2000. Mr. Fisher currently serves as the vice chairman of SOFTBANK Holdings Inc. and SOFTBANK Corp. and a managing general partner of SOFTBANK Capital Partners LP, a late-stage private equity organization. He joined SOFTBANK in October 1995. From January 1990 to September 1995, Mr. Fisher was chief executive officer of Phoenix Technologies, Ltd., a developer and marketer of system software products. Mr. Fisher is also a director of SOFTBANK Corporation, E*TRADE Group, Inc., and Vie Financial Group, Inc.

Harvey Lamm has been one of our directors since April 1998. Mr. Lamm has served as a director and chief executive officer of Vintek Corporation, a privately-held company based in Philadelphia, PA, since 1996. Vintek specializes in automated title management and the development of tools to reduce cost and manage risk for

automotive finance institutions. From 1990 to 1996, Mr. Lamm spent his time managing his own investments. From 1967 until 1990, Mr. Lamm served as chairman of the board, chief executive officer, president and chief operating officer of Subaru of America, Inc., until its acquisition by Fuji Heavy Industries Ltd. Mr. Lamm helped found Subaru of America, which was the exclusive importer of Subaru brand vehicles in the United States and was a publicly-traded company listed on the Nasdaq National Market.

Mark S. Menell has been one of our directors since April 2000. Mr. Menell has been a partner of Rustic Canyon Partners, a venture capital firm, since January 2000. From August 1990 to January 2000, Mr. Menell was an investment banker at Morgan Stanley & Co. Incorporated, most recently as principal and co-head of Morgan Stanley’s Technology Mergers and Acquisitions Group, based in Menlo Park, CA.

Michael S. Perlis has been one of our directors since May 2001. Mr. Perlis has been a managing partner of SOFTBANK Capital Partners LP, a late-stage private equity organization, since July 2000. From November 1998 to June 2000, Mr. Perlis was employed by Ziff-Davis Publishing Holdings Inc., an integrated media company and technology magazine publisher, most recently as president and chief executive officer. From June 1996 to October 1998, Mr. Perlis served as president, chief operating officer and partner of TVSM Inc., a publisher of system specific television listing and guidance publications.

Dr. Jeffrey F. Rayport has been one of our directors since April 1999. Dr. Rayport has been chairman of Marketspace LLC, an information industries strategy and research business of Monitor Group, headquartered in Cambridge, Massachusetts, since October 2003 and was chief executive officer of Marketspace from September 1998 to October 2003. From January 1995 through September 1999, Dr. Rayport was a faculty member in the service management unit at the Harvard Business School. Dr. Rayport is also a director of ValueClick Inc.

Right to Designate Directors

The stock purchase agreements pursuant to which SOFTBANK acquired its shares of our common stock provide that SOFTBANK has the right to designate up to two members of our board of directors, depending on the number of shares of our common stock held by SOFTBANK. SOFTBANK also has the right to have one of its directors serve as a member of each committee of our board of directors. Messrs. Fisher and Perlis are the current SOFTBANK members of our board of directors. The stock purchase agreement pursuant to which Interactive Technology Holdings, LLC, or ITH, acquired its shares of our common stock provided that ITH had the right to designate up to two members of our board of directors, depending on the number of shares of our common stock held by ITH. On January 31, 2005, ITH effected a distribution of all of its assets, including shares of our common stock, to its members. In the liquidation, QK Holdings, Inc., or QK Holdings, was assigned ITH’s rights under the stock purchase agreement, including the right to designate members to our board of directors. QK Holdings also has the right to have one of its directors serve as a member of each committee of our board of directors. Mr. Branman was ITH’s designee until its liquidation. As of May 12, 2005, Mr. Branman still served as a member of our Board of Directors and QK Holdings had not designated a member of our board of directors. QK Holdings is an affiliate of QVC. This stock purchase agreement also provides QK Holdings with observation rights over our board of directors during periods when they are still a significant stockholder but do not have an acting board designee.

Voting Agreements

Mr. Rubin entered into a voting agreement, dated as of May 1, 2000, in favor of SOFTBANK, pursuant to which, among other things, Mr. Rubin agreed that he would vote all shares of our common stock then held by him in favor of election to the board of directors of the directors that SOFTBANK would be entitled to designate. In addition, Mr. Rubin, as a stockholder, agreed not to take any action to remove any of our directors designated by SOFTBANK.

SOFTBANK also entered into a voting agreement in favor of Mr. Rubin, dated as of May 1, 2000, relating to the election of directors designated by Mr. Rubin. Pursuant to this voting agreement, SOFTBANK agreed that it would vote all shares of our common stock then held by it with respect to all directorships other than those which it was entitled to designate (i) in favor of any member of our board of directors who was a member of the

board of directors prior to April 27, 2000, and any director who is thereafter chosen to fill any vacancy on the board of directors or who is elected as a director, referred to as continuing director, and who, in either event, is not a director designated by SOFTBANK and in connection with his or her initial assumption of office is recommended for appointment or election by a majority of the continuing directors then on the board of directors, and (ii) against the election of any directors other than those directors specified in clause (i) of this sentence.

Mr. Rubin and ITH entered into a voting agreement, dated as of September 13, 2000, whereby (i) Mr. Rubin agreed, among other things, that he would vote all of his shares of our common stock in favor of election to our board of directors of the directors that ITH would be entitled to designate, and (ii) ITH agreed, among other things, that ITH would vote all of its shares of our common stock in favor of election to our board of directors of certain continuing directors (as such term is defined therein). ITH assigned its rights under this voting agreement to QK Holdings.

SOFTBANK and ITH also entered into a voting agreement, dated September 13, 2000, whereby (i) SOFTBANK agreed, among other things, that SOFTBANK would vote all of its shares of our common stock in favor of election of our board of directors of the directors that ITH would be entitled to designate, and (ii) ITH agreed, among other things, that ITH would vote for all of its shares of our common stock in favor of election to our board of directors of the directors that SOFTBANK would be entitled to designate. ITH assigned its rights under this voting agreement to QK Holdings.

PRINCIPAL STOCKHOLDERS

The following table sets forth information, as of May 12, 2005, concerning the beneficial ownership of our common stock by:

each person known by us to be the beneficial owner of five percent or more of our outstanding common stock;

our chief executive officer and four most highly compensated executive officers and each director, or named executive officers; and

our directors and executive officers as a group.

Unless otherwise specified, all persons listed below have sole voting and investment power with respect to their shares. The securities “beneficially owned” by an individual are determined in accordance with the definition of “beneficial ownership” set forth in the regulations of the Securities and Exchange Commission. Accordingly, they include securities as to which the individual has or shares voting or investment power or has the right to acquire under outstanding stock options or warrants within 60 days of May 12, 2005 (as reflected in the applicable column below). Beneficial ownership may be disclaimed as to certain of the securities. The business address of our executive officers and directors is the same as our address.


Name, position and address of beneficial owner	Number of shares beneficially owned	Options included in beneficial ownership	Warrants included in beneficial ownership	Percentage of shares before the offering		Percentage of shares after the offering (1)
Michael G. Rubin (2) Chairman, Co-President and Chief Executive Officer	8,378,096	1,237,500	—	19.44	%	17.40	%
Robert W. Liewald Executive Vice President, Merchandising	354,511	277,500	10,000	*		*
Arthur H. Miller Executive Vice President and General Counsel	341,177	307,500	—	*		*
Damon Mintzer Executive Vice President, Sales; President and Chief Operating Officer of Global-QVC Solutions, Inc.	224,781	207,500	—	*		*
Joseph N. Seibert (3) Former Senior Vice President and Chief Information Officer	95,000	70,000	—	*		*
Kenneth J. Adelberg Director	141,962	112,500	—	*		*
M. Jeffrey Branman Director	63,000	55,000	—	*		*
Ronald D. Fisher (4) Director	65,000	65,000	—	*		*
Harvey Lamm Director	200,260	95,000	—	*		*
Mark S. Menell (5) Director	892,600	65,000	12,500	2.13		1.13
Michael S. Perlis (6) Director	55,000	55,000	—	*		*
Jeffrey F. Rayport Director	75,000	75,000	—	*		*


Name, position and address of beneficial owner	Number of shares beneficially owned	Options included in beneficial ownership	Warrants included in beneficial ownership	Percentage of shares before the offering	Percentage of shares after the offering
Capital Research and Management Company (7) SMALLCAP World Fund, Inc. 333 South Hope Street, Los Angeles, CA 90071	2,794,490	—	—	6.68	6.43
Comcast Corporation (8) Comcast Holdings Corporation 1500 Market Street, Philadelphia, PA 19102 Comcast QIH, Inc. 1201 N. Market Street, Suite 1000 Wilmington, DE 19801	2,578,932	—	—	6.16	5.93
Liberty Media Corporation (2)(9) QVC, Inc. QK Holdings, Inc. 1200 Wilson Drive, West Chester, PA 19380	8,518,968	—	300,000	20.20	19.47
SOFTBANK Capital Partners LP(2)(10) SOFTBANK Capital LP SOFTBANK Capital Advisors Fund LP SOFTBANK Capital Partners LLC SB Capital Managers LLC 1188 Centre Street, Newton Center, MA 02459	8,653,850	—	—	20.67	18.76
All executive officers and directors as a group (16 persons) (11)	11,538,146	3,283,750	22,500	25.54	23.21

Less than one percent

(1)

These percentages do not take into account the exercise of the underwriters’ over-allotment option.

(2)

Unless specifically stated herein, shares held by Mr. Rubin, Liberty Media Corporation, QVC, Inc. QK Holdings, Inc., or SOFTBANK are not beneficially owned by each other. Mr. Rubin, Liberty Media Corporation, QVC, Inc. QK Holdings, Inc., and SOFTBANK have each granted a right to vote all of their shares, solely with respect to the election of directors, as set forth in the voting agreements described in “Management—Voting Agreements.” Mr. Rubin and SOFTBANK are selling stockholders in this offering. See “Selling Stockholders.”

(3)

Mr. Seibert ceased being our employee and senior vice president and chief information officer effective February 6, 2005.

(4)

Does not include (a) 4,309,176 shares of common stock held by SOFTBANK Capital Partners LP; (b) 4,235,098 shares of common stock held by SOFTBANK Capital LP; or (c) 109,576 shares of common stock held by SOFTBANK Capital Advisors Fund LP, because Mr. Fisher does not have investment or voting power over these shares. Mr. Fisher is one of SOFTBANK’s designees to our board of directors.

(5)

Includes 815,100 shares of common stock and 12,500 shares of common stock issuable upon the exercise of warrants held by Rustic Canyon Ventures LP. Mr. Menell is a Partner of Rustic Canyon Ventures LP. Mr. Menell disclaims beneficial ownership of these shares, except to the extent of his pecuniary interest, if any, therein. Rustic Canyon Ventures LP is a selling stockholder in this offering. See “Selling Stockholders.”

(6)

Does not include (a) 4,309,176 shares of common stock held by SOFTBANK Capital Partners LP; (b) 4,235,098 shares of common stock held by SOFTBANK Capital LP; or (c) 109,576 shares of common stock held by SOFTBANK Capital Advisors Fund LP upon the exercise of warrants because Mr. Perlis does not have investment or voting power over these shares. Mr. Perlis is one of SOFTBANK’s designees to our board of directors.

(7)

Based on a Schedule 13G/A filed with the Securities and Exchange Commission on February 14, 2005. Capital Research and Management company is an investment adviser and serves as the investment advisor of SMALLCAP World Fund, Inc. Includes 2,794,490 shares of common stock beneficially owned by Capital Research and Management Company of which 2,294,491 shares of common stock are held by SMALLCAP World Fund, Inc. SMALLCAP World Fund, Inc. disclaims beneficial ownership of the additional 499,999 shares of common stock beneficially owned by Capital Research and Management Company.

(8)

Based on a Schedule 13G filed with the Securities and Exchange Commission on February 9, 2005.

(9)

Based in part on a Schedule 13D/A filed with the Securities and Exchange Commission on February 11, 2005. Includes 8,218,968 shares of common stock and 300,000 shares of common stock issuable upon exercise of warrants held by QK Holdings, Inc.

(10)

Based on a Schedule 13D/A filed with the Securities and Exchange Commission on February 21, 2003. Includes (a) 4,309,176 shares of common stock held by SOFTBANK Capital Partners LP; (b) 4,235,098 shares of common stock held by SOFTBANK Capital LP; and (c) 109,576 shares of common stock held by SOFTBANK Capital Advisors Fund LP. Each of SOFTBANK Capital Partners LP, SOFTBANK Capital LP, SOFTBANK Capital Advisors Fund LP, SOFTBANK Capital Partners LLC and SB Capital Managers LLC disclaims beneficial ownership of securities owned by any other person or entity, except to the extent of its respective pecuniary interest, if any, therein. SB Capital Managers LLC is a member of SOFTBANK Capital Partners LLC, the general partner of SOFTBANK Capital Partners LP, SOFTBANK Capital LP and SOFTBANK Capital Advisors Fund LP. SOFTBANK Capital Partners LP, SOFTBANK Capital LP and SOFTBANK Capital Advisors Fund LP are selling stockholders in this offering. See “Selling Stockholders.”

(11)

Includes (i) 9,368,565 shares of common stock beneficially owned in the aggregate by the named executive officers before the offering as set forth in this table; (ii) 1,492,882 shares of common stock beneficially owned in the aggregate by the directors (not including Mr. Rubin) before the offering as set forth in this table; and (iii) 676,759 shares of common stock beneficially owned in the aggregate by executive officers (other than named executive officers) before the offering (of which 661,250 shares are issuable upon the exercise of options that are exercisable within 60 days of May 12, 2005). Messrs. Rubin Adelberg, Conn, Copland and Mintzer are selling stockholders in this offering. See “Selling Stockholders.”

SELLING STOCKHOLDERS

The following table sets forth certain information regarding the selling stockholders’ beneficial ownership as of May 12, 2005 and the number of shares of common stock to be sold by them in this offering. To our knowledge, each of the selling stockholders has sole voting and investment power as to the shares shown unless otherwise noted. The securities “beneficially owned” by an individual are determined in accordance with the definition of “beneficial ownership” set forth in the regulations of the Securities and Exchange Commission. Accordingly, they include securities as to which the individual has or shares voting or investment power or has the right to acquire under outstanding stock options or warrants within 60 days of May 12, 2005. Beneficial ownership may be disclaimed as to certain of the securities.


	Beneficial ownership of shares prior to the offering			Number of shares offered hereby	Beneficial ownership of shares after the offering
Selling stockholder	Number of shares	Percent of shares		Number of shares offered hereby	Number of shares	Percent of shares (1)
Michael G. Rubin (2)	8,378,096	19.44	%	600,000	7,778,096	17.40	%
Kenneth J. Adelberg (3)	141,962	*		2,500	139,462	*
Michael R. Conn (4)	256,700	*		33,500	223,200	*
Jordan M. Copland (5)	285,059	*		27,500	257,559	*
Damon Mintzer (6)	224,781	*		40,000	184,781	*

Rustic Canyon Ventures LP (7)	827,600	1.98		400,000	427,600	*

SOFTBANK Capital Partners LP SOFTBANK Capital LP SOFTBANK Capital Advisors Fund LP SOFTBANK Capital Partners LLC SB Capital Managers LLC 1188 Centre Street, Newton Center, MA 02459 (8)	8,653,850	20.67		500,000	8,153,850	18.76

Less than 1%

(1)

These percentages do not take into account the exercise of the underwriters’ over-allotment option.

(2)

Includes 1,237,500 shares issuable pursuant to stock options which are exercisable within 60 days of May 12, 2005. Mr. Rubin granted the underwriters the right to purchase up to an additional 93,105 shares of common stock to cover over-allotments. If the underwriters exercise their over-allotment option in full, Mr. Rubin will beneficially own 7,684,991 shares of common stock, or 17.11%, after the offering. Mr. Rubin is our chairman of the board, co-president and chief executive officer.

(3)

Includes 112,500 shares issuable pursuant to stock options which are exercisable within 60 days of May 12, 2005. In connection with this offering, Mr. Adelberg is exercising options to purchase 2,500 shares and selling these shares in this offering. If the underwriters exercise their over-allotment option in full, Mr. Adelberg will beneficially own 139,462 shares of common stock, or less than 1%, after the offering. Mr. Adelberg is our director.

(4)

Includes 247,500 shares issuable pursuant to stock options which are exercisable within 60 days of May 12, 2005. In connection with this offering, Mr. Conn is exercising options to purchase 30,000 shares and selling these shares in this offering. If the underwriters exercise their over-allotment option in full, Mr. Conn will beneficially own 223,200 shares of common stock, or less then 1%, after the offering. Mr. Conn is our senior vice president, corporate development.

(5)

Includes 278,750 shares issuable pursuant to stock options which are exercisable within 60 days of May 12, 2005. In connection with this offering, Mr. Copland is exercising options to purchase 27,500 shares and selling these shares in this offering. If the underwriters exercise their over-allotment option in full, Mr. Copland will beneficially own 257,559 shares of common stock, or less than 1%, after the offering. Mr. Copland is our executive vice president and chief financial officer.

(6)

Includes 207,500 shares issuable pursuant to options which are exercisable within 60 days of May 12 , 2005. In connection with this offering, Mr. Mintzer is exercising options to purchase 30,000 shares and selling these shares in this offering. If the underwriters exercise their over-allotment

option in full, Mr. Mintzer will beneficially own 184,781 shares of common stock, or less than 1%, after the offering. Mr. Mintzer is our executive vice president, sales and president and chief operating officer of our subsidiary Global-QVC Solutions, Inc.

(7)

Includes 12,500 shares of common stock issuable upon the exercise of warrants held by Rustic Canyon Ventures LP. Rustic Canyon Ventures LP granted the underwriters the right to purchase up to an additional 62,070 shares of common stock to cover over-allotments. If the underwriters exercise their over-allotment option in full, Rustic Canyon Ventures LP will beneficially own 365,530 shares of common stock, or less than 1%, after the offering. Rustic Canyon Ventures LP has certain registration and pre-emptive rights. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Certain Related Party Transactions” and “Description of Capital Stock—Registration Rights” and “—Pre-emptive Rights.” Rustic Canyon Ventures LP had the ability to appoint directors to our board of directors pursuant to a stock purchase agreement prior to June 24, 2004. Rustic Canyon Ventures LP no longer has this right. Mr. Menell, one of our directors, is a partner of Rustic Canyon Ventures LP.

(8)

Based on a Schedule 13D/A filed with the Securities and Exchange Commission on February 21, 2003. Includes (a) 4,309,176 shares of common stock held by SOFTBANK Capital Partners LP; (b) 4,235,098 shares of common stock held by SOFTBANK Capital LP; and (c) 109,576 shares of common stock held by SOFTBANK Capital Advisors Fund LP. Each of SOFTBANK Capital Partners LP, SOFTBANK Capital LP, SOFTBANK Capital Advisors Fund LP, SOFTBANK Capital Partners LLC and SB Capital Managers LLC disclaims beneficial ownership of securities owned by any other person or entity, except to the extent of its respective pecuniary interest, if any, therein. SB Capital Managers LLC is a member of SOFTBANK Capital Partners LLC, the general partner of SOFTBANK Capital Partners LP, SOFTBANK Capital LP and SOFTBANK Capital Advisors Fund LP. SOFTBANK has the ability to appoint two directors to our board of directors pursuant to a stock purchase agreement. See “Management—Right to Designate Directors.”

Additionally, SOFTBANK has certain registration and pre-emptive rights. See “Description of Capital Stock—Registration Rights” and “—Pre-emptive Rights.”

SOFTBANK has granted the underwriters the right to purchase up to an additional 77,587 shares of common stock to cover over-allotments. If the underwriters exercise their over-allotment option in full, SOFTBANK will beneficially own 8,076,263 shares of common stock, or 18.49%, after the offering.

DESCRIPTION OF MATERIAL INDEBTEDNESS

Mortgage Note

In connection with the purchase of our new corporate headquarters, one of our wholly-owned subsidiaries entered into a $13.0 million mortgage note on June 9, 2004, collateralized by a first lien on substantially all of the assets of that subsidiary. The mortgage note has a term of ten years and six months, and bears interest at 6.32% per annum. We, in accordance with the provisions of the mortgage note, provided a letter of credit in the amount of $3.0 million as additional security. Upon completion of initial capital improvements to the building, the letter of credit will be reduced to $1.0 million. The letter of credit may be reduced further to $500,000 if we have positive income for calendar years 2006, 2007 and 2008. As of January 1, 2005, the mortgage note had an aggregate outstanding principal balance of $12.9 million, with $142,000 classified as current and $12.8 million classified as long-term. As of April 2, 2005, the mortgage note had an aggregate outstanding principal balance of $12.9 million, with $145,000 classified as current and $12.8 million classified as long-term.

Concurrent Offering of Convertible Notes Due 2025

Concurrently with this offering, we are also offering by separate prospectus $50.0 million aggregate principal amount of our convertible notes due 2025 (plus up to an additional $7.5 million principal amount of notes available for purchase by the underwriters of the notes to cover over-allotments). We cannot assure you that we will complete the concurrent offering of our convertible notes. Completion of this offering of shares is not contingent upon completion of the convertible notes offering.

The following description is a summary of the material provisions of the notes and the indenture which governs the notes. It does not purport to be complete. This summary is subject to and is qualified by reference to all the provisions of the indenture, including the definitions of some terms used in the indenture. Wherever particular provisions or defined terms of the indenture or form of note are referred to, these provisions or defined terms are incorporated in this prospectus by reference. We urge you to read the indenture because it and not this description defines the rights of holder of notes.

Maturity date. The notes mature on , 2025.

Ranking. The notes are our senior unsecured obligations and will rank effectively junior to our existing and future secured debt, on a parity with all of our other existing and future senior unsecured debt and prior to any existing or future subordinated debt. Holders of the notes will only be creditors of ours, and not of our subsidiaries. None of our subsidiaries will guarantee the notes. As a result, existing and future liabilities of our subsidiaries, including trade payables, will be effectively senior to the notes. As of April 2, 2005, our subsidiaries had outstanding $14.0 million of secured debt.

Interest. The notes will bear interest at a rate of % per annum on the principal amount from , 2005, payable semi-annually in arrears in cash on and of each year, beginning , 2005.

Conversion; Make whole premium upon a fundamental change. A holder may convert the notes into shares of our common stock at a conversion rate of shares per $1,000 principal amount of notes, representing a conversion price of approximately $ per share, subject to adjustment, at any time prior to the close of business on the business day immediately preceding , 2010, subject to prior repurchase of the notes, only under any of the following circumstances:

during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each day of such measurement period was less than 103% of the product of the closing sale price of our common stock and the conversion rate on each such day; or

upon the occurrence of any of the following corporate events:

if we distribute to all holders of our common stock certain rights or warrants entitling them to purchase, for a period expiring within 45 days of the record date for such issuance, our common stock at less than the average closing sale prices of our common stock for the 10 trading days preceding the announcement date for such distribution; or

if we distribute to all holders of our common stock, assets, debt securities or certain rights to purchase our securities, which distribution has a per share value exceeding 10% of the closing sale price of our common stock on the day preceding the announcement date for such distribution; or

if we are a party to a consolidation, merger or sale or transfer of all or substantially all of our assets, in each case pursuant to which our common stock would be converted into cash, securities or other property.

On and after , 2010, to (and including) the close of business on the business day immediately preceding the maturity date of the notes, subject to prior redemption or repurchase of the notes, a holder may convert notes, in whole or in part, into shares of our common stock (or cash or a combination of cash and shares of our common stock, if we so elect) at any time, regardless of the foregoing circumstances.

Upon conversion, we will have the right to deliver, in lieu of shares of our common stock, cash or a combination of cash and shares of our common stock, in each case calculated as described in the indenture. At any time on or prior to the maturity date, we may irrevocably elect to satisfy our conversion obligation with respect to the principal amount of the notes to be converted with a combination of cash and shares of our common stock, as described in the indenture. Upon any conversion, subject to certain exceptions, a holder will not receive any cash payment representing accrued and unpaid interest.

In addition, if a holder elects to convert notes in connection with the occurrence of a fundamental change that occurs prior to , 2010, we will increase the applicable conversion rate for the notes such that the holder will be entitled to receive additional shares of common stock (or cash, or a combination of cash and shares of common stock, if we so elect) upon conversion in some circumstances as described in the indenture. A fundamental change is any transaction or event, whether by means of an exchange offer, liquidation, tender offer, consolidation, merger, combination, reclassification, recapitalization or otherwise, in connection with which 50% or more of our common stock is exchanged for, converted into, acquired for or constitutes solely the right to receive, consideration which is not at least 90% common stock that:

is listed on, or immediately after the transaction or event will be listed on, a U.S. national securities exchange, or

is approved, or immediately after the transaction or event will be approved, for quotation on the Nasdaq Stock Market or any similar U.S. system of automated dissemination of quotations of securities prices.

Redemption. At any time on or after , 2010, we may redeem any of the notes for cash by giving the holders not more than 60 but not less than 30 days’ notice. We may redeem the notes either in whole or in part at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, up to, but excluding, the redemption date.

Repurchase at the option of the holder. A holder may require us to repurchase all or part of their notes for cash on of 2010, 2015 and 2020 at a repurchase price equal to 100% of their principal amount. We will pay accrued and unpaid interest, if any, up to, but excluding, the date of repurchase.

Designated event. If a designated event occurs prior to maturity, a holder will have the right to require us to repurchase all or part of their notes at a repurchase price equal to 100% of their principal amount, plus accrued and unpaid interest and liquidated damages, if any, up to, but excluding, the repurchase date. A designated event will be deemed to have occurred upon a fundamental change or if our common stock, or other common stock into which the notes are then convertible, is neither listed for trading on a U.S. national securities exchange nor approved for trading on the Nasdaq Stock Market

Sinking fund. The notes will not be subject to a sinking fund provision.

DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock consists of 90,000,000 shares of common stock, $0.01 par value, and 5,000,000 shares of preferred stock, $0.01 par value. As of May 12, 2005, there were 41,864,915 shares of our common stock outstanding held of record by approximately 1,938 stockholders of record and no shares of preferred stock outstanding.

Common Stock

Each outstanding share of common stock is, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any then outstanding preferred stock.

Dividend Rights. Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of common stock are entitled to receive dividends out of assets legally available at the times and in the amounts as our board may from time to time determine.

Voting Rights. Each common stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders and does not have cumulative voting rights.

No Preemptive or Other Rights. Other than pursuant to contractual rights described in “—Pre-emptive Rights,” holders of common stock are not entitled to preemptive, subscription, conversion or redemption rights.

Right to Receive Liquidation Distributions. Upon our liquidation, dissolution or winding-up, the holders of our common stock and any participating preferred stock outstanding at that time are entitled to receive ratably our net assets available after the payment of all debts and other claims and payment of any liquidation preferences on any outstanding preferred stock.

Preferred Stock

Our board of directors may from time to time authorize the issuance of one or more series of preferred stock without stockholder approval. Subject to the provisions of our certificate of incorporation and limitations prescribed by law, our board of directors is authorized to adopt resolutions to, among other things, issue shares of preferred stock in one or more series, establish the number of shares constituting a series, change the number of shares constituting any series, and provide or change the voting powers, designations, preferences and relative, participating, optional or other rights, and qualifications, limitations or restrictions on shares of our preferred stock, including dividend rights, terms of redemption, conversion rights and liquidation preferences, in each case without any action or vote by our stockholders. The number of authorized shares of preferred stock may be increased or decreased (but not below the number of shares of preferred stock then outstanding) by the affirmative vote of the holders of a majority of the common stock, without a vote of the holders of the preferred stock, or of any series thereof, unless a vote of the preferred stockholders is required pursuant to the terms of any certificate of designation with respect to any series of preferred stock.

One of the effects of undesignated preferred stock may be to enable our board of directors to discourage an attempt to obtain control of our company by means of a tender offer, proxy contest, merger or otherwise. The issuance of such preferred stock may adversely affect the rights of our common stockholders by, among other things:

restricting the payment of dividends on our common stock;

diluting the voting power of our common stock;

reducing the amount of assets remaining for payment to holders of shares in the event of a liquidation of assets;

delaying or preventing a change in control without further action by the stockholders; or

decreasing the market price of our common stock.

Warrants

As of May 12, 2005, we had warrants outstanding to purchase an aggregate of 812,250 shares of our common stock at an average weighted exercise price of $7.71 per share, 612,250 of which are vested and presently exercisable.

Shares Authorized Under Plans

As of May 12, 2005, we had 6,536,795 shares of common stock reserved for issuance upon exercise of outstanding options granted under our 1996 plan with a weighted average exercise price of $9.63 per share, 5,141,278 of which are vested and presently exercisable; and 153,750 shares of common stock reserved for issuance upon exercise of outstanding options granted under other of our plans with a weighted average exercise price of $3.14 per share, all of which are vested and presently exercisable. In addition, as of May 12, 2005, we had 239,146 shares of common stock reserved for issuance upon vesting of outstanding restricted stock units awarded under our 1996 plan. The number of shares issuable upon the exercise of outstanding options excludes the 90,000 shares of common stock which are to be issued upon the exercise of options held by certain selling stockholders and sold in this offering. In addition, as of May 12, 2005, the total number of additional shares for which awards could be granted under our 1996 plan was 35,526.

In March 2005, our board of directors approved the 2005 plan. The 2005 plan is being submitted as a proposal at our 2005 annual meeting of stockholders. If the 2005 plan is adopted by stockholders, the 2005 plan will replace, on a prospective basis, our 1996 plan and no new grants will be made from our 1996 plan. Any shares remaining available for issuance under the 1996 plan will be rolled into the 2005 plan. A maximum of 2,000,000 shares plus those shares remaining available for issuance under the 1996 plan will be available for issuance under the 2005 plan.

Registration Rights

After giving effect to this offering, assuming the exercise of the underwriters’ over-allotment option in full, the holders of approximately 26,976,746 shares of common stock and the holders of warrants to purchase an aggregate of 512,500 shares of common stock, upon exercise of the warrants, will have the right to require us to register their shares with the Securities and Exchange Commission so that those shares may be publicly resold, subject to conditions and limitations set forth in the respective agreements. After giving effect to this offering, assuming the exercise of the underwriters’ over-allotment option in full, the holders of approximately 26,976,746 shares of common stock and the holders of warrants to purchase an aggregate of 522,500 shares of common stock, upon exercise of the warrants, will have the right to include these shares in any registration statement on a Form S-1, S-2 or S-3 that we file with the Securities and Exchange Commission, subject to conditions and limitations set forth in the respective agreements.

Pre-emptive Rights

Three of our stockholders, SOFTBANK, QK Holdings, Inc. and Rustic Canyon Ventures LP, have entered into agreements with us which provide them with pre-emptive rights with respect to new issuances of our common stock. We expect to receive waivers related to such pre-emptive rights with respect to this offering of common stock from each of these entities.

Anti-Takeover Provisions

Our certificate of incorporation provides that our board of directors may issue shares of preferred stock with voting or other rights without stockholder action.

We are subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. This section prevents Delaware corporations, under certain circumstances, from engaging in a “business combination” with:

a stockholder who owns 15.0% or more of our outstanding voting stock (otherwise known as an interested stockholder);

an affiliate of an interested stockholder; or

an associate of an interested stockholder;

for three years following the date that the stockholder became an interested stockholder. A “business combination” includes a merger or sale of more than 10.0% of our assets.

However, the above provisions of Section 203 do not apply if:

our board of directors approves the transaction that made the stockholder an interested stockholder, prior to the date of that transaction;

after the completion of the transaction that resulted in the stockholder becoming an interested stockholder, that stockholder owned at least 85.0% of our voting stock outstanding at the time the transaction commenced, excluding shares owned by our officers and directors; or

on or subsequent to the date of the transaction, the business combination is approved by our board of directors and authorized at a meeting of our stockholders by an affirmative vote of at least two-thirds of the outstanding voting stock not owned by the interested stockholder.

This statute could prohibit or delay mergers or other change in control attempts, and thus may discourage attempts to acquire us.

The possible issuance of preferred stock and the requirements of Delaware General Corporation Law could have the effect of delaying, deferring or preventing a change in control of us, including without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of our common stock. The provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock.

In addition, QK Holdings contractually has veto rights over our ability to execute any change of control transaction with, or sales of assets or equity to, certain specified companies or their affiliates.

Limitations on Liability and Indemnification of Officers and Directors

Certificate of Incorporation/Bylaws. Our certificate of incorporation contains provisions permitted under Delaware General Corporation Law relating to the liability of directors. The provisions eliminate a director’s liability for monetary damages for a breach of fiduciary duty, except in circumstances involving wrongful acts, such as the breach of a director’s duty of loyalty or acts or omissions which involve intentional misconduct or a knowing violation of law. In addition, our bylaws provide indemnification of our directors and officers to the fullest extent permitted by Delaware General Corporation Law.

Indemnification Agreements. We also entered into separate indemnification agreements with our directors and some of our officers that provide them indemnification protection that is greater than the protection currently provided under Delaware General Corporation Law.

The indemnification agreements, among other things:

confirm the present indemnity provided by our bylaws and provide that this indemnity will continue despite future changes in our bylaws, as the indemnification agreements will be our contractual obligations, unlike our bylaws which may be amended by our stockholders or our board;

provide further indemnification to the fullest possible extent permitted by law against all expenses (including attorneys’ fees), judgments, fines and settlement amounts paid or incurred by a director or officer in any action or proceeding, including any action by us or in our own right, on account of service as our director, officer, employee, attorney or agent or any of our subsidiaries or any other company or enterprise at our request;

cover all actions and proceedings, even if they arise from acts or omissions by a director or officer occurring before the execution of the agreements;

continue in force so long as the individual continues to serve in such capacity on our behalf and cover liabilities related to his activities in any such capacity regardless of future changes to our corporate documents;

provide for payment of expenses in advance of a final disposition of the action or suit, regardless of the recipient’s ability to make repayments, and provide that all repayment obligations in respect of any such advances will be unsecured and interest-free;

provide protection during the determination process in the event there is a change of control of us or our board and grant our directors and officers rights to appeal a denial of indemnification to a court of competent jurisdiction; and

except as discussed below with respect to violations of Section 16(b) of the Securities Exchange Act of 1934 and expenses or liabilities which are covered by insurance, provide that directors or officers who rely on our records or upon information supplied by our officers, legal counsel, outside accountants or appraisers are deemed to have acted in a manner which would entitle our directors or officers to indemnification under the indemnification agreements.

However, a director or officer is not entitled to indemnification under these agreements unless that director or officer acted in good faith and in a manner reasonably believed to be in or not opposed to our best interests.

In addition, no indemnification will be provided in respect of any suit in which judgment is rendered against a director or officer for an accounting of profits from a purchase or sale of our securities in violation of Section 16(b) of the Securities Exchange Act of 1934, or of any successor statute, or for expenses or liabilities which have been paid directly to a director or officer by an insurance carrier under a policy of directors’ and officers’ liability insurance.

Transfer Agent and Registrar

Our transfer agent and registrar for our common stock is American Stock Transfer & Trust Company.

Listing

Our common stock trades on the Nasdaq National Market under the symbol “GSIC.”

UNDERWRITERS

Under the terms and subject to the conditions contained in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Morgan Stanley & Co. Incorporated is acting as representative, have severally agreed to purchase, and we and the selling stockholders have agreed to sell to them, severally, the number of shares indicated below.


Name		Number of Shares
Morgan Stanley & Co. Incorporated
Bear, Stearns & Co. Inc.
CIBC World Markets Corp.
Friedman, Billings, Ramsey & Co., Inc.
Pacific Crest Securities Inc.

Total		3,103,500

The underwriters, collectively, and the representative are referred to as the “underwriters” and the “representative,” respectively. The underwriters are offering the shares of common stock subject to their acceptance of the shares from each of us and the selling stockholders and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters’ over-allotment option described below.

The underwriters initially propose to offer part of the shares of common stock directly to the public at the public offering price listed on the cover page of this prospectus and part to certain dealers at a price that represents a concession not in excess of $ a share under the public offering price. Any underwriter may allow, and such dealers may reallow, a concession not in excess of $ a share to other underwriters or to certain dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representative.

We and the selling stockholders have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 465,525 additional shares of common stock at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase about the same percentage of the additional shares of common stock as the number listed next to the underwriter’s name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table. If the underwriters’ option is exercised in full, the total price to the public would be $ , the total underwriters’ discounts and commissions would be $ and total proceeds to us and the selling stockholders would be $ and $ , respectively.

The following table shows the total underwriting discounts and commissions to be paid to the underwriters by us and the selling stockholders for the common stock. These amounts are shown assuming both no exercise and full exercise of the option of the underwriters to purchase up to an additional 465,525 shares of common stock.

Per share

Total

No exercise

Full exercise

No exercise

Full exercise

Underwriting discounts and commissions paid by us

Underwriting discounts and commissions paid by the selling stockholders

We and our directors, executive officers and certain of our other stockholders, and each of the selling stockholders has agreed, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, subject to the exceptions described below, not to, during the period ending 90 days after the date of this prospectus:

offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock, referred to as common stock rights; or

enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock,

whether any transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise.

The restrictions described in this paragraph do not apply to:

the sale of shares to the underwriters;

the sale of our convertible notes due 2025 offered concurrently herewith;

the issuance by us of shares of common stock (i) upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this prospectus, or (ii) upon the conversion of our convertible notes due 2025;

the issuance by us of shares of common stock or common stock rights (i) pursuant to our stock option and equity compensation plans outstanding on the date of this prospectus (including but not limited to our 2005 Stock Equity Incentive Plan), (ii) in connection with any acquisition, partner agreement or strategic agreement entered into after the date of this prospectus, provided that, in each case, each recipient agrees in writing with us to be bound to the restrictions set forth herein, or (iii) upon the exercise or conversion of any common stock rights issued pursuant to the foregoing;

transactions by any person other than us relating to shares of common stock or other securities acquired in open market transactions after the completion of the offerings of the shares and the notes;

the exercise of any stock option, warrant or other right to acquire shares of common stock, the conversion of a security convertible into common stock, or any disposition of shares of common stock (i) in lieu of payment of the exercise or conversion price thereof or (ii) to us to satisfy any withholding tax obligation in connection with such exercise or conversion;

transfers to any member of the immediate family of the transferor or to any trust for the direct or indirect benefit of such transferor or as bona fide gifts, provided that, in each case, each transferee and the trustee of any such trust, as applicable, agrees to be bound in writing to the restrictions described herein; or

if the holder is an individual, the transfer of any shares as a result of testate or intestate succession, or in the event that the individual becomes permanently disabled, provided, that, in each case, each transferee agrees to be bound in writing to the restrictions described herein.

In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may over-allot in connection with the offering, creating a short position in the common stock for their own account. A short sale is covered if the short position is no greater than the number of shares available for purchase by the underwriters under their over-allotment option to purchase additional shares. The underwriters can close out a covered short sale by exercising their over-allotment option to purchase additional shares or purchasing the shares in the open market. In determining the source of shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of shares compared to the price available under the

over-allotment option. The underwriters may also sell common stock in excess of the over-allotment option, creating a naked short position. The underwriters must close out any naked short position by purchasing common stock in the open market. A naked short position is more likely to be created if an underwriter is concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. In addition, to cover over-allotments or to stabilize the price of the common stock, the underwriters may bid for, and purchase, shares of common stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in the offering, if the syndicate repurchases previously distributed common stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities, and may end any of these activities at any time.

From time to time, certain of the underwriters have provided, and may provide, various financial advisory or investment banking services to us and our affiliates, for which they have received and may continue to receive customary fees and commissions. The underwriters are also acting as underwriters with respect to the offering of our convertible notes due 2025 being conducted concurrently with this offering. CIBC World Markets Corp. acted as lead manager in connection with the initial public offering of Odimo Incorporated. As of April 28, 2005, we beneficially owned approximately 11.5% of the outstanding common stock of Odimo Incorporated.

We, the selling stockholders and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act and we and the selling stockholders have agreed to contribute to payments that the underwriters may be required to make in respect thereof.

LEGAL MATTERS

The validity of the shares of common stock offered hereby will be passed upon for us by Blank Rome LLP. The underwriters are being represented in connection with this offering by Cravath, Swaine & Moore LLP.

EXPERTS

The consolidated financial statements as of January 3, 2004 and January 1, 2005, and for each of the three years in the period ended January 1, 2005, and management’s report on the effectiveness of internal control over financial reporting incorporated in this prospectus by reference from our Amendment No. 2 to the Annual Report on Form 10-K/A for the year ended January 1, 2005, and the consolidated financial statements as of January 3, 2004 and January 1, 2005, and for each of the three years in the period ended January 1, 2005, included in this prospectus have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their reports, which appear herein and are incorporated herein by reference, and have been so included and incorporated in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.

ADDITIONAL INFORMATION

We file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy materials that we have filed with the SEC at the SEC public reference room located at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information about the public reference room by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public on the SEC’s Internet website at http://www.sec.gov or on our website at www.gsicommerce.com/investors. The information on the Web site listed above is not and should not be considered part of this prospectus and is not incorporated by reference in this document. This Web site is and is only intended to be an inactive textual reference.

INCORPORATION BY REFERENCE

We incorporate by reference into this prospectus the documents listed below and any filings we make with the Securities and Exchange Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after the date of this prospectus and prior to the termination of the offering of common stock under this prospectus; provided, however, that we are not incorporating any information furnished under either Item 2.02 or Item 7.01 of any Current Report on Form 8-K. The information incorporated by reference into this prospectus is considered a part of this prospectus, and information that we file later with the Securities and Exchange Commission, prior to the termination of the offering of common stock under this prospectus, will automatically update and supersede the previously filed information.

Our Annual Report on Form 10-K for our fiscal year ended January 1, 2005, as amended.

Our Quarterly Report on Form 10-Q for our quarterly period ended April 2, 2005.

Our Current Reports on Form 8-K filed on January 31, 2005, February 2, 2005, March 11, 2005 and May 4, 2005 (other than the information furnished under Item 2.02 of such report).

The description of our common stock contained in our Form 8-A filed with the Securities and Exchange Commission on March 19, 1988 under Section 12(g) of the Securities Exchange Act of 1934, including any amendment or report filed for the purpose of updating such description.

You may request a copy of these filings (other than exhibits to documents, unless the exhibits are specifically incorporated by reference into the documents that this prospectus incorporates), at no cost, by writing to or telephoning us at the following address:

GSI Commerce, Inc.

935 First Avenue

King of Prussia, PA 19406

Attention: Investor Relations

(610) 265-3229

INDEX TO FINANCIAL STATEMENT S


		Page
Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of January 1, 2005 and April 2, 2005 (Unaudited)		F-2
Condensed Consolidated Statements of Operations for the three-month periods ended April 3, 2004 and April 2, 2005 (Unaudited)		F-3
Condensed Consolidated Statements of Cash Flows for the three-month periods ended April 3, 2004 (restated) and April 2, 2005 (Unaudited)		F-4
Notes to Condensed Consolidated Financial Statements (Unaudited)		F-5

Consolidated Financial Statements (audited)
Report of Independent Registered Accounting Firm		F-22
Consolidated Balance Sheets as of January 3, 2004 and January 1, 2005		F-23
Consolidated Statements of Operations for the Fiscal Years Ended December 28, 2002, January 3, 2004 and January 1, 2005		F-24
Consolidated Statements of Stockholders’ Equity for the Fiscal Years Ended December 28, 2002, January 3, 2004 and January 1, 2005		F-25
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 28, 2002, January 3, 2004 and January 1, 2005		F-26
Notes to Consolidated Financial Statements		F-27

F-1

GSI COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)


	January 1, 2005			April 2, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	20,064		$	10,736
Marketable securities		55,359			32,487
Accounts receivable, net of allowance of $406 and $388, respectively		14,908			9,431
Inventory		37,773			34,013
Prepaid expenses and other current assets		2,382			2,193

Total current assets		130,486			88,860

Property and equipment, net		74,286			76,453
Goodwill		13,453			13,453
Other equity investments		2,847			5,650
Other assets, net of accumulated amortization of $4,416 and $4,913, respectively		10,824			10,317

Total assets	$	231,896		$	194,733

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	58,762		$	31,918
Accrued expenses and other		31,691			21,576
Deferred revenue		9,370			8,679
Current portion—long-term debt and other		971			589

Total current liabilities		100,794			62,762

Long-term debt and other		13,564			13,410
Mandatorily redeemable preferred stock, Series A, $0.01 par value, 10,000 shares authorized; 0 shares issued and outstanding as of January 1, 2005 and April 2, 2005		—			—

Total liabilities		114,358			76,172
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value, 4,990,000 shares authorized; 0 shares issued and outstanding as of January 1, 2005 and April 2, 2005		—			—
Common stock, $0.01 par value, 90,000,000 shares authorized; 41,584,061 and 41,778,856 shares issued as of January 1, 2005 and April 2, 2005, respectively; 41,582,851 and 41,772,246 shares outstanding as of January 1, 2005 and April 2, 2005, respectively		416			418
Additional paid in capital		294,495			295,021
Accumulated other comprehensive (loss) income		(104	)		2,067
Accumulated deficit		(177,269	)		(178,945	)

Total stockholders’ equity		117,538			118,561

Total liabilities and stockholders’ equity	$	231,896		$	194,733

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

F-2

GSI COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended
	April 3, 2004			April 2, 2005
Revenues:
Net revenues from product sales	$	56,878		$	76,652
Service fee revenues		9,390			14,706

Net revenues		66,268			91,358
Cost of revenues from product sales		41,508			57,626

Gross profit		24,760			33,732

Operating expenses:
Sales and marketing, exclusive of $494 and $189 reported below as stock-based compensation, respectively		17,449			20,911
Product development, exclusive of $49 and $(30) reported below as stock-based compensation, respectively		4,483			6,589
General and administrative, exclusive of $84 and $(389) reported below as stock-based compensation, respectively		3,920			5,225
Stock-based compensation		627			(230	)
Depreciation and amortization		2,599			3,122

Total operating expenses		29,078			35,617

Other (income) expense:
Other (income) expense		—			(99	)
Interest expense		—			233
Interest income		(290	)		(343	)

Total other (income) expense		(290	)		(209	)

Net loss	$	(4,028	)	$	(1,676	)

Loss per share—basic and diluted:
Net loss	$	(0.10	)	$	(0.04	)

Weighted average shares outstanding—basic and diluted		40,868			41,662

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

F-3

GSI COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended
	April 3, 2004 (as restated See Note 17)			April 2, 2005

Cash Flows from Operating Activities:
Net loss	$	(4,028	)	$	(1,676	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,599			3,122
Stock-based compensation		627			(230	)
Changes in operating assets and liabilities:
Accounts receivable, net		(2,870	)		5,477
Inventory		1,847			3,760
Prepaid expenses and other current assets		(79	)		189
Notes receivable		180			—
Other assets, net		35			9
Accounts payable and accrued expenses and other		(12,584	)		(36,959	)
Deferred revenue		(1,773	)		(691	)

Net cash used in operating activities		(16,046	)		(26,999	)

Cash Flows from Investing Activities:
Acquisition of property and equipment		(2,393	)		(5,280	)
Deferred cost in other		—			(247	)
Net cash paid for equity investments		—			(136	)
Purchases of marketable securities		(8,664	)		(9,177	)
Sales of marketable securities		8,455			32,000

Net cash (used in) provided by investing activities		(2,602	)		17,160

Cash Flows from Financing Activities:
Repayments of loan		—			(339	)
Repayments of capital lease obligations		—			(160	)
Repayments of mortgage note		—			(38	)
Deferred cost paid		—			(199	)
Proceeds from exercises of common stock options		903			1,247

Net cash provided by financing activities		903			511

Net decrease in cash and cash equivalents		(17,745	)		(9,328	)
Cash and cash equivalents, beginning of period		38,808			20,064

Cash and cash equivalents, end of period	$	21,063		$	10,736

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

F-4

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

April 2, 2005 (Unaudited)

NOTE 1—BASIS OF PRESENTATION

GSI Commerce, Inc. (“GSI” or the “Company”), a Delaware corporation, is a leading provider of e-commerce solutions that enable retailers, branded manufacturers, entertainment companies and professional sports organizations to operate e-commerce businesses. The Company began its e-commerce business in 1999 and initially targeted the sporting goods category. Since 2001, the Company expanded into five additional categories: apparel, beauty, consumer electronics, entertainment and home. The Company provides solutions for its partners through its integrated e-commerce platform, which is comprised of three components—core technology, supporting infrastructure and partner services. Through the Company’s integrated e-commerce platform, it provides Web site administration, Web infrastructure and hosting, business intelligence, an e-commerce engine, order management, fulfillment, drop shipping, customer service, buying, creative design, Web site usability, testing and enhancements, channel integration, business-to-business (B-to-B) services, content development and imaging, e-commerce strategy, online marketing and customer relationship management (CRM). The Company derives virtually all of its revenues from sales of products by the Company through its partners’ e-commerce businesses and service fees earned by the Company in connection with the development and operation of its partners’ e-commerce businesses.

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

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

This quarterly report should be read in conjunction with the financial statements and notes thereto included in the Company’s audited financial statements presented in the Company’s Annual Report on Form 10-K/A Amendment No. 2 filed with the Securities and Exchange Commission (“SEC”) on May 6, 2005.

NOTE 2—ACCOUNTING POLICIES

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.

F-5

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

April 2, 2005 (Unaudited)

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 January 1, 2005 and April 2, 2005, 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.

Marketable Securities: Marketable securities, which consist of investments in various 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. All investments with original maturities of greater than 90 days are accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The Company determines the appropriate classification at the time of purchase. At January 1, 2005, the Company held $39,700 and at April 2, 2005 $12,400 of investments in auction rate securities classified as available-for-sale. Investments in these securities are recorded at cost, which approximates fair value due to their variable interest rates, which reset approximately every 30 to 45 days. Despite the long-term nature of their stated contractual maturities, there is a ready liquid market for these securities based on the interest rate reset mechanism. As a result, there are no cumulative gross realized or unrealized holding gains or (losses) from the Company’s auction rate securities. All income generated from these marketable securities was recorded as interest income. As of January 1, 2005, the Company recorded net unrealized losses on its marketable securities, other than auction rate securities, of $104. As of April 2, 2005, the Company recorded net unrealized losses on its marketable securities, other than auction rate securities, of $153. 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.

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

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 also capitalized, provided that these enhancements result in additional functionality. Depreciation and amortization is provided using the straight-line method over the estimated useful lives of the assets, which are generally:

•

Three to 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;

F-6

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

April 2, 2005 (Unaudited)

•

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 gain or loss on disposition of the assets in other income/expense. Expenditures from maintenance and repairs are expensed as incurred.

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.

Other Equity Investments: Other equity investments consist of 824,594 shares of Odimo Incorporated (“Odimo”) common stock, which was converted from Series C and Series D preferred stock when Odimo completed an initial public offering through the issuance of 3,125,000 shares of its common stock in February of 2005. The Company accounts for the investment in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The initial cost of the Company’s investment was determined based on the fair value of the investment at the time of its acquisition. At the time, an observable market price did not exist for non-marketable securities. 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 $2,847 as of January 1, 2005. The fair value of the Odimo investment as of April 2, 2005 was $5,203, which was determined by the current market price of the common stock of Odimo on April 1, 2005, which resulted in an unrealized gain of $2,220 in the three-month period ended April 2, 2005, which is recorded in accumulated other comprehensive income (loss) as a component of stockholders equity. During the three-month period ended April 2, 2005, the Company exercised warrants to purchase Odimo common stock for $136, which represents 119,272 of common stock.

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. Deferred partner revenue share charges were $10,097 as of January 1, 2005 and $9,609 as of April 2, 2005, and are being amortized as stock-based compensation expense as the partner revenue

F-7

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

April 2, 2005 (Unaudited)

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 $360 for the three-month period ended April 3, 2004, and $488 for the three-month period ended April 2, 2005.

Deferred Revenue: Deferred revenue consists primarily of fees paid in advance to the Company under agreements to manage some aspects of certain partners’ 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: Net revenues from product sales are derived from the sale of products by the Company through its partners’ e-commerce businesses. Net revenues from product sales are net of allowances for returns and discounts and include outbound shipping charges and other product related services such as gift wrapping and monogramming.

The Company recognizes revenues from product sales when the following revenue recognition criteria are met: persuasive evidence of an arrangement exists, shipment 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 centers in Louisville, KY and Shepherdsville, KY. 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.

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 sold by the Company 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.

F-8

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

April 2, 2005 (Unaudited)

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 service fees earned by it in connection with the development and operation of its partners’ e-commerce businesses. Service fees primarily consist of variable fees based on the value of merchandise sold or gross profit generated through its partners’ e-commerce businesses. To a lesser extent, service fees include fixed periodic payments by partners for the development and operation of their e-commerce businesses and fees related to the provision of marketing, design, development 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: Cost of revenues consist of cost of revenues from product sales and cost of service fee revenues. Cost of revenues from product sales include 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. The Company specifically does not record cost of service fee revenue. The cost of the sales of the merchandise on which the Company earns service fees are incurred by its service-fee partners because they are the owners and sellers of the merchandise.

Sales and Marketing: Sales and marketing expenses include fulfillment costs, customer service costs, credit card fees, net partner revenue share charges, net advertising and promotional expenses incurred by it on behalf of the Company’s partners’ e-commerce businesses, and payroll related to the buying, business management and marketing functions of its company. Net partner revenue share charges are royalty payments made to the Company’s partners in exchange for the use of their brands, the promotion of its 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 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, net of amounts reimbursed to the Company by its partners. Net advertising and promotional expenses include promotional free shipping and subsidized shipping and handling costs and are net of amounts reimbursed to the Company by its partners. Partner revenue share charges were $3,004 for the three-month period ended April 3, 2004 and $1,806 for the three-month period ended April 2, 2005.

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

F-9

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

April 2, 2005 (Unaudited)

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 $579 for the three-month period ended April 3, 2004 and $874 for the three-month period ended April 2, 2005, 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, personnel and other costs associated with its logistical support and vendor operations departments and third-party warehouse and fulfillment services costs. Fulfillment costs were $4,964 for the three-month period ended April 3, 2004, and $6,407 for the three-month period ended April 2, 2005, and are included in sales and marketing expense.

Advertising: The Company expenses the cost of advertising, which includes online 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. Online 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 costs were $410 for the three-month period ended April 3, 2004 and $30 for the three-month period ended April 2, 2005 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.

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 significant assumptions as to the expected life of the option or warrant, the expected volatility of the Company’s common stock and the risk-free interest rate over the expected life of the option or warrant.

F-10

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

April 2, 2005 (Unaudited)

The following table illustrates the pro forma net loss and losses per share for the three-month periods ended April 3, 2004 and April 2, 2005 as if compensation expense for stock options issued to employees had been determined consistent with SFAS No. 123:


	Three Months Ended
	April 3, 2004			April 2, 2005
Net loss, as reported	$	(4,028	)	$	(1,676	)
Add: Stock-based compensation expense included in reported net loss		261			(709	)
Deduct: Total stock-based compensation determined under fair value based method for all awards		(1,352	)		(1,326	)

Pro forma net loss	$	(5,119	)	$	(3,711	)

Losses per share—basic and diluted:
Net loss per share, as reported	$	(0.10	)	$	(0.04	)

Pro forma net loss per share	$	(0.13	)	$	(0.09	)

Stock-based compensation expense related to the amortization of deferred partner revenue share charges was $360 for the three-month periods ended April 3, 2004, and $488 for the three-month periods ended April 2, 2005.

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, is 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.

New Accounting Pronouncements

Inventory Costs an Amendment of ARB No. 43, Chapter 4: In November 2004, the FASB issued SFAS No. 151, “Inventory Costs an Amendment of ARB No. 43, Chapter 4”. SFAS No. 151 amends the guidance in ARB No. 43 Chapter 4, “Inventory Pricing” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43 Chapter 4, previously stated that “…under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges.” SFAS No. 151 requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal”. SFAS No. 151 is effective for inventory costs incurred during the fiscal years beginning after June 15, 2005. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on normal capacity of the production facility. The Company anticipates that adoption of SFAS No. 151 will have no significant impact on the Company’s financial position or results of operations.

F-11

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

April 2, 2005 (Unaudited)

have commercial substance. This Statement specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company anticipates that adoption of SFAS No. 153 will have no significant impact on the Company’s financial position or results of operations.

Share-Based Payment. In December 2004, the Financial Accounting Standards Board, or FASB, issued Financial Accounting Standards Board Statement No. 123R “Share-Based Payment”, or FAS 123R, which replaces Financial Accounting Standards Board Statement No. 123, “Accounting for Stock-Based Compensation”, or FAS 123, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, or APB 25. FAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. In addition, FAS 123R will cause unrecognized expense (based on the amounts in the Company’s pro forma footnote disclosure) related to options vesting after the date of initial adoption to be recognized as a charge to results of operations over the remaining vesting period. In April 2005, the SEC announced that it would delay the initial adoption of FAS 123R from interim periods that begin after June 15, 2005, to annual periods. The Company will now be required to adopt FAS 123R in its first quarter of 2006. Under FAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The Company has preliminarily decided to use the prospective method for transition as of the effective date of FAS 123R. The prospective method requires that compensation expense be recorded for all unvested stock options and share awards at the beginning of the first quarter of adoption of FAS 123R. The Company is evaluating the requirements of FAS 123R and it expects that the adoption of FAS 123R will have a material impact on its consolidated results of operations and earnings per share.

In March 2005, the FASB issued Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations—an Interpretation of FASB Statement No. 143” (“SFAS 143”). FIN 47 clarifies the term conditional asset retirement obligation as used in SFAS 143 and requires a liability to be recorded if the fair value of the obligation can be reasonably estimated. The types of asset retirement obligations that are covered by FIN 47 are those for which an entity has a legal obligation to perform an asset retirement activity; however, the timing and/or method of settling the obligation are conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than fiscal years ending after December 15, 2005. The Company is currently evaluating the impact of FIN 47 on its financial statements.

NOTE 3—MARKETABLE SECURITIES

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


	January 1, 2005
	Amortized Cost		Gross Unrealized Losses			Estimated Fair Value
Auction rate securities	$	39,700	$	—		$	39,700
Corporate Bonds		5,963		(41	)		5,922
U.S. government agency securities		9,800		(63	)		9,737

	$	55,463	$	(104	)	$	55,359

F-12

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

April 2, 2005 (Unaudited)


	April 2, 2005
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Auction rate securities		12,400		—		—			12,400
Corporate bonds		8,441		6		(66	)		8,381
U.S. government agency securities		11,799		—		(93	)		11,706

	$	32,640	$	6	$	(159	)	$	32,487

The fair value of marketable securities with loss positions was $15,658 as of January 1, 2005 and $19,562 as of April 2, 2005, and the gross unrealized losses on these marketable securities were $104 as of January 1, 2005 and $159 as of April 2, 2005. 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 April 2, 2005, by contractual maturity, are as follows:


	Amortized Cost		Estimated Fair Value
Due within one year	$	19,907	$	19,792
Due after one year through five years		7,733		7,695
Due after five years through ten years		—		—
Due after ten years		5,000		5,000

	$	32,640	$	32,487

NOTE 4—PROPERTY AND EQUIPMENT

The major classes of property and equipment, at cost, as of January 1, 2005 and April 2, 2005 are as follows:


	January 1, 2005			April 2, 2005
Computer hardware and software	$	51,841		$	54,960
Building and building improvements		39,751			40,095
Furniture, warehouse and office equipment		10,550			10,835
Land		7,663			7,663
Leasehold improvements		529			532
Capitalized lease		1,692			1,692
Construction in progress		387			1,805

		112,413			117,582
Less: Accumulated depreciation and amortization		(38,127	)		(41,129	)

Property and equipment, net	$	74,286		$	76,453

F-13

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

April 2, 2005 (Unaudited)

NOTE 5—LEASES

Capital Leases

During the three-month period ended October 2, 2004, the Company entered into capital leases for computer hardware and software. As of April 2, 2005, the leases had an aggregate outstanding balance of $1,091, with $444 classified as current. The Company’s net investment in these capital leases as of April 2, 2005 was $1,483, which is included in property and equipment. Interest expense recorded on the capital leases for the three month period ended April 2, 2005 was $24.

Operating Leases

The Company leases its Melbourne, FL customer contact center, as well as, its Shepherdsville, KY fulfillment center and certain fixed assets under noncancellable operating leases. Rent expense under operating lease agreements was $227 for the three-month period ended April 3, 2004 and $492 for the three-month period ended April 2, 2005.

NOTE 6—CHANGES IN STOCKHOLDERS’ EQUITY

The following table summarizes the changes in stockholders’ equity for the three-month periods ended April 3, 2004 and April 2, 2005:


	Common Stock			Additional Paid in Capital			Accumulated Deficit			Comprehensive (Loss) Income			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
	Shares	Dollars		Additional Paid in Capital			Accumulated Deficit			Comprehensive (Loss) Income						Shares	Dollars		Total
Consolidated balance at January 3, 2004	40,781	$	408	$	287,571		$	(177,609	)				$	—		1	$	—	$	110,370
Net loss								(4,028	)	$	(4,028	)								(4,028	)
Net unrealized losses on available-for-sale securities											(25	)		(25	)					(25	)

Comprehensive (loss)										$	(4,053	)

Issuance of options to purchase common stock in exchange for services					267															267
Issuance of common stock upon exercise of options	193		2		901															903
Consolidated balance at April 3, 2004	40,974	$	410	$	288,739		$	(181,637	)				$	(25	)	1	$	—	$	107,487

Consolidated balance at January 1, 2005	41,584	$	416	$	294,495		$	(177,269	)				$	(104	)	1	$	—	$	117,538
Net loss								(1,676	)	$	(1,676	)								(1,676	)
Net unrealized losses on available-for-sale securities											(49	)		(49	)					(49	)
Unrealized gain on equity investment in Odimo recorded at fair value (See Note 2)											2,220			2,220						2,220

Comprehensive income										$	495

Issuance of options to purchase common stock in exchange for services					(719	)														(719	)
Issuance of common stock upon exercise of options	195		2		1,245															1,247

Consolidated balance at April 2, 2005	41,779	$	418	$	295,021		$	(178,945	)				$	2,067		1	$	—	$	118,561

F-14

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

April 2, 2005 (Unaudited)

NOTE 7—STOCK OPTIONS, WARRANTS AND RESTRICTED STOCK UNITS

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, restricted stock and unrestricted stock awards and restricted stock units to purchase up to 10,025,071 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.

The following table summarizes the stock option activity for the three-month periods ended April 3, 2004 and April 2, 2005:


	Three Months Ended
	April 3, 2004				April 2, 2005
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Outstanding, beginning of period	6,716		$	8.37	6,109		$	8.50
Granted	90			9.88	58			14.78
Exercised	(193	)		4.67	(195	)		6.40
Cancelled	(212	)		13.99	(159	)		8.94

Outstanding, end of period	6,401			8.28	5,813			8.62

Exercisable, end of period	3,982			8.00	4,378			8.35

During the three-month period ended April 2, 2005, the Company granted to employees options to purchase an aggregate of 58,375 shares of the Company’s common stock at a price of $14.78 per share and restricted stock units to purchase 106,119 shares of the Company’s common stock. The weighted average fair value and the weighted average exercise price of the options granted with exercise prices at the then-current market prices of the underlying stock during the three-month period ended April 2, 2005 was $6.34 and $14.78 per share, respectively. For the three-month period ended April 2, 2005, the Company recorded a reduction of $719 of stock-based compensation primarily relating to options and restricted stock, subject to variable accounting.

During the three-month period ended April 3, 2004, the Company granted to employees options to purchase an aggregate of 90,000 shares of the Company’s common stock at prices ranging from $9.15 to $9.93 per share. The weighted average fair value and the weighted average exercise price of the options granted with exercise prices at the then-current market prices of the underlying stock during the three-month period ended April 3, 2004 was $6.89 and $9.88 per share, respectively. For the three-period ended April 3, 2004, the Company recorded $267 of stock-based compensation expense relating to options and restricted stock.

F-15

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

April 2, 2005 (Unaudited)

The following table summarizes the warrant activity for the three-month periods ended April 3, 2004 and April 2, 2005:


	Three Months Ended
	April 3, 2004			April 2, 2005
	Number of Shares	Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price
Outstanding, beginning of period	803	$	7.68	815	$	7.71
Granted	—		—	—		—
Exercised	—		—	—		—
Cancelled	—		—	—		—

Outstanding, end of period	803		7.68	815		7.71

Exercisable, end of period	603		9.40	615		9.40

No warrants were granted or issued by the Company during the three-month periods ended April 3, 2004 and April 2, 2005.

The following table summarizes information regarding options and warrants outstanding and exercisable as of April 2, 2005:


	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
$ 0.01 – $ 5.56	2,231	5.63	$	4.50	1,928	$	4.82
$ 5.69 – $10.00	3,165	6.97		8.65	2,077		8.29
$10.60 – $24.69	1,233	6.35		15.37	988		16.00

$ 0.01 – $24.69	6,629	6.40		8.51	4,993		8.48

As of April 2, 2005, 1,209,028 shares of common stock were available for future grants under the Plans.

The fair value of options granted under the Plans during the three-month periods ended April 3, 2004 and April 2, 2005 were estimated on the date of grant using the Black-Scholes multiple option pricing model, with the following weighted average assumptions:


	Three Months Ended
Assumption	April 3, 2004		April 2, 2005
Dividend yield	None		None
Expected volatility	103.00	%	81.4	%
Average risk free interest rate	2.40	%	3.92	%
Average expected lives	3.95 years		1.82 years

F-16

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

April 2, 2005 (Unaudited)

NOTE 8—LOSS PER SHARE

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

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


	Three Months Ended
	April 3, 2004			April 2, 2005
Net loss	$	(4,028	)	$	(1,676	)

Weighted average shares outstanding—basic and diluted		40,868			41,662

Outstanding common stock options having no dilutive effect		6,401			5,813

Outstanding common stock warrants having no dilutive effect		803			815

NOTE 9—COMPREHENSIVE INCOME (LOSS):

The following table summarizes the components of comprehensive income (loss):


	Three Months Ended
	April 3, 2004			April 2, 2005
Net loss	$	(4,028	)	$	(1,676	)

Other comprehensive income (loss):
Net unrealized losses on available-for-sale securities		(25	)		(49	)
Unrealized gain on equity investment in Odimo recorded at fair value		—			2,220

Other comprehensive (loss) income		(25	)		2,171

Comprehensive (loss) income		(4,053	)		495

NOTE 10—SIGNIFICANT TRANSACTIONS/CONCENTRATIONS OF CREDIT RISK

The Company had $12,397 as of January 1, 2005 and $5,103 as of April 2, 2005, of operating cash and $63,026 as of January 1, 2005 and $38,120 as of April 2, 2005 of cash equivalents and marketable securities invested with three financial institutions, which are potentially subject to credit risk. The composition of these investments is regularly monitored by management of the Company.

NOTE 11—MAJOR SUPPLIERS/ECONOMIC DEPENDENCY

During the three-month period ended April 2, 2005, the Company purchased inventory from one supplier amounting to $24,713 or 48.7% of total inventory purchased.

F-17

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

April 2, 2005 (Unaudited)

During the three-month period ended April 3, 2004, the Company purchased inventory from one supplier amounting to $12,431 or 36.9% of total inventory purchased.

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

NOTE 12—COMMITMENTS AND CONTINGENCIES

Legal Proceedings

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

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

F-18

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

April 2, 2005 (Unaudited)

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 its partners may have been or may be named in similar cases in other states. The Company does not believe that it is liable under existing laws and regulations for any failure to collect sales or other taxes relating to internet sales and intends to vigorously defend itself in this matter.

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

Advertising and Media Agreements

As of April 2, 2005, the Company was contractually committed for the purchase of future advertising totaling approximately $30 through the fiscal year ending December 31, 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 April 2, 2005 and subject to the satisfaction of certain conditions, the Company was contractually committed to future minimum cash revenue share payments as follows:


Fiscal Year-Ended	Partner Revenue Share Payments
2005	$	2,050
2006		4,200
2007		4,500
2008		4,850
2009		5,150
Thereafter		2,650

Total conditional future minimum cash revenue share payments	$	23,400

NOTE 13—SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION


	Three Months Ended
	April 3, 2004			April 2, 2005
Cash paid during the period for interest	$	—		$	234

Noncash Investing and Financing Activities:
Unrealized gain on equity investment of Odimo recorded at fair value	$	—		$	2,220
Net unrealized losses on available-for-sale securities	$	(25	)	$	(49	)

F-19

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

April 2, 2005 (Unaudited)

NOTE 14—BUSINESS SEGMENTS

The Company operates in one principal business segment. The Company provides e-commerce solutions that enable retailers, branded manufacturers, entertainment companies and professional sports organizations to operate e-commerce businesses. The Company provides solutions for its partners through its integrated e-commerce platform, which is comprised of three components—core technology, supporting infrastructure and partner services. Through the Company’s integrated e-commerce platform, it provides Web site administration, Web infrastructure and hosting, business intelligence, an e-commerce engine, order management, fulfillment, drop shipping, customer service, buying, creative design, Web site usability, testing and enhancements, channel integration, business-to-business (B-to-B) services, content development and imaging, e-commerce strategy, online marketing and customer relationship management (CRM). The Company currently derives virtually all of its revenues from the sales of products by it through its partners’ e-commerce businesses and service fees earned by the Company in connection with the development and operation of its partner’s e-commerce businesses. 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 15—RELATED PARTY TRANSACTIONS

In the fiscal years ended December 30, 2000 and December 29, 2001, Interactive Technology Holdings, LLC (ITH), a joint venture of Comcast Corporation and QVC, Inc., acquired 10,797,900 shares of the Company’s common stock and warrants to purchase 300,000 shares of the Company’s common stock, which accounted for approximately 26.0% of the Company’s outstanding common stock as of January 1, 2005. On January 31, 2005, ITH effected a distribution of all of its assets, including shares of GSI common stock, to entities affiliated with Comcast and QVC. As of April 2, 2005, QVC beneficially owned approximately 20.3% of GSI’s outstanding common stock. M. Jeffrey Branman, one of the Company’s directors, was the President of Interactive Technology Services, which served as financial advisor to ITH through its dissolution.

In the fiscal year ended December 30, 2000, the Company entered into a website development and distribution agreement with iQVC, a division of QVC, Inc., pursuant to which the Company provides technology, procurement and fulfillment services for QVC, including selling sporting goods, recreational and/or fitness related equipment and related products, apparel and footwear to QVC for resale through the QVC Web site. The Company recognized net revenues on sales to this related party for the three-month period ended April 3, 2004 of $333 and for the three-month period ended April 2, 2005 of $398 under this Web site development and distribution agreement. The terms of these sales are comparable to those with other business-to-business partners of the Company. As of April 2, 2005, the amount included in accounts receivable net was $69 related to these sales.

In the fiscal year ended January 3, 2004, the Company entered into a service agreement with QVC pursuant to which QVC provided shipping services to the Company in exchange for fees. The fees charged to the Company by QVC were determined through arms-length negotiations. The Company incurred fees $319 for the three-month period ended April 3, 2004, of which $307 related directly to products shipped and was charged to cost of revenues from product sales and $12 related to professional services provided and was charged to sales and marketing expense. The Company incurred fees of $26 for the three-month period ended April 2, 2005, of which $13 related directly to products shipped and was charged to cost of revenues from product sales and $13 related to professional services provided and was charged to sales and marketing expense. On February 1, 2005 we provided a 60 day termination notice to QVC, which terminated this agreement effective April 3, 2005.

F-20

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Concluded)

(In thousands, except per share data)

April 2, 2005 (Unaudited)

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

NOTE 16—LONG-TERM DEBT AND OTHER

The following table summarizes the Company’s long-term debt and other long-term liabilities as of April 2, 2005:


	April 2, 2005
Note payable	$	12,908
Capital lease obligation		1,091

		13,999
Less: Current portion of note payable		(145	)
Less: Current portion of capital lease obligation		(444	)

Long-term debt and other	$	13,410

NOTE 17—RESTATEMENT OF THE CONSOLIDATED STATEMENT OF CASH FLOWS

Subsequent to the issuance of the Company’s consolidated financial statements for the year ended January 1, 2005, the Company determined that its investments in auction rate securities should have been classified as marketable securities within current assets. Previously, such investments had been classified as cash and cash equivalents. Accordingly, the Company restated its Condensed Consolidated Cash Flow Statement for the three-month period ended April 3, 2004, to reflect the gross purchases and sales of these investments as investing activities rather than as a component of cash and cash equivalents. The restatement had no impact on previously reported total current assets, total assets, working capital position, results of operations or cash flows from operating activities.

The following table presents a summary of the significant effects of the restatement:


	Consolidated Statement of Cash Flows
	As Previously Reported			Adjustments			As Restated
Three-Month Period Ended April 3, 2004
Purchases of marketable securities	$	(5,314	)	$	(3,350	)	$	(8,664	)
Sales of marketable securities		1,105			7,350			8,455
Net cash used in investing activities		(6,602	)		4,000			(2,602	)
Net decrease in cash and cash equivalents	$	(21,745	)	$	4,000		$	(17,745	)

F-21

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

King of Prussia, PA

We have audited the accompanying consolidated balance sheets of GSI Commerce, Inc. and subsidiaries (the “Company”) as of January 1, 2005 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 1, 2005. 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 the 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 January 1, 2005 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 1, 2005, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of January 1, 2005, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/S/ DELOITTE & TOUCHE LLP

Deloitte & Touche LLP

Philadelphia, Pennsylvania

March 16, 2005

(May 4, 2005 as to the effects of the restatement discussed in Note 22)

F-22

GSI COMMERCE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	January 3, 2004 (as restated, see Note 22)			January 1, 2005 (as restated, see Note 22)

ASSETS
Current assets:
Cash and cash equivalents	$	38,808		$	20,064
Marketable securities		30,662			55,359
Accounts receivable, net of allowance of $709 and $406, respectively		4,898			14,908
Inventory		22,910			37,773
Current portion—notes receivable		1,377			—
Prepaid expenses and other current assets		1,848			2,382

Total current assets		100,503			130,486
Property and equipment, net		44,840			74,286
Goodwill		13,453			13,453
Notes receivable		2,356			—
Other equity investments		2,159			2,847
Other assets, net of accumulated amortization of $2,644 and $4,416, respectively		12,272			10,824

Total assets	$	175,583		$	231,896

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	27,677		$	58,762
Accrued expenses and other		22,538			31,691
Deferred revenue		14,998			9,370
Current portion—long-term debt and other		—			971

Total current liabilities		65,213			100,794
Long-term debt and other		—			13,564
Mandatorily redeemable preferred stock, Series A, $0.01 par value, 10,000 shares authorized; 0 shares issued as of January 3, 2004 and January 1, 2005; 0 shares outstanding as of January 3, 2004 and January 1, 2005		—			—

Total liabilities		65,213			114,358

Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value, 4,990,000 shares authorized; 0 shares issued and outstanding as of January 3, 2004 and January 1, 2005		—			—
Common stock, $0.01 par value, 90,000,000 shares authorized; 40,781,036 and 41,584,061 shares issued as of January 3, 2004 and January 1, 2005, respectively; 40,779,826 and 41,582,851 shares outstanding as of January 3, 2004 and January 1, 2005, respectively		408			416
Additional paid in capital		287,571			294,495
Accumulated other comprehensive income		—			(104	)
Accumulated deficit		(177,609	)		(177,269	)

Total stockholders’ equity		110,370			117,538

Total liabilities and stockholders’ equity	$	175,583		$	231,896

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

F-23

GSI COMMERCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)


	Fiscal Year Ended
	December 28, 2002			January 3, 2004			January 1, 2005
Revenues:
Net revenues from product sales	$	154,819		$	216,510		$	274,988
Service fee revenues		17,819			25,409			60,344

Net revenues		172,638			241,919			335,332
Cost of revenues		114,258			154,731			203,135

Gross profit		58,380			87,188			132,197

Operating expenses:
Sales and marketing, exclusive of $532, $1,527 and $2,720 reported below as stock-based compensation, respectively		50,965			59,613			78,919
Product development, exclusive of $(44), $42 and $350 reported below as stock-based compensation, respectively		11,833			14,124			20,181
General and administrative, exclusive of $(87), $366 and $530 reported below as stock-based compensation, respectively		14,863			13,295			18,217
Restructuring costs related to Ashford.com		1,680			74			—
Net loss on sale of Ashford.com assets		2,566			—			—
Stock-based compensation		401			1,935			3,600
Depreciation and amortization		10,509			11,386			10,944

Total operating expenses		92,817			100,427			131,861

Other (income) expense:
Other Expense		—			—			620
Interest expense		749			—			538
Interest income		(1,377	)		(1,177	)		(1,162	)

Total other (income) expense		(628	)		(1,177	)		(4	)

Net income (loss)	$	(33,809	)	$	(12,062	)	$	340

Income (losses) per share—basic and diluted:
Net income (loss)—basic	$	(0.88	)	$	(0.30	)	$	0.01

Net income (loss)—diluted	$	(0.88	)	$	(0.30	)	$	0.01

Weighted average shares outstanding:
Basic		38,566			39,638			41,073

Diluted		38,566			39,638			42,369

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

F-24

GSI COMMERCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)


	Common Stock					Additional Paid in Capital			Accumulated Deficit			Comprehensive (Loss) Income			Accumulated Other Comprehensive Income			Treasury Stock					Total
	Shares		Dollars			Additional Paid in Capital			Accumulated Deficit			Comprehensive (Loss) Income			Accumulated Other Comprehensive Income			Shares		Dollars			Total
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
Purchase of treasury stock Plan							(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
Net income										340		$	340											340
Net unrealized losses on available-for-sale securities													(104	)		(104	)							(104	)

Comprehensive income												$	236


Issuance of options to purchase common stock in exchange for services							1,859																	1,859
Issuance of common stock upon exercise of options and warrants	803			8			5,065																	5,073

Consolidated balance at January 1, 2005	41,584		$	416		$	294,495		$	(177,269	)				$	(104	)	1		$	—		$	117,538

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

F-25

GSI COMMERCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Fiscal Year Ended
	December 28, 2002 (as restated, see Note 22)			January 3, 2004 (as restated, see Note 22)			January 1, 2005 (as restated, see Note 22)
Cash Flows from Operating Activities:
Net income (loss)	$	(33,809	)	$	(12,062	)	$	340

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		10,509			11,386			10,944
Stock-based compensation		401			1,935			3,600
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	)		—
Net loss on disposal of assets		—			—			113
Changes in operating assets and liabilities:
Accounts receivable, net		4,693			(924	)		(10,010	)
Inventory		3,978			1,396			(14,863	)
Prepaid expenses and other current assets		(329	)		230			(399	)

Notes receivable		—			(30	)		(201	)
Other assets, net		861			—			(325	)
Accounts payable and accrued expenses and other		13,458			(1,729	)		40,239
Deferred revenue		6,431			(27	)		(5,627	)

Net cash provided by (used in) operating activities		9,600			(5	)		23,811

Cash Flows from Investing Activities:
Acquisition of property and equipment, net		(29,039	)		(7,519	)		(37,434	)

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			3,246
Purchases of marketable securities		(81,430	)		(60,384	)		(64,131	)

Sales of marketable securities		94,194			59,808			39,330
(Purchases) sales of short-term investments		(38	)		2,280			—

Net cash used in investing activities		(23,022	)		(4,915	)		(58,989	)

Cash Flows from Financing Activities:
Repayments of capital lease obligations		(429	)		(78	)		(1,581	)

Proceeds of mortgage note		—			—			13,000
Repayments of mortgage note		(5,247	)		—			(55	)

Retirement of Ashford.com revolving credit facility		(3,123	)		—			—

Purchases of treasury stock		(353	)		—			—

Proceeds from sale of common stock and warrants		568			349			—
Proceeds from exercises of common stock options and warrants		1,364			1,053			5,070

Net cash provided by (used in) financing activities		(7,220	)		1,324			16,434

Net decrease in cash and cash equivalents		(20,642	)		(3,596	)		(18,744	)

Cash and cash equivalents, beginning of year		63,046			42,404			38,808

Cash and cash equivalents, end of year	$	42,404		$	38,808		$	20,064

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

F-26

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except per share data)

NOTE 1—DESCRIPTION OF BUSINESS

GSI Commerce, Inc. (“GSI” or the “Company”), a Delaware corporation, is a leading provider of e-commerce solutions that enable retailers, branded manufacturers, entertainment companies and professional sports organizations to operate e-commerce businesses. The Company began its e-commerce business in 1999 and initially targeted the sporting goods category. Since fiscal 2001, the Company expanded into five additional categories: apparel, beauty, consumer electronics, entertainment and home. The Company provides solutions for its partners through its integrated e-commerce platform, which is comprised of three components—core technology, supporting infrastructure and partner services. Through the Company’s integrated e-commerce platform, it provides Web site administration, Web infrastructure and hosting, business intelligence, an e-commerce engine, order management, fulfillment, drop shipping, customer service, buying, creative design, Web site usability, testing and enhancements, channel integration, business-to-business (B-to-B) services, content development and imaging, e-commerce strategy, online marketing and customer relationship management (CRM). The Company derives virtually all of our revenues from sales of products by the Company through its partners’ e-commerce businesses and service fees earned by the Company in connection with the development and operation of its partners’ e-commerce businesses.

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES

The following summarize the Company’s significant accounting policies:

Fiscal Year: The Company’s fiscal year ends on the Saturday closest to December 31. 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 the fiscal year ended December 28, 2002, the six additional days in the fiscal year ended January 3, 2004 and the two fewer days in the fiscal year ended January 1, 2005 are not significant.

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 January 3, 2004 and January 1, 2005, and have not been comprehensively revalued for purposes of these consolidated financial statements since such dates.

F-27

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

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 various 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. All investments with original maturities of greater than 90 days are accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The Company determines the appropriate classification at the time of purchase. At January 1, 2005, the Company held $39,700 and at January 3, 2004, $18,750 of investments in auction rate securities classified as available-for-sale. Investments in these securities are recorded at cost, which approximates fair value due to their variable interest rates, which reset approximately every 30 to 45 days. Despite the long-term nature of their stated contractual maturities, there is ready liquid market for these securities based on the interest rate reset mechanism. As a result, there are no cumulative gross realized or unrealized holding gains or (losses) from our auction rate securities. All income generated from these marketable securities was recorded as interest income. As of January 3, 2004, the aggregate amortized cost of the Company’s marketable securities, other than auction rate securities, approximated their fair value. As of January 1, 2005, the Company recorded net unrealized losses on its marketable securities, other than auction rate securities, of $104. 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.

Inventory: Inventory, primarily consisting of sporting goods, consumer electronics and licensed entertainment products, is valued at the lower of cost (determined using the weighted average 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.

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 also 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:

•

Three to 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 gain or loss on disposition of the assets in other income/expense. Expenditures for maintenance and repairs are expensed as incurred.

F-28

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

Effective December 30, 2001, the Company adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 changed 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. 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 accordance with the provisions of SFAS No. 142, the Company performed an annual impairment test of its recorded goodwill in December 2003 and December 2004, and found no instances of impairment.

During the three-month period ended January 1, 2005, 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 miscellaneous equipment. The Company disposed of these assets during the year ended January 1, 2005 and recorded an impairment charge of $207 which is included in other expense.

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 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 which is included in depreciation and amortization expense.

Notes Receivable: Notes receivable consists primarily of a $4,500, 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 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 $4,000. The balance of the note due was $3,976 as of December 28, 2002, $3,076 as of January 3, 2004 and $0 as of January 1, 2005, with $900 classified as current as of December 28, 2002 and January 3, 2004. On April 28, 2004, the Company converted $730 of principal due

F-29

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

under the note in exchange for 2,036,830 shares of Odimo Incorporated’s (“Odimo”) Series C preferred stock and a warrant to purchase 305,525 shares of Odimo’s Series C preferred stock at an exercise price of $0.3584 per share. As a result of the conversion, the principal amount owing under the note as of April 28, 2004 was $2,645 due in eleven consecutive quarterly payments of $225 each, beginning June 2004 through December 2006, and one final payment of $170 due in March 2007. On August 3, 2004, the Company received payment in full of the $2,420 amount then outstanding, together with accrued interest. The Company recorded interest income on the note of $0 for the fiscal year ended December 28, 2002, $313 for the fiscal year ended January 3, 2004 and $129 for the fiscal year ended January 1, 2005. The $500 discount has been fully amortized and recorded as an increase in interest income. Amortization of the discount was $0 for the fiscal year ended December 28, 2002, $180 for the fiscal year ended January 3, 2004 and $320 for the fiscal year ended January 1, 2005. Notes receivable also consists of a $376 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 including accrued interest due was $447 as of December 28, 2002, $477 as of January 3, 2004 and $0 as of January 1, 2005, with $0 as of December 28, 2002, $477 as of January 3, 2004 and $0 as of January 1, 2005 classified as current. The principal balance of the note together with accrued interest was paid in full on June 14, 2004. The Company recorded interest income on the note of $24 for the fiscal year ended December 28, 2002, $30 for the fiscal year ended January 3, 2004 and $10 as of fiscal year ended January 1, 2005.

Other Equity Investments: Other equity investments consist of shares of, and warrants to purchase, Odimo Incorporated (“Odimo”) Series C and Series D preferred stock convertible into 17.9% 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 non-marketable securities 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 non-marketable securities, 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 $2,847 as of January 1, 2005. Based on the Company’s valuation of the investment as of January 1, 2005, it was determined that there was no impairment of the investment. In February, 2005, Odimo consummated an initial public offering through the issuance of 3,125,000 shares of its common stock. Based on the current market price of Odimo’s common stock, the Company determined that there is no impairment in the carrying value of this investment.

Other Assets, Net: Other assets, net consists primarily of deferred partner revenue share charges, resulting from the exercise by a partner of a right to receive 1,600,000 shares of the Company’s common stock in lieu of future cash 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 90% of such shares on January 1, 2005 and will lapse as to an additional 10% of such shares on the last day of March 2005,

F-30

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

becoming free of all such transfer restrictions on March 31, 2005. Deferred partner revenue share charges were, $13,207 as of December 28, 2002, $11,835 as of January 3, 2004 and $10,097 as of January 1, 2005 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 $857 for the fiscal year ended December 28, 2002, $1,372 for the fiscal year ended January 3, 2004 and $1,738 for the fiscal year ended January 1, 2005.

Deferred Revenue: Deferred revenue consists primarily of fees paid in advance to the Company under agreements to manage some aspects of certain partners’ 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: Net revenues from product sales are derived from the sale of products by us through our partners’ e-commerce businesses. Net revenues from product sales are net of allowances for returns and discounts and include outbound shipping charges and other product related services such as gift wrapping and monogramming.

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 centers in Louisville, KY and Shepherdsville, 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-31

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

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.

Cost of Revenues: Cost of revenues consist of cost of revenues from product sales and cost of service fee revenues. Cost of revenues from product sales include 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. We specifically do not record cost of service fee revenue. The cost of the sales of the merchandise on which we earn service fees are incurred by our service-fee partners because they are the owners and sellers of the merchandise.

Sales and Marketing: Sales and marketing expenses include fulfillment costs, customer service costs, credit card fees, net partner revenue share charges, net advertising and promotional expenses incurred by us on behalf of the Company’s partners’ e-commerce businesses, and payroll related to the buying, business management and marketing functions of its company. Net partner revenue share charges are royalty payments made to the Company’s partners in exchange for the use of their brands, the promotion of its 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 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, net of amounts reimbursed to the Company by its partners. Net advertising and promotional expenses include promotional free shipping and subsidized shipping and handling costs and are net of amounts reimbursed to the Company by its partners. Partner revenue share charges were $5,666 for the fiscal year ended December 28, 2002, $10,499 for the fiscal year ended January 3, 2004 and $9,143 for the fiscal year ended January 1, 2005.

F-32

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

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 $2,895 for the fiscal year ended December 28, 2002, $1,513 for the fiscal year ended January 3, 2004 and $3,530 for the fiscal year ended January 1, 2005 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 centers and Ashford.com’s Texas fulfillment center that it formerly maintained, personnel and other costs associated with its logistical support and vendor operations departments and third-party warehouse and fulfillment services costs. Fulfillment costs were $12,531 for the fiscal year ended December 28, 2002, $15,631 for the fiscal year ended January 3, 2004 and $24,216 for the fiscal year ended January 1, 2005 and are included in sales and marketing expense.

Advertising: The Company expenses the cost of advertising, which includes online 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. Online 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 costs were $3,377 for the fiscal year ended December 28, 2002, $2,418 for the fiscal year ended January 3, 2004 and $4,843 for the fiscal year ended January 1, 2005 and are included in sales and marketing expenses.

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.

F-33

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

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.

The following table illustrates the pro forma net loss and losses per share for the fiscal years ended December 28, 2002, January 3, 2004 and January 1, 2005 as if compensation expense for stock options issued to employees had been determined consistent with SFAS No. 123:


	Fiscal Year Ended
	December 28, 2002			January 3, 2004			January 1, 2005
Net income (loss), as reported	$	(33,809	)	$	(12,062	)	$	340
Add: Stock-based compensation expense included in reported net loss		(21	)		462			1,738
Deduct: Total stock-based compensation determined under fair value based method for all awards		(6,508	)		(5,030	)		(6,915	)


Pro forma net loss	$	(40,338	)	$	(16,630	)	$	(4,837	)


Income (losses) per share—basic and diluted:
Net income (loss) per share, as reported	$	(0.88	)	$	(0.30	)	$	0.01


Pro forma net loss per share—basic	$	(1.05	)	$	(0.42	)	$	(0.12	)


Pro forma net loss per share—diluted	$	(1.05	)	$	(0.42	)	$	(0.12	)

The Company also records the amortization of deferred partner revenue charges as stock-based compensation expense. This expense is amortized over the contract term of the partner agreement. Stock-based compensation related to the amortization of deferred partner revenue share charges was $857 for the fiscal year ended December 28, 2002, $1,372 for the fiscal year ended January 3, 2004 and $1,738 for the fiscal year ended January 1, 2005.

Reclassifications: Certain reclassifications have been made to the prior years’ consolidated financial statements to conform to those classifications used in the current year. These reclassifications were made to reflect certain communication costs previously classified product development expenses to sales and marketing expenses and general and administrative expenses.

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,

F-34

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

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 FIN No. 46(R)-5 effective during fiscal 2004 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 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.

F-35

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

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. The accounting guidance of EITF 03-1 relating to the recognition of investment impairment which was to be effective in the third quarter of 2004 has been delayed pending the development of additional guidance.

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.

Inventory Costs an Amendment of ARB No. 43, Chapter 4: In November 2004, the FASB issued SFAS No. 151, “Inventory Costs an Amendment of ARB No. 43, Chapter 4” . SFAS No. 151 amends the guidance in ARB No. 43 Chapter 4, “Inventory Pricing” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43 Chapter 4, previously stated that “…under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges.” SFAS No. 151 requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal”. SFAS No. 151 is effective for inventory costs incurred during the fiscal years beginning after June 15, 2005. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on normal capacity of the production facility. The Company anticipates that adoption of SFAS No. 151 will have no significant impact on the Company’s financial position or results of operations.

Exchanges of Nonmonetary Assets an Amendment of APB Opinion No. 29: In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets an Amendment of APB Opinion No. 29”. SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29 and replaces it with an exception for exchanges that do not have commercial substance. This Statement specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company anticipates that adoption of SFAS No. 153 will have no significant impact on the Company’s financial position or results of operations.

Share-Based Payment. In December 2004, the Financial Accounting Standards Board, or FASB, issued Financial Accounting Standards Board Statement No. 123R “Share-Based Payment”, or FAS 123R, which

F-36

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

replaces Financial Accounting Standards Board Statement No. 123, “Accounting for Stock-Based Compensation”, or FAS 123, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, or APB 25. FAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. In addition, FAS 123R will cause unrecognized expense (based on the amounts in our pro forma footnote disclosure) related to options vesting after the date of initial adoption to be recognized as a charge to results of operations over the remaining vesting period. Under FAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The Company has preliminarily decided to use the prospective method for transition as of the effective date of FAS 123R. The prospective method requires that compensation expense be recorded for all unvested stock options and share awards at the beginning of the first quarter of adoption of FAS 123R. The Company is evaluating the requirements of FAS 123R and it expects that the adoption of FAS 123R will have a material impact on its consolidated results of operations and earnings per share.

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 $7,074 in cash and approximately 430,000 shares of the Company’s common stock valued at $6,881 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 $15,737 was allocated to the assets acquired and the liabilities assumed based upon estimates of their respective fair values. A total of $8,815, 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 $1,470 and the trademarks at $1,570.

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 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

F-37

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

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.

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 $1,200 in cash proceeds and recognized a gain on the sale of assets of $379.

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 in cash, (ii) a $4,500, five year subordinated secured promissory note, valued at approximately $3,976, (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 $2,159, and (iv) a right to receive 10% of Odimo’s consolidated EBITDA from 2003 to 2007 up to a maximum aggregate payment of $2,000. 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 $2,945.

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 the Company’s net revenues of approximately $21,617 in the fiscal year ended December 28, 2002, $940 in the fiscal year ended January 3, 2004 and $0.0 in the fiscal year ended January 1, 2005. This plan involved the liquidation of Ashford.com’s remaining inventory, the closure of its Houston, TX 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.

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 $1,198. No additional inventory write downs from the restructuring were recorded during the fiscal years ended January 3, 2004 and January 1, 2005.

F-38

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

For the fiscal years ended December 28, 2002, January 3, 2004 and January 1, 2005, restructuring costs related to Ashford.com were as follows:


	Fiscal Year Ended
	December 28, 2002		January 3, 2004		January 1, 2005
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.

At January 1, 2005, the accrued liability associated with the cessation of Ashford.com operations was $370 and consisted of the following (in thousands):


	Balance at December 28, 2002		Subsequent Accruals, net		Payments			Balance at January 3, 2004		Balance January 1, 2005		Due Within 12 Months
Termination benefits	$	417	$	—	$	(417	)	$	—	$	—	$	—
Contractual obligations		402		74		(106	)		370		370		370
Other restructuring costs		12		—		(12	)		—		—		—


	$	831	$	74	$	(535	)	$	370	$	370	$	370

NOTE 4—MARKETABLE SECURITIES

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


	January 3, 2004
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses (1)			Estimated Fair Value
Auction rate securities	$	18,750	$	—	$	—		$	18,750
Corporate bonds		2,908		7		(10	)		2,905
U.S. government agency securities		9,004		12		(9	)		9,007


	$	30,662	$	19	$	(19	)	$	30,662

F-39

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)


	January 1, 2005
	Amortized Cost		Gross Unrealized Losses(1)			Estimated Fair Value
Auction rate securities	$	39,700	$	—		$	39,700
Corporate bonds		5,963		(41	)		5,922
U.S. government agency securities		9,800		(63	)		9,737


	$	55,463	$	(104	)	$	55,359

(1)

The fair value of marketable securities with loss positions was $6,071 as of January 3, 2004 and $15,658 as of January 1, 2005, and the gross unrealized losses on these marketable securities were $19 as of January 3, 2004 and $104 as of January 1, 2005. The Company considered the nature of these marketable securities, which are primarily U.S. government agency securities, corporate bonds and auction preferred stock, 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 temporary.

The amortized cost and estimated fair value of investments in debt securities as of January 1, 2005, by contractual maturity, are as follows:


	Amortized Cost		Estimated Fair Value
Due within one year	$	36,156	$	36,089
Due after one year through five years		13,307		13,270
Due after five years through ten years		—		—
Due after ten years		6,000		6,000


	$	55,463	$	55,359

NOTE 5—PROPERTY AND EQUIPMENT

The major classes of property and equipment, at cost, as of January 3, 2004 and January 1, 2005 are as follows:


	January 3, 2004			January 1, 2005
Computer hardware and software	$	44,113		$	53,381
Building and building improvements		20,977			38,406
Furniture, warehouse and office equipment		6,712			9,696
Land		3,663			7,663
Leasehold improvements		413			479
Capitalized Lease		—			2,401
Construction in progress		655			387


		76,533			112,413
Less: Accumulated depreciation and amortization		(31,693	)		(38,127	)


Property and equipment, net	$	44,840		$	74,286

F-40

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

NOTE 6—LEASES

Capital Leases

During the third quarter of fiscal 2004, the Company entered into capital leases for computer hardware and software. As of January 1, 2005, the leases had an aggregate outstanding balance of $1,590, with $829 classified as current. The Company’s net investment in these capital leases as of January 1, 2005 was $1,594, which is included in property and equipment. Interest expense recorded on the capital leases for the twelve month period ended January 1, 2005 was $65.

Future minimum lease payments under the capital lease as of January 1, 2005, together with present value of those future minimum lease payments, are as follows:


	January 1, 2005
2005	$	912
2006		516
2007		297


Total future minimum lease payments		1,725
Less: Interest discount amount		(135	)


Total present value of future minimum lease payments		1,590
Less: Current portion		(829	)


Long-term portion	$	761

During the fourth quarter of fiscal 2000, the Company entered into various capital leases for computer hardware and furniture. As of January 1, 2005, no capital leases on this equipment remained. The Company’s net investment in these capital leases as of January 3, 2004 was $347 and as of January 1, 2005 was $0, which is included in property and equipment. Interest expense recorded on the capital leases for the fiscal year ended December 28, 2002 was $59, for fiscal year ended January 3, 2004 was $0 and for fiscal year ended January 1, 2005 was $0.

Operating Leases

The Company leases its Melbourne, FL customer contact center, as well as, its Shepherdsville, KY fulfillment center 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 and additional office space until the Company completed its move to its new corporate headquarters. Rent expense under operating lease agreements was $2,349 in fiscal year ended December 28, 2002, $1,346 in fiscal year ended January 3, 2004 and $2,019 for the fiscal years ended January 1, 2005.

F-41

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

Future minimum lease payments under operating leases as of January 1, 2005 are as follows:


	Operating Leases
2005	$	2,175
2006		2,025
2007		1,592
2008		1,588
2009		1,579
Thereafter		1,428

Total future minimum lease payments	$	10,387

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.

On May 12, 1998, the Company issued 10,000 shares of mandatorily redeemable Series A preferred stock. As of December 28, 2002 all of the shares of Series A preferred stock had been redeemed. As of September 27, 2003 all of the shares of the Series A preferred stock had been retired.

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 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 $14,400. 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.

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 $30,000. 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 $10,000.

F-42

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

On July 25, 2003, the Company issued 1,650,000 shares of common stock to ITH in exchange for warrants held by ITH to purchase 4,500,000 shares of the Company’s common stock, purchased by ITH on September 13, 2000. 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 $23,000 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.

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. The shares of common stock issued under the ESPP were 399,201 shares as of December 28, 2002, 548,948 shares as of January 3, 2004 and 548,948 shares as of January 1, 2005. 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 $10,000 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.

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 10,025,071 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

F-43

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

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.

The following table summarizes the stock option activity for the fiscal years ended December 28, 2002, January 3, 2004 and January 1, 2005:


	Fiscal Year Ended
	December 28, 2002				January 3, 2004				January 1, 2005
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Outstanding, beginning of fiscal year	5,527		$	8.02	5,369		$	8.30	6,716		$	8.37
Granted	856			12.58	2,035			9.02	793			10.18
Exercised	(270	)		4.73	(194	)		5.15	(803	)		5.89
Cancelled	(744	)		12.85	(494	)		12.12	(597	)		11.28


Outstanding, end of fiscal year	5,369			8.30	6,716			8.37	6,109			8.50


Exercisable, end of fiscal year	2,594			8.35	3,837			8.39	4,275			8.38

During the fiscal year ended January 1, 2005, the Company granted to employees options to purchase an aggregate of 730,800 shares of the Company’s common stock at prices ranging from $0.01 to $16.10 per share and granted to directors options to purchase an aggregate of 62,500 shares of the Company’s common stock at $8.11 per share. The weighted average fair value during the fiscal year ended January 1, 2005 was $7.00 per share 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 1, 2005 was $10.18 per share. The weighted average fair value during the fiscal year ended January 1, 2005 was $9.47 per share 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 January 1, 2005 was $0.01 per share. For the fiscal year ended January 1, 2005, the Company recorded $1,773 of stock-based compensation expense relating to options and restricted stock, $1,758 relating to employees and $15 relating to consultants.

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 during the fiscal year ended January 3, 2004 was $3.48 per share 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 $5.42 per share. The weighted average fair value during the fiscal year ended January 3, 2004 was $5.78 per share 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 $10.00 per share. For the fiscal year ended January 3, 2004, the Company recorded $563 of stock-based compensation expense relating to options and restricted stock, $462 relating to employees and $101 relating to consultants.

F-44

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

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 during the fiscal year ended December 28, 2002 was $8.66 per share 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 $12.45 per share. For the fiscal year ended December 28, 2002, the Company recorded a reduction of $508 in stock-based compensation expense relating to options and restricted stock, $21 relating to employees and $487 relating to consultants.

The following table summarizes the warrant activity for the fiscal years ended December 28, 2002, January 3, 2004 and January 1, 2005:


	Fiscal Year Ended
	December 28, 2002				January 3, 2004				January 1, 2005
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price
Outstanding, beginning of fiscal year	7,817		$	9.27	7,082		$	9.25	803	$	7.68
Granted	—			—	—			—	12		9.31
Exercised	(330	)		9.32	(13	)		5.00	—		—
Cancelled	(405	)		9.67	(6,266	)		9.46	—		—


Outstanding, end of fiscal year	7,082			9.25	803			7.68	815		7.71


Exercisable, end of fiscal year	6,882			9.44	603			9.40	615		9.40

During the fiscal year ended January 1, 2005, the Company granted to a related party warrants to purchase an aggregate of 12,500 shares of the Company’s common stock at $9.31 per share. The Company recognized $89 of stock-based compensation for the fiscal year ended January 1, 2005 related to the grant of the warrants.

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 of stock-based compensation expense for the fiscal year ended December 28, 2002 relating to the grant of the warrants.

F-45

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

The following table summarizes information regarding options and warrants outstanding and exercisable as of January 1, 2005:


	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
$ 0.01 – $ 5.56	2,372	5.89	$	4.44	1,749	$	4.65
$ 5.69 – $10.00	3,318	7.22		8.66	2,168		8.29
$10.01 – $24.69	1,234	6.23		15.33	973		15.92
$ 0.01 – $24.69	6,924	6.58		8.40	4,890		8.51

As of January 1, 2005, 1,215,100 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 28, 2002, January 3, 2004 and January 1, 2005 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 28, 2002		January 3, 2004		January 1, 2005
Dividend yield	None		None		None
Expected volatility	102.00	%	104.00	%	94.11	%
Average risk free interest rate	3.59	%	2.63	%	3.22	%
Average expected lives	3.93 years		3.41 years		4.13 years

No warrants were granted or issued by the Company during the fiscal years ended December 28, 2002 and January 3, 2004, and 12,500 warrants were issued during the fiscal year ended January 1, 2005. The fair value of warrants granted and issued during the fiscal year ended January 1, 2005 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 January 1, 2005
Dividend yield	None
Expected volatility	100.0	%
Average risk free interest rate	3.93	%
Average expected lives	5.00 years

F-46

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

NOTE 9—INCOME TAXES

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


	Fiscal Year Ended
	December 28, 2002			January 3, 2004			January 1, 2005
Income (loss) from continuing operations before income taxes:
Domestic	$	(33,809	)	$	(12,062	)	$	340
Foreign		—			—			—

Total	$	(33,809	)	$	(12,062	)	$	340

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 28, 2002, January 3, 2004 and January 1, 2005, the Company had no provision for federal and state income taxes.

F-47

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

The significant components of net deferred tax assets and liabilities as of January 3, 2004 and January 1, 2005 consisted of the following:


	Fiscal Year Ended
	January 3, 2004			January 1, 2005
Deferred tax assets:
Net operating loss carryforwards	$	174,249		$	179,495
Deferred revenue		6,104			3,798
Employee benefits		248			91
Inventory		1,149			1,019
Prepaid expenses		—			—
Depreciation		914			2,278
Provision for doubtful accounts		1,556			1,293

Gross deferred tax assets		184,220			187,974
Deferred tax liabilities:
Prepaid expenses		—			—

Net deferred tax assets and liabilities		184,220			187,974
Valuation allowance		(184,220	)		(187,974	)

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 1, 2005, the Company had available net operating loss carryforwards of approximately $442,827 which expire in the years 2005 through 2024. 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 $245,986 will expire before they can be utilized.

Of the net operating losses $14,309 relate to employee related stock options and the tax benefit when realized will reduce equity.

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 28, 2002		January 3, 2004		January 1, 2005
Statutory federal income tax rate	(34.0	)%	(34.0	)%	(34.0	)%
Increase (decrease) in taxes resulting from:
Valuation allowance	33.7	%	33.4	%	34.0	%
Nondeductible amortization	—		—		—
Other	0.3	%	0.6	%	0.0	%

Effective income tax rate	0.0	%	0.0	%	0.0	%

F-48

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

NOTE 10—INCOME (LOSS) PER SHARE

Net income (loss) per share has been computed in accordance with SFAS No. 128, “Earnings per Share.” Basic and diluted income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the fiscal year. In fiscal 2002 and fiscal 2003, the outstanding common stock options and warrants have been excluded from the calculation of diluted income (loss) per share because their effect would be antidilutive.

The amounts used in calculating income (loss) per share data are as follows:


	Year ended December 31,
	December 28, 2002			January 3, 2004			January 1, 2005
Net income (loss) attributable to common shares	$	(33,809	)	$	(12,062	)	$	340

Weighted average common shares outstanding—basic		38,566			39,638			41,073
Effective of dilutive securities:
Warrants		—			—			220
Employee stock options		—			—			1,076

Weighted average common shares outstanding—diluted		38,566			39,638			42,369
Outstanding common stock options having no dilutive effect		5,369			6,716			5,033
Outstanding common stock warrants having no dilutive effect		7,082			803			595

Income (loss) per common share—basic:	$	(0.88	)	$	(0.30	)	$	0.01
Income (loss) per common share—diluted:	$	(0.88	)	$	(0.30	)	$	0.01

NOTE 11—COMPREHENSIVE INCOME (LOSS)

The following table summarizes the components of comprehensive income (loss):


	Fiscal Year Ended
	December 28, 2002			January 3, 2004			January 1, 2005
Net income (loss)	$	(33,809	)	$	(12,062	)	$	340
Other comprehensive income (loss):
Net unrealized gains (losses) on available-for-sale securities		57			(57	)		(104	)

Other comprehensive income (loss)		57			(57	)		(104	)

Comprehensive income (loss)	$	(33,752	)	$	(12,119	)	$	236

NOTE 12—SIGNIFICANT TRANSACTIONS/CONCENTRATIONS OF CREDIT RISK

Net revenues included $2,457 for the fiscal year ended December 28, 2002, $0 for the fiscal year ended January 3, 2004 and $0 for the fiscal year January 1, 2005, related to bulk sales to one entity. As of January 3, 2004 and January 1, 2005, the amount included in accounts receivable related to these bulk sales was $0.

Net revenues included $8,281 for the fiscal year ended December 28, 2002, $0 for the fiscal year ended January 3, 2004 and $0 for the fiscal year ended January 1, 2005 from sales of one of the Company’s partner’s

F-49

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

products sold primarily through its direct response television campaigns in addition to Web site and toll-free number sales. As of January 3, 2004 and January 1, 2005, the amount included in accounts receivable related to these sales was $0.

The Company had $3,360 as of January 3, 2004 and $12,397 as of January 1, 2005, of operating cash and $66,110 as of January 3, 2004 and $63,026 as of January 1, 2005, of cash equivalents and marketable securities invested with three financial institutions, which are potentially subject to credit risk. The composition of these investments is regularly monitored by management of the Company.

NOTE 13—MAJOR SUPPLIERS AND CUSTOMERS/ECONOMIC DEPENDENCY

During the fiscal year ended January 1, 2005, the Company purchased inventory from one supplier amounting to $80,430 or 43.1% of total inventory purchased.

During the fiscal year ended January 3, 2004, the Company purchased inventory from one supplier amounting to $50,434 or 37.7% of total inventory purchased.

During the fiscal year ended December 28, 2002, the Company purchased inventory from one supplier amounting to $19,435 or 20.5% of total inventory purchased.

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 $23,559 or 14% from Kmart Corporation (“Kmart”) in connection the operation of Kmart’s e-commerce business. In March 2003, the Company and Kmart 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. In October 2004, we further modified this agreement following which we only provide sporting goods merchandise to Bluelight on a business-to-business basis and continue to recognize revenues based on those business-to-business sales.

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

NOTE 14—COMMITMENTS AND CONTINGENCIES

Legal Proceedings

F-50

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

certain fees and commissions collected by the underwriters or arrangements designed to inflate the price of the common stock. The plaintiffs further allege that because of these purchases, Ashford.com’s post-initial public offering stock price was artificially inflated. As a result of the alleged omissions in the prospectus and the purported inflation of the stock price, the plaintiffs claim violations of Sections 11 and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934. The complaints have been consolidated into a single action, and the consolidated cases against Ashford.com have been consolidated with similarly consolidated cases filed against 308 other issuer defendants for the purposes of pretrial proceedings. The claims against Ashford.com’s officers and directors were dismissed in exchange for tolling agreements which permit the refiling of claims against officers and directors at a later date. A motion to dismiss filed on behalf of all issuer defendants, including Ashford.com, was denied in all aspects relevant to Ashford.com on February 19, 2003. Ashford.com and its insurers have entered into a memorandum of understanding regarding terms for settlement of this suit. Under the settlement, plaintiffs’ claims against Ashford.com and other issuers will be dismissed in exchange for certain consideration from the issuers’ insurers and for the issuers’ assignment to plaintiffs of certain potential claims against the underwriters of the relevant initial public offerings. Formal documentation of the settlement contemplated by the memorandum of understanding is complete and the Judge presiding over this matter has preliminarily approved the settlement. 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 per violation, and treble damages under the Illinois Whistleblower Reward and Protection Act. The Company is aware that this same private litigant has filed similar actions against retailers in other states, and it may be possible that the Company and/or partners may have been or may be named in similar cases in other states. The Company does not believe that it is liable under existing laws and regulations for any failure to collect sales or other taxes relating to internet sales and intends to vigorously defend itself in this matter.

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

Advertising and Media Agreements

As of January 1, 2005, the Company was contractually committed for the purchase of future advertising totaling approximately $130 through the fiscal year ending December 31, 2005. The expense related to these commitments will be recognized in accordance with the Company’s accounting policy related to advertising (see Note 2).

F-51

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

Partner Revenue Share Payments

As of January 1, 2005 and subject to the satisfaction of certain conditions, the Company was contractually committed to future minimum cash revenue share payments as follows:


	Partner Revenue Share Payments
2005	$	7,450
2006		5,700
2007		6,000
2008		6,350
2009		6,650
Thereafter		4,900

Total conditional future minimum cash revenue share payments	$	37,050

Partner Relationships

The Company operates e-commerce businesses for its partners pursuant to contractual agreements. The Company generally operates e-commerce businesses for its partners based on one of three models, or, in some circumstances, a combination of these models. The Company refers to these three models as the GSI-owned inventory model, the partner-owned inventory model and the business-to-business model.

GSI-Owned Inventory Model—The Company selects and purchases inventory from vendors, sells the inventory directly to consumers through its e-commerce platform under its partners’ names, records revenues generated from the sale by the Company of these products and generally pays a percentage of these revenues to the respective partners in exchange for the right to use their brand names, logos and Web site address in the operation of their e-commerce business and for their commitment to promote and advertise their e-commerce business. The Company has a buying organization that procures products in the following merchandise categories: sporting goods, consumer electronics, and licensed entertainment products. Because the Company operates e-commerce businesses for its sporting good partners using a common pool of owned sporting goods inventory, the Company is able to offer a broad assortment while efficiently managing its inventory. Under the owned-inventory model, the Company establishes the prices for products that it offers. To the extent possible, the Company strategically prices products sold through a partner’s e-commerce business to be consistent with the pricing for the same products at that partner’s retail stores. Accordingly, prices for the same products may differ across the Company’s partners’ e-commerce businesses. Revenues generated from this model are recorded by the Company as product sales. The Company believes that it has strong relationships with its vendors and sources of unique products, and it regularly seeks to add new vendors, brands and sources of unique products.

Partner-Owned Inventory Model—The Company operates certain aspects of its partners’ e-commerce businesses in exchange for service fees, which primarily consist of variable fees based on the value of merchandise sold or gross profit generated through its partners’ e-commerce businesses. To a lesser extent, service fees include fixed periodic payments by partners for the development and operation of their e-commerce businesses and fees related to the provision of marketing, design, development and other services. Under the partner-owned inventory model, its 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. Revenues generated from partners in this model are recorded by the Company as service fees.

F-52

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

Business-to-Business Model—The Company generally provides a product information database, including product images, descriptions and availability to these partners, which they use to sell merchandise on their e-commerce sites. These partners process customer orders on their Web sites and deliver the orders to the Company electronically. The Company sells the products ordered to these partners from its inventory or through its network of drop shippers and transfers title to the partners at a predetermined price. The Company then sends the orders to customers on behalf of these partners. These partners generally perform their own customer service. To date, this model has been deployed using GSI-owned sporting goods inventory. Revenues generated from sales by the Company to its partners in this model are recorded by the Company as product sales.

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 $396 for the fiscal year ended December 28, 2004, $419 for the fiscal year ended January 3, 2004 and $540 for the fiscal year ended January 1, 2005.

NOTE 16—SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION


	Fiscal Year Ended
	December 28, 2002			January 3, 2004			January 1, 2005
Cash paid during the year for interest	$	749		$	—		$	466
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	)	$	(104	)
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		$	—		$	—
Receipt of shares of, and warrants to purchase, Odimo’s Series C preferred stock in connection with a conversion of principal due under a note	$	—		$	—		$	688
Exchange of a portion of a promissory note in connection with a conversion of principal due under the note	$	—		$	—		$	(682	)
Issuance of common stock upon exercises of options granted to employees of the discontinued operations	$	4		$	3		$	—
Acquisition of property and equipment under a capital lease	$	—		$	—		$	3,170

F-53

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

NOTE 17—BUSINESS SEGMENTS

The Company operates in one principal business segment. The Company provides e-commerce solutions that enable 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

In fiscal 2000, the Company entered into a website development and distribution agreement with iQVC, a division of QVC, Inc., pursuant to which the Company provides technology, procurement and fulfillment services for QVC, including selling sporting goods, recreational and/or fitness related equipment and related products, apparel and footwear to QVC for resale through the QVC Web site. 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 on sales to this related party of $2,711 for fiscal year ended December 28, 2002, $2,145 for fiscal year ended January 3, 2004 and $1,843 for fiscal year ended January 1, 2005 under this Web site development and distribution agreement. The terms of these sales are comparable to those with other business-to-business partners of the Company. As of January 1, 2005, the amount included in accounts receivable related to these sales was $88. In the three month period ended September 27, 2003, the Company took a charge of $325 for the settlement of disputed amounts billed to QVC for product and shipping costs.

In the fiscal year ended January 3, 2004, the Company entered into a services agreement with QVC pursuant to which QVC provided shipping services to the Company in exchange for fees. The fees charged to us by QVC were determined through arms-length negotiations. The Company incurred fees of $484 for the fiscal year ended January 3, 2004 and $1,061 for the fiscal year ended January 1, 2005 of which $414 for fiscal year ended January 3, 2004 and $1,009 for the fiscal year ended January 1, 2005 related directly to products shipped and was charged to cost of revenues from product sales, and $70 for fiscal year ended January 3, 2004 and $52 for fiscal year ended January 1, 2005 related to professional services provided and was charged to sales and marketing expense.

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

F-54

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

NOTE 19—LONG-TERM DEBT AND OTHER

The following table summarizes the Company’s long-term debt and other long-term liabilities as of January 1, 2005:


	January 1, 2005
Note payable	$	12,945
Capital lease obligation		1,590

		14,535
Less: current portion of note payable		(142	)
Less: current portion of capital lease obligation		(829	)

Long-term debt and other	$	13,564

On March 16, 2004, a wholly-owned subsidiary of the Company entered into an agreement to purchase a new corporate headquarters in King of Prussia, Pennsylvania, together with an option to purchase an additional parcel of land. The Company closed on the purchase on June 9, 2004 and the purchase price for the building was $17,000.

In connection with the purchase of the new corporate headquarters, a wholly-owned subsidiary of the Company entered into a $13,000 mortgage note on June 9, 2004, collateralized by a first lien on substantially all of the assets of that subsidiary, which have a carrying value of approximately $17,444. The mortgage note has a term of ten years and six months, and bears interest at 6.32% per annum. The Company, in accordance with the provisions of the mortgage note, provided a Letter of Credit in the amount of $3,000 as additional security. Upon completion of initial capital improvements to the building, the Letter of Credit will be reduced to $1,000. The Letter of Credit may be reduced further to $500 if the Company has positive income for calendar years 2006, 2007 and 2008. As of January 1, 2005, the mortgage note had an aggregate outstanding principal balance of $12,945, with $142 classified as current and $12,803 classified as long-term. The Company recorded interest expense related to the note of $209 for the three month period ended January 1, 2005 and $473 for the twelve month period ended January 1, 2005.

Annual maturities of the mortgage note are based on a thirty year amortization and as of January 1, 2005 are as follows:


	January 1, 2005
Year 1	$	142
Year 2		152
Year 3		161
Year 4		170
Year 5		184
Thereafter		12,136

		12,945
Less current portion		(142	)

Long-term portion	$	12,803

F-55

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)

On April 20, 2000, the Company entered into a $5,300 mortgage note collateralized by the land, building and improvements of its corporate headquarters which have a carrying value of $6,832. 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 $5,212 outstanding principal balance remaining on the mortgage note. In connection with the early retirement of the mortgage note, the Company paid a $250 early termination fee, which is recorded in interest expense. The Company recorded interest expense related to this note of $690 during the fiscal year ended December 28, 2002, $0 during the fiscal year ended January 3, 2004 and $0 during the fiscal year ended January 1, 2005.

NOTE 20—QUARTERLY RESULTS (UNAUDITED)

The following tables contain selected unaudited Statement of Operations information for each quarter of the fiscal years ended January 3, 2004 and January 1, 2005. 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 January 3, 2004
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
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	)	$	2,744

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.

F-56

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except per share data)


	For the Fiscal Year Ended January 1, 2005
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Net revenues	$	66,268		$	64,689		$	68,588		$	135,787

Gross profit	$	24,760		$	25,125		$	26,417		$	55,895

Net income (loss)	$	(4,028	)	$	(3,146	)	$	(3,047	)	$	10,561

Income (losses) per share—basic and diluted(1):
Net income (loss)—basic	$	(0.10	)	$	(0.08	)	$	(0.07	)	$	0.26

Net income (loss)—diluted	$	—		$	—		$	—		$	0.25

Weighted average shares outstanding—basic		40,868			40,991			41,081			41,351

Weighted average shares outstanding—diluted		40,868			40,991			41,081			43,076

(1)

NOTE 21—SUBSEQUENT EVENT

The Company was the beneficial owner of Series C and Series D Convertible Preferred Stock of Odimo Incorporated and warrants to acquire additional shares of Series C and Series D Convertible Preferred Stock of Odimo Incorporated (see footnotes 2 and 3).

In February, 2005, Odimo Incorporated consummated an initial public offering through the issuance of 3,125,000 shares of its common stock. Effective upon consummation of Odimo Incorporated’s IPO, the Company exercised its warrants to acquire Series C and Series D Convertible Preferred Stock of Odimo Incorporated and converted all of such shares, along with its already held shares of Series C and Series D Convertible Preferred Stock of Odimo Incorporated, into an aggregate of 824,594 shares of common stock of Odimo Incorporated. The Company’s investment in Odimo Incorporated’s common stock represents 11.5% of the outstanding common stock of Odimo Incorporated.

NOTE 22—RESTATEMENT OF THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF CASH FLOWS

Subsequent to the issuance of our consolidated financial statements for the year ended January 1, 2005, the Company determined that the Company’s investments in auction rate securities should have been classified as marketable securities within current assets. Previously, such investments had been classified as cash and cash equivalents. Accordingly, the Company restated the classification to report these investments in marketable securities on the consolidated balance sheets as of January 1, 2005 and January 3, 2004. The Company also made corresponding corrections to the consolidated statements of cash flows for the fiscal years ended January 1, 2005, January 3, 2004 and December 28, 2002, to reflect the gross purchases and sales of these investments as investing activities rather than as a component of cash and cash equivalents. In addition, the Company has corrected the number of shares of common stock available for future grants, in Note 8. The restatement had no impact on previously reported total current assets, total assets, working capital position, results of operations or cash flows from operating activities.

F-57

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Concluded)

(amounts in thousands, except per share data)

The following tables present a summary of the significant effects of the restatement:


	Consolidated Balance Sheets
	As Previously Reported			Adjustments			As Restated
As of January 1, 2005

Cash and Cash Equivalents	$	56,564		$	(36,500	)	$	20,064
Marketable securities		18,859			36,500			55,359

As of January 3, 2004

Cash and Cash Equivalents	$	57,558		$	(18,750	)	$	38,808
Marketable securities		11,912			18,750			30,662

	Consolidated Statement of Cash Flows
Fiscal Year Ended January 1, 2005
Purchases of marketable securities	$	(9,656	)	$	(54,475	)	$	(64,131	)
Sales of marketable securities		2,605			36,725			39,330
Net cash used in investing activities		(41,239	)		(17,750	)		(58,989	)
Net decrease in cash and cash equivalents	$	(994	)	$	(17,750	)	$	(18,744	)

Fiscal Year Ended January 3, 2004
Purchases of marketable securities	$	(15,976	)	$	(44,408	)	$	(60,384	)
Sales of marketable securities		15,550			44,258			59,808
Net cash used in investing activities		(4,765	)		(150	)		(4,915	)
Net decrease in cash and cash equivalents	$	(3,446	)	$	(150	)	$	(3,596	)

Fiscal Year Ended December 28, 2002
Purchases of marketable securities	$	(20,578	)	$	(60,852	)	$	(81,430	)
Sales of marketable securities		9,092			85,102			94,194
Net cash used in investing activities		(47,272	)		24,250			(23,022	)
Net decrease in cash and cash equivalents	$	(44,892	)	$	24,250		$	(20,642	)

F-58

LOGO

PROSPECTUS (Subject to Completion)

Issued May 25, 2005

$50,000,000

LOGO

CONVERTIBLE NOTES DUE 2025

Interest payable on and

Holders may convert the notes into shares of our common stock at a conversion rate of shares per $1,000 principal amount of notes, subject to adjustment, on or prior to the close of business on the business day immediately preceding , 2010, only under the following circumstances: (1) subject to certain exceptions, during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per note for each day of that measurement period was less than 103% of the product of the closing sale price of our common stock and the conversion rate on each such day; or (2) upon the occurrence of specified corporate events. On and after , 2010, to (and including) the close of business on the business day immediately preceding the maturity date of the notes, holders may convert the notes into shares of our common stock (or cash or a combination of cash and shares of our common stock, if we so elect) at any time, regardless of the foregoing circumstances. Upon conversion, we will have the right to deliver, in lieu of shares of our common stock, cash or a combination of cash and shares of our common stock. At any time on or prior to the maturity date, we may irrevocably elect to satisfy our conversion obligation with respect to the principal amount of the notes to be converted with a combination of cash and shares of our common stock. We will pay a make-whole premium and accrued and unpaid interest, if any, if holders convert their notes in connection with a fundamental change that occurs on or prior to , 2010. Any such make-whole premium will be payable solely in shares of our common stock (other than cash paid in lieu of fractional shares).

At any time on or after 2010, we may redeem any of the notes for cash by giving you at least 30 days’ notice. We may redeem the notes either in whole or in part at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, up to, but excluding, the redemption date. On of 2010, 2015 and 2020, or if a designated event occurs prior to maturity, holders may require us to repurchase all or part of their notes at a repurchase price equal to 100% of their principal amount, plus accrued and unpaid interest.

The notes are our senior unsecured debt and will rank on a parity with all of our other existing and future senior unsecured debt and prior to all subordinated debt.

For a more detailed description of the notes, see “Description of Notes” beginning on page 68.

Concurrent with this offering of notes, we are also offering under a separate prospectus 1,500,000 shares of our common stock and the selling stockholders named in that prospectus are offering 1,603,500 shares of our common stock. The underwriters of the common stock also have the option to purchase up to an additional 465,525 shares of common stock to cover over-allotments. The offering of the notes under this prospectus is not contingent on the consummation of the concurrent common stock offering.

Investing in the notes and our common stock involves risks. You should carefully read and consider the “Risk Factors” beginning on page 11.

PRICE 100% PLUS ACCRUED INTEREST, IF ANY


	*Price to Public*	Underwriting Discounts and Commissions	*Proceeds to Company*
Per Note	%	%	%
Total	$	$	$

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

We have granted the underwriters the right to purchase up to an additional $7.5 million principal amount of notes.

Morgan Stanley & Co. Incorporated expects to deliver the notes to purchasers on , 2005.


Sole Bookrunning Manager		Co-Lead Manager
MORGAN STANLEY		Bear, Stearns & Co. Inc.
	Co-Managers
CIBC World Markets	Friedman Billings Ramsey	Pacific Crest Securities

, 2005

TABLE OF CONTENTS


		Page
Prospectus Summary		1
Risk Factors		11
Forward-Looking Statements		27
Use of Proceeds		28
Common Stock Price Range		28
Dividend Policy		28
Capitalization		29
Selected Consolidated Financial Data		30
Management’s Discussion and Analysis of Financial Condition and Results of Operations		32
Business		54


		Page
Management		63
Description of Material Indebtedness		67
Description of Notes		68
United States Federal Income Tax Considerations		86
Description of Capital Stock		93
Underwriters		97
Legal Matters		100
Experts		100
Additional Information		100
Incorporation By Reference		100
Index to Financial Statements		F-1

You should rely only on the information contained or incorporated by reference in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with information different from that contained in this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, offering to sell notes or seeking offers to buy notes in any jurisdiction where offers and sales are not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the notes offered hereby. As used in this prospectus, “GSI,” “company,” “we,” “our,” “ours” and “us” refer to GSI Commerce, Inc. and its consolidated subsidiaries, except where the context otherwise requires or as otherwise indicted.

PROSPECTUS SUMMARY

Overview

Industry Overview

Market Size and Opportunity

We believe the growing use of the Internet by consumers to purchase merchandise is driven by many factors including:

decreased concerns about the security and reliability of e-commerce;

technology innovations, such as broadband Internet access, that have enhanced the e-commerce shopping experience; and

increased recognition and support by retailers and manufacturers of the Internet as an important sales channel.

Need for “Partnered” E-Commerce Solutions

e-commerce to their overall strategy, online sales were estimated to account for only 7.0 percent of total retail sales in 2004. Because online sales generally represent a small part of retailers’ businesses, we believe that the ability to operate an e-commerce business is not part of their core competency. We also believe that, as a result, many retailers struggle to justify making the level of investment in technology, infrastructure and expertise to support a high-quality e-commerce business. Our belief is supported by Forrester Research which has stated that there has been an increase in interest in hosted or partnered e-commerce solutions. By partnering, retailers can gain access to higher quality technology, infrastructure and expertise than many of them could justify investing in on their own.

Our Solution

Our E-Commerce Platform


Core Technology		Supporting Infrastructure		Partner Services
·	Web site administration	·	Fulfillment	·	Creative design, Web site usability, testing and enhancements

·	Web infrastructure and hosting	·	Drop shipping	·	Channel integration

·	Business intelligence	·	Customer service	·	Business-to-business (B-to-B) services

·	E-commerce engine	·	Buying	·	Content development and imaging

·	Order management			·	E-commerce strategy

				·	Online marketing

				·	Customer relationship management (CRM)

Growth Strategy

Our objective is to grow our business by expanding the e-commerce businesses of our existing partners and by adding new partners. Key elements of our growth strategy include:

Grow Our Existing Partners’ Businesses

Expand Our Partner Base

We began our e-commerce business in fiscal 1999 and initially targeted the sporting goods category. Since fiscal 2001, we have expanded into five additional categories: apparel, health and beauty, consumer electronics, entertainment and home. In fiscal 2004, we added nine new partners, including three partners in sporting goods, four partners in apparel, one partner in entertainment and one business-to-business partner. As of May 17, 2005, we have announced the addition of five new partners in fiscal 2005, including two partners in sporting goods, one partner in apparel, one partner in consumer electronics and one partner in health and beauty.

Principal Executive Offices

We are a Delaware corporation organized in 1986. Our principal executive offices are located at 935 First Avenue, King of Prussia, PA 19406. Our telephone number is (610) 265-3229.

THE OFFERING



Securities offered		$50.0 million principal amount of convertible notes due 2025 (plus up to an additional $7.5 million principal amount available for purchase by the underwriters to cover over-allotments).

Maturity date		, 2025.

Ranking		The notes are our senior unsecured obligations and will rank effectively junior to any future secured debt, on a parity with all of our other existing and future senior unsecured debt and prior to any existing or future subordinated debt. Holders of the notes will only be creditors of ours, and not of our subsidiaries. None of our subsidiaries will guarantee the notes. As a result, existing and future liabilities of our subsidiaries, including trade payables, will be effectively senior to the notes. As of April 2, 2005, our subsidiaries had outstanding $14.0 million of secured debt.

Interest		% per annum on the principal amount from , 2005, payable semi-annually in arrears in cash on and of each year, beginning , 2005.

Conversion; Make whole premium upon a fundamental change		You may convert the notes into shares of our common stock at a conversion rate of shares per $1,000 principal amount of notes, representing a conversion price of approximately $ per share, subject to adjustment, at any time prior to the close of business on the business day immediately preceding , 2010, subject to prior repurchase of the notes, only under any of the following circumstances: · during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each day of such measurement period was less than 103% of the product of the closing sale price of our common stock and the conversion rate on each such day; or · upon the occurrence of specified corporate events described under “Description of Notes-Conversion of Notes-Conversion Upon Specified Corporate Transactions.” On and after , 2010, to (and including) the close of business on the business day immediately preceding the maturity date of the notes, subject to prior redemption or


		repurchase of the notes, you may convert your notes, in whole or in part, into shares of our common stock (or cash or a combination of cash and shares of our common stock, if we so elect) at any time, regardless of the foregoing circumstances.

		Upon conversion, we will have the right to deliver, in lieu of shares of our common stock, cash or a combination of cash and shares of our common stock, in each case calculated as described under “Description of Notes—Conversion of Notes—Settlement Upon Conversion.” At any time on or prior to the maturity date, we may irrevocably elect to satisfy our conversion obligation with respect to the principal amount of the notes to be converted with a combination of cash and shares of our common stock, as described under “Description of Notes—Conversion of Notes—Our Right to Irrevocably Elect Net Share Settlement Upon Conversion.” Upon any conversion, subject to certain exceptions, you will not receive any cash payment representing accrued and unpaid interest. See “Description of Notes—Conversion of Notes.” In addition, if you elect to convert your notes in connection with the occurrence of a fundamental change that occurs prior to , 2010, we will increase the applicable conversion rate for the notes such that you will be entitled to receive additional shares of common stock (or cash, or a combination of cash and shares of our common stock, if we so elect) upon conversion in some circumstances as described under “Description of Notes—Conversion of Notes—Make Whole Payment Upon the Occurrence of a Fundamental Change.”

Redemption		At any time on or after , 2010, we may redeem any of the notes for cash by giving you not more than 60 but not less than 30 days’ notice. We may redeem the notes either in whole or in part at a redemption price equal to 100% of the principal amount of the notes to be


		redeemed, plus accrued and unpaid interest, if any, up to, but excluding, the redemption date.

Repurchase at the Option of the Holder		You may require us to repurchase all or part of your notes for cash on of 2010, 2015 and 2020 at a repurchase price equal to 100% of their principal amount. We will pay accrued and unpaid interest, if any, up to, but excluding, the date of repurchase.

Designated event		If a designated event, as described under “Description of Notes—Repurchase at Option of the Holder,” occurs prior to maturity, you will have the right to require us to repurchase all or part of your notes at a repurchase price equal to 100% of their principal amount, plus accrued and unpaid interest, up to, but excluding, the repurchase date.

Sinking fund		None.

Use of proceeds		We intend to use the net proceeds from the offering, together with the net proceeds from the concurrent offering of common stock by us, for working capital and general corporate purposes, including possible acquisitions. We will not receive any of the proceeds from the concurrent sale of shares by the selling stockholders. See “Use of Proceeds.”

DTC eligibility		Except as hereinafter described, notes will be issued in fully registered book-entry form and will be represented by one or more permanent global notes without coupons deposited with a custodian for and registered in the name of a nominee of The Depository Trust Company, which we refer to as DTC, in New York, New York. Beneficial interests in any such global note will be shown on, and transfers thereof will be effected only through, records maintained by DTC and its direct and indirect participants and any such interest may not be exchanged for certificated notes, except in limited circumstances described herein. Settlement and all secondary market trading activity for the notes will be in same day funds. See “Description of Notes—Form, Denomination and Registration.”


Trading		The notes will not be listed on any securities exchange or included in any automated quotation system. We can provide no assurance as to the liquidity of or trading markets for the notes. Our common stock is listed on the Nasdaq National Market under the symbol “GSIC.”

CONCURRENT OFFERING

Concurrently with this offering, by separate prospectus we and certain selling stockholders are also offering 1,500,000 and 1,603,500 shares of our common stock, respectively, plus up to an additional 465,525 shares (up to 232,763 shares from us and up to 232,762 shares from the selling stockholders) to cover over-allotments by the underwriters for that offering. Of the shares of common stock to be sold by selling stockholders in the concurrent offering of our common stock, 1,513,500 shares are currently issued and outstanding and 90,000 shares are issuable upon exercise of options held by such selling stockholders. We cannot assure you that we will complete the concurrent offering of our common stock. Consummation of this note offering is not contingent upon consummation of the concurrent common stock offering.

RISK FACTORS

In evaluating an investment in our notes, prospective investors should carefully consider, along with the other information set forth in this prospectus and incorporated by reference, the specific factors set forth under “Risk Factors” beginning on page 11.

SUMMARY CONSOLIDATED FINANCIAL DATA


	Fiscal Year Ended										Three Months Ended
	December 30, 2000		December 29, 2001		December 28, 2002		January 3, 2004		January 1, 2005		April 3, 2004		April 2, 2005
	(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Net revenues from product sales	$	41,808	$	98,325	$	154,819	$	216,510	$	274,988	$	56,878	$	76,652
Service fee revenues		1,000		4,285		17,819		25,409		60,344		9,390		14,706

Net revenues		42,808		102,610		172,638		241,919		335,332		66,268		91,358
Cost of revenues		29,567		67,586		114,258		154,731		203,135		41,508		57,626

Gross profit	$	13,241	$	35,024	$	58,380	$	87,188	$	132,197	$	24,760	$	33,732

Operating expenses:
Sales and marketing, exclusive of $1,486, $847, $532, $1,527, $2,720, $494 and $189 reported below as stock-based compensation, respectively		37,730		32,390		50,965		59,613		78,919		17,449		20,911
Product development, exclusive of $0, $461, $(44), $42, $350, $49 and $(30) reported below as stock-based compensation, respectively		7,292		8,590		11,833		14,124		20,181		4,483		6,589
General and administrative, exclusive of $3,497, $8,974, $(87), $366, $530, $84 and $(389) reported below as stock-based compensation, respectively		8,730		10,638		14,863		13,295		18,217		3,920		5,225
Restructuring costs related to Ashford.com(1)		—		—		1,680		74		—		—		—
Net loss on sale of Ashford.com assets		—		—		2,566		—		—		—		—
Stock-based compensation		4,983		10,282		401		1,935		3,600		627		(230	)
Depreciation and amortization		8,074		6,662		10,509		11,386		10,944		2,599		3,122

Total operating expenses	$	66,809	$	68,562	$	92,817	$	100,427	$	131,861	$	29,078		35,617


	Fiscal Year Ended															Three Months Ended
	December 30, 2000			December 29, 2001			December 28, 2002			January 3, 2004			January 1, 2005			April 3, 2004			April 2, 2005
	(in thousands, except per share data)
Other (income) / expense:
Other (income) / expense		—			(502	)		—			—			620			—			(99	)
Interest expense		407			608			749			—			538			—			233
Interest income		(1,815	)		(3,049	)		(1,377	)		(1,177	)		(1,162	)		(290	)		(343	)

Total other (income) / expense	$	(1,408	)	$	(2,943	)	$	(628	)	$	(1,177	)	$	(4	)	$	(290	)	$	(209	)

(Loss) / income from continuing operations before income taxes		(52,160	)		(30,595	)		(33,809	)		(12,062	)		340			(4,028	)		(1,676	)
Benefit from income taxes		—			—			—			—			—			—			—

(Loss) / income from continuing operations		(52,160	)		(30,595	)		(33,809	)		(12,062	)		340			(4,028	)		(1,676	)
Discontinued operations:
Loss on disposition of discontinued operations		(5,850	)		—			—			—			—			—			—

Net (loss) / income	$	(58,010	)	$	(30,595	)	$	(33,809	)	$	(12,062	)	$	340		$	(4,028	)	$	(1,676	)

Earnings (losses) per share—basic:
(Loss) / income from continuing operations	$	(2.37	)	$	(0.90	)	$	(0.88	)	$	(0.30	)	$	0.01		$	(0.10	)	$	(0.04	)
(Loss) / income on disposition of discontinued operations		(0.27	)		—			—			—			—			—			—

Net (loss) / income	$	(2.64	)	$	(0.90	)	$	(0.88	)	$	(0.30	)	$	0.01		$	(0.10	)	$	(0.04	)

Earnings (losses) per share—diluted:
(Loss) / income from continuing operations	$	(2.37	)	$	(0.90	)	$	(0.88	)	$	(0.30	)	$	0.01		$	(0.10	)	$	(0.04	)
(Loss) / income on disposition of discontinued operations		(0.27	)		—			—			—			—			—			—

Net (loss) / income	$	(2.64	)	$	(0.90	)	$	(0.88	)	$	(0.30	)	$	0.01		$	(0.10	)	$	(0.04	)

Weighted average common shares outstanding:
Basic		22,028			34,033			38,566			39,638			41,073			40,868			41,662

Diluted(2)		22,028			34,033			38,566			39,638			42,369			40,868			41,662

Number of common shares outstanding		31,925			37,673			38,784			40,780			41,583			40,973			41,772


	As of
	December 30, 2000		December 29, 2001		December 28, 2002		January 3, 2004		January 1, 2005		April 2, 2005
	(in thousands)
BALANCE SHEET DATA:
Total assets	$	160,173	$	190,765	$	187,573	$	175,583	$	231,896	$	194,733
Total long-term debt		5,750		5,208		—		—		13,564		13,410
Working capital		80,805		93,702		39,035		35,290		29,692		26,098
Stockholders’ equity		116,300		146,267		120,523		110,370		117,538		118,561

(1)

(2)

RATIO OF EARNINGS TO FIXED CHARGES

Our ratios of earnings to fixed charges determined under the method prescribed by the Securities and Exchange Commission are shown below.


	Fiscal Year Ended														Three Months Ended
	December 30, 2000			December 29, 2001			December 28, 2002			January 3, 2004			January 1, 2005		April 2, 2005
	(in thousands)
Total earnings (losses) and fixed charges	$	(51,149	)	$	(29,036	)	$	(28,706	)	$	(11,331	)	$	1,993	$	(1,085	)
Fixed charges		1,011			1,559			2,103			731			1,653		591
Ratio of earnings to fixed charges(1)		n/a			n/a			n/a			n/a			1.2		n/a

(1)

For purposes of computing the ratio of earnings to fixed charges, total earnings consist of pre-tax (loss) income from continuing operations before adjustment for minority interest and before provision for income taxes plus fixed charges minus minority interest in pre-tax income of subsidiaries that have not incurred fixed charges. Fixed charges consist of interest expense plus amortized premiums, discounts and capitalized expenses related to indebtedness plus that portion of rent expense that we believe to be representative of interest. Earnings were not sufficient to cover fixed charges by $52.2 million, $30.6 million, $30.8 and $12.1 million for the years ended December 30, 2000, December 29, 2001, December 28, 2001 and January 3, 2004, respectively and by $1.7 million for the three months ended April 2, 2005.

RISK FACTORS

Any investment in the notes or our common stock involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information contained in this prospectus. If any of the following risks occur, our business could be materially harmed. In these circumstances, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy the notes or our common stock. The risks described below are not the only ones facing our company. Additional risks not necessarily known to us or that we currently deem immaterial may also impair our business operations.