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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.
20549



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FORM 10-K



(Mark One)

| | xANNUAL |  | REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | ------- |  | -----------------------------------------------------------------------------



For the fiscal year ended December 28, 2002 or



| |  ̈TRANSITION |  | REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | ----------- |  | -----------------------------------------------------------------------------

|
|



For the
transition period from                   to                  .



Commission file number0-16611



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GSI COMMERCE, INC.

(Exact name of registrant as specified in its charter)



|DELAWARE                                                       |  | 04-2958132                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. employer identification no.)



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

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



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

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



Common Stock, par value $.01 per share

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(Title of Class)



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



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



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



The aggregate market value of the registrants voting stock held by non-affiliates of the registrant as of the close of business on June 28, 2002, was approximately $99,169,212.(1)There were 38,848,772 shares of the registrants Common Stock outstanding as of the close of business on March 21, 2003.



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DOCUMENTS INCORPORATED BY REFERENCE

(Specific sections incorporated are identified under applicable items herein)



Certain information required for Part II and Part III of this Form 10-K is incorporated herein by reference to the Proxy Statement for the
2003 Annual Meeting of our shareholders.



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|(1) |  | This amount equals the number of outstanding shares of the registrants Common Stock reduced by the number of shares that may be deemed beneficially owned by
the registrants officers, directors and stockholders owning in excess of 10% of the registrants Common Stock, multiplied by the last reported sale price for the registrants Common Stock on June 28, 2002. This information is
provided solely for record keeping purposes of the Securities and Exchange Commission and shall not be construed as an admission that any officer, director or 10% stockholder of the registrant is an affiliate of the registrant or is the beneficial
owner of any such shares. Any such inference is hereby disclaimed.
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GSI
COMMERCE, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 28, 2002



TABLE OF CONTENTS



|               |  | PART I                                                                                         |  | Page
|-------------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|ITEM 1:        |  | BUSINESS                                                                                       |  | 1   
|ITEM 2:        |  | PROPERTIES                                                                                     |  | 25  
|ITEM 3:        |  | LEGAL PROCEEDINGS                                                                              |  | 25  
|ITEM 4:        |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                            |  | 25  
|ITEM 4.1       |  | EXECUTIVE OFFICERS OF THE REGISTRANT                                                           |  | 25  
|              
|               |  | PART II                                                                                        |  |     
|              
|ITEM 5:        |  | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                          |  | 28  
|ITEM 6:        |  | SELECTED FINANCIAL DATA                                                                        |  | 28  
|ITEM 7:        |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS          |  | 30  
|ITEM 7A:       |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                     |  | 43  
|ITEM 8:        |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                    |  | 44  
|ITEM 9:        |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE           |  | 44  
|              
|               |  | PART III                                                                                       |  |     
|              
|ITEM 10:       |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                             |  | 45  
|ITEM 11:       |  | EXECUTIVE COMPENSATION                                                                         |  | 45  
|ITEM 12:       |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |  | 45  
|ITEM 13:       |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                 |  | 45  
|ITEM 14:       |  | CONTROLS AND PROCEDURES                                                                        |  | 45  
|              
|               |  | PART IV                                                                                        |  |     
|              
|ITEM 15:       |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                                |  | 46  
|SIGNATURES     |  | 50                                                                                            
|CERTIFICATIONS |  | 51                                                                                            



For all
years prior to 1999, our fiscal year ended on December 31. Effective for 1999, we changed our fiscal year from the last day of December to the Saturday nearest the last day of December. Accordingly, references to fiscal 1998, fiscal 1999, fiscal
2000, fiscal 2001, fiscal 2002 and fiscal 2003 refer to the years ended December 31, 1998, January 1, 2000, December 30, 2000, December 29, 2001, December 28, 2002 and the year ending January 3, 2004.



Although we refer to the retailers, branded manufacturers,
media companies, television networks 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.





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PART I



ITEM 1:BUSINESS.



Overview



We
develop and operate electronic commerce businesses for retailers, branded manufacturers, media companies, television networks and professional sports organizations. Our solution encompasses Web site design and development, e-commerce technology,
customer service, fulfillment, merchandising, content development, and marketing. Based on these capabilities, we can quickly and cost-effectively implement customized e-commerce businesses for a broad range of partners.



We enable our partners to remain focused on their core
businesses and avoid substantial investments and operating expenses and the commitment of significant resources relating to e-commerce. Depending on the specific needs of a partner, we can undertake either a complete outsourcing of the
partners e-commerce activities or a more customized solution that uses portions of our platform. We benefit from the traffic generated by our partners established brand franchises and extensive advertising and promotions to achieve
operational efficiencies, economies of scale and lower customer acquisition costs. We offer our partners the following:



| |  |  | design, development and maintenance of customized e-commerce businesses under our partners banners;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | extensive technology that operates and manages all aspects of multiple e-commerce businesses including online retail stores, direct response television campaigns and
catalogs;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | customer sales and service through our 24 hours a day, seven days a week, call center;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | fulfillment capabilities through our 470,000 square-foot fulfillment center in Louisville, Kentucky and management of a network of drop-ship vendors that ship
directly to customers;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | product descriptions and images, as well as other relevant category and product data from vendors and independent sources;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | marketing of Web sites through arrangements with online portals, affiliate programs and database email marketing programs; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | buying, merchandising and sourcing of brand-name and unique merchandise, access to a broad assortment of inventory from approximately 5,000 brands encompassing more
than 200,000 stock keeping units, referred to as SKUs.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





We provide some or all of these services to each of our partners. In fiscal 2002, we derived virtually all of our revenues from sales of
goods through our partners e-commerce businesses, toll-free telephone number sales, bulk sales, business-to-business and group sales and related outbound shipping charges, net of allowances for returns and discounts, as well as 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.



We believe that our ability to quickly and cost-effectively add new partners creates advantages for us over
our competitors. In addition, we believe our approach can generate attractive economic returns by allowing us to operate multiple e-commerce businesses for established brands on a common infrastructure.



We currently operate or have agreements to operate either all
or a portion of the e-commerce businesses for over 40 partners and for Fogdog, Inc., which we acquired on December 28, 2000.



We are a Delaware corporation organized in 1986. Our executive offices are located at 1075 First Avenue, King of Prussia, Pennsylvania
19406. Our telephone number is (610) 265-3229.



Investor
Information



We are subject to the
informational requirements of the Securities Exchange Act of 1934. Therefore, we file reports and information, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy and information statements and
other information may be obtained by visiting the Public



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Reference Room of the SEC at 450 Fifth Street, NW, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.



You can access financial and other information at our Investor Relations website. The address is
www.gsicommerce.com/investors. We make available through our website, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. In addition, we will provide at no cost, paper or electronic copies of our reports and
other filings made with the SEC. Requests should be directed to Investor Relations, 1075 First Avenue, King of Prussia, Pennsylvania 19406.



The information on the web site listed above, is not and should not be considered part of this Annual Report on Form 10-K and is not
incorporated by reference in this document. This web site is and is only intended to be an inactive textual reference.



Recent Developments



On December 6, 2002, Ashford.com, Inc., a wholly owned subsidiary which we had acquired on March 14, 2002, and Odimo Acquisition Corp., a
wholly owned subsidiary of Odimo Incorporated, entered into an Asset Purchase Agreement and related agreement for the sale of certain of the assets of Ashford to Odimo. The sale was completed on December 27, 2002. A second closing involving
additional inventory was completed in March 2003. In conjunction with the sale of certain assets of Ashford, we also announced and implemented a plan to cease the operations of Ashford.



Under the terms of the sale, we sold certain inventory, trademarks, product images and descriptions and other
intangibles, to Odimo in exchange for:



| |  |  | $1.1 million in cash,
| | - |  | ---------------------



| |  |  | a $4.5 million, five year subordinated secured promissory note bearing interest at 7%,
| | - |  | --------------------------------------------------------------------------------------



| |  |  | a right to receive 10% of Odimos consolidated earnings, before taking into consideration interest, taxes, depreciation, amortization and other non-cash
expenses, for each of the five calendar years beginning January 1, 2003, up to a maximum aggregate payment of $2.0 million,
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 15,596,183 shares of Odimos Series D preferred stock, and
| | - |  | ----------------------------------------------------------



| |  |  | a warrant to purchase an aggregate of 2,676,303 shares of Odimos Series D preferred stock at an exercise price of $.01 per share.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



Industry Background



E-Commerce.    The e-commerce
businesses that we operate include the sale of products through online retail stores and direct response television campaigns. The U.S. market for general merchandise online retail sales represents a significant market opportunity. Forrester
Research estimates that this market will be $59.2 billion in 2003. The Internet offers a number of advantages to consumers. Consumers can enjoy the convenience and flexibility of shopping online 24 hours a day, seven days a week, with access to
a broader selection of products than is traditionally available in a retail store. In addition, online retailing allows for personalized shopping experiences through the delivery of content, purchasing advice, community and electronic features such
as reminder and suggestion services. Consumers also benefit from easier access to product information and customer service. As a result, we believe that more U.S. consumers will make online retail purchases, and, therefore, we expect consumer demand
to increase over time. Accordingly, we believe significant opportunities exist to use the brand and marketing power of our partners to attract consumers to the online retail stores we operate.



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The Internet
has emerged as one of the fastest growing communications, information and commerce media. Business and consumers acceptance of the Internet as a communication, information and commerce platform has created the foundation for significant
growth in business-to-consumer and business-to-business online commerce.



The Internet is an attractive marketplace for both online retailers and consumers. Online retailers are able to display a larger number and wider variety of products at a lower cost than physical stores and
catalogs, which have limitations on inventory and shelf and catalog space. In addition, online retailers do not incur the costs of managing and maintaining a retail store base or the significant printing and mailing cost of catalogs. Online
retailers also enjoy significant merchandising flexibility with the ability to easily and frequently adjust their featured selections and editorial content to better respond to consumers needs. Finally, online retailers can more easily obtain
demographic and behavioral data about customers. This increases opportunities for targeted marketing programs and to provide personalized services to their customers.



The U.S. market for direct response television also represents a significant market
opportunity. Direct response television involves programs and advertisements of various lengths that allow the advertiser to reach a targeted audience, mostly through cable channels. Direct response television programs and advertisements range from
one-half hour or longer programs that discuss and demonstrate the products to thirty-second advertisements that merely advertise the product. These programs and advertisements provide a toll-free telephone number and usually provide a URL for a Web
site for consumers to use to purchase the advertised product. Direct response television allows networks, cable channels, manufacturers and other sellers of product to air programs and advertisements that feature products unique to the
networks or channels offerings or that provide an additional distribution channel for manufacturers and other sellers of products.



Challenges of E-Commerce.    We believe that traditional retailers, branded manufacturers, media companies,
television networks and professional sports organizations which desire to operate e-commerce businesses face significant obstacles to compete successfully in e-commerce. These companies must develop a separate infrastructure for their online retail
stores and direct response television campaigns, including Web site design and development, development and production of direct response television programs and advertisements, order processing, fulfillment, customer service and a digital product
database. They must also make significant capital investments to develop in-house technology systems and incur significant expenses to operate their e-commerce businesses.



Companies desiring to establish e-commerce retail businesses confront a variety of obstacles to establishing
cost-efficient operations. Many of them do not have expertise in Web site development, the day-to-day operations of an e-commerce business or processing orders. Additionally, many of them do not have significant expertise in fulfillment of products
to customers, the provision of customer service or the acquisition of e-commerce customers.



We also believe that it is costly for single-brand e-commerce companies to own inventory and build a sophisticated fulfillment infrastructure while simultaneously building their brand and driving
traffic to their e-commerce businesses. Online retailers tend to make large investments to build and maintain their brand awareness, resulting in high customer acquisition costs.



Our Solution



We believe that our business model allows us to provide a comprehensive solution to many of the challenges facing retailers, branded
manufacturers, media companies, television networks and professional sports organizations that desire to have e-commerce businesses. Our platform allows us to develop and operate customized e-commerce businesses with characteristics appropriate for
each of our partners. Our solution enables our partners to remain focused on their core businesses and avoid substantial investments and operating expenses



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relating to an e-commerce business. We believe that we can generate attractive economic returns by operating multiple e-commerce businesses
on a common infrastructure and by operating under the established brands of our partners. Our platform also allows us to develop and operate for partners under their brands most of the components necessary to conduct a retail catalog business. The
key features of our solution are:



Comprehensive E-Commerce Businesses.    We can quickly develop and implement virtually all aspects of an e-commerce business. These aspects include Web site design and development, e-commerce technology,
customer service, fulfillment, buying and merchandising, content development, marketing and product development and sourcing. We customize the design and operation of a partners e-commerce businesses with a broad range of characteristics that
include differentiated user interfaces on partners Web sites, partner-specific content pages, product descriptions and images, partner-specific products for direct response television campaigns and partner specific customer service and
fulfillment. Our solution allows our partners to avoid the lengthy start-up, the complex integration effort and the substantial fixed and variable costs required to build and operate e-commerce businesses.



Creation of Other Channels of Commerce Under Existing Brand
Names.    We enable our partners to establish distinct e-commerce businesses that are consistent with their brands and that are complementary to their existing distribution channels. We believe that this contributes to the
development and enhances the value of our partners existing brands.



Increased Return on Investment Opportunity.    We operate multiple e-commerce businesses on a common infrastructure. This allows us to capitalize on our core technology platform, product database,
order processing, fulfillment, customer service, and, for our sporting goods partners, centralized inventory. By leveraging our investment in technology and order fulfillment systems over all of our partners, we can derive economies of scale and add
additional partners without significant increases in fixed expenses. In addition, we aggregate demand from all of our partners e-commerce businesses and generally fulfill customer orders from our fulfillment center or through our network of
drop ship vendors. Although we offer unique products through each of our partners e-commerce businesses, a large number of SKUs is common among multiple businesses. By centralizing inventory management across multiple partner businesses
particularly for our sporting goods partners, we are able to increase the frequency of inventory turns, thus reducing obsolescence risk and financing costs.



Efficient Customer Acquisition.    We benefit from the brand assets and substantial marketing budgets of our
partners to reduce customer acquisition costs. Our partners existing marketing budgets allow us to generate exposure and drive traffic to the e-commerce businesses that we operate. For example, our partners generally are contractually
obligated to include their Web site addresses, referred to as URLs, and the toll-free telephone numbers for their e-commerce businesses in their marketing and communication materials. Our partners marketing includes television, radio, print
and outdoor advertising, point of purchase displays, cash register receipts, shopping bags, employee uniforms and promotional events designed to attract and retain customers. By having an established history of purchasing from our partners
offline retail stores or watching our partners television programming or advertisements, we believe that customers are more inclined to purchase from their e-commerce businesses.



Benefit from Relationships with Vendors.    We maintain strong relationships with
vendors and with sources of unique products. We believe that this provides us with an extensive, authorized selection of brands and products for sale through our partners e-commerce businesses.



Growth Strategy



The key elements of our growth strategy are as follows:



Expand Our Partner
Base.    We intend to increase our market share by adding new partners that have strong brand franchises within the categories in which we currently operate and that desire to establish or transition an e-commerce business.
New partners could include companies with major brand names in retail, consumer products, media and entertainment, the Internet and professional sports organizations.



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Expand into
New Vertical Markets.    We intend to selectively expand into categories outside of those in which we currently operate that offer attractive characteristics with respect to size and fragmentation of the category and average
order value and gross margin of products offered within the category. We currently offer through our partners e-commerce businesses products in the following categories: sporting goods, beauty products, consumer electronics, general
merchandise, licensed entertainment products and home products.



Promote Brands Online.    We intend to build awareness and drive customers to our partners e-commerce businesses by capitalizing on the brand assets, marketing budgets, customers of our partners
retail stores and viewers for our partners television programming and advertisements. Each of our partners prominently features and promotes the URL and/or the toll-free telephone number for its online retail store and its direct response
television campaigns in its marketing and communication materials. We also plan to continue to selectively use a variety of online marketing strategies to reach customers and viewers, including affiliate programs, portal relationships and public
relations.



Increase Repeat
Purchases.    We intend to build customer loyalty and drive repeat purchases by implementing the following strategies:



| |  |  | continuously enhancing our level of customer service;
| | - |  | -----------------------------------------------------



| |  |  | offering new and unique products and product categories;
| | - |  | --------------------------------------------------------



| |  |  | implementing direct e-mail marketing techniques to target customers;
| | - |  | --------------------------------------------------------------------



| |  |  | increasing the level of personalization on our partners e-commerce businesses; and
| | - |  | -----------------------------------------------------------------------------------



| |  |  | enhancing our product offerings related to specific television programming.
| | - |  | ---------------------------------------------------------------------------





We believe that these initiatives will drive
repeat purchases as consumers become increasingly satisfied with their shopping experiences.



Enhance the Shopping Experience.    We plan to continuously enhance and expand the e-commerce businesses that we operate to address the evolving needs of customers. We intend
to improve the scope and presentation of our product offerings by taking advantage of the unique characteristics of the Internet and direct response television as retail media and our relationships with vendors and sources of unique products. In
addition, we plan to continue to invest in technology and develop features to improve the functionality, speed, navigation and ease of use of our partners Web sites and the customer service we offer to support our partners e-commerce
businesses.



Pursue Growth by
Acquisitions.    From time to time we assess strategic investments and acquisitions that are aligned with our goals of expanding into new vertical markets, increasing our partner and customer base and expanding our product
and service offerings.



Our Operations



Web Site and Content Design, Implementation and
Maintenance



We design, develop and maintain
most of our partners Web sites. We implement all changes to current Web sites and oversee the creation of new front-end Web sites for most new partners, ensuring that the look and feel of their Web sites meet all parties satisfaction. We
also generate content for each of our partners Web sites, including product images, product descriptions and related value-added content. We have an in-house photography studio that produces a large number of our photographic images. We
receive the remainder of our photographic images from our vendors or partners.



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Technology



The three major elements of our technology
platform that we use to operate our partners e-commerce businesses are The Common Engine, the front-end
and the data center.



The Common Engine.We have created a core technology
platform, The Common Engine, that operates and manages the applications and functionality across our
partners e-commerce businesses. This system allows us to add new partners without significant increases in our fixed costs. The Common Engineallows us to operate multiple stores on a common infrastructure with each store being personalized to fit the brand equity and identity of our individual partners. We enhance The Common Enginecontinuously to improve our partners e-commerce businesses and enrich the overall customer experience.



The
Front-End.    The front-end represents the overall look and feel of our partners Web sites. The front-end is the interface with the e-commerce customer and includes content development, logo placement, graphic design,
color palette, navigation and links. We use the front-end to communicate special promotions, content feature and product collections as well as the merchandising strategy of each of our partners.



The Data Center.    The data
center is our database management system that controls the information used in connection with our partners e-commerce businesses, including all product images and descriptions, customer log-in and purchasing data, customer profiles,
verification requirements, brand information and shipping data. A third-party provider hosts our data center. System security is managed both by internal staff as well as by security staff at our third-party provider. Our technology infrastructure
is supported by a number of fail-over back-up systems. Much of our technology infrastructure is set up with redundancies so that our operations can move forward seamlessly in the event of computer malfunctions.



Order Processing and Fulfillment



Order Processing.    We conduct
our own order processing, claims processing and crediting of customers. Order processing activities include electronically capturing orders generated through the e-commerce businesses that we operate, screening orders for potential fraud,
authorizing credit, processing the payment method, determining the shipping costs, adding any applicable sales tax, facilitating any coupon or promotional discounts, sending an order confirmation to the customer and printing a pick ticket, a packing
slip, return labels and a detailed order list that include the name of the partner through whose online retail store or toll-free telephone number the order was received. For a typical order, after a customer has ordered an item and we have
determined that the order has been packed and shipped, our computer system automatically sends an e-mail to that customer informing them that their merchandise has been shipped.



Customer Sale and Service



General.    We are committed to providing a high level of customer service. We
believe that superior customer service is critical to retaining long-term and repeat customers. We offer customer service 24 hours a day, seven days a week for most of our partners. We provide customer service for our partners under their brand
names, and our computer systems automatically identify from which partner a customer needs information or service. Our customer service is principally provided through our 80,000 square-foot leased customer service call center in Melbourne, FL.



Category Experts and Service
Experts.    In our effort to provide customers with the most thorough and accurate information possible, we have both category experts and service experts on staff within the customer service department. Category experts have
a particular interest in and detailed knowledge of particular industry or products. These professionals are able to answer detailed questions about various categories and products to help customers select the best merchandise for them. Service
experts are trained and experienced in working with a variety of complex customer service issues. Customers can obtain assistance through e-mail or telephone. We aim to answer all customer e-mails within 24 hours and often are able to respond within
a shorter period of time.



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Buying,
Merchandising and Vendor Relationships



Buying, Sourcing and Consignment Inventory.    In categories in which we own inventory, we offer for sale a broad assortment of brands and items through certain of our partners e-commerce businesses.
In some categories, a partner may provide us with inventory on a consignment basis, which we offer for sale through that partners e-commerce business. We currently offer customers over 5,000 brands and more than 200,000 SKUs from our owned
inventory across our partners e-commerce businesses and continue to add additional brands and SKUs. We have personnel who buy and/or source products in the following merchandise categories: sporting goods, consumer electronics, general
merchandise, and branded and unique licensed entertainment products.



Merchandising.    We work with our partners to decide which brands and merchandise to carry. We typically review with our partners what products they are offering or plan to offer through their
e-commerce businesses and what television programming and advertisements they plan to air, and determine with our partners what items we believe will be successful on our partners e-commerce businesses. We believe that we are able to offer a
wider variety of merchandise on our retail partners Web sites than might be found in most of their retail stores because we are not hindered by space availability, although not all of our partners Web sites carry the same products and
brand assortments. In addition, our partners typically have the right to prevent us from selling products which are not sold in their retail stores. We also are able to offer our media partners the opportunity to offer to their viewers products
related to their television programming. Our buyers work with partners on strategies for product offerings, merchandise locations within Web sites and television campaigns and promotional activities of our partners. After consulting with a partner
on their strategy, we then work to enhance product selection and development.



Vendor Relationships.    We believe that we have solid relationships with our vendors and sources of unique products and we continuously seek to add new vendors, brands and
sources of unique products. During fiscal 2002, we purchased $19.4 million of inventory from one vendor. These purchases accounted for 20% of the total amount of inventory we purchased during fiscal 2002.



Pricing.    We establish the prices
for products that we offer for sale through our partners e-commerce businesses from inventory that we own. In the case of partner-owned inventory, the partner is the seller of the products and establishes the prices. For our retail partners,
to the extent possible, we strategically price these products to be consistent with the prices in our partners retail stores. Accordingly, we may maintain different pricing structures for the same products across our partners e-commerce
businesses.



Marketing



Web Site Integration.    We work
with each of our partners to integrate URL, Web site and toll-free telephone number information into their marketing and advertising campaigns. Our partners typically are contractually obligated to incorporate their URLs and toll-free telephone
number into the advertising, marketing, promotion and communication vehicles they create. These marketing vehicles not only incorporate the URL and toll-free telephone number into the copy or design, but the message also educates consumers about
these e-commerce businesses and drives traffic and viewers to these businesses. We believe that our partners embrace this strategy because they realize the value in alerting their customers and viewers to an additional distribution channel within
their brand.



Online Marketing and Affiliate
Network.    We have entered into marketing agreements, including agreements with AOL, Yahoo! and MSN eShop, through which various of our partners are featured prominently in the shopping and other areas of these Internet
destinations. We also have agreements with many third party Web sites, referred to as affiliates, which enable them to link to our partners Web sites. When a visitor clicks through an affiliate to one of our partners Web sites and the
visit generates a sale, we compensate the affiliate with a portion of the sale proceeds. We have implemented a revenue share payment structure to affiliates based on actual sales or, in some cases, clicks through the link. The partners that are
promoted generally subsidize these online marketing and affiliate arrangements.



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E-mail
Campaigns.    We are dedicated to managing, strengthening and improving customer relationships. We have implemented personalized customer e-mail campaigns, which inform customers about upcoming specials, promotions, new
brands or merchandise in which they might be interested.



Fulfillment.    We currently conduct fulfillment out of our company-operated fulfillment center located in Louisville, KY and through drop ship arrangements with a number of suppliers. Our fulfillment
center has been operational since August 2000 and was purchased by us in April 2002. The fulfillment center is 470,000 square feet. We also have drop ship arrangements with over 250 suppliers, pursuant to which we transmit to the suppliers orders
received through the e-commerce businesses that we operate and the suppliers deliver the items ordered directly to consumers.



Distribution.    We currently use UPS, USPS and Federal Express as our primary shipping carriers for small
package consumer delivery items and use a variety of trucking companies for our larger or heavier delivery items. We generally ship orders for merchandise in our fulfillment center within two business days of receipt of the order. Our drop shippers
generally ship orders within two to five business days for in-stock merchandise and up to six weeks for personalized, customized or made to order merchandise.



Returns.    We accept returns through mailing or delivery services. Our partners that operate retail stores are
not required to accept in-store returns of items purchased on their Web sites. When a customer returns an item to us, we provide the customer with a credit and then return the item to inventory, return it to the vendor or dispose of it.



Direct Response Television Campaigns and
Product Development



We typically consult
with our partners on the development and production of direct response television campaigns. We have in-house personnel that are responsible for working with our partners to coordinate product selection and the development and production of direct
response television marketing campaigns. We typically purchase products from third parties or our partners, or outsource the manufacture of products to third parties. These products usually are related to our partners television programming or
their brands. Our personnel also work with our partners to develop in context marketing campaigns relating to our partners television programming. These campaigns are either produced by our partners or outsourced to third parties for
production.



Our Partners



We operate e-commerce businesses for our partners pursuant to
agreements. We operate each of these e-commerce businesses based on one of three formats  GSI-owned inventory model, partner-owned inventory model or business-to-business model.



GSI-Owned Inventory Model  We select and purchase inventory from vendors, sell the inventory
directly to customers through the e-commerce businesses that we operate, record revenues generated from the sale of products through those businesses and pay a percentage of those revenues to the respective partners in exchange for the rights to use
their brand names and the promotions and advertising that our partners agree to provide.



Partner-Owned Inventory Model  We manage certain aspects of our partners overall e-commerce business, including fulfillment, technology and customer service, in exchange for a
combination of fixed fees and/or a percentage of sales. Our partners select the merchandise to be sold on the site, own a portion of the inventory and market the e-commerce business at its retail stores and provide other offline marketing support,
including newspaper circular advertising.



Business-to-Business Model  Pursuant to these agreements, we provide a product information database to each of these partners which they use to merchandise the sporting goods department of their flagship Web sites. These
partners process orders for sporting goods on their Web sites and deliver the orders to us electronically. We then sell the products from our inventory and transfer title to them at a predetermined price and we pick, pack and ship the products to
consumers on behalf of these partners. These partners perform all of their own customer service.



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The following
table lists our partners for which we operated their e-commerce businesses as of December 28, 2002 or with which we have publicly-announced agreements:



|Retailers                                      |  | Professional Sports Organizations
|---------------------------------------------- |  | ---------------------------------
|Ace Hardware                                   |  | Atlanta Falcons                  
|Bally Total Fitness                            |  | Carolina Panthers                
|Blades Board & Skate                           |  | Denver Broncos                   
|Bluelight (Kmart)                              |  | Houston Texans                   
|City Sports                                    |  | LPGA                             
|Dicks Sporting Goods                          |  | Turner Sports/NASCAR             
|Dunhams Sports                                |  | San Diego Chargers               
|G.I. Joes                                     |  |                                  
|Gart Sports (including Sportmart and Oshmans) |  | Media Companies                  
|MC Sports                                      |  | Comedy Central                   
|Modells Sporting Goods                        |  | FOXSPORTS                        
|Olympia Sports                                 |  | Lifetime                         
|Pro Golf International                         |  | Nickelodeon                      
|Shoe Carnival                                  |  | PAX                              
|Sport Chalet                                   |  | QVC (sporting goods store)       
|The Athletes Foot                             |  | Sportsline                       
|The Sports Authority                           |  | The Golf Channel                 
|Tweeter                                        |  | TV Land                          

|                     
|---------------------
|Branded Manufacturers
|Airwalk              
|Estée Lauder/Gloss   
|Palm                 
|Rawlings             
|Reebok               
|Rockport             
|Russell Athletic     



We
operate the e-commerce business for Bluelight, a subsidiary of Kmart Corporation. Bluelight and Kmart have been operating in bankruptcy since January 2002. Bluelight accounted for 14% of our annual revenue in fiscal 2002. In March 2003, we and
Bluelight modified our agreement to shorten the term, eliminate the last two of eight fixed fee payments required under the agreement and provide for early termination rights for both us and Bluelight. We will, however, continue to receive a
percentage of sales through the Bluelight Web site for the services that we provide under this agreement. Because Bluelight and Kmart are still operating in bankruptcy, our relationship with them is subject to certain risks that are further
described under Risk Factors.



Competition



The market for outsourced solutions for the development and
operation of e-commerce businesses is continuously evolving and intensely competitive. We compete with companies that can provide all or part of our solution to companies that wish to operate e-commerce businesses, including Web site developers and
third-party fulfillment and customer service providers. Our primary competitor in this area currently is Amazon.com. We also compete with third-party fulfillment and customer service providers, such as Federal Express, UPS and Newroads and
third-party technology providers such as Digital River.



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



| |  |  | reputation within relevant markets for providing a quality outsourced solution;
| | - |  | -------------------------------------------------------------------------------



| |  |  | the comprehensive and flexible nature of the outsourced solution provided; and
| | - |  | ------------------------------------------------------------------------------



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



In addition, because we sell various products through the
e-commerce businesses that we operate, we compete with both the online and offline businesses of:



| |  |  | general merchandise retailers, such as Target, Wal-Mart and Nordstrom;
| | - |  | ----------------------------------------------------------------------



| |  |  | specialty sporting goods retailers, such as Footlocker and REI.com;
| | - |  | -------------------------------------------------------------------



| |  |  | catalog retailers, such as L.L. Bean and Eastbay; and
| | - |  | -----------------------------------------------------



| |  |  | manufacturers, such as Nike.
| | - |  | ----------------------------



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



| |  |  | recognition of and trust in our partners brands;
| | - |  | -------------------------------------------------



| |  |  | the broad and unique selection of merchandise that we offer through the e-commerce businesses that we operate;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | convenience of the shopping experience;
| | - |  | ---------------------------------------



| |  |  | price;
| | - |  | ------



| |  |  | the amount of product information provided to customers;
| | - |  | --------------------------------------------------------



| |  |  | visibility and performance of the e-commerce businesses that we operate; and
| | - |  | ----------------------------------------------------------------------------



| |  |  | quality of fulfillment and customer service.
| | - |  | --------------------------------------------



Intellectual Property



We use our partners names, URLs, logos and other marks in connection with the operation and promotion of their e-commerce
businesses. The 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 co-terminus with the 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.



In order 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.



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Government Regulation



We generally are not regulated other than
pursuant to federal, state and local laws applicable to businesses in general or to retailing, e-commerce or television specifically. Certain regulatory authorities have proposed specific laws and regulations governing the Internet and online
retailing. These laws and regulations may cover taxation, user privacy, pricing, content, distribution, electronic contracts, characteristics and quality of products and services, intellectual property rights and information security. Changes in
consumer protection laws also may impose additional burdens on companies conducting business online. It is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the
Internet and online commerce. Unfavorable resolution of these issues may increase our cost of doing business.



We currently provide individual personal information regarding users of a partners e-commerce business to that partner and to
certain third parties that we use to process credit cards, process and fulfill orders, send emails, evaluate and maintain the performance of our Web sites. We currently do not identify registered users by age. However, the adoption of additional
privacy or consumer protection laws could create uncertainty in Web usage and reduce the demand for our products and services or require us to redesign our partners Web sites.



We are not certain how our business may be affected by the application of existing laws governing issues such
as property ownership, copyrights, encryption and other intellectual property issues, taxation, libel, obscenity, qualification to do business and export or import matters. Many of these laws were adopted prior to the advent of the Internet. As a
result, they do not contemplate or address the unique issues of the Internet and related technologies. Changes in laws intended to address these issues could create uncertainty in the Internet marketplace. 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.



In addition, because our services are available through the Internet and toll-free telephone numbers in multiple states, other
jurisdictions may claim that we are required to qualify to do business in those jurisdictions. Our failure to qualify in a jurisdiction where we are required to do so could subject us to taxes and penalties. It could also hamper our ability to
enforce contracts in these jurisdictions. The application of laws or regulations from jurisdictions whose laws do not currently apply to our business could have a material adverse effect on our business, results of operations and financial
condition.



Employees



As of March 7, 2003, we employed 731 full-time employees, of
which 370 are based at our headquarters in King of Prussia, PA, 229 are based in our fulfillment center in Louisville, KY and 132 are based in our customer service center in Melbourne, FL. 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.



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, the 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 21 to our consolidated
financial statements included in this Annual Report on Form 10-K.



Risk Factors



Any
investment in our common stock or other securities involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information contained in this Annual Report on Form 10-K. 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.



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All
statements made in this Annual Report on Form 10-K, 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 industry and markets
in which we operate. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or
implied by these forward-looking statements. Factors which may affect our business, financial condition and operating results include the effects of changes in the economy, consumer spending, the stock market and the industries in which we operate,
changes affecting the Internet, our ability to maintain relationships with strategic partners and suppliers, our ability to timely and successfully develop, maintain and protect our technology and product and service offerings and execute
operationally, our ability to attract and retain qualified personnel, our ability to successfully integrate our acquisitions of other businesses and the performance of acquired businesses. More information about potential factors that could affect
us are described below. We expressly disclaim any intent or obligation to update these forward-looking statements, except as otherwise specifically stated by us.



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



Although we commenced operations in 1987,
we did not initiate our e-commerce business until the first quarter of 1999 and did not begin operating our e-commerce business until the fourth quarter of 1999. Prior to the fourth quarter of 1999, when we launched our first e-commerce businesses
that we operate for our partners, 100% of our revenues had been generated by our discontinued operations. The sale of the discontinued operations was completed in May 2000. Accordingly, 100% of our revenues are currently generated through our
e-commerce business. In addition, the nature of our e-commerce business has undergone rapid development and change since we began operating it. Based on our limited experience with our e-commerce business, it is difficult to predict whether we will
be successful. Thus, our chances of financial and operational success should be evaluated in light of the risks, uncertainties, expenses, delays and difficulties associated with operating a business in a relatively new and unproven market or a new
business in an existing market, many of which may be beyond our control. If we are unable to address these issues, we may not be financially or operationally successful.



We expect continuing losses.



We incurred substantial losses in fiscal 1999, fiscal 2000, fiscal 2001 and fiscal 2002, and as of
December 28, 2002, we had an accumulated deficit of $165.5 million. Except for the fourth quarter of fiscal 2001, we have not achieved profitability from our continuing operations, and we do not expect to achieve profitability in fiscal 2003.
We may not obtain an appropriate volume of purchases from the e-commerce businesses that we operate, generate an appropriate amount of service fee revenue from our existing partners or add an appropriate amount of new partners to generate sufficient
revenues to achieve profitability. Additionally, in 2002 our net loss was greater than the prior year despite an increase in revenue. Therefore, even if we are able to generate increased revenue, there is no assurance that our results will improve.
There can be no assurances that we will be able to achieve profitability from our continuing operations.



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



| |  |  | enhance our distribution and order fulfillment capabilities;
| | - |  | ------------------------------------------------------------



| |  |  | further improve our order processing systems and capabilities;
| | - |  | --------------------------------------------------------------



| |  |  | develop enhanced technologies and features to improve our partners e-commerce businesses;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | enhance our customer service capabilities to better serve customers needs;
| | - |  | ---------------------------------------------------------------------------



| |  |  | increase our general and administrative functions to support our growing operations; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | continue our business development, sales and marketing activities.
| | - |  | ------------------------------------------------------------------





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



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



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



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



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



The uncertainty regarding the general economy may reduce our revenues.



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



We have an e-commerce agreement with Bluelight.com, a subsidiary of Kmart, pursuant to which we operate the Kmart.com Web site.
Kmarts bankruptcy filing may mean that we may not realize all of the economic benefits of that agreement.



Kmart, as well as Bluelight.com, has been operating in bankruptcy since January 2002. The bankruptcy court has permitted Bluelight.com to
pay us all amounts due prior to the bankruptcy filing and to continue business as usual with us. In March 2003, we and Bluelight modified our agreement to shorten the term, eliminate the last two of eight fixed fee payments required under the
agreement and provide for early termination rights for both us and Bluelight. We will, however, continue to receive a percentage of sales through the Bluelight Web site for the services that we provide under this agreement. Our agreement with
Bluelight accounted for 14% of our annual revenue in fiscal 2002. Bluelight.com may cease making future payments and/or reject its agreement with us, thereby terminating our relationship with Bluelight.com. If Bluelight.com ceases making payments,
rejects the e-commerce agreement or does not emerge from bankruptcy, we will not realize all of the economic benefits of that agreement.



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



The contracts with our
partners establish new and 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 new and
complex relationships. For fiscal 2002, sales to



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customers through one of our partners e-commerce businesses accounted for 20% of our revenue, sales to customers through another one of
our partners e-commerce businesses accounted for 12% of our revenue, sales to Kmart as well as related service fees accounted for 14% of our revenue, and sales through our top four partners e-commerce businesses and sales to Kmart
accounted for 56.4% of our revenue. For fiscal 2001, sales to customers through one of our partners e-commerce businesses accounted for 25% of our revenue, sales to customers through another of our partners e-commerce businesses
accounted for 19% of our revenue and sales through our top five partners e-commerce businesses accounted for 62% of our revenue. If we do not maintain good working relationships with our partners or perform as required under these agreements,
our partners could seek to terminate the agreements prior to the end of the term or they could decide not to renew the contracts at the end of the term. This could adversely affect our business, financial condition and results of operations.
Moreover, our partners could decide not to renew these contracts for reasons not related to our performance.



Our operating results are difficult to predict. If we fail to meet the expectations of public market analysts and investors, the market
price of our common stock may decline significantly.



Our annual and quarterly operating results have and may continue to fluctuate significantly due to a variety of factors, many of which are outside of our control. Because our operating results may be volatile and difficult to
predict, quarter-to-quarter comparisons of our operating results may not be a good indication of our future performance. In July 2002 and February 2003, we revised our guidance to reflect lower operating results than we had previously disclosed and
in February 2003, we announced that we had not met our revised guidance that we had provided for fiscal 2002. In some future quarter, our operating results may also fall below the expectations of securities analysts and investors. In this event, the
trading price of our common stock likely will decline significantly.



Factors that may harm our business or cause our operating results to fluctuate include the following:



| |  |  | our inability to obtain new partners or to retain existing partners;
| | - |  | --------------------------------------------------------------------



| |  |  | lower than expected performance of one or more of our partners e-commerce businesses;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | our inability to obtain new customers at a reasonable cost, retain existing customers or encourage repeat purchases;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | decreases in the number of visitors to or viewers of the e-commerce businesses operated by us or the inability to convert these visitors and viewers into customers;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our failure to offer an appealing mix of products or to sell products that we purchase;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | our inability to adequately maintain, upgrade and develop our partners Web sites or the technology and systems we use to process customers orders and
payments;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | price competition that results in lower profit margins or losses;
| | - |  | -----------------------------------------------------------------



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



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



| |  |  | increases in the cost of advertising;
| | - |  | -------------------------------------



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



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



| |  |  | technical difficulties, system security breaches, system downtime or Internet slowdowns;
| | - |  | ----------------------------------------------------------------------------------------



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| |  |  | seasonality;
| | - |  | ------------



| |  |  | our inability to manage inventory levels or control inventory theft;
| | - |  | --------------------------------------------------------------------



| |  |  | our inability to manage distribution operations or provide adequate levels of customer service;
| | - |  | -----------------------------------------------------------------------------------------------



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



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



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



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



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



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



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



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



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



For the categories in which we own inventory, we primarily purchase products from the manufacturers and
distributors of the products. For the categories in which we provide e-commerce services to our partners, our partners purchase products from the manufacturers and distributors of products. If we or our partners are unable to develop and maintain
relationships with these manufacturers, we or our partners may be unable to obtain or continue to carry a sufficient assortment and quantity of quality merchandise on acceptable commercial terms



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and our business could be adversely impacted. We do not have written contracts with many manufacturers or distributors. In addition, during
fiscal 2002, we purchased 20% of the total amount of inventory we purchased during fiscal 2002 from one manufacturer and during fiscal 2001, we purchased 23% and 16% of the total amount of inventory we purchased during fiscal 2001 from two
manufacturers. Manufacturers could stop selling products to our partners or us and may ask us or our partners to remove their products or logos from our partners Web sites. If our partners or we are unable to obtain products directly from
manufacturers, especially popular brand manufacturers, we may not be able to obtain the same or comparable merchandise in a timely manner or on acceptable commercial terms.



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



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



We may be unable to source product for direct response
television campaigns on favorable terms. Additionally, the products we are able to source may not be profitable.



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



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



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





| |  |  | fire, flood, earthquake or other natural disasters;
| | - |  | ---------------------------------------------------



| |  |  | Power losses, interruptions or brown-outs;
| | - |  | ------------------------------------------



| |  |  | Internet, telecommunications or data network failures;
| | - |  | ------------------------------------------------------



| |  |  | physical and electronic break-ins or security breaches;
| | - |  | -------------------------------------------------------



| |  |  | computer viruses; and
| | - |  | ---------------------



| |  |  | other similar events.
| | - |  | ---------------------



We have been operating e-commerce businesses for our partners for less than four years. The limited time during which we have been
operating these businesses, as well as the inherent unpredictability of the events described above, makes it difficult to predict whether the occurrence of any of these events is likely. If any of these events does occur, it could result in
interruptions, delays or cessations in service to customers of our partners e-commerce businesses.



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



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



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



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



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



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



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



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



Third
parties may assert that our business or technologies infringe their intellectual property rights. From time to time, we may receive notices from third parties questioning our right to offer certain services or products or to present specific images
or logos on our partners e-commerce businesses, or stating that we have infringed their trademarks or copyrights. We may in the future receive claims that we are engaging in unfair competition or other illegal trade practices. We may be
unsuccessful in defending against these claims, which could result in substantial damages, fines or other penalties. The resolution of a claim could also require us to change how we do business, redesign our service offering or partners
e-commerce businesses or enter into burdensome royalty or licensing agreements. These license or royalty agreements, if required, may not be available on acceptable terms,



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if at all, in the event of a successful claim of infringement. Our insurance coverage may not be adequate to cover every claim that third
parties could assert against us. Even unsuccessful claims could result in significant legal fees and other expenses, diversion of managements time and disruptions in our business. Any of these claims could also harm our reputation.



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



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



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



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



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



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



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



E-commerce and the provision of e-commerce services are constantly evolving and are extremely competitive. Increased competition could result in fewer successful outsourced opportunities, price
reductions, reduced gross margins and loss of market share, any of which could seriously harm our business, financial condition and results of operations. We compete with companies that may be able to provide solutions to companies that wish to
establish e-commerce businesses, including:



| |  |  | third party providers, such as Amazon.com and Digital River; and
| | - |  | ----------------------------------------------------------------



| |  |  | third-party fulfillment and customer services providers, such as Federal Express, UPS and Newroads.
| | - |  | ---------------------------------------------------------------------------------------------------



We also compete with the online and offline businesses of a
variety of companies, including:



| |  |  | specialty sporting goods retailers, such as Footlocker and REI;
| | - |  | ---------------------------------------------------------------



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| |  |  | general merchandise retailers, such as Target, Wal-Mart and Nordstrom;
| | - |  | ----------------------------------------------------------------------



| |  |  | catalog retailers, such as L.L. Bean and Eastbay; and
| | - |  | -----------------------------------------------------



| |  |  | manufacturers, such as Nike.
| | - |  | ----------------------------



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



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



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



Our success depends, in part,
upon our ability and our partners ability to anticipate and respond to consumer trends with respect to products sold through the e-commerce businesses we operate. Consumers tastes are subject to frequent and significant changes. In order
to be successful, our partners and we must accurately predict consumers tastes and avoid overstocking or understocking products. If we or our partners fail to identify and respond to changes in merchandising and consumer preferences, our sales
could suffer and we and 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 could
adversely affect our business, financial condition and results of operations.



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



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



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



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



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



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



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



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



In connection with the sale of certain assets related to Ashford, we received equity securities and an earn out that is dependent on Odimos consolidated earnings. Fluctuations in the value of
these securities and Odimos performance will affect our actual realization of the amounts we expect to receive from this sale. Further, as an observable market price does not exist for equity securities of Odimo as it is a private company, our
estimates of fair value of such securities are more subjective than for the securities of public companies. We also received a $4.5 million, five year subordinated secured promissory note from Odimo in connection with this sale. There is no
guarantee that Odimo will be able to repay this note in full or at all. If Odimo does not pay this note in full, we will realize less than what we expected from this sale.



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



While we sold certain assets related to Ashford, Ashford retained its liabilities. 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, several of Ashfords officers and directors, and various underwriters of Ashfords initial public offering. The purported class actions have all been brought on behalf of purchasers of Ashford common stock during
various periods beginning on September 22, 1999, the date of Ashfords initial public offering. The plaintiffs allege that Ashfords prospectus, included in Ashford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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 have been
consolidated with similarly consolidated cases filed against 308 other issuer defendants for the purposes of pretrial proceedings. The claims against Ashford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, was denied in all aspects relevant to Ashford on February 19, 2003. We believe that
Ashford has defenses against these actions. We believe that the ultimate disposition of these matters will not have a material effect on our business, financial condition or results of operations, although we expect that Ashford will continue to
incur costs related to defend this litigation.



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



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



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



| |  |  | unexpected changes in international regulatory requirements and tariffs;
| | - |  | ------------------------------------------------------------------------



| |  |  | difficulties in staffing and managing foreign operations;
| | - |  | ---------------------------------------------------------



| |  |  | greater difficulty in accounts receivable collection;
| | - |  | -----------------------------------------------------



| |  |  | potential adverse tax consequences;
| | - |  | -----------------------------------



| |  |  | price controls or other restrictions on foreign currency; and
| | - |  | -------------------------------------------------------------



| |  |  | difficulties in obtaining export and import licenses
| | - |  | ----------------------------------------------------



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



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



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



| |  |  | actual or perceived lack of security of information or privacy protection;
| | - |  | --------------------------------------------------------------------------



| |  |  | lack of access and ease of use;
| | - |  | -------------------------------



| |  |  | congestion of traffic on the Internet;
| | - |  | --------------------------------------



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



| |  |  | possible disruptions, computer viruses or other damage to the Internet servers or to users computers;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | excessive governmental regulation;
| | - |  | ----------------------------------



| |  |  | uncertainty regarding intellectual property ownership; and
| | - |  | ----------------------------------------------------------



| |  |  | lack of high-speed modems and other communications equipment.
| | - |  | -------------------------------------------------------------



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



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



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



| |  |  | customers frequently changing their requirements and preferences;
| | - |  | -----------------------------------------------------------------



| |  |  | competitors frequently introducing new products and services; and
| | - |  | -----------------------------------------------------------------



| |  |  | industry associations and others creating new industry standards and practices.
| | - |  | -------------------------------------------------------------------------------



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



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



| |  |  | continuously enhance and improve our partners Web sites;
| | - |  | ---------------------------------------------------------



| |  |  | identify, select and obtain leading technologies useful in our business; and
| | - |  | ----------------------------------------------------------------------------



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



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



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



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



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



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



We generally enter into exclusive agreements with media companies, branded manufacturers and other sellers of products to run, their e-commerce businesses, including some of their direct response
television campaigns. In those agreements, the media companies, branded manufacturers and other sellers of products generally agree to certain marketing, advertising and air-time commitments for the promotion of products sold



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through their e-commerce businesses, including direct response television and online retail stores. Air-time is very valuable and is
essential for the success of direct response television campaigns. If we are unable to negotiate favorable marketing, advertising and air-time commitments in our agreements with our partners or if our partners do not fulfill their commitments, the
amount of products we could sell likely would be lower which would cause our revenues to be lower.



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



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



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 do not currently collect
sales or other similar taxes for goods sold by us and shipped into states other than Kentucky and Pennsylvania. 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 purchase 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.



Existing or future government regulation could harm our
business.



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



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



We are subject to increasing regulation at the federal and state levels relating to privacy and the use of personal user information. Several states have proposed legislation that would limit the uses of personal user information
online or require collectors of information to establish privacy policies. The Federal Trade Commission has adopted regulations regarding the collection and use of personal identifying information



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



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



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



We are controlled by certain principal
stockholders.



As of February 1, 2003,
Michael G. Rubin, our Chairman, President and Chief Executive Officer, beneficially owned 19.1%, funds affiliated with SOFTBANK America Inc., or SOFTBANK, beneficially owned 24.7% and Interactive Technology Holdings, LLC, or ITH, a joint venture
company of Comcast Corporation and QVC, Inc., beneficially owned 31.6% of our outstanding common stock, including currently exercisable warrants and options to purchase common stock. Should they decide to act together, any two of Mr. Rubin, SOFTBANK
and ITH would be in a position to exercise effective control, and all three would be in a position to exercise complete control, over most matters requiring stockholder approval, including the election or removal of directors, approval of
significant corporate transactions and the ability generally to direct our affairs. Furthermore, the stock purchase agreements pursuant to which SOFTBANK and ITH acquired their shares of our common stock provide that SOFTBANK and ITH each have the
right to designate up to two members of our board of directors. This concentration of ownership and SOFTBANKs and ITHs right to designate members to our board of directors may have the effect of delaying or preventing a change in control
of us, including transactions in which stockholders might otherwise receive a premium over current market prices for their shares.



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



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



There are limitations on the
liabilities of our directors.



Pursuant to
our amended and restated certificate of incorporation and under Delaware law, our directors are not liable to us or our stockholders for monetary damages for breach of fiduciary duty, except for liability for breach of a directors duty of
loyalty, acts or omissions by a director not in good faith or which involve intentional misconduct or a knowing violation of law, dividend payments or stock repurchases that are unlawful under Delaware law or any transaction in which a director has
derived an improper personal benefit. In addition,



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we have entered into indemnification agreements with each of our directors. These agreements, among other things, require us to indemnify
each director for certain expenses including attorneys fees, judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by us or in our right, arising out of the persons services
as one of our directors. Our directors are not currently subject to legal action that would require us to indemnify them; however, if any such actions were brought, the costs associated with such actions could be harmful to our business.



ITEM 2:PROPERTIES.



Our principal executive offices are located in a 56,000 square-foot facility purchased by us in August 1999 and located in King of Prussia, Pennsylvania. We provide our fulfillment operations from a
470,000 square-foot facility purchased by us in April 2002 and located in Louisville, Kentucky. We own both our King of Prussia offices and our Louisville fulfillment center free of any debt. We provide our customer service operations from an 82,000
square-foot customer service call center leased by us and located in Melbourne, FL.



We believe that our properties are adequate for our present needs and that suitable additional or replacement space will be available as required.



ITEM 3:LEGAL PROCEEDINGS.



We are involved in various routine litigation incidental to our current and discontinued businesses. We believe that the disposition of
these matters will not have a material adverse effect on our financial position or results of operations.



ITEM 4:SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.



No matters were submitted to a vote of our shareholders during the fiscal quarter ended December 28, 2002.



ITEM 4.1:EXECUTIVE OFFICERS OF THE REGISTRANT.



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



|Name              |  | Age(1) |  | Title                                                              
|----------------- |  | ------ |  | -------------------------------------------------------------------
|Michael G. Rubin  |  | 30     |  | Chairman, President and Chief Executive Officer                    
|Jordan M. Copland |  | 40     |  | Executive Vice President and Chief Financial Officer               
|Robert W. Liewald |  | 54     |  | Executive Vice President, Merchandising                            
|Arthur H. Miller  |  | 49     |  | Executive Vice President and General Counsel                       
|Mark Reese        |  | 40     |  | Executive Vice President and Chief Operating Officer               
|Michael R. Conn   |  | 32     |  | Senior Vice President, Business Development                        
|Steven C. Davis   |  | 32     |  | Senior Vice President, Marketing                                   
|Joseph Seibert    |  | 43     |  | Senior Vice President and Chief Information Officer                
|Damon Mintzer     |  | 37     |  | President and Chief Operating Officer of Global-QVC Solutions, Inc.

---

|(1) |  | As of March 1, 2003
|--- |  | -------------------



Michael G. Rubinhas served as our Chairman of the Board and Chief Executive Officer since July 1995 and as our President since
June 2000. Mr. Rubin was named Entrepreneur of the Year in 1994 and 2000 at the Greater Philadelphia Entrepreneur of the Year Awards sponsored by Ernst & Young. Mr. Rubin attended Villanova University, Villanova, Pennsylvania.



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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 United States-based Megastore and global e-commerce businesses. While at Virgin, Mr. Copland oversaw financial administration and technology. From October 1990 to March 1999, Mr. Copland held a variety of positions with increasing
responsibility 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 several other divisions of Disney, including the Disney Publishing Group, Disney Consumer Products Europe, the Middle East and Africa and Walt Disney Records.



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. (formerly Venator Group), an athletic footwear and apparel retailer based in New York, New York, most recently as Senior Vice President,
Corporate Merchandiser, with merchandising responsibility for all of Foot Lockers specialty athletic divisions. Also while at Foot Locker, Mr. Liewald served as Vice President, General Merchandise Manager for Champs Sports and Vice President,
Merchandise Manager at Foot Locker and Lady Foot Locker.



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 in the corporate department of Blank Rome Comisky &
McCauley LLP, a law firm based in Philadelphia, Pennsylvania. Mr. Miller joined Blank Rome in April 1983.



Mark S. Reese has served as our Executive Vice President and Chief Operating Officer since May 2000. From February 1999 to May
2000, Mr. Reese served as Chief eCommerce Officer of Toysmart.com, an e-tailer of family products. While at Toysmart.com, Mr. Reese was responsible for the leadership and management of the Internet production, merchandising, fulfillment, customer
care, research and online content groups. From December 1997 to February 1999, Mr. Reese was a Senior Manager with Andersen Consultings Strategic Services practice group, where he led strategic e-commerce initiatives for Fortune 50 companies.



Michael R. Conn has served as our Senior
Vice President, Business Development since February 1999. From June 1993 to February 1999, Mr. Conn served as Vice President, Research at Gruntal & Co. L.L.C., an investment bank based in New York, New York. Mr. Conn worked as a sell-side
securities analyst specializing in footwear, apparel, retail and leisure products. While at Gruntal, Mr. Conn was named to the 1998 Wall Street Journal All-Star Analyst Team.



Steven C. Davis has served as our Senior Vice President, Marketing since January 2000. From June 1996
to January 2000, Mr. Davis held a number of management positions at Just for Feet, Inc., a specialty sporting goods retailer based in Birmingham, Alabama. Most recently, Mr. Davis was Vice President of Marketing and previously he served as Director
of Marketing and Director of Special Projects. From September 1994 to June 1996, Mr. Davis was enrolled at the University of Pennsylvanias Wharton School of Business where he received an MBA.



Joseph Seibert has served as our Senior Vice President
and Chief Information Officer since February 2003. From May 2002 until January 2003, Mr. Seibert served as a consultant to the Chief Information Officer of Bertelsmann AG, a media and entertainment company. From March 2000 until May 2002, Mr.
Seibert served as Vice President and Chief Information Officer for Viacom, Inc., a leading global media company. From 1993 until 2000, Mr. Seibert held a variety of positions within CBS, Inc. including Chief Information Officer from 1998 until 2000.



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Damon Mintzer has served as President and Chief Operating Officer of Global-QVC Solutions, Inc., a wholly owned subsidiary of GSI Commerce, Inc., since June 2001. From October 1999 to May 2001, Mr. Mintzer worked
for WHN.com. He first served as Vice President of Business Development and then as Senior Vice President as well as 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. From 1995 to 1998, Mr. Mintzer served as Director of Business Development for Modus Media International/Stream International, a subsidiary of R.R. Donnelley & Sons Co.



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PART II



|ITEM 5: |  | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
|------- |  | ----------------------------------------------------------------------



Market Price of and
Dividends on Common Stock



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. The prices shown do not include retail markups, markdowns or commissions.



As of March 21, 2003, we had approximately 2,103 stockholders
of record. The closing share price for our common stock on March 21, 2003, as reported on the Nasdaq National Market, was $2.18.



|                                    |  | Prices
|----------------------------------- |  | ------
|                                    |  | High  
|Fiscal Year Ended December 29, 2001 |  |       
|First Quarter                       |  | $     
|Second Quarter                      |  | $     
|Third Quarter                       |  | $     
|Fourth Quarter                      |  | $     
|Fiscal Year Ended December 28, 2002 |  |       
|First Quarter                       |  | $     
|Second Quarter                      |  | $     
|Third Quarter                       |  | $     
|Fourth Quarter                      |  | $     



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.



Information about securities authorized for
issuance under our equity compensation plans appears under Equity Compensation Plan Information in the Proxy Statement for the 2003 Annual Meeting of our shareholders. That portion of the Proxy Statement is incorporated by reference into
this report.



ITEM 6:SELECTED FINANCIAL DATA.



The following tables present portions of our consolidated financial statements and are not complete. You should read the following
selected consolidated financial data together with our 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 30, 2000, December 29, 2001 and December 28, 2002 and the balance sheet data as of December 29, 2001 and December 28, 2002 are derived from our audited consolidated financial
statements included elsewhere in this Annual Report on Form 10-K. The selected statement of operations data for the years ended December 31, 1998 and January 1, 2000 and the balance sheet data as of December 31, 1998, January 1, 2000 and December
30, 2000 are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K.



On April 20, 1999, we formalized a plan to sell our historic branded athletic footwear and our off-price athletic footwear and apparel and
action sports divisions in order to focus exclusively on our e-commerce business. Accordingly, for financial statement purposes, the assets, liabilities, results of operations and cash flows of those divisions have been segregated from that of
continuing operations and are presented as discontinued operations. The following selected consolidated financial data and our consolidated financial statements included in this Annual Report on Form 10-K have been reclassified to reflect this
presentation.



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|                                                                                                                                         |  | Year Ended December 31, 1998          |                 |   | Fiscal Year Ended |                  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | --------------- | - | ----------------- | -----------------
|                                                                                                                                         |  |                                       | January 1, 2000 |   |                   | December 30, 2000
|                                                                                                                                         |  | (in thousands, except per share data) |                
|STATEMENT OF OPERATIONS DATA:                                                                                                            |  |                                       |                 |   |                   |                  
|Revenues:                                                                                                                                |  |                                       |                 |   |                   |                  
|Net revenues from product sales                                                                                                          |  | $                                     |                |   |                   | $                
|Service fee revenue                                                                                                                      |  |                                       |                |   |                   |                  
|                                                                                                                                         |  |                                       |                 |   |                   |                  
|Net revenues                                                                                                                             |  |                                       |                |   |                   |                  
|Cost of revenues from product sales                                                                                                      |  |                                       |                |   |                   |                  
|                                                                                                                                         |  |                                       |                 |   |                   |                  
|Gross profit                                                                                                                             |  |                                       |                |   |                   |                  
|                                                                                                                                         |  |                                       |                 |   |                   |                  
|                                                                                                                                        
|Operating expenses:                                                                                                                      |  |                                       |                 |   |                   |                  
|Sales and marketing, exclusive of $0, $192, $1,486, $847 and $532 reported below as
stock-based compensation, respectively               |  |                                       |                |   |                   |                  
|Product development, exclusive of $0, $20, $0, $461 and $(44) reported below as
stock-based compensation, respectively                   |  |                                       |                |   |                   |                  
|General and administrative, exclusive of $150, $2,443, $3,497, $8,974 and $(87) reported
below as stock-based compensation, respectively |  |                                       | 2,736           |   |                   |                  
|Restructuring costs related to Ashford                                                                                                   |  |                                       |                |   |                   |                  
|Net loss on sale of Ashford assets                                                                                                       |  |                                       |                |   |                   |                  
|Stock-based compensation.                                                                                                                |  |                                       | 150             |   |                   |                  
|Depreciation and amortization                                                                                                            |  |                                       | 567             |   |                   |                  
|                                                                                                                                         |  |                                       |                 |   |                   |                  
|Total operating expenses                                                                                                                 |  |                                       | 3,453           |   |                   |                  
|                                                                                                                                         |  |                                       |                 |   |                   |                  
|Other (income) expense:                                                                                                                  |  |                                       |                 |   |                   |                  
|Other income                                                                                                                             |  |                                       |                |   |                   |                  
|Interest expense                                                                                                                         |  |                                       | 2,367           |   |                   |                  
|Interest income                                                                                                                          |  |                                       |                |   |                   |                  
|                                                                                                                                         |  |                                       |                 |   |                   |                  
|Total other (income) expense                                                                                                             |  |                                       | 2,367           |   |                   |                  
|                                                                                                                                         |  |                                       |                 |   |                   |                  
|                                                                                                                                        
|Loss from continuing operations before income taxes                                                                                      |  |                                       | (5,820          | ) |                   |                  
|Benefit from income taxes                                                                                                                |  |                                       | 1,979           |   |                   |                  
|                                                                                                                                         |  |                                       |                 |   |                   |                  
|Loss from continuing operations                                                                                                          |  |                                       | (3,841          | ) |                   |                  
|Discontinued operations:                                                                                                                 |  |                                       |                 |   |                   |                  
|Income from discontinued operations                                                                                                      |  |                                       | 9,665           |   |                   |                  
|Loss on disposition of discontinued operations                                                                                           |  |                                       |                |   |                   |                  
|                                                                                                                                         |  |                                       |                 |   |                   |                  
|Net income (loss)                                                                                                                        |  | $                                     | 5,824           |   |                   | $                
|                                                                                                                                         |  |                                       |                 |   |                   |                  
|Earnings (losses) per sharebasic and diluted:                                                                                           |  |                                       |                 |   |                   |                  
|Loss from continuing operations                                                                                                          |  | $                                     | (.34            | ) |                   | $                
|Income from discontinued operations                                                                                                      |  |                                       | .85             |   |                   |                  
|Loss on disposition of discontinued operations                                                                                           |  |                                       |                |   |                   |                  
|                                                                                                                                         |  |                                       |                 |   |                   |                  
|Net income (loss)                                                                                                                        |  | $                                     | .51             |   |                   | $                
|                                                                                                                                         |  |                                       |                 |   |                   |                  
|Weighted average common shares outstanding:                                                                                              |  |                                       |                 |   |                   |                  
|Basic and diluted                                                                                                                        |  |                                       | 11,379          |   |                   |                  
|                                                                                                                                         |  |                                       |                 |   |                   |                  
|Number of common shares outstanding                                                                                                      |  |                                       | 11,925          |   |                   |                  
|                                                                                                                                         |  |                                       |                 |   |                   |                  
|BALANCE SHEET DATA:                                                                                                                      |  |                                       |                 |   |                   |                  
|Net assets of discontinued operations                                                                                                    |  | $                                     | 41,128          |   |                   | $                
|Total assets                                                                                                                             |  |                                       | 45,053          |   |                   |                  
|Total long-term debt                                                                                                                     |  |                                       | 20,993          |   |                   |                  
|Working capital                                                                                                                          |  |                                       | 34,846          |   |                   |                  
|Stockholders equity .                                                                                                                   |  |                                       | 17,094          |   |                   |                  



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|ITEM 7: |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|------- |  | --------------------------------------------------------------------------------------



All
statements made in this Annual Report on Form 10-K, 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 industry and markets
in which we operate. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or
implied by these forward-looking statements. Factors which may affect our business, financial condition and operating results include the effects of changes in the economy, consumer spending, the stock market and the industries in which we operate,
changes affecting the Internet, our ability to maintain relationships with strategic partners and suppliers, our ability to timely and successfully develop, maintain and protect our technology and product and service offerings and execute
operationally, our ability to attract and retain qualified personnel, our ability to successfully integrate our acquisitions of other businesses and the performance of acquired businesses. More information about potential factors that could affect
us are described below. We expressly disclaim any intent or obligation to update these forward-looking statements, except as otherwise specifically stated by us.



Overview



We develop and operate electronic commerce businesses for retailers, branded manufacturers, media companies, television networks and
professional sports organizations. The e-commerce businesses that we operate include the sale of products through online retail stores and direct response television campaigns. We enable our partners to capitalize on their existing brands to exploit
e-commerce opportunities. We customize the design of our partners e-commerce businesses with a broad range of characteristics that includes differentiated user interfaces on partners Web sites, partner-specific content, product
descriptions and images, partner specific products for direct response television campaigns and partner specific customer service and fulfillment. We currently derive virtually all of our revenues from the sale of goods through our partners
e-commerce businesses, toll-free telephone number sales, bulk sales, business-to-business and group sales and related outbound shipping charges, net of allowances for returns and discounts, as well as 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.



Company Background



Prior to our decision to initiate our e-commerce business in 1999, we operated two primary businesses: our Branded division and our
Off-Price and Action Sports division. Through our Branded division, we designed, marketed and distributed athletic and outdoor footwear under the RYKÄ brand and the Yukon brand. As part of our Off-Price and Action Sports division, we purchased
closeouts, overstocks, canceled orders and excess inventories of athletic, outdoor, casual and specialty footwear, athletic apparel and athletic equipment from manufacturers and retailers for resale, and designed and distributed special make-up
athletic equipment. In April 1999, we formalized our plan to divest these divisions in order to focus exclusively on the development of our e-commerce business. Accordingly, for financial statement purposes, the assets, liabilities, results of
operations and cash flows of these divisions have been segregated from those of continuing operations and are presented as discontinued operations.



On June 10, 1999, in order to finance our e-commerce business, we agreed to sell to SOFTBANK 6,153,850 shares of our common stock at a
price of $13.00 per share for an aggregate purchase price of approximately $80.0 million. The purchase price reflected the closing price of our common stock on May 26, 1999, the day prior to the date SOFTBANK and we agreed in principle to the
transaction. The sale of these shares was completed on July 23, 1999.



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On September
24, 1999, in furtherance of our plan to sell our historical businesses, we entered into an agreement, as amended on March 13, 2000, to sell our Off-Price and Action Sports division for a cash payment at closing of $13.2 million and the assumption by
the purchaser of $4.0 million in indebtedness. The sale of this division was completed on May 26, 2000. On December 29, 1999, we sold substantially all of the assets of our Branded division, other than accounts receivable of approximately $6.6
million, for a cash payment of approximately $10.4 million. During fiscal 1999 and 2000, we recognized an aggregate loss of approximately $23.2 million related to the disposition of these divisions. Included in accrued expenses and other as of
December 30, 2000, December 29, 2001 and December 28, 2002 was $2.2 million, $102,000 and $69,154, respectively, related to certain remaining obligations of the discontinued operations.



On April 27, 2000, in order to continue financing our e-commerce operations, we agreed to sell to funds
affiliated with SOFTBANK 2,500,000 shares of our common stock and to Rustic Canyon Ventures, L.P. (f/k/a TMCT Ventures, L.P.), or Rustic Canyon, 625,000 shares of our common stock at a price of $8.00 per share for an aggregate purchase price of
$25.0 million. The sale of these shares was completed on May 1, 2000. In addition, as part of this financing, we issued to SOFTBANK warrants to purchase 1,250,000 shares of our common stock and to Rustic Canyon warrants to purchase 312,500 shares of
our common stock. These warrants have a three-year term and an exercise price of $10.00 per share.



On September 13, 2000, we agreed to sell to Interactive Technology Holdings, LLC, a joint venture company formed by Comcast Corporation
and QVC, Inc., or ITH, 5,000,000 shares of our common stock at $8.15 per share for an aggregate purchase price of $40.8 million. In addition, ITH agreed to purchase, for approximately $563,000, five-year warrants to purchase an additional 4,500,000
shares of our common stock, at prices ranging from $8.15 to $10.00 per share. These warrants were valued at approximately $8.9 million. This investment was completed through two separate closings. On September 13, 2000, ITH invested $14.9 million
and on October 5, 2000, ITH invested $26.4 million.



On July 20, 2001, we agreed to sell to ITH 3,000,000 shares of our common stock at $10.00 per share for an aggregate purchase price of $30.0 million. In addition, we issued to ITH a five-year warrant to purchase an aggregate of
300,000 shares of our common stock at an exercise price of $6.00 per share in consideration for certain corporate development services performed by ITH on behalf of us. We valued the warrant at approximately $2.1 million and charged stock-based
compensation expense. The investment was completed on August 23, 2001.



In August 2001, we announced our intention to expand our business to include developing and operating e-commerce businesses beyond the sporting goods merchandise category. Concurrent with that announcement, we announced that
we had entered into an e-commerce agreement with Bluelight.com, LLC, a subsidiary of Kmart Corporation. Under that agreement, we manage certain aspects of Kmarts overall e-commerce business, including fulfillment, technology and customer
service in exchange for a combination of fixed and variable fees.



During fiscal 2001, we established our media and entertainment division to develop and operate e-commerce businesses for media and entertainment companies.



As part of our plan to selectively pursue additional opportunities outside of sporting goods, while
continuing to grow our existing sporting goods business, on September 13, 2001, we entered into a definitive merger agreement to acquire all of the outstanding shares of Ashford. The merger was consummated March 14, 2002. Under the terms of the
agreement, Ashford stockholders received $0.125 and 0.0076 of a share of our common stock for each share of Ashford common stock for an aggregate of approximately $7.1 million in cash and 430,000 shares of common stock.



In December 2002, we sold certain assets of Ashford to Odimo.
For more information about this sale, see BusinessRecent Developments in Part I of this Annual Report on Form 10-K.



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Financial Presentation



Our consolidated financial statements
present:



| |  |  | net revenues from product sales, which are derived from the sale of goods through our partners e-commerce businesses (which include the sale of products
through online retail stores and direct response television campaigns), toll-free telephone number sales, bulk sales, business-to-business and group sales and related outbound shipping charges, net of allowances for returns and discounts. Net
revenues from product sales include the revenues of Ashford from March 14, 2002, the date our acquisition of Ashford was completed.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | service fee revenue, which is derived from fixed and variable fees earned in connection with the development and operation of our partners e-commerce
businesses and the provision of marketing and other services.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | cost of revenues from product sales, which 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | product development expenses, which 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | general and administrative expenses, which consist primarily of payroll and related expenses associated with executive, finance, human resources, legal and
administrative personnel, as well as bad debt expense and occupancy costs for our headquarters and other offices.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | restructuring costs related to Ashford, which consists of charges attributable to the cessation of the operations of Ashford, including termination benefits,
contractual obligations, asset impairments and other restructuring costs.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | net loss on sale of Ashford assets, which relates to the loss on the sale of the assets of Ashford, offset, in part, by a gain on the sale of assets relating to the
disposition of a division of Ashford Corporate Gifts, Inc., which is a subsidiary of Ashford.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | depreciation and amortization expenses, which relate primarily to the depreciation of our corporate headquarters and Kentucky fulfillment center,
the depreciation and amortization of the capitalized costs for our purchased and internally developed technology, including a portion of the cost related to the
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | employees that developed such technology, hardware and software and the depreciation of improvements, furniture, and fulfillment center and
office equipment at our corporate headquarters and our fulfillment and call centers.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | other income and expense, which consists primarily of interest income earned on cash, cash equivalents, short-term investments and marketable securities, interest
expense paid primarily in connection with the former mortgage on our corporate headquarters, interest expense on capital leases and income earned pursuant to the terms of a lease termination agreement.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Results of Operations



Comparison of Fiscal 2002 and 2001



Net Revenues from Product
Sales.    Net revenues from product sales increased $56.5 million from $98.3 million for fiscal 2001 to $154.8 million for fiscal 2002. Of this increase, $41.5 million was due to the net addition of online retail stores
that were not operated for the entirety of both periods, $12.1 million was due to an increase in sales from our company owned online stores, which was primarily due to the Ashford acquisition, and $7.0 million was due to sales from partners
online retail stores that were operated for the entirety of both periods, offset, in part, by a $4.1 million decrease in sales through direct response television campaigns primarily due to lower sales of our partners products. Net revenues
from product sales for fiscal 2002 and fiscal 2001 included $15.3 million and $10.5 million in shipping revenue, respectively.



Service Fee Revenue.    Service fee revenue increased $13.5 million from $4.3 million for fiscal 2001 to $17.8
million for fiscal 2002. This increase was due to a $6.3 million increase in fees related to partners for which we operated e-commerce businesses in both periods and a $7.2 million increase in fees related to new partners added in the second quarter
of fiscal 2002.



Cost of Revenues from Product
Sales.    We had cost of revenues from product sales of $114.3 million for fiscal 2002 and $67.6 million for fiscal 2001. As a percentage of net revenues from product sales, cost of revenues from product sales was 73.8%
and 68.7% for fiscal 2002 and fiscal 2001, respectively. This increase was due primarily to inventory write downs resulting from the Ashford restructuring and the closure of our Kentucky retail store, sales in new product categories, which have
lower margins and represent a greater percentage of product sales, and lower margins associated with a bulk sale in fiscal 2002.



Gross Profit.    We had gross profit of $58.4 million for fiscal 2002 and $35.0 million for fiscal 2001. As a
percentage of net revenues, gross profit was 33.8% and 34.1% for fiscal 2002 and fiscal 2001, respectively. The increase in gross profit dollars for fiscal 2002 compared to fiscal 2001 was due primarily to an increase of $13.5 million in
service fee revenue for fiscal 2002. The decrease in gross profit percentage for fiscal 2002 compared to fiscal 2001 was due primarily to inventory write downs resulting from the Ashford restructuring and the closure of our Kentucky retail store,
sales in new product categories, which have lower margins and represent a greater percentage of product sales, and lower margins associated with a bulk sale in fiscal 2002, offset, in part, by the increase in service fee revenue for fiscal 2002.



Sales and Marketing
Expenses.    Sales and marketing expenses increased $17.4 million from $32.4 million for fiscal 2001 to $49.8 million for fiscal 2002. This increase was primarily due to a $10.2 million increase in personnel and related
costs, of which $7.4 million was attributable to our merchandising, marketing and customer service departments and $2.2 million was attributable to our fulfillment operations, a $2.2 million increase in credit card fees, a $2.0 million increase
in partner revenue share charges, a $1.9 million increase in subsidized shipping and handling costs, a $939,000 increase in occupancy costs and an $888,000 increase in professional fees, of which $700,000 was attributable to the write-off of
unused pre-paid IT consulting services, offset, in part, by a $2.3 million decrease in advertising costs relating to direct marketing campaigns.



Product Development Expenses.    Product development expenses increased $4.3 million from $8.6 million for
fiscal 2001 to $12.9 million for fiscal 2002. This increase was primarily due to a $2.3 million increase in



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equipment and software maintenance costs related to the increased number of e-commerce businesses that we operated and maintained, a $1.1
million increase in personnel and related costs, a $514,000 increase in communication costs and a $290,000 increase in occupancy costs.



General and Administrative Expenses.    General and administrative expenses increased $4.4 million from $10.6
million for fiscal 2001 to $15.0 million for fiscal 2002. This increase was primarily due to a $1.7 million increase in personnel and related costs, a $940,000 increase in bad debt and chargeback activity primarily as a result of higher chargeback
activity related to increased sales activity through our partners online stores, offset, in part, by lower direct response television campaign activity in fiscal 2002 and its associated higher bad debt rate, an $857,000 increase in insurance
related expenses and other administrative costs and a $614,000 increase in legal, audit and other professional fees.



Restructuring Costs Related to Ashford.    We had restructuring costs related to Ashford of $1.7 million for
fiscal 2002. In conjunction with the sale of certain assets of Ashford, we also announced and implemented our plan to cease the operations of Ashford, which accounted for approximately $21.6 million of our revenue for fiscal 2002. This plan involved
the liquidation of Ashford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 December 28, 2002, two
employees had been terminated and actual termination benefits paid were $0.



Costs relating to ongoing operations are not included in restructuring costs related to Ashford. 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 are included in cost of revenues from product sales. As of December 28, 2002, inventory write downs
resulting from the restructuring totaled $1.2 million. No additional write downs from the restructuring are anticipated.



For fiscal 2002, the charges associated with the cessation of Ashfords operations are included in restructuring costs related to
Ashford and were as follows:



|Termination benefits      |  | $ | 417,000  
|------------------------- |  | - | ---------
|Contractual obligations   |  |   | 402,000  
|Asset impairments         |  |   | 849,000  
|Other restructuring costs |  |   | 12,000   
|                          |  |   |          
|                          |  | $ | 1,680,000
|                          |  |   |          



Termination benefits are comprised of severance-related payments for all employees terminated in connection with the Ashford restructuring. The contractual obligations relate to contracts entered into by Ashford prior to the sale of
assets to Odimo Acquisition Corp. As of December 28, 2002, we had contractual obligations of $402,000. Asset impairments relate to the closure of Ashfords fulfillment center and offices. For assets to be disposed of, we estimated the fair
value based on expected salvage value less costs to sell. We are actively seeking third-party buyers for the assets held for disposal. As of December 28, 2002, the carrying amount of assets held for disposal was not significant. Other restructuring
costs include expenses which are directly attributable to the cessation of operations of Ashford.



Net Loss on Sale of Ashford Assets.    We had a net loss on the sale of assets related to Ashford of $2.6
million for fiscal 2002. Such assets were acquired 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 to Odimo Acquisition Corp., offset, in part, by a gain of $379,000 on the
sale in August 2002 of assets related to the disposition of a division of Ashford Corporate Gifts, Inc., which is a subsidiary of Ashford. We received $1.2 million in cash proceeds from the sale of this division.



Stock-Based Compensation
Expense.    Stock-based compensation expense decreased $9.9 million from $10.3 million for fiscal 2001 to $401,000 for fiscal 2002. This decrease was primarily due to a decrease of $6.8



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million in charges related to the issuance of warrants during fiscal 2001, a decrease of $2.6 million in charges related to options subject
to variable accounting and a decrease of $863,000 in charges related to the issuance of options granted during fiscal 2000 and fiscal 2001 with exercise prices below the then-current market prices of the underlying stock, offset, in part, by an
increase of $521,000 related to the amortization of deferred partner revenue share charges. As of December 28, 2002, we had an aggregate of $1.4 million of deferred stock-based compensation remaining to be amortized. We had stock-based compensation
expense related to the amortization of deferred partner revenue share charges of $857,000 and $336,000 for fiscal 2002 and fiscal 2001, respectively.



Depreciation and Amortization Expenses.    Depreciation and amortization expenses increased $3.8 million from
$6.7 million for fiscal 2001 to $10.5 million for fiscal 2002. The increase in depreciation and amortization expenses was due primarily to a $2.8 million increase in depreciation expense related to the purchase of our Kentucky fulfillment
center and the assets purchased to build, manage and operate our e-commerce business, a $1.1 million increase in depreciation and amortization related to assets acquired as part of the Ashford acquisition and an impairment charge of $645,000,
offset, in part, by a $710,000 decrease in amortization of goodwill related to our acquisition of Fogdog, Inc. The impairment charge related to the disposal of certain long-lived assets during the fourth quarter of fiscal 2002, which we determined
were no longer being used in our continuing operations. The decrease in amortization was due to the discontinuance of amortization of goodwill in accordance with Statement of Financial Accounting Standards, or SFAS, No. 142, Goodwill and Other
Intangible Assets.



Interest (Income)
Expense.    We had interest income of $1.4 million and interest expense of $749,000 for fiscal 2002 compared to interest income of $3.0 million and interest expense of $608,000 for fiscal 2001. The decrease in interest income
of $1.6 million was due to lower interest rates and lower average balances of cash, cash equivalents, short-term investments and marketable securities during fiscal 2002 compared to fiscal 2001.



Other Income.    We had other
income of $0 for fiscal 2002 and $502,000 for fiscal 2001, respectively. The income in 2001 related primarily to fees earned pursuant to the terms of a lease termination agreement.



Income Taxes.    Since the sales of our discontinued operations, we have not
generated taxable income. Net operating losses generated have been carried back to offset income taxes paid in prior years. The remaining net operating losses will be carried forward. As of December 28, 2002, we had available net operating loss
carryforwards of approximately $420.0 million which expire in the years 2003 through 2022. The use of certain net operating loss carryforwards are subject to annual limitations based on ownership changes of our stock, as defined by Section 382 of
the Internal Revenue Code. We expect that net operating losses of approximately $243.2 million will expire before they can be utilized. Any otherwise recognizable deferred tax assets have been offset by a valuation allowance for the net
operating loss carryforwards.



Comparison of
Fiscal 2001 and 2000



Net Revenues from
Product Sales.    Net revenues from product sales increased $56.5 million from $41.8 million for fiscal 2000 to $98.3 million for fiscal 2001. Of this increase, $31.2 million was due to the net addition of new sporting
goods partners online retail stores that were not operated for the entirety of both fiscal 2000 and fiscal 2001 and the addition of the fogdog.com Web site after our acquisition of Fogdog on December 28, 2000, $9.7 million was due to an
increase in sales from sporting goods partners online retail stores that were operated for the entirety of both periods, $8.7 million was due to an increase in sales through direct response television campaigns primarily from the sale of one
of our partners products and $6.9 million was due to a net increase in bulk sales. Net revenues for fiscal 2001 and fiscal 2000 included $10.5 million and $3.0 million in shipping revenue, respectively.



Service Fee Revenue.    Service fee
revenue increased $3.3 million from $1.0 million for fiscal 2000 to $4.3 million for fiscal 2001. This increase was due to a $4.3 million increase in fees related to a new partner added in fiscal 2001, offset, in part, by a $1.0 million
decrease in fees related to the provision of marketing services in fiscal 2000.



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Cost of
Revenues from Product Sales.    We incurred cost of revenues from product sales of $67.6 million for fiscal 2001 and $29.6 million for fiscal 2000. As a percentage of net revenues from product sales, cost of revenues from
product sales was 68.7% for fiscal 2001 and 70.7% for fiscal 2000. This decrease was due primarily to volume and price discounts on merchandise purchased by us.



Gross Profit.    We had gross profit of $35.0 million for fiscal 2001 and $13.2
million for fiscal 2000. As a percentage of net revenues, gross profit was 34.1% for fiscal 2001 and 30.9% for fiscal 2000. The increase in gross profit dollars from fiscal 2000 to fiscal 2001 was due to the increase in net revenues and the increase
in gross profit percentage was due primarily to an increase of $3.3 million in service fee revenue for fiscal 2001 and, to a lesser extent, volume and price discounts on merchandise purchased by us.



Sales and Marketing
Expenses.    Sales and marketing expenses decreased $5.3 million from $37.7 million for fiscal 2000 to $32.4 million for fiscal 2001. This decrease was primarily due to a $5.6 million decrease in advertising costs, a $3.5
million decrease in third-party warehouse and fulfillment services costs, a $2.1 million decrease in subsidized shipping and handling costs and a $1.3 million decrease in professional fees, offset, in part, by a $3.3 million increase in personnel,
occupancy and other costs associated with our Kentucky fulfillment center, a $2.6 million increase in partner revenue share charges and a $1.3 million increase in personnel costs associated with our merchandising, customer service and vendor
operations departments.



Product Development
Expenses.    Product development expenses increased $1.3 million from $7.3 million for fiscal 2000 to $8.6 million for fiscal 2001. This increase was primarily due to a $971,000 increase in personnel costs, an $885,000
increase in equipment and software maintenance costs associated with the increased number of e-commerce businesses that we operated and maintained and a $428,000 increase in communication costs, offset, in part, by a $961,000 decrease in costs
relating to our use of professional consultants.



General and Administrative Expenses.    General and administrative expenses increased $1.9 million from $8.7 million for fiscal 2000 to $10.6 million for fiscal 2001. This increase was primarily due to a
$1.6 million increase in credit card chargeback activity due principally to increased sales volume and a $1.2 million increase in insurance related expenses and other administrative costs to support our e-commerce business, offset, in part, by a
$753,000 decrease in personnel costs.



Stock-Based Compensation Expense.    Stock-based compensation expense increased $5.3 million from $5.0 million for fiscal 2000 to $10.3 million for fiscal 2001. This increase was primarily the result
of higher charges associated with the issuance of warrants to our partners and consultants and charges related to options subject to variable accounting. As of December 29, 2001, we had an aggregate of $3.5 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 $336,000 for fiscal 2001 and $0 for fiscal 2000.



Depreciation and Amortization
Expenses.    Depreciation and amortization expenses decreased $1.4 million from $8.1 million for fiscal 2000 to $6.7 million for fiscal 2001. This decrease was due to a $5.4 million decrease in depreciation expense related to
the change in our estimate of the useful lives of our computer hardware and software from two years to four years. This change in our estimate was based on managements then-current analysis of our historical operating experience, which
indicated that the original estimate was no longer appropriate. This decrease in depreciation and amortization expenses was offset, in part, by a $3.5 million increase in depreciation expense related to our corporate headquarters, our Kentucky
fulfillment center and the assets purchased to build, manage and operate our e-commerce business and a $706,000 increase in amortization of goodwill associated with our acquisition of Fogdog.



Interest (Income) Expense.    We
had interest income of $3.0 million and interest expense of $608,000 for fiscal 2001 compared to interest income of $1.8 million and interest expense of $407,000 for fiscal 2000. The increase in interest income of $1.2 million was due to higher
average balances of cash, cash equivalents and short-term investments during fiscal 2001. The increase in interest expense of $201,000 was primarily due to increased interest incurred on the $5.3 million mortgage note on our corporate headquarters
which was entered



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into on April 20, 2000. Twelve months of interest on this note was recorded in fiscal 2001 compared with eight months of interest in fiscal
2000.



Other
Income.    We had other income of $502,000 for fiscal 2001 and $0 for fiscal 2000, respectively. This income related primarily to fees earned pursuant to the terms of a lease termination agreement.



Income Taxes.    Since the sales of
our discontinued operations, we have not generated taxable income. Net operating losses generated have been carried back to offset income taxes paid in prior years. The remaining net operating losses will be carried forward. The use of certain net
operating loss carryforwards are subject to annual limitations based on ownership changes of our stock, as defined by Section 382 of the Internal Revenue Code. Any otherwise recognizable deferred tax assets have been offset by a valuation allowance
for the net operating loss carryforwards.



Certain Related
Party Transactions



We have entered into a
strategic alliance to provide technology, procurement and fulfillment services for QVC, Inc., which along with its majority stockholder, Comcast Corporation, owns Interactive Technology Holdings, LLC, which is one of our major stockholders. We
recognized net revenues of $349,000, $1.8 million and $2.7 million on sales to this related party for fiscal 2000, fiscal 2001 and fiscal 2002, respectively. The terms of these sales are comparable to those with our other business-to-business
partners, and the amount included in accounts receivable as a result of these sales was $637,000 as of December 28, 2002.



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, and could potentially result in materially different results under different assumptions and conditions.



Accounting for Inventory



Inventory, primarily consisting of sporting goods, athletic equipment, footwear, apparel and consumer electronics is valued at the lower
of cost or market. Inherent in this valuation are significant management judgments and estimates, including among others, assessments concerning obsolescence and shrinkage rates. Based upon these judgments and estimates, which are applied
consistently from period to period, we record a valuation allowance to adjust the carrying amount of our inventory.



Accounting for Goodwill and Certain Other Intangibles



We adopted SFAS No. 141, Business Combinations as of July 1, 2001. We accounted for our
acquisition of Ashford under SFAS No. 141.



Effective December 30, 2001, we adopted the provisions of SFAS, No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach.
Under an impairment-only approach, goodwill and certain intangibles are not amortized into results of operations but instead, are reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded
value of goodwill and certain intangibles is more than their fair value. SFAS No. 142



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requires us to complete a two-step impairment test of goodwill. The first step, which was required to be completed by June 29, 2002, was to
determine if an impairment existed. The second step, which was required to be completed by December 28, 2002 (if necessary), was to measure the impairment. As part of the impairment test, we obtained an independent, third party valuation in order to
determine if the fair value of our recorded goodwill was impaired. The valuation incorporated a variety of methodologies to estimate fair value, including comparing our market capitalization with that of publicly traded companies in similar lines of
business, applying price multiples to our estimated future operating results and estimating discounted cash flows. We completed the first step of the impairment test during the second quarter of fiscal 2002 and found no instances of impairment of
our recorded goodwill. Therefore, the second step of the impairment test was not necessary during fiscal 2002. In addition, upon adoption of SFAS No. 142, we evaluated our goodwill and intangibles acquired prior to June 30, 2001 using the criteria
in SFAS No. 141 and determined that no change in previously recognized goodwill was required.



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



Accounting for Long-Lived Assets



The ability to realize long-lived assets is evaluated periodically as events or circumstances indicate a possible inability to recover
their carrying amount. Such evaluation is based on various analyses, including undiscounted cash flow and profitability projections that incorporate, as applicable, the impact on the existing business. The analyses necessarily involve significant
management judgment. Any impairment loss, if indicated, is measured as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. During the fourth quarter of fiscal 2002, we determined that certain
long-lived assets were no longer being used in our 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. We disposed of
these assets during the fourth quarter of fiscal 2002 and recorded an impairment charge of $645,000 which is included in depreciation and amortization expense.



Accounting for Notes Receivable



Notes receivable consists primarily of a $4.5 million, five year subordinated secured promissory note, with a stated interest rate of 7%,
received in connection with the sale of certain assets of Ashford. The note is due in twenty consecutive quarterly principal payments of $225,000 each, beginning March 2003 through December 2007. Accrued interest on the note is payable with each
quarterly principal payment. In order to determine the fair value of the note, we obtained an independent, third party valuation. Based upon the valuation, we determined that the market interest rate of the note is 12.5% and therefore valued the
note at approximately $4.0 million. The $500,000 discount will be amortized over the term of the note and recorded as an increase in interest income.



Accounting for Other Equity Investments



Other equity investments consist of shares of, and warrants to purchase Odimo Series D preferred stock convertible into 19.9% of the fully
diluted common shares of Odimo, received in connection with the sale of certain assets of Ashford. We do not have the ability to exercise significant influence over Odimo and therefore the investment is accounted for under the cost method. Under the
cost method of accounting, investments in private companies are carried at cost and are adjusted only for other-than-temporary declines in fair value, distributions of earnings and additional investments. The initial cost of our investment was
determined based on



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the fair value of the investment at the time of its acquisition. As an observable market price does not exist for equity securities of
private companies, estimates of fair value of such securities are more subjective than for securities of public companies. In order to determine the fair value of the investment in Odimo, we 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 us, such as our knowledge of the industry and
knowledge of specific information about Odimo. Using this valuation, we determined the estimated fair value of the investment to be approximately $2.2 million.



Revenue Recognition



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



We recognize revenue from product sales, net of estimated returns based on historical experience and current
trends, upon shipment of products to customers. We ship the majority of products from our fulfillment center in Louisville, KY. In fiscal 2002, we also shipped products from our former jewelry and luxury goods fulfillment center in Houston, TX. We
also rely upon certain vendors to ship products to customers. 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, 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 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 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 in advance to us 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 Internal-Use Computer Software and Web Site Development Costs



We account for internal-use computer software and Web site development costs in accordance with the AICPA Accounting Standards Executive
Committees Statement of Position 98-1, Accounting for the Costs of



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Computer Software Developed or Obtained for Internal Use, and EITF 00-2, Accounting for Web Site Development Costs.
Accordingly, we generally capitalize costs incurred to develop internal-use computer software during the application development stage, including those relating to developing our partners Web sites. We also capitalize costs of enhancements to
internal-use computer software, provided that these enhancements result in additional functionality.



We depreciate capitalized costs using the straight-line method over their useful lives, which are based on managements estimate of
the useful life of the underlying asset. During the first quarter of fiscal 2001, management increased its estimate of the useful lives of these capitalized costs from two years to four years. This change had the effect of decreasing the loss from
continuing operations for fiscal 2002 by $1.3 million, or $0.03 per share, and for fiscal 2001 by $5.4 million, or $0.16 per share, respectively. This increase was based on managements then-current analysis of our historical operating
experience, which indicated that the original estimate was no longer appropriate.



Accounting for Restructuring Costs



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



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 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 $13.2 million and $14.1 million as of December 28, 2002
and December 29, 2001, respectively. The deferred partner revenue share charges are being 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.



New Accounting Pronouncements



Impairment or Disposal of Long-Lived Assets: In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. This statement supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of Accounting Principals Board, or APB,
Opinion



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No. 30, Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual, and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. SFAS No. 144 retains the requirement in APB No. 30 to report separately discontinued operations and extends that reporting to a component
of an entity that either has been disposed of or is classified as held for sale. This statement is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. We adopted this statement in the first
quarter of fiscal 2002, and it did not have a significant impact on our financial position or results of operations.



Consideration Given by a Vendor to a Customer or Reseller: In November 2001, the EITF reached a consensus on EITF No. 01-09,
Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendors Products. EITF No. 01-09 addresses the accounting for consideration given by a vendor to a customer or reseller and is a codification of EITF
No. 00-14, Accounting for Certain Sales Incentives, EITF No. 00-22, Accounting for Points and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in
the Future and EITF No. 00-25, Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendors Products. We adopted this statement in the first quarter of fiscal 2002, and it did not have a
significant impact on our financial position or results of operations.



Costs Associated with Exit or Disposal Activities: In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities and nullifies EITF No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. We adopted this statement in the fourth quarter of fiscal 2002,
and it did not have a significant impact on our financial position or results of operations.



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 02-16 addresses the accounting of cash consideration received by a customer from a vendor, including vendor rebates and refunds. The consensus reached states that consideration received should be presumed to be a
reduction of the prices of the vendors products or services and should therefore be shown as a reduction of cost of sales in the income statement of the customer. The presumption could be overcome if the vendor receives an identifiable benefit
in exchange for the consideration or the consideration represents a reimbursement of a specific incremental identifiable cost incurred by the customer in selling the vendors product or service. If one of these conditions is met, the cash
consideration should be characterized as a reduction of those costs in the income statement of the customer. The consensus reached also concludes that if rebates or refunds can be reasonably estimated, such rebates or refunds should be recognized as
a reduction of the cost of sales based on a systematic and rational allocation of the consideration to be received relative to the transactions that mark the progress of the customer toward earning the rebate or refund. We do not expect the
provisions of this consensus to have a significant impact on our financial position or results of operations.



Stock-Based Compensation: In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure, an amendment of FASB Statement 123. SFAS No. 148 addresses alternative methods of transition for a voluntary change to fair value-based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method
used on reported results. The transition guidance and annual disclosure provisions of SFAS No.148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. We adopted this statement
in the fourth quarter of fiscal 2002, and it did not have a significant impact on our financial position or results of operations.



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Liquidity and Capital
Resources



Our principal source of liquidity
is our cash, cash equivalents, short-term investments and marketable securities. Our cash, cash equivalents, short-term investments and marketable securities balances were $74.8 million and $106.7 million as of December 28, 2002 and December
29, 2001, respectively.



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



On April 20, 2000, we received $5.3 million in
gross proceeds through a mortgage financing of our corporate headquarters. On April 27, 2000, we raised $25.0 million in gross proceeds through an equity financing with SOFTBANK and Rustic Canyon. On September 13, 2000, we raised $14.9 million in
gross proceeds and on October 5, 2000, we raised $26.4 million in gross proceeds, through an equity financing with ITH. On August 23, 2001, we raised $30.0 million in gross proceeds through an equity financing with ITH. See Company
Background section above. We have used the proceeds of these financings for additional working capital needs and general business purposes.



We received an aggregate of $23.5 million in proceeds from the sales of our discontinued operations in fiscal 1999 and fiscal 2000, as
well as $35.7 million in net cash from the acquisition of Fogdog in fiscal 2000.



We have incurred substantial costs to develop our e-commerce businesses and to recruit, train and compensate personnel for our creative, engineering, business development, marketing, merchandising,
customer service, management information systems and administrative departments. In addition, during fiscal 2000, we invested in the required technology, equipment and personnel to make our Kentucky fulfillment center fully operational, and in April
2002, we purchased our previously leased Kentucky fulfillment center for $8.8 million in cash. During fiscal 2002, we spent approximately $12.2 million on upgrades to our technology infrastructure, including upgrades to our server, storage and
telecommunications hardware, as well as on technical enhancements to our existing software and on new software solutions, including for customer service, marketing, financial management, merchandise planning, fraud detection and enhanced search
functionality. In addition, during fiscal 2002, we spent $1.7 million on the installation of a second, fully redundant data center to increase both our capacity as well as our reliability, $4.0 million on the expansion of our Kentucky fulfillment
center to increase capacity and $1.2 million to acquire certain assets of and enhance a 500-seat call center in Melbourne, Florida to expand our customer service capabilities. As of December 28, 2002, we had cash, cash equivalents, short-term
investments and marketable securities of $74.8 million, working capital of $38.1 million and an accumulated deficit of $165.5 million.



Operating activities provided net cash of approximately $9.6 million during fiscal 2002. We used approximately $14.1 million in net cash
for operating activities during fiscal 2001 and approximately $38.1 million in net cash for operating activities of continuing operations during fiscal 2000. Net cash provided by operating activities during fiscal 2002 was primarily the result
of changes in accounts payable and accrued expenses and other, depreciation and amortization, deferred revenue, accounts receivable, inventory, a net loss on the sale of Ashford assets, other assets, non-cash restructuring costs related to Ashford
and stock-based compensation, offset, in part, by net losses and changes in prepaid expenses and other current assets. Net cash used for operating activities during fiscal 2001 was primarily the result of net losses and changes in accounts payable
and accrued expenses and other, accounts receivable, other assets and prepaid expenses and other current assets, offset, in part, by changes in stock-based compensation, deferred revenue, depreciation and amortization and inventory. Net cash used
for operating activities of continuing operations during fiscal 2000 was primarily the result of net losses from continuing operations and changes in inventory, accounts receivable, other assets and prepaid expenses and other current assets, offset
in part, by changes in accounts payable and accrued expenses and other, depreciation and amortization, stock-based compensation, refundable income taxes and deferred revenue.



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Our investing
activities during fiscal 2002 consisted primarily of capital expenditures of $29.0 million. During fiscal 2002, we also purchased $20.6 million and sold $9.1 million of marketable securities, paid $8.9 million for the acquisition of Ashford
including acquisition costs and received $2.2 million in gross proceeds from the sale of Ashford assets. During fiscal 2001, we incurred capital expenditures of $8.4 million and received $947,000 in gross proceeds from sales of short-term
investments. During fiscal 2000, we incurred capital expenditures of $13.7 million, we received $13.2 million in gross proceeds from the sale our discontinued operations and received $35.7 million in net cash from the acquisition of Fogdog.



Our financing activities during fiscal 2002
consisted primarily of a $5.2 million prepayment of the mortgage on our corporate headquarters and a $3.1 million retirement of a revolving credit facility with Congress Financial Corporation, a unit of First Union National Bank, that had been
maintained by Ashford prior to our acquisition of Ashford. During fiscal 2002, our Board of Directors authorized, subject to certain business and market conditions, the purchase of up to $10.0 million of our common stock. Under this program, we
repurchased 73,000 shares of our common stock for an aggregate purchase price of $353,000. During fiscal 2001, we received $30.0 million in gross proceeds from the sale of shares of our common stock to ITH. During fiscal 2000, we received $25.0
million in gross proceeds from the sale of shares of our common stock to SOFTBANK and Rustic Canyon. During fiscal 2000, we also received $41.3 million in gross proceeds from the sale of shares of our common stock and warrants to purchase shares of
our common stock to ITH.



We had the following
commitments as of December 28, 2002 with respect to our lease obligations, employment agreements, advertising and media agreements and partner revenue share payment obligations.



|                                 |  | Fiscal Year    |       |     
|-------------------------------- |  | -------------- | ----- | ----
|                                 |  | 2003           |       | 2004
|                                 |  | (in thousands)
|Capital leases                   |  | $              | 78    |     
|Operating leases                 |  |                | 839   |     
|Employment agreements            |  |                | 2,609 |     
|Advertising and media agreements |  |                | 267   |     
|Partner revenue share payments   |  |                | 1,650 |     
|                                 |  |                |       |     
|Total commitments                |  | $              | 5,443 |     
|                                 |  |                |       |     



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



ITEM 7A:QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.



We have not used derivative financial instruments in our investment portfolio. We invest our excess cash in institutional Money Market
accounts, auction rate certificates, U.S. Government agencies and auction preferred stock. In order to minimize risk and credit exposure, we invest with four financial institutions. We protect and preserve our invested funds by limiting default,
market and reinvestment risk.



43



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##### Table of Contents



Investments in
both fixed rate and floating rate interest earning-instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may
produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or it may suffer losses in principal if forced to sell securities
which have declined in market value due to changes in interest rates.



The following table provides information about our cash equivalents and marketable securities, including principal cash flows by expected maturity and the related weighted average interest rates as of December 28, 2002:



|                                           |  | Fiscal Year |        |      |   |      |  | Estimated Fair Value at December 28, 2002
|------------------------------------------ |  | ----------- | ------ | ---- | - | ---- |  | -----------------------------------------
|                                           |  | 2003        |        | 2004 |   | 2005 |  | 2006                                     
|Money market accounts                      |  | $           | 32,855 |      | $ |     |  | $                                        
|Weighted average interest rate             |  |             | 1.34%  |      |   |     |  |                                          
|Auction rate certificates                  |  |             | 18,600 |      |   |     |  |                                          
|Weighted average interest rate             |  |             | 1.62%  |      |   |     |  |                                          
|U.S. government agency securities          |  |             | 10,000 |      |   |     |  |                                          
|Weighted average interest rate             |  |             | 1.96%  |      |   |     |  |                                          
|Auction preferred stock                    |  |             | 1,500  |      |   |     |  |                                          
|Weighted average interest rate             |  |             | 1.95%  |      |   |     |  |                                          
|                                           |  |             |        |      |   |      |  |                                          
|Cash equivalents and marketable securities |  | $           | 62,955 |      | $ |     |  | $                                        
|                                           |  |             |        |      |   |      |  |                                          



We do not intend to hold
our marketable securities for more than one year from the most recent balance sheet date and have therefore classified them as a current asset.



ITEM 8:FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.



Our financial statements, supplementary data and related documents that are included in this Annual Report on Form 10-K are listed in Item
15(a), Part IV, of this Report.



|ITEM 9: |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|------- |  | -------------------------------------------------------------------------------------



Not
applicable.



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##### Table of Contents

PART III



This Part
III incorporates certain information from our definitive proxy statement for our 2003 Annual Meeting of Shareholders (the 2003 Proxy Statement) to be filed with the Securities and Exchange Commission not later than 120 days after the end
of our fiscal year covered by this Annual Report on Form 10-K. Notwithstanding such incorporation, the sections of our 2003 Proxy Statement entitled Report of the Compensation Committee, Report of the Audit Committee and
Performance Graph shall not be deemed to be filed as part of this Annual Report.



ITEM 10:DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.



Information concerning our directors is incorporated by reference to our 2003 Proxy Statement including but necessarily limited to the
sections of the 2003 Proxy Statement entitled Proposal 1Election of Directors and Section 16(a) Beneficial Ownership Reporting Compliance.



Information concerning our executive officers is included in Item 4.1, Part I, of this Annual Report on Form
10-K.



ITEM 11:EXECUTIVE COMPENSATION.



This information is incorporated by reference to our 2003 Proxy Statement including but necessarily limited to the section of the 2003
Proxy Statement entitled Executive Compensation.



|ITEM 12: |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
|-------- |  | -----------------------------------------------------------------------------------------------



This
information is incorporated by reference to our 2003 Proxy Statement including but necessarily limited to the sections of the 2003 Proxy Statement entitled Principal Shareholders and Equity Compensation Plan Information.



ITEM 13:CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.



This information is incorporated by reference to our 2003 Proxy Statement including but necessarily limited to the section of the 2003
Proxy Statement entitled Certain Relationships and Related Transactions.



ITEM 14:CONTROLS AND PROCEDURES.



Evaluation of Disclosure Controls and Procedures.  Based on their evaluation of the Companys disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date within 90 days of the filing date of this Annual Report on Form 10-K, the Companys principal executive officer and principal financial officer have
concluded that the Companys disclosure controls and procedures are effective.



Changes in Internal Controls.    There were no significant changes in the Companys internal controls or in other factors that could significantly affect these controls
subsequent to the date of the principal executive officers and principal financial officers evaluation referred to above, including any corrective actions with regard to significant deficiencies and material weaknesses.



45



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##### Table of Contents



PART IV



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



(a)  1.    CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                                      |  | Page
|------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Report of Independent AuditorsDeloitte & Touche LLP                                                                                  |  | F-1 
|Consolidated Balance Sheets as of December 29, 2001 and December 28,
2002                                                             |  | F-2 
|Consolidated Statements of Operations for the Fiscal Years Ended December 30, 2000,
December 29, 2001 and December 28, 2002           |  | F-3 
|Consolidated Statements of Stockholders Equity for the Fiscal Years Ended December
30, 2000, December 29, 2001 and December 28, 2002 |  | F-4 
|Consolidated Statements of Cash Flows for the Fiscal Years Ended December 30, 2000,
December 29, 2001 and December 28, 2002           |  | F-5 
|Notes to Consolidated Financial Statements                                                                                            |  | F-6 





| | 2.    FINANCIAL |  | STATEMENT SCHEDULES
| | --------------- |  | -------------------



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



46



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##### Table of Contents

3.     EXHIBITS



|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                   
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |  | Amended and Restated Certificate of Incorporation of Global Sports, Inc. (filed as Appendix B to GSI Commerce,
Inc.s Definitive Proxy Statement on Schedule 14A filed on April 27, 2001 and Incorporated herein by reference)                                                                                                                                                                                                
|3.2            |  | Certificate of Amendment to Amended and Restated Certificate of Incorporation of Global Sports, Inc. (filed with GSI
Commerce, Inc.s Quarterly Report on Form 10-Q for the quarter ended June 29, 2002 and incorporated herein by reference)                                                                                                                                                                                 
|3.3            |  | Bylaws, as amended, of Global Sports, Inc. (filed with GSI Commerce, Inc.s Registration Statement No. 33-33754
and incorporated herein by reference)                                                                                                                                                                                                                                                                         
|4.1            |  | Form of Investor Warrant (filed with GSI Commerce, Inc.s Quarterly Report on Form 10-Q for the quarter ended
September 29, 2001 and incorporated herein by reference)                                                                                                                                                                                                                                                        
|4.2            |  | Form of Partner Warrant (filed with GSI Commerce, Inc.s Quarterly Report on Form 10-Q for the quarter ended
September 29, 2001 and incorporated herein by reference)                                                                                                                                                                                                                                                         
|4.3            |  | Warrant to Purchase 200,000 Shares of Common Stock dated January 30, 2002 (filed with GSI Commerce, Inc.s
Annual Report on Form 10-K for the fiscal year ended December 29, 2001 and incorporated herein by reference)                                                                                                                                                                                                       
|4.4            |  | Specimen Common Stock Certificate (filed with GSI Commerce, Inc.s Quarterly Report on Form 10-Q for the Quarter
ended June 29, 2002 and incorporated herein by reference)                                                                                                                                                                                                                                                    
|4.5            |  | Registration Rights Agreement, dated July 31, 1995, by and between Global Sports, Inc. and MR Acquisitions, Inc.
(filed with GSI Commerce, Inc.s Current Report on Form 8-K filed on July 31, 1995 and incorporated herein by reference)                                                                                                                                                                                     
|4.6            |  | Second Amended and Restated Registration Rights Agreement, dated as of September 13, 2000, by and between Global
Sports, Inc., Interactive Technology Holdings, LLC, SOFTBANK Capital Advisors Fund LP and TMCT Ventures, L.P. (filed with GSI Commerce, Inc.s Current Report on Form 8-K filed on September 13, 2000 and incorporated herein by
reference)                                                                  
|4.7            |  | Second Amendment to Second Amended and Restated Registration Rights Agreement, dated as of July 20, 2001, among
Global Sports, Inc., SOFTBANK Capital Partners LP, SOFTBANK Capital Advisors Fund LP, Rustic Canyon Ventures, LP (f/k/a TMCT Ventures, LP) and Interactive Technology Holdings, LLC (filed with GSI Commerce, Inc.s Current Report on Form 8-K
filed on August 27, 2001 and incorporated herein by reference)
|10.1+          |  | Global Sports, Inc.s 1996 Equity Incentive Plan, amended and restated as of January 4, 2001 (filed as Appendix A
to GSI Commerce, Inc.s Definitive Proxy Statement on Schedule 14A filed on April 27, 2001 and incorporated herein by reference)                                                                                                                                                                            
|10.2+          |  | Global Sports, Inc.s 2000 Employee Stock Purchase Plan (filed with GSI Commerce, Inc.s Preliminary Proxy
Statement on Schedule 14A filed on March 22, 2000 and incorporated herein by Reference)                                                                                                                                                                                                                            
|10.3+          |  | Global Sports, Inc.s 1987 Stock Option Plan (filed with GSI Commerce, Inc.s Registration Statement No.
33-19754-B and incorporated herein by reference)                                                                                                                                                                                                                                                                     
|10.4+          |  | Global Sports, Inc.s 1988 Stock Option Plan (filed with GSI Commerce, Inc.s Registration Statement No.
33-27501 and incorporated herein by reference)                                                                                                                                                                                                                                                                       
|10.5+          |  | Global Sports, Inc.s 1990 Stock Option Plan (filed with GSI Commerce, Inc.s Quarterly Report on Form 10-Q
for the quarter ended September 30, 1990 and incorporated herein by reference)                                                                                                                                                                                                                                    
|10.6+          |  | Global Sports, Inc.s 1992 Stock Option Plan (filed with GSI Commerce, Inc.s Annual Report onForm 10-K
for the fiscal year ended December 31, 1991 and incorporated herein by reference)                                                                                                                                                                                                                                     
|10.7+          |  | Global Sports, Inc.s 1993 Stock Option Plan (filed with GSI Commerce, Inc.s Form S-8 Registration
Statement filed on January 3, 1994 and incorporated herein by reference)                                                                                                                                                                                                                                                  
|10.8+          |  | Global Sports, Inc.s 1995 Stock Option Plan (filed with GSI Commerce, Inc.s Current Report on
Form 8-K dated July 31, 1995 and incorporated herein by reference)                                                                                                                                                                                                                                                            



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##### Table of Contents

|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                            
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.9+          |  | Global Sports, Inc.s 1995 Non-Employee Directors Stock Option Plan (filed with GSI Commerce, Inc.s
Proxy Statement on Schedule 14A filed on October 13, 1995 in connection with the 1995 Special Meeting in Lieu of Annual Meeting held on November 15, 1995 and incorporated herein by Reference)                                  
|10.10+         |  | Global Sports, Inc.s Deferred Profit Sharing Plan and Trust (filed with GSI Commerce, Inc.s Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference)                                                                                                                                 
|10.11+         |  | Employment Agreement, dated June 1, 2001, by and between Global Sports, Inc. and Michael G. Rubin (filed with GSI
Commerce, Inc.s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 and incorporated herein by reference)                                                                                             
|10.12+         |  | Employment Agreement, dated February 24, 1999, by and between Global Sports, Inc. and Michael R. Conn (filed with
GSI Commerce, Inc.s Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and incorporated herein by reference)                                                                                    
|10.13+         |  | Letter Amendment, dated April 23, 2002, to the Employment Agreement, by and between Global Sports, Inc. and Michael R.
Conn (filed with GSI Commerce, Inc.s Quarterly Report on Form 10-Q for the quarter ended September 28, 2002 and incorporated herein by reference)                                                              
|10.14+         |  | Employment Agreement, dated August 9, 1999, by and between Global Sports, Inc. and Arthur H. Miller (filed with
GSI Commerce, Inc.s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference)                                                                                      
|10.15+         |  | Letter Amendment, dated April 23, 2002, to the Employment Agreement, by and between Global Sports, Inc. and Arthur H.
Miller (filed with GSI Commerce, Inc.s Quarterly Report on Form 10-Q for the quarter ended September 28, 2002 and incorporated herein by reference)                                                             
|10.16+         |  | Employment Agreement, dated January 10, 2000, by and between Global Sports, Inc. and Steven Davis (filed with GSI
Commerce, Inc.s Annual Report on Form 10-K for the fiscal year ended January 1, 2000 and incorporated herein by reference)                                                                                          
|10.17+         |  | Letter Amendment, dated April 23, 2002, to the Employment Agreement, by and between Global Sports, Inc. and Steven
Davis (filed with GSI Commerce, Inc.s Quarterly Report on Form 10-Q for the quarter ended September 28, 2002 and incorporated herein by reference)                                                                 
|10.18+         |  | Employment Agreement, dated February 9, 2000, by and between Global Sports, Inc. and Jordan M. Copland (filed with GSI
Commerce, Inc.s Annual Report on Form 10-K for the fiscal year ended January 1, 2000 and incorporated herein by reference)                                                                                     
|10.19+         |  | Employment Agreement, dated May 30, 2000, by and between Global Sports, Inc. and Mark Reese (filed with GSI Commerce,
Inc.s Annual Report on Form 10-K for the fiscal year ended December 30, 2000 and incorporated herein by reference)                                                                                              
|10.20+         |  | Employment Agreement, dated April 23, 2002, by and between Global Sports, Inc. and Robert Liewald (filed with GSI
Commerce, Inc.s Quarterly Report on Form 10-Q for the quarter ended September 28, 2002 and incorporated herein by reference)                                                                                        
|10.21+         |  | Personal Services Agreement, dated June 12, 2001, by and between GSI West, Inc. and Damon Mintzer (filed with GSI
Commerce, Inc.s Quarterly Report on Form 10-Q for the quarter ended June 29, 2002 and incorporated herein by reference)                                                                                             
|10.22+         |  | Amendment Number 1, dated September 10, 2001, to Personal Services Agreement by and between GSI West, Inc. and
Damon Mintzer (filed with GSI Commerce, Inc.s Quarterly Report on Form 10-Q for the quarter ended June 29, 2002 and incorporated herein by reference)                                                                  
|10.23*         |  | License and E-Commerce Agreement, dated July 6, 2001, by and among Global Sports Interactive, Inc., The Sports
Authority, Inc. and The Sports Authority Michigan, Inc. (filed with Amendment No. 1 to GSI Commerce, Inc.s Quarterly Report on Form 10-Q for the quarter ended September 29, 2001 and incorporated herein by reference)
|10.24*         |  | E-Commerce Agreement, dated as of August 10, 2001, by and among Global Sports, Inc., Bluelight.com, LLC and Kmart
Corporation (filed with Amendment No. 1 to GSI Commerce, Inc.s Quarterly Report on Form 10-Q for the quarter ended September 29, 2001 and incorporated herein by Reference)                                         



48



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##### Table of Contents

|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                                  
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.25*         |  | First Amendment to the E-Commerce Agreement, dated as of August 10, 2001, by and among Global Sports Interactive,
Inc., Bluelight.com, LLC and Kmart Corporation, dated as of December 14, 2001 (filed with GSI Commerce, Inc.s Quarterly Report on Form 10-Q for the quarter ended September 28, 2002 and incorporated herein by reference)
|10.26*         |  | Second Amendment to the E-Commerce Agreement, dated as of August 10, 2001, by and among Global Sports Interactive,
Inc., Bluelight.com, LLC and Kmart Corporation, dated as of August 9, 2002 (filed with GSI Commerce, Inc.s Quarterly Report on Form 10-Q for the quarter ended September 28, 2002 and incorporated herein by
reference)  
|10.27          |  | Stock Purchase Agreement, dated as of July 20, 2001, by and among Global Sports, Inc., Michael G. Rubin and
Interactive Technology Holdings, LLC (filed with GSI Commerce, Inc.s Current Report on Form 8-K filed on August 27, 2001 and incorporated herein by reference)                                                                  
|10.28          |  | Letter Agreement, dated as of July 20, 2001, among Global Sports, Inc., Interactive Technology Holdings, LLC, SOFTBANK
Capital Partners LP and SOFTBANK Capital Advisors Fund LP (filed with GSI Commerce, Inc.s Current Report on Form 8-K filed on August 27, 2001 and incorporated herein by reference)                                  
|10.29*         |  | E-Commerce Agreement, dated as of June 14, 2002, by and among GSI Commerce Solutions, Inc. and Palm,
Inc.                                                                                                                                                                                                                                    
|10.30*         |  | Amendment No. 1 to E-Commerce Agreement, dated as of June 14, 2002 by and between GSI Commerce Solutions, Inc. and
Palm, Inc., dated as of December 3, 2002                                                                                                                                                                                  
|21.1           |  | List of Subsidiaries                                                                                                                                                                                                                                                                                                                         
|23.1           |  | Independent Auditors Consent (Deloitte & Touche LLP)                                                                                                                                                                                                                                                                                        
|99.1           |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002                                                                                                                                                                                            
|99.2           |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                            

---

|+ |  | Management contract or compensatory plan or arrangement
|- |  | -------------------------------------------------------

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



(b)    REPORTS
ON FORM 8-K



On December 17, 2002 we filed a
Current Report on Form 8-K announcing the sale of certain specified assets of the Company to Odimo Acquisition Corp.



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##### Table of Contents

SIGNATURES



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



Date: March 25, 2003

GSI COMMERCE, INC.By:

/s/    MICHAEL G. RUBINMichael G. Rubin Chairman, President and Chief Executive Officer




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



|Signature                                     |  | Capacity                                                                                                            |  | Date          
|--------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------- |  | --------------
|                                             
|/s/    MICHAEL G. RUBINMichael G. Rubin       |  | Chairman, President and Chief Executive Officer (principal executive
officer)                                       |  | March 25, 2003
|                                             
|/s/    JORDAN M. COPLANDJordan M. Copland     |  | Executive Vice President and Chief Financial Officer (principal financial officer and
principal accounting officer) |  | March 25, 2003
|                                             
|/s/    KENNETH J. ADELBERGKenneth J. Adelberg |  | Director                                                                                                            |  | March 25, 2003
|                                             
|/s/    M. JEFFREY BRANMANM. Jeffrey Branman   |  | Director                                                                                                            |  | March 25, 2003
|                                             
|/s/    RONALD D. FISHERRonald D. Fisher       |  | Director                                                                                                            |  | March 25, 2003
|                                             
|/s/    HARVEY LAMMHarvey Lamm                 |  | Director                                                                                                            |  | March 25, 2003
|                                             
|/s/    MARK S. MENELLMark S. Menell           |  | Director                                                                                                            |  | March 25, 2003
|                                             
|/s/    MICHAEL S. PERLISMichael S. Perlis     |  | Director                                                                                                            |  | March 25, 2003
|                                             
|/s/    JEFFREY F. RAYPORTJeffrey F. Rayport   |  | Director                                                                                                            |  | March 25, 2003



50



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##### Table of Contents



CERTIFICATIONS



I,
Michael G. Rubin, Chief Executive Officer of GSI Commerce, Inc., certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of GSI Commerce, Inc.;
| | -- |  | ----------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent functions):
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



March 25, 2003

/s/ Michael G. Rubin

Michael G. Rubin

Chairman, President and Chief Executive
Officer



51



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##### Table of Contents



I, Jordan M.
Copland, Chief Financial Officer of GSI Commerce, Inc., certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of GSI Commerce, Inc.;
| | -- |  | ----------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent functions):
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



March 25, 2003

/s/ Jordan M. Copland

Jordan M. Copland

Executive Vice President and Chief
Financial Officer



52



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##### Table of Contents



INDEPENDENT
AUDITORS REPORT



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



We have audited the accompanying consolidated balance sheets of GSI Commerce, Inc., formerly, Global Sports, Inc., and subsidiaries (the Company) as of December 29, 2001 and December 28, 2002, and the related consolidated
statements of operations, stockholders equity, and cash flows for each of the three years in the period ended December 28, 2002. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, such consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of December 29, 2001 and December 28, 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 28, 2002 in conformity with accounting principles
generally accepted in the United States of America.



|                            
|----------------------------
|/s/    DELOITTE & TOUCHE
LLP
|Deloitte & Touche LLP       



Philadelphia,
Pennsylvania

March 20, 2003



F-1



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##### Table of Contents



GSI
COMMERCE, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)



|                                                                                                                                                                                                                                                                                                   |  | December 29, 2001 |          |   | December 28, 2002 |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ----------------- | -
|ASSETS                                                                                                                                                                                                                                                                                             |  |                   |          |   |                   |  
|Current assets:                                                                                                                                                                                                                                                                                    |  |                   |          |   |                   |  
|Cash and cash equivalents                                                                                                                                                                                                                                                                          |  | $                 | 105,896  |   |                   | $
|Short-term investments                                                                                                                                                                                                                                                                             |  |                   | 842      |   |                   |  
|Marketable securities                                                                                                                                                                                                                                                                              |  |                   |         |   |                   |  
|Accounts receivable, net of allowance of $239 and $1,533, respectively                                                                                                                                                                                                                             |  |                   | 6,973    |   |                   |  
|Inventory                                                                                                                                                                                                                                                                                          |  |                   | 17,779   |   |                   |  
|Prepaid expenses and other current assets                                                                                                                                                                                                                                                          |  |                   | 1,502    |   |                   |  
|                                                                                                                                                                                                                                                                                                   |  |                   |          |   |                   |  
|Total current assets                                                                                                                                                                                                                                                                               |  |                   | 132,992  |   |                   |  
|Property and equipment, net                                                                                                                                                                                                                                                                        |  |                   | 28,929   |   |                   |  
|Goodwill, net                                                                                                                                                                                                                                                                                      |  |                   | 13,453   |   |                   |  
|Notes receivable                                                                                                                                                                                                                                                                                   |  |                   |         |   |                   |  
|Other equity investments                                                                                                                                                                                                                                                                           |  |                   |         |   |                   |  
|Other assets, net of accumulated amortization of $377 and $1,250,
respectively                                                                                                                                                                                                                     |  |                   | 15,391   |   |                   |  
|                                                                                                                                                                                                                                                                                                   |  |                   |          |   |                   |  
|Total assets                                                                                                                                                                                                                                                                                       |  | $                 | 190,765  |   |                   | $
|                                                                                                                                                                                                                                                                                                   |  |                   |          |   |                   |  
|                                                                                                                                                                                                                                                                                                  
|LIABILITIES AND STOCKHOLDERS
EQUITY                                                                                                                                                                                                                                                               |  |                   |          |   |                   |  
|Current liabilities:                                                                                                                                                                                                                                                                               |  |                   |          |   |                   |  
|Accounts payable                                                                                                                                                                                                                                                                                   |  | $                 | 22,356   |   |                   | $
|Accrued expenses and other                                                                                                                                                                                                                                                                         |  |                   | 8,196    |   |                   |  
|Deferred revenue                                                                                                                                                                                                                                                                                   |  |                   | 8,193    |   |                   |  
|Current portionnote payable                                                                                                                                                                                                                                                                       |  |                   | 39       |   |                   |  
|Current portioncapital lease obligations                                                                                                                                                                                                                                                          |  |                   | 506      |   |                   |  
|                                                                                                                                                                                                                                                                                                   |  |                   |          |   |                   |  
|Total current liabilities                                                                                                                                                                                                                                                                          |  |                   | 39,290   |   |                   |  
|Note payable                                                                                                                                                                                                                                                                                       |  |                   | 5,208    |   |                   |  
|Commitments and contingencies                                                                                                                                                                                                                                                                      |  |                   |         |   |                   |  
|Stockholders equity:                                                                                                                                                                                                                                                                              |  |                   |          |   |                   |  
|Preferred stock, Series A, $0.01 par value, 5,000,000 shares authorized; 400 and
200 shares issued as mandatorily redeemable preferred stock as of December 29, 2001 and December 28, 2002, respectively; 400 and 0 shares outstanding as of December 29, 2001 and December 28, 2002, respectively |  |                   |         |   |                   |  
|Common stock, $0.01 par value, 90,000,000 shares authorized; 37,673,808 and 38,857,855
shares issued as of December 29, 2001 and December 28, 2002, respectively; 37,672,598 and 38,783,645 shares outstanding as of December 29, 2001 and December 28, 2002, respectively                         |  |                   | 377      |   |                   |  
|Additional paid in capital                                                                                                                                                                                                                                                                         |  |                   | 277,628  |   |                   |  
|Accumulated other comprehensive income                                                                                                                                                                                                                                                             |  |                   |         |   |                   |  
|Accumulated deficit                                                                                                                                                                                                                                                                                |  |                   | (131,738 | ) |                   |  
|                                                                                                                                                                                                                                                                                                   |  |                   |          |   |                   |  
|                                                                                                                                                                                                                                                                                                   |  |                   | 146,267  |   |                   |  
|Less: Treasury stock, at par                                                                                                                                                                                                                                                                       |  |                   |         |   |                   |  
|                                                                                                                                                                                                                                                                                                   |  |                   |          |   |                   |  
|Total stockholders equity                                                                                                                                                                                                                                                                         |  |                   | 146,267  |   |                   |  
|                                                                                                                                                                                                                                                                                                   |  |                   |          |   |                   |  
|Total liabilities and stockholders equity                                                                                                                                                                                                                                                         |  | $                 | 190,765  |   |                   | $
|                                                                                                                                                                                                                                                                                                   |  |                   |          |   |                   |  



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



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##### Table of Contents



GSI
COMMERCE, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)



|                                                                                                                           |  | Fiscal Year Ended |                  
|-------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -----------------
|                                                                                                                           |  |                   | December 30, 2000
|                                                                                                                           |  |                   |                  
|Revenues:                                                                                                                  |  |                   |                  
|Net revenues from product sales                                                                                            |  | $                 | 41,808           
|Service fee revenue                                                                                                        |  |                   | 1,000            
|                                                                                                                           |  |                   |                  
|Net revenues                                                                                                               |  |                   | 42,808           
|Cost of revenues from product sales                                                                                        |  |                   | 29,567           
|                                                                                                                           |  |                   |                  
|Gross profit                                                                                                               |  |                   | 13,241           
|                                                                                                                           |  |                   |                  
|Operating expenses:                                                                                                        |  |                   |                  
|Sales and marketing, exclusive of $1,486, $847 and $532 reported below as stock-based
compensation, respectively           |  |                   | 37,730           
|Product development, exclusive of $0, $461 and $(44) reported below as stock based
compensation, respectively              |  |                   | 7,292            
|General and administrative, exclusive of $3,497, $8,974 and $(87) reported below as
stock-based compensation, respectively |  |                   | 8,730            
|Restructuring costs related to Ashford                                                                                     |  |                   |                 
|Net loss on sale of Ashford assets                                                                                         |  |                   |                 
|Stock-based compensation                                                                                                   |  |                   | 4,983            
|Depreciation and amortization                                                                                              |  |                   | 8,074            
|                                                                                                                           |  |                   |                  
|Total operating expenses                                                                                                   |  |                   | 66,809           
|                                                                                                                           |  |                   |                  
|Other (income) expense:                                                                                                    |  |                   |                  
|Other income                                                                                                               |  |                   |                 
|Interest expense                                                                                                           |  |                   | 407              
|Interest income                                                                                                            |  |                   | (1,815           
|                                                                                                                           |  |                   |                  
|Total other (income) expense                                                                                               |  |                   | (1,408           
|                                                                                                                           |  |                   |                  
|Loss from continuing operations                                                                                            |  |                   | (52,160          
|Discontinued operations:                                                                                                   |  |                   |                  
|Loss on disposition of discontinued operations                                                                             |  |                   | (5,850           
|                                                                                                                           |  |                   |                  
|Net loss                                                                                                                   |  | $                 | (58,010          
|                                                                                                                           |  |                   |                  
|Earnings (losses) per share:                                                                                               |  |                   |                  
|Basic and diluted                                                                                                         |  |                   |                  
|Loss from continuing operations                                                                                            |  | $                 | (2.37            
|Loss on disposition of discontinued operations                                                                             |  |                   | (0.27            
|                                                                                                                           |  |                   |                  
|Net loss                                                                                                                   |  | $                 | (2.64            
|                                                                                                                           |  |                   |                  





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



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##### Table of Contents



GSI
COMMERCE, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands)



|                                                                                                            |  | Common Stock |   |  | Additional Paid in Capital |     |   | Accumulated Deficit |   |         | Comprehensive Loss |        |   | Accumulated Other Comprehensive Income |         | Treasury Stock |   |         | Total | 
|----------------------------------------------------------------------------------------------------------- |  | ------------ | - |  | -------------------------- | --- | - | ------------------- | - | ------- | ------------------ | ------ | - | -------------------------------------- | ------- | -------------- | - | ------- | ----- | 
|                                                                                                            |  | Shares       |   |  | Dollars                    |     |   |                     |   |         |                    | Shares |   |                                        | Dollars |                |  
|Consolidated balance at January 1, 2000                                                                     |  | 19,544       |   |  | $                          | 195 |   |                     | $ | 102,461 |                    |        | $ | (43,133                                | )       |                |   |         |       | 
|Net loss                                                                                                    |  |              |   |  |                            |     |   |                     |   |         |                    |        |   | (58,010                                | )       |                | $ | (58,010 | )     | 
|Net unrealized gains on available-for-sale securities                                                       |  |              |   |  |                            |     |   |                     |   |         |                    |        |   |                                        |         |                |   |        |       | 
|                                                                                                            |  |              |   |  |                            |     |   |                     |   |         |                    |        |   |                                        |         |                |   |         |       | 
|Comprehensive loss                                                                                          |  |              |   |  |                            |     |   |                     |   |         |                    |        |   |                                        |         |                | $ | (58,010 | )     | 
|                                                                                                            |  |              |   |  |                            |     |   |                     |   |         |                    |        |   |                                        |         |                |   |         |       | 
|Issuance of common stock and warrants to SOFTBANK and Rustic Canyon Ventures, LP, net of
costs              |  | 3,125        |   |  |                            | 31  |   |                     |   | 24,752  |                    |        |   |                                        |         |                |   |         |       | 
|Issuance of common stock and issuance of warrants valued at approximately $8.9 million
to ITH, net of costs |  | 5,000        |   |  |                            | 50  |   |                     |   | 41,263  |                    |        |   |                                        |         |                |   |         |       | 
|Issuance of common stock in acquisition of Fogdog,Inc.                                                      |  | 5,067        |   |  |                            | 51  |   |                     |   | 42,305  |                    |        |   |                                        |         |                |   |         |       | 
|Issuance of options and warrants to purchase common stock in exchange for
services                          |  |              |   |  |                            |     |   |                     |   | 5,573   |                    |        |   |                                        |         |                |   |         |       | 
|Issuance of common stock upon exercise of options and warrants                                              |  | 205          |   |  |                            | 2   |   |                     |   | 724     |                    |        |   |                                        |         |                |   |         |       | 
|Issuance of common stock under Employee Stock Purchase Plan                                                 |  | 53           |   |  |                            | 1   |   |                     |   | 249     |                    |        |   |                                        |         |                |   |         |       | 
|Retirement of treasury stock                                                                                |  | (1,069       | ) |  |                            | (11 | ) |                     |   | (203    | )                  |        |   |                                        |         |                |   |         |       | 
|                                                                                                            |  |              |   |  |                            |     |   |                     |   |         |                    |        |   |                                        |         |                |   |         |       | 
|Consolidated balance at December 30, 2000                                                                   |  | 31,925       |   |  |                            | 319 |   |                     |   | 217,124 |                    |        |   | (101,143                               | )       |                |   |         |       | 
|Net loss                                                                                                    |  |              |   |  |                            |     |   |                     |   |         |                    |        |   | (30,595                                | )       |                | $ | (30,595 | )     | 
|Net unrealized gains on available-for-sale securities                                                       |  |              |   |  |                            |     |   |                     |   |         |                    |        |   |                                        |         |                |   |        |       | 
|                                                                                                            |  |              |   |  |                            |     |   |                     |   |         |                    |        |   |                                        |         |                |   |         |       | 
|Comprehensive loss                                                                                          |  |              |   |  |                            |     |   |                     |   |         |                    |        |   |                                        |         |                | $ | (30,595 | )     | 
|                                                                                                            |  |              |   |  |                            |     |   |                     |   |         |                    |        |   |                                        |         |                |   |         |       | 
|Issuance of common stock in lieu of future cash revenue share payments                                      |  | 1,600        |   |  |                            | 16  |   |                     |   | 14,400  |                    |        |   |                                        |         |                |   |         |       | 
|Issuance of common stock to ITH, net of costs                                                               |  | 3,000        |   |  |                            | 30  |   |                     |   | 29,970  |                    |        |   |                                        |         |                |   |         |       | 
|Issuance of options and warrants to purchase common stock in exchange for
services                          |  |              |   |  |                            |     |   |                     |   | 9,962   |                    |        |   |                                        |         |                |   |         |       | 
|Issuance of common stock upon exercise of options and warrants                                              |  | 958          |   |  |                            | 10  |   |                     |   | 5,722   |                    |        |   |                                        |         |                |   |         |       | 
|Issuance of common stock under Employee Stock Purchase Plan                                                 |  | 191          |   |  |                            | 2   |   |                     |   | 683     |                    |        |   |                                        |         |                |   |         |       | 
|Contribution from stockholder                                                                               |  |              |   |  |                            |     |   |                     |   | 71      |                    |        |   |                                        |         |                |   |         |       | 
|Repurchase of warrants                                                                                      |  |              |   |  |                            |     |   |                     |   | (300    | )                  |        |   |                                        |         |                |   |         |       | 
|Purchase of treasury stock                                                                                  |  |              |   |  |                            |     |   |                     |   | (4      | )                  |        |   |                                        |         |                |   |         |       | 
|                                                                                                            |  |              |   |  |                            |     |   |                     |   |         |                    |        |   |                                        |         |                |   |         |       | 
|Consolidated balance at December 29, 2001                                                                   |  | 37,674       |   |  | $                          | 377 |   |                     | $ | 277,628 |                    |        | $ | (131,738                               | )       |                |   |         |       | 
|Net loss                                                                                                    |  |              |   |  |                            |     |   |                     |   |         |                    |        |   | (33,809                                | )       |                | $ | (33,809 | )     | 
|Net unrealized gains on available-for-sale securities                                                       |  |              |   |  |                            |     |   |                     |   |         |                    |        |   |                                        |         |                |   | 57      |       | 
|                                                                                                            |  |              |   |  |                            |     |   |                     |   |         |                    |        |   |                                        |         |                |   |         |       | 
|Comprehensive loss                                                                                          |  |              |   |  |                            |     |   |                     |   |         |                    |        |   |                                        |         |                | $ | (33,752 | )     | 
|                                                                                                            |  |              |   |  |                            |     |   |                     |   |         |                    |        |   |                                        |         |                |   |         |       | 
|Issuance of common stock in acquisition of Ashford.com, Inc.                                                |  | 430          |   |  |                            | 4   |   |                     |   | 6,877   |                    |        |   |                                        |         |                |   |         |       | 
|Issuance of options and warrants to purchase common stock in exchange for
services                          |  |              |   |  |                            |     |   |                     |   | (452    | )                  |        |   |                                        |         |                |   |         |       | 
|Issuance of common stock upon exercise of options and warrants                                              |  | 599          |   |  |                            | 6   |   |                     |   | 1,358   |                    |        |   |                                        |         |                |   |         |       | 
|Issuance of common stock under Employee Stock Purchase Plan                                                 |  | 155          |   |  |                            | 2   |   |                     |   | 566     |                    |        |   |                                        |         |                |   |         |       | 
|Purchases of treasury stock                                                                                 |  |              |   |  |                            |     |   |                     |   | (352    | )                  |        |   |                                        |         |                |   |         |       | 
|                                                                                                            |  |              |   |  |                            |     |   |                     |   |         |                    |        |   |                                        |         |                |   |         |       | 
|Consolidated balance at December 28, 2002                                                                   |  | 38,858       |   |  | $                          | 389 |   |                     | $ | 285,625 |                    |        | $ | (165,547                               | )       |                |   |         |       | 
|                                                                                                            |  |              |   |  |                            |     |   |                     |   |         |                    |        |   |                                        |         |                |   |         |       | 





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



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##### Table of Contents



GSI
COMMERCE, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                                                 |  | Fiscal Year Ended |        
|---------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------
|                                                                                                                 |  | December 30, 2000 |        
|Cash Flows from Operating Activities:                                                                            |  |                   |        
|Net loss                                                                                                         |  | $                 | (58,010
|Deduct:                                                                                                          |  |                   |        
|                                                                                                                
|Loss on disposition of discontinued operations                                                                   |  |                   | (5,850 
|                                                                                                                 |  |                   |        
|Loss from continuing operations                                                                                  |  |                   | (52,160
|                                                                                                                 |  |                   |        
|Adjustments to reconcile loss from continuing operations to net cash provided by (used
in) operating activities: |  |                   |        
|Depreciation and amortization                                                                                    |  |                   | 8,074  
|Stock-based compensation                                                                                         |  |                   | 4,983  
|Non-cash restructuring costs related to Ashford                                                                  |  |                   |       
|Net loss on sale of Ashford assets                                                                               |  |                   |       
|Changes in operating assets and liabilities, net of discontinued
operations:                                     |  |                   |        
|Accounts receivable, net                                                                                         |  |                   | (3,660 
|Inventory                                                                                                        |  |                   | (7,056 
|Prepaid expenses and other current assets                                                                        |  |                   | (49    
|Other assets, net                                                                                                |  |                   | (196   
|Refundable income taxes                                                                                          |  |                   | 1,338  
|Accounts payable and accrued expenses and other                                                                  |  |                   | 10,454 
|Deferred revenue                                                                                                 |  |                   | 130    
|                                                                                                                 |  |                   |        
|Net cash provided by (used in) continuing operations                                                             |  |                   | (38,142
|Net cash used in discontinued operations                                                                         |  |                   | (670   
|                                                                                                                 |  |                   |        
|Net cash provided by (used in) operating activities                                                              |  |                   | (38,812
|                                                                                                                 |  |                   |        
|Cash Flows from Investing Activities:                                                                            |  |                   |        
|Acquisition of property and equipment, net                                                                       |  |                   | (13,675
|Reductions to goodwill                                                                                           |  |                   |       
|Proceeds from sale of Ashford assets                                                                             |  |                   |       
|Net cash received from acquisition of Fogdog, net of acquisition costs                                           |  |                   | 35,692 
|Net cash paid for acquisition of Ashford                                                                         |  |                   |       
|Proceeds from sale of discontinued operations                                                                    |  |                   | 13,200 
|Purchases of marketable securities                                                                               |  |                   |       
|Sales of marketable securities                                                                                   |  |                   |       
|(Purchases) sales of short-term investments                                                                      |  |                   | (794   
|                                                                                                                 |  |                   |        
|Net cash provided by (used in) investing activities                                                              |  |                   | 34,423 
|                                                                                                                 |  |                   |        
|Cash Flows from Financing Activities:                                                                            |  |                   |        
|Repurchase of warrants                                                                                           |  |                   |       
|Repayments of capital lease obligations                                                                          |  |                   | (1,394 
|Proceeds from mortgage note                                                                                      |  |                   | 5,300  
|Repayments of mortgage note                                                                                      |  |                   | (18    
|Retirement of Ashford revolving credit facility                                                                  |  |                   |       
|Purchases of treasury stock                                                                                      |  |                   |       
|Proceeds from sale of common stock and warrants                                                                  |  |                   | 64,545 
|Proceeds from exercises of common stock options and warrants                                                     |  |                   | 623    
|Contribution from stockholder.                                                                                   |  |                   |       
|                                                                                                                 |  |                   |        
|Net cash provided by (used in) financing activities                                                              |  |                   | 69,056 
|                                                                                                                 |  |                   |        
|Net increase (decrease) in cash and cash equivalents                                                             |  |                   | 64,667 
|Cash and cash equivalents, beginning of year                                                                     |  |                   | 27,345 
|                                                                                                                 |  |                   |        
|Cash and cash equivalents, end of year                                                                           |  | $                 | 92,012 
|                                                                                                                 |  |                   |        



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



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##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 1DESCRIPTION
OF BUSINESS



GSI Commerce, Inc., formerly,
Global Sports, Inc., (GSI or the Company), a Delaware corporation, develops and operates electronic commerce businesses for retailers, branded manufacturers, media companies, television networks and professional sports
organizations. The e-commerce businesses that we operate include the sale of products through online retail stores and direct response television campaigns. The Company enables its partners to capitalize on their existing brands to exploit
e-commerce opportunities. The Company customizes the design of its partners e-commerce businesses with a broad range of characteristics that includes differentiated user interfaces on partners Web sites, partner-specific content pages,
product descriptions and images, partner specific products for direct response television campaigns and partner specific customer service and fulfillment. 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, as well as from fixed and variable fees
earned in connection with the development and operation of partners e-commerce businesses and the provision of marketing and other services.



NOTE 2SIGNIFICANT ACCOUNTING POLICIES



The following summarize the Companys significant accounting policies:



Fiscal Year:    During 1999, the Company changed its fiscal year end date from a
calendar year end to a year end date representing the Saturday closest to December 31, beginning with the fiscal year ended January 1, 2000. The fiscal year is named for the calendar year ending on that December 31. The effects on results of
operations of the two fewer days in the fiscal year ended December 30, 2000 and one fewer day in each of the fiscal years ended December 29, 2001 and December 28, 2002 are not significant.



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



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



Fair Values:    The estimated fair value amounts presented in these consolidated financial statements have been
determined by the Company using available market information and appropriate methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. The estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Such fair
value estimates are based on pertinent information available to management as of December 29, 2001 and December 28, 2002, 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.



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GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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



Marketable
Securities:    Marketable securities, which consist of investments in debt securities, are classified as available-for-sale and are reported at fair value, with unrealized gains and losses recorded as a component of
stockholders equity. The Company does not intend to hold its marketable securities for more than one year from the most recent balance sheet date and has therefore classified them as a current asset. Realized gains or losses and declines in
value judged to be other than temporary, if any, on available-for-sale securities are reported in other income or loss. As of December 28, 2002, the Company recorded net unrealized gains on its marketable securities of $57,000.



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



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



| |  |  | Four years for computer hardware and software;
| | - |  | ----------------------------------------------



| |  |  | Three to ten years for furniture, and fulfillment center and office equipment;
| | - |  | ------------------------------------------------------------------------------



| |  |  | The lesser of fifteen years or lease term for leasehold improvements;
| | - |  | ---------------------------------------------------------------------



| |  |  | Fifteen years for building improvements; and
| | - |  | --------------------------------------------



| |  |  | Thirty years for buildings.
| | - |  | ---------------------------



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



Change in Useful Life of Property and Equipment:    During the three-month period
ended March 31, 2001, the Company increased its estimate of the useful lives of its computer hardware and software from two years to four years. This change had the effect of decreasing the loss from continuing operations for the fiscal year ended
December 29, 2001 by $5.4 million, or $0.16 per share, and for the fiscal year ended December 28, 2002 by $1.3 million, or $0.03 per share. The increase in estimated useful lives was based on the Companys then-current analysis of its
historical operating experience, which indicated that the original estimate was no longer appropriate.



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



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##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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



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



The following is a
reconciliation of reported net loss to net loss adjusted to reflect the impact of the discontinuance of the amortization of goodwill for the fiscal years ended December 30, 2000, December 29, 2001 and December 28, 2002:



|                                            |  | Fiscal Year Ended |        
|------------------------------------------- |  | ----------------- | -------
|                                            |  | December 30, 2000 |        
|                                            |  | (in thousands)    |        
|Net loss:                                   |  |                   |        
|Reported net loss                           |  | $                 | (58,010
|Goodwill amortization                       |  |                   |       
|                                            |  |                   |        
|Adjusted net loss                           |  | $                 | (58,010
|                                            |  |                   |        
|Losses per sharebasic and diluted:         |  |                   |        
|Reported net loss per share                 |  | $                 | (2.64  
|Goodwill amortization                       |  |                   |       
|                                            |  |                   |        
|Adjusted losses per sharebasic and diluted |  | $                 | (2.64  
|                                            |  |                   |        



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Long-Lived Assets:    The ability to realize long-lived assets is evaluated periodically as events or circumstances indicate a possible inability to recover their carrying amount. Such evaluation is based
on various analyses, including undiscounted cash flow and profitability projections that incorporate, as applicable, the impact on the existing business. The analyses necessarily involve significant management judgment. Any impairment loss, if
indicated, is measured as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. During the three-month period ended December 28, 2002, the Company determined that certain long-lived assets were no longer
being used in its continuing operations and, therefore, that the carrying amounts of these assets were not recoverable. The long-lived assets consisted of furniture and computer hardware and software. The Company disposed of these assets during the
three-month period ended December 28, 2002 and recorded an impairment charge of $645,000 which is included in depreciation and amortization expense.



Notes Receivable:    Notes receivable consists primarily of a $4.5 million, five year subordinated secured
promissory note, with a stated interest rate of 7%, received in connection with the sale of certain assets of Ashford (see Note 3). The note is due in twenty consecutive quarterly principal payments of $225,000 each, beginning March 2003 through
December 2007. Accrued interest on the note is payable with each quarterly principal payment. In order to determine the fair value of the note, the Company obtained an independent, third party valuation. Based upon the valuation, the Company
determined that the market interest rate of the note is 12.5% and therefore valued the note at approximately $4.0 million. The $500,000 discount will be amortized over the term of the note and recorded as an increase in interest income.



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



Other Assets, Net:    Other assets, net consists primarily of deferred partner revenue share charges, resulting
from the exercise of a right to receive 1,600,000 shares of the Companys common stock in lieu of future cash partner revenue share payments (see Note 7). The 1,600,000 shares of GSI common stock issued are subject to restrictions, including
the prohibition of the transfer of such shares. These restrictions lapsed as to 10% of such shares on December 31, 2002 and will lapse as to an additional 10% of such shares on the last day of each quarter thereafter, becoming free of all such
transfer restrictions on March 31, 2005. Deferred partner revenue share charges were $0, $14.1 million and $13.2 million as of December 30, 2000, December 29, 2001 and December 28, 2002, respectively, and are being amortized as stock-based
compensation expense as the partner revenue share expense is incurred. The partner revenue share expense incurred is based on actual revenues



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 $0, $336,000 and $857,000 for the fiscal years ended December 30, 2000, December 29, 2001 and
December 28, 2002, respectively.



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



Net Revenues from Product
Sales:    The Company derives its net revenues from product sales from the sale of goods through its partners e-commerce businesses (which include the sale of products through online retail stores and direct response
television campaigns), toll-free telephone number sales, bulk sales, business-to-business and group sales and related outbound shipping charges, net of allowances for returns and discounts. Other sources of revenue, including commissions from the
sale of gift certificates to the Companys retail partners land-based stores and the sale of advertising on the partners Web sites, were not significant for the fiscal years ended December 30, 2000, December 29, 2001 and December
28, 2002.



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 product from the Companys fulfillment center in Louisville, KY. During the fiscal year ended
December 28, 2002, the Company also shipped product from its former jewelry and luxury goods fulfillment center in Houston, TX. The Company also relies on certain vendors to ship products to customers. 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 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, 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 00-25 addresses consideration paid to parties along a distribution chain. The Company purchases merchandise from its vendors, at its discretion, and is responsible for paying those
vendors. The amounts purchased and the prices paid to the Companys vendors are not in any way impacted by the revenue share provisions of the Companys agreements with its partners. Accordingly, the Companys partners and vendors are
not linked in the distribution chain, and the provisions of EITF No. 00-25 do not apply.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Service
Fee Revenue:    The Company derives its service fee revenue from fixed and variable fees earned in connection with the development and operation of its partners e-commerce businesses and the provision of marketing and
other services. The Company recognizes revenues from services provided when the following revenue recognition criteria are met: persuasive evidence of an arrangement exists, services have been rendered, the fee is fixed or determinable and
collectibility is reasonably assured. If the Company receives payments for services in advance, these amounts are deferred and then recognized over the service period. Costs relating to service fee revenue consist primarily of personnel and other
costs associated with the Companys engineering, production and creative departments which are included in product development expense, as well as fulfillment costs and personnel and other costs associated with its marketing and customer
service departments which are included in sales and marketing expense.



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



Sales and Marketing:    Sales and marketing expenses include advertising and promotional expenses, including
promotional free shipping and subsidized shipping and handling costs, online marketing fees, commissions to affiliates, fulfillment costs, customer service costs, credit card fees, merchandising costs and payroll and related expenses. These expenses
also include partner revenue share charges, which are royalty payments made to the Companys partners in exchange for the use of the partners brands, the promotion of their URLs, Web sites and toll-free telephone numbers in their
marketing and communications materials, the implementation of programs to provide incentives to customers to shop through the e-commerce businesses that the Company operates for its partners and other programs and services provided to the customers
of the e-commerce businesses that the Company operates for its partners. Partner revenue share charges were $1.1 million, $3.6 million and $5.7 million for the fiscal years ended December 30, 2000, December 29, 2001 and December 28, 2002,
respectively.



Shipping and Handling
Costs:    The Company defines shipping and handling costs as only those costs incurred for a third-party shipper to transport products to the customer and these costs are included in cost of revenues from product sales. In
some instances, shipping and handling costs exceed shipping charges to the customer and are subsidized by the Company. Additionally, the Company selectively offers promotional free shipping whereby it ships merchandise to customers free of all
shipping and handling charges. The cost of promotional free shipping and subsidized shipping and handling was $3.0 million, $960,000 and $2.9 million for the fiscal years ended December 30, 2000, December 29, 2001 and December 28, 2002,
respectively, and was charged to sales and marketing expense.



Fulfillment Costs:    The Company defines fulfillment costs as personnel, occupancy and other costs associated with its Kentucky fulfillment center and its former Texas 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 $10.6 million, $10.0 million and $12.5 million for the fiscal years ended December
30, 2000, December 29, 2001 and December 28, 2002, respectively, and are included in sales and marketing expense.



Advertising:    The Company expenses the cost of advertising, which includes on-line marketing fees, media,
agency and production expenses, in accordance with the AICPA Accounting Standards Executive Committees Statement of Position (SOP) 93-7, Reporting on Advertising Costs. Advertising production



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



costs are expensed the first time the advertisement runs. On-line marketing fees and media (television, radio and print) placement costs are
expensed in the month the advertising appears. Agency fees are expensed as incurred. Advertising expense was $11.3 million, $5.6 million and $3.4 million for the fiscal years ended December 30, 2000, December 29, 2001 and December 28, 2002,
respectively, and are included in sales and marketing expenses.



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



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



Restructuring Costs Related to
Ashford:    Restructuring costs related to Ashford, 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 included the timing of employee terminations and estimates of the expected salvage value of assets held for disposal. The Company will review these reserves periodically and adjust them if
necessary.



Stock-Based
Compensation:    SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the intrinsic method prescribed in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, compensation expense for stock options issued to employees is measured as the excess, if any, of the quoted market price of the Companys stock at the date of the grant over the amount an employee must pay to
acquire the stock. The Company accounts for stock-based compensation for stock options and warrants issued to non-employees in accordance with SFAS No. 123 and EITF No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services, and EITF No. 00-18, Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other Than Employees. Accordingly, compensation
expense for stock options and warrants issued to non-employees is measured using a Black-Scholes multiple option pricing model that takes into account 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 30, 2000, December 29, 2001 and December 28, 2002 as if compensation expense for stock
options issued to employees had been determined consistent with SFAS No. 123:



|                                                                                               |  | Fiscal Year Ended |        
|---------------------------------------------------------------------------------------------- |  | ----------------- | -------
|                                                                                               |  | December 30, 2000 |        
|                                                                                               |  | (in thousands)    |        
|Net loss, as reported                                                                          |  | $                 | (58,010
|Deduct: Total stock-based compensation determined under fair value based method for all
awards |  |                   | (6,193 
|                                                                                               |  |                   |        
|Pro forma net loss                                                                             |  | $                 | (64,203
|                                                                                               |  |                   |        
|Losses per sharebasic and diluted:                                                            |  |                   |        
|Net loss per share, as reported                                                                |  | $                 | (2.64  
|                                                                                               |  |                   |        
|Pro forma net loss per share                                                                   |  | $                 | (2.91  
|                                                                                               |  |                   |        



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
Company also records stock-based compensation as deferred partner revenue share charges are amortized. Stock-based compensation related to the amortization of deferred partner revenue share charges was $0, $336,000 and $857,000 for the fiscal years
ended December 30, 2000, December 29, 2001 and December 28, 2002, respectively.



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



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



New Accounting Pronouncements



Impairment or Disposal of Long-Lived Assets:    In October 2001, the Financial Accounting Standards Board
(FASB) issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, and the accounting and reporting provisions of Accounting Principals Board (APB) Opinion No. 30, Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. SFAS No. 144 retains the requirement in APB No. 30 to report separately discontinued operations and extends that reporting
to a component of an entity that either has been disposed of or is classified as held for sale. This statement is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company adopted this
statement in the first quarter of fiscal 2002, and it did not have a significant impact on the Companys financial position or results of operations.



Consideration Given by a Vendor to a Customer or Reseller:    In November 2001, the Emerging Issues Task Force
(EITF) reached a consensus on EITF No. 01-09, Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendors Products. EITF No. 01-09 addresses the accounting for consideration given by a
vendor to a customer or reseller and is a codification of EITF No. 00-14, Accounting for Certain Sales Incentives, EITF No. 00-22, Accounting for Points and Certain Other Time-Based or Volume-Based Sales Incentive
Offers, and Offers for Free Products or Services to be Delivered in the Future and EITF No. 00-25, Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendors Products. The Company adopted this
statement in the first quarter of fiscal 2002, and it did not have a significant impact on the Companys financial position or results of operations.



Costs Associated with Exit or Disposal Activities:    In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The provisions of this statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company adopted this statement in the fourth quarter of fiscal 2002, and it did not have a significant impact on the Companys financial position or results of operations.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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
02-16 addresses the accounting of cash consideration received by a customer from a vendor, including vendor rebates and refunds. The consensus reached states that consideration received should be presumed to be a reduction of the prices of the
vendors products or services and should therefore be shown as a reduction of cost of sales in the income statement of the customer. The presumption could be overcome if the vendor receives an identifiable benefit in exchange for the
consideration or the consideration represents a reimbursement of a specific incremental identifiable cost incurred by the customer in selling the vendors product or service. If one of these conditions is met, the cash consideration should be
characterized as a reduction of those costs in the income statement of the customer. The consensus reached also concludes that if rebates or refunds can be reasonably estimated, such rebates or refunds should be recognized as a reduction of the cost
of sales based on a systematic and rational allocation of the consideration to be received relative to the transactions that mark the progress of the customer toward earning the rebate or refund. We do not expect the provisions of this consensus to
have a significant impact on our financial position or results of operations.



Stock-Based Compensation:    In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure, an amendment of
FASB Statement 123. SFAS No. 148 addresses alternative methods of transition for a voluntary change to fair value-based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements
of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The transition guidance and annual
disclosure provisions of SFAS No.148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. The Company adopted this statement in the fourth quarter of fiscal 2002, and it did
not have a significant impact on the Companys financial position or results of operations.



NOTE 3ACQUISITIONS AND DISPOSITIONS



Ashford



On March 14, 2002, the Company completed its acquisition of all of the outstanding common stock of Ashford 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 and in December 2002, the Company sold certain assets of Ashford to Odimo Acquisition Corp., a wholly owned subsidiary of
Odimo. In conjunction with the sale of certain assets of Ashford, the Company also announced and implemented its plan to cease the operations of Ashford.



Acquisition of Ashford



The Companys primary reason for the acquisition was to extend its outsource business model into the jewelry, luxury goods and
corporate gifts categories. The primary factors that contributed to recognition of goodwill were the reduction of the book value of Ashfords net assets from the measurement date to the date the merger was completed and the adjustment of
Ashfords inventory and certain liabilities to fair value.



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



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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



The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in
thousands).



|Assets acquired:                                |  |   |       
|----------------------------------------------- |  | - | ------
|Short-term investments                          |  | $ | 1,400 
|Accounts receivable, net of allowance of $1,184 |  |   | 2,168 
|Inventory                                       |  |   | 11,954
|Prepaid expenses and other current assets       |  |   | 551   
|Property and equipment                          |  |   | 1,681 
|Goodwill                                        |  |   | 8,815 
|Other assets                                    |  |   | 723   
|                                                |  |   |       
|Total assets acquired                           |  | $ | 27,292
|                                                |  |   |       
|                                               
|Liabilities assumed:                            |  |   |       
|Accounts payable                                |  | $ | 986   
|Accrued expenses and other                      |  |   | 7,133 
|Deferred revenue                                |  |   | 313   
|Revolving credit facility                       |  |   | 3,123 
|                                                |  |   |       
|Total liabilities assumed                       |  | $ | 11,555
|                                                |  |   |       



During
the three-month period ended June 29, 2002, the Company obtained a third-party valuation relating to intangible assets acquired from Ashford 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 consisted of Ashfords customer base and trademarks. The Company recorded the customer base at $1.5
million and the trademarks at $1.6 million, respectively.



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



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



The unaudited pro forma combined information below presents the combined results of operations of the Company and Ashford as if the acquisition had occurred at the beginning of the respective periods presented. The unaudited pro
forma combined information, based upon the historical consolidated financial statements of the



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Company and Ashford, is based on an acquisition cost of $15.7 million and assumes that an estimated $6.7 million of acquisition cost
over the book value of Ashfords net tangible assets is allocated to goodwill.



|                       |  | Fiscal Year Ended                        |        
|---------------------- |  | ---------------------------------------- | -------
|                       |  | December 29, 2001                        |        
|                       |  | (in thousands, except per share amounts) |        
|Revenues               |  | $                                        | 152,274
|Net loss               |  | $                                        | (80,307
|Net loss per share (1) |  | $                                        | (2.33  

---

|(1) |  | Net loss per share is calculated using the weighted average number of common shares outstanding, including the issuance of approximately 430,000 shares to
stockholders of Ashford as if such event had occurred at the beginning of the respective periods presented.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The unaudited pro forma combined information is not necessarily indicative of the results of operations of the combined company had the
acquisition occurred at the beginning of the periods presented, nor is it necessarily indicative of future results.



Sale of Ashford 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. The Company received $1.2 million in cash proceeds and recognized a gain on the sale of assets of $379,000.



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



Cessation of Ashford Operations



In conjunction with the sale of certain assets of Ashford, the Company also announced and implemented its
plan to cease the operations of Ashford, which accounted for approximately $21.6 million of the Companys total revenue for the fiscal year ended December 28, 2002. This plan involved the liquidation of Ashford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 December 28, 2002, two employees had been terminated and actual termination benefits paid
were $0.



Costs relating to ongoing operations
are not included in restructuring costs related to Ashford. 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 are included in cost of revenues from product sales. As of December 28, 2002, inventory write downs resulting from the restructuring totaled $1.2 million. No additional write downs from the restructuring are
anticipated.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





For the
year ended December 28, 2002, the charges associated with the cessation of Ashfords operations are included in restructuring costs related to Ashford and were as follows (in thousands):



|Termination benefits      |  | $ | 417  
|------------------------- |  | - | -----
|Contractual obligations   |  |   | 402  
|Asset impairments         |  |   | 849  
|Other restructuring costs |  |   | 12   
|                          |  |   |      
|                          |  | $ | 1,680
|                          |  |   |      



Termination benefits are comprised of severance-related payments for all employees terminated in connection with the Ashford restructuring. The contractual obligations relate to contracts entered into by Ashford prior to the sale of
assets to Odimo Acquisition Corp. As of December 28, 2002, the Company had contractual obligations of $402,000. Asset impairments relate to the closure of Ashfords fulfillment center and offices. For assets to be disposed of, the Company
estimated the fair value based on expected salvage value less costs to sell. The Company is actively seeking third-party buyers for the assets held for disposal. At December 28, 2002, the carrying amount of assets held for disposal was not
significant. Other restructuring costs include expenses which are directly attributable to the cessation of operations of Ashford.



Fogdog



On December 28, 2000, the Company completed its acquisition of Fogdog, Inc. (Fogdog) pursuant to a definitive merger agreement
executed on October 24, 2000. As consideration for the purchase, the Company issued to the stockholders of Fogdog approximately 5.1 million shares of the Companys common stock valued at $38.7 million based on the stock price as of the
measurement date.



The acquisition has been
accounted for under the purchase method and the acquisition costs of $44.7 million have been allocated to the assets acquired and the liabilities assumed based upon estimates of their respective fair values. A total of $14.4 million, representing
the excess of the purchase price over fair value of the net tangible assets acquired, has been allocated to goodwill and was amortized during the fiscal year ended December 29, 2001 by the straight-line method, assuming a useful life of twenty
years.



The Companys consolidated results
of operations incorporates Fogdogs results of operations commencing upon the December 28, 2000 acquisition date. The effect of incorporating Fogdogs results of operations for the three days ended December 30, 2000 was not significant.



NOTE 4MARKETABLE SECURITIES



Marketable securities, at estimated fair value, consist of
the following as of December 28, 2002:



|                                  |  | Amortized Cost |        | Gross Unrealized Gains |   | Gross Unrealized Losses |  | Estimated Fair Value
|--------------------------------- |  | -------------- | ------ | ---------------------- | - | ----------------------- |  | --------------------
|                                  |  | (in thousands)
|Auction preferred stock           |  | $              | 1,500  |                        | $ |                        |  | $                   
|U.S. government agency securities |  |                | 9,986  |                        |   | 57                      |  |                     
|                                  |  |                |        |                        |   |                         |  |                     
|                                  |  | $              | 11,486 |                        | $ | 57                      |  | $                   
|                                  |  |                |        |                        |   |                         |  |                     



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
amortized cost and estimated fair value of investments in debt securities as of December 28, 2002, by contractual maturity, are as follows:



|                                     |  | Amortized Cost |        | Estimated Fair Value
|------------------------------------ |  | -------------- | ------ | --------------------
|                                     |  | (in thousands)
|Due within one year                  |  | $              | 6,983  |                     
|Due after one year through two years |  |                | 4,503  |                     
|                                     |  |                |        |                     
|                                     |  | $              | 11,486 |                     
|                                     |  |                |        |                     



NOTE 5PROPERTY
AND EQUIPMENT



The major classes of property
and equipment, at cost, as of December 29, 2001 and December 28, 2002 are as follows:



|                                                       |  | December 29, 2001 |         |   | December 28, 2002 |  
|------------------------------------------------------ |  | ----------------- | ------- | - | ----------------- | -
|                                                       |  | (in thousands)    |        
|Computer hardware and software                         |  | $                 | 27,120  |   |                   | $
|Building and building improvements                     |  |                   | 7,125   |   |                   |  
|Furniture, and fulfillment center and office equipment |  |                   | 4,463   |   |                   |  
|Land                                                   |  |                   | 1,242   |   |                   |  
|Leasehold improvements                                 |  |                   | 3,119   |   |                   |  
|Construction in progress                               |  |                   |        |   |                   |  
|                                                       |  |                   |         |   |                   |  
|                                                       |  |                   | 43,069  |   |                   |  
|Less: Accumulated depreciation and amortization        |  |                   | (14,140 | ) |                   |  
|                                                       |  |                   |         |   |                   |  
|Property and equipment, net                            |  | $                 | 28,929  |   |                   | $
|                                                       |  |                   |         |   |                   |  



NOTE 6LEASES



Capital Leases



During the fourth quarter of fiscal 2000, the Company entered
into various capital leases for computer hardware and furniture. As of December 28, 2002, one capital lease remained with an outstanding principal balance of $78,000. The Companys net investment in these capital leases as of December 28, 2002
was $570,000, which is included in property and equipment. Interest expense recorded on the capital leases for the fiscal years ended December 30, 2000, December 29, 2001 and December 28, 2002 was $3,000, $116,000 and $59,000, respectively.



Operating Leases



The Company leases its former Houston, TX fulfillment center
and offices, its Melbourne, FL call center, its former Louisville, KY retail store as well as additional office space and certain fixed assets under noncancellable operating leases. The Company previously leased its Louisville, KY fulfillment center
until April 2002, at which time it was purchased by the Company. Rent expense under operating lease agreements was $1.2 million, $1.8 million and $2.3 million for the fiscal years ended December 30, 2000, December 29, 2001 and December 28,
2002, respectively.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Future
minimum lease payments under leases as of December 28, 2002, together with the present value of those future minimum lease payments, are as follows:



|                                                     |  | Capital Leases |    | Operating Leases
|---------------------------------------------------- |  | -------------- | -- | ----------------
|                                                     |  | (in thousands)
|2003                                                 |  | $              | 78 |                 
|2004                                                 |  |                |   |                 
|2005                                                 |  |                |   |                 
|2006                                                 |  |                |   |                 
|2007                                                 |  |                |   |                 
|                                                     |  |                |    |                 
|Total future minimum lease payments                  |  |                | 78 |                 
|                                                     |  |                |    |                 
|Less: Interest discount amount                       |  |                |   |                 
|                                                     |  |                |    |                 
|Total present value of future minimum lease payments |  |                | 78 |                 
|Less: Current portion                                |  |                | 78 |                 
|                                                     |  |                |    |                 
|Long-term portion                                    |  | $              |   |                 
|                                                     |  |                |    |                 



NOTE
7STOCKHOLDERS EQUITY



Preferred Stock:



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



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



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



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



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.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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



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



On September 13, 2000, the Company agreed to sell to ITH 5,000,000 shares of common stock at $8.15 per share in cash, for an aggregate purchase price of $40.8 million. In addition, ITH agreed to
purchase, for approximately $563,000, warrants to purchase 2,500,000 shares of the Companys common stock at an exercise price of $10.00 per share and 2,000,000 shares of the Companys common stock at an exercise price of $8.15 per share.
These warrants have a term of five years and were valued at approximately $8.9 million. This investment was completed through two separate closings. On September 13, 2000, ITH invested $14.9 million and on October 5, 2000, ITH invested $26.4
million. The Company has granted ITH certain demand and piggy-back registration rights with respect to the shares of common stock issued to ITH and issuable to ITH upon exercise of the warrants.



On April 27, 2000, the Company agreed to sell to funds
affiliated with SOFTBANK America Inc. (collectively SOFTBANK) 2,500,000 shares of common stock and to Rustic Canyon Ventures, LP (f/k/a TMCT Ventures, LP) (Rustic Canyon) 625,000 shares of common stock at a price of $8.00 per
share in cash for an aggregate purchase price of $25.0 million. The sale of these shares was completed on May 1, 2000. In addition, as part of this financing, the Company issued to SOFTBANK warrants to purchase 1,250,000 shares of common stock and
to Rustic Canyon warrants to purchase 312,500 shares of common stock. These warrants have a three-year term and an exercise price of $10.00 per share.



Employee Stock Purchase Plan:



In March 2000, the Companys board of directors adopted, and in May 2000, the Companys stockholders approved, the 2000 Employee
Stock Purchase Plan (the ESPP). A total of 400,000 shares of common stock are authorized for issuance under the ESPP, plus an annual increase equal to the lesser of (i) 50,000 shares, or (ii) such smaller number of shares as
determined by the board of directors; provided that the total aggregate number of shares issuable under the ESPP may not exceed 900,000 shares. The ESPP is implemented by the periodic offerings of rights to all eligible employees from time to time,
as determined by the board of directors. The maximum period of time for an offering is 27 months. The purchase price per share at which common stock is sold in an offering is established by the board of directors prior to the commencement of the
offering, but such price may not be less than the lower of (i) 85% of the fair market value of a share of common stock on the date the right to purchase such shares was granted (generally the first day of the offering) or (ii) 85% of the fair market
value of a share of common stock on the applicable purchase date. As of December 28, 2002 and December 29, 2001, 399,201 shares and 244,546 shares, respectively, of common stock had been issued under the ESPP.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Treasury Stock:



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



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



On March 13, 2000, the Companys Board of Directors approved the retirement of 1,069,086 shares of
treasury stock held by the Company. The treasury stock was retired during the three-months ended April 1, 2000.



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 and unrestricted stock awards to purchase up to 8,092,571 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.



In connection with the Fogdog acquisition, the Company assumed all of the outstanding options issued under the Fogdog, Inc. 1999 Stock Incentive Plan (the Fogdog Plan), as well as an outstanding warrant. Upon closing of
the merger, options outstanding under the Fogdog Plan became options to purchase an aggregate of 381,500 shares of the Companys common stock and the outstanding warrant became a warrant to purchase 555,437 shares of the Companys common
stock. The terms of the Fogdog options are similar to the terms of the options issuable under the Companys Plans.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
following table summarizes the stock option activity for the fiscal years ended December 30, 2000, December 29, 2001 and December 28, 2002:



|                                      |  | Fiscal Year Ended
|------------------------------------- |  | -----------------
|                                      |  | December 30, 2000
|                                      |  | Number of Shares 
|                                      |  | (in thousands)   
|Outstanding, beginning of fiscal year |  | 1,924            
|Granted and assumed(1)                |  | 3,472            
|Exercised                             |  | (202             
|Cancelled                             |  | (642             
|                                      |  |                  
|Outstanding, end of fiscal year       |  | 4,552            
|                                      |  |                  
|Exercisable, end of fiscal year       |  | 1,399            
|                                      |  |                  

---

|(1) |  | For the fiscal year ended December 30, 2000, the number of shares granted and assumed includes the assumption of 381,500 outstanding options issued under the Fogdog,
Inc. 1999 Stock Incentive Plan assumed by the Company in connection with the Fogdog acquisition.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following table summarizes the warrant activity for the fiscal years ended December 30, 2000, December 29, 2001 and December 28, 2002:



|                                      |  | Fiscal Year Ended
|------------------------------------- |  | -----------------
|                                      |  | December 30, 2000
|                                      |  | Number of Shares 
|                                      |  | (in thousands)   
|Outstanding, beginning of fiscal year |  | 488              
|Granted and assumed(1)                |  | 7,045            
|Exercised                             |  | (2               
|Cancelled                             |  | (280             
|                                      |  |                  
|Outstanding, end of fiscal year       |  | 7,251            
|                                      |  |                  
|Exercisable, end of fiscal year.      |  | 7,250            
|                                      |  |                  

---

|(1) |  | For the fiscal year ended December 30, 2000, the number of shares granted and assumed includes the assumption of an outstanding warrant to purchase 555,437 shares of
the Companys common stock assumed by the Company in connection with the Fogdog acquisition.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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. The weighted average fair value and the weighted average exercise price of the options granted with exercise prices at the then-current market prices of the underlying
stock during the fiscal year ended December 28, 2002 was $8.66 and $12.45 per share, respectively. For the fiscal year ended December 28, 2002, the Company



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



recorded a reduction of $508,000 in stock-based compensation expense relating to options and restricted stock, $(21,000) relating to
employees and $(487,000) relating to consultants.



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



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



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



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



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



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





During the
fiscal year ended December 30, 2000, the Company granted to employees options and restricted stock awards to purchase an aggregate of 2,875,439 shares of the Companys common stock at prices ranging from $0.01 to $20.75 per share and granted to
consultants options to purchase an aggregate of 215,295 shares of the Companys common stock at prices ranging from $0.01 to $17.13 per share. The weighted average fair value and the weighted average exercise price of the options granted with
exercise prices at the then-current market prices of the underlying stock during the fiscal year ended December 30, 2000 was $4.57 and $9.95 per share, respectively. The weighted average fair value and the weighted average exercise price of the
options granted with exercise prices below the then-current market prices of the underlying stock during the fiscal year ended December 30, 2000 was $12.62 and $6.93 per share, respectively. The weighted average fair value and the weighted average
exercise price of the options granted with exercise prices above the then-current market prices of the underlying stock during the fiscal year ended December 30, 2000 was $4.17 and $8.15 per share, respectively. For the fiscal year ended December
30, 2000, the Company recorded $2.2 million of stock-based compensation expense relating to options and restricted stock. Of this amount, $1.7 million is included in continuing operations, $1.6 million relating to employees and $85,000 relating to
consultants, and $475,000 is included in discontinued operations. The balance of the value of options and restricted stock granted during fiscal 2000 will be recognized as services are provided over terms of three years.



During the fiscal year ended December 30, 2000, the Company
modified the vesting schedule or exercise price of 306,735 options. For those options repriced, the exercise prices were changed to prices ranging from $0.01 to $8.15 per share. Because these options were accelerated or repriced, they are subject to
variable accounting, and the Company recognized $354,000 and $611,000 of stock-based compensation expense for the fiscal years ended December 30, 2000 and December 29, 2001, respectively, which amounts are included in the amounts of stock-based
compensation expense relating to options described above. Of the $354,000 of stock-based compensation expense recognized for the fiscal year ended December 30, 2000, $19,000 is included in continuing operations and $335,000 is included in
discontinued operations. The amount of stock-based compensation expense to be recognized in future periods is subject to adjustment based upon changes in the price of the Companys common stock.



During the fiscal year ended December 30, 2000, the Company
granted to partners warrants to purchase an aggregate of 426,620 shares of the Companys common stock at prices ranging from $4.31 to $18.00 per share and issued to investors warrants to purchase an aggregate of 6,062,500 shares of the
Companys common stock at prices ranging from $8.15 to $10.00 per share. The weighted average fair value and the weighted average exercise price of the warrants granted with exercise prices at the then-current market prices of the underlying
stock during the fiscal year ended December 30, 2000 was $2.81 and $7.75 per share, respectively. The weighted average fair value and the weighted average exercise price of the warrants granted with exercise prices below the then-current market
prices of the underlying stock during the fiscal year ended December 30, 2000 was $6.09 and $15.36 per share, respectively. The weighted average fair value and the weighted average exercise price of the warrants granted and issued with exercise
prices above the then-current market prices of the underlying stock during the fiscal year ended December 30, 2000 was $2.24 and $9.44 per share, respectively. For the fiscal year ended December 30, 2000, the Company recorded $3.3 million of
stock-based compensation expense relating to warrants, all of which is included in continuing operations.



During the fiscal year ended December 30, 2000, the Company modified the exercise price of 293,320 warrants. The exercise prices were
changed to $8.15 per share. Because these warrants were repriced, they are subject to variable accounting, and the Company recognized $446,000 of stock-based compensation expense for the fiscal year ended December 30, 2000, which is included in the
amount of stock-based compensation expense relating to warrants described above. The amount of stock-based compensation expense to be recognized in future periods is $0 as there is no future vesting or service period for the modified warrants.



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GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table summarizes information regarding options and warrants outstanding
and exercisable as of December 28, 2002:



|                         |  | Outstanding        |  | Exercisable                                         
|------------------------ |  | ------------------ |  | ----------------------------------------------------
|Range of Exercise Prices |  | Number Outstanding |  | Weighted Average Remaining Contractual Life In Years
|                         |  | (in thousands)     |  |                                                     
|$  0.59  $  6.00        |  | 3,213              |  | 7.23                                                
|$  6.13  $  8.15        |  | 3,199              |  | 4.38                                                
|$  9.00  $10.00         |  | 4,492              |  | 2.45                                                
|$10.60  $24.69          |  | 1,482              |  | 6.03                                                
|$30.56  $74.54          |  | 16                 |  | 3.56                                                
|                         |  |                    |  |                                                     
|$  0.59  $74.54         |  | 12,402             |  | 4.62                                                
|                         |  |                    |  |                                                     



As of
December 28, 2002, 1,381,221 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 30, 2000, December 29, 2001
and December 28, 2002 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 30, 2000
|Dividend yield                  |  | None             
|Expected volatility             |  | 90.00%           
|Average risk free interest rate |  | 5.26%            
|Average expected lives          |  | 4.45 years       



No
warrants were granted or issued by the Company during the fiscal year ended December 28, 2002. The fair value of warrants granted and issued during the fiscal years ended December 30, 2000 and December 29, 2001 were estimated on the date of grant
using the Black-Scholes multiple option pricing model, with the following range of assumptions:



|                                |  | Fiscal Year Ended
|------------------------------- |  | -----------------
|Assumption                      |  | December 30, 2000
|Dividend yield                  |  | None             
|Expected volatility             |  | 50.00%90.00%    
|Average risk free interest rate |  | 4.86%6.70%      
|Average expected lives          |  | 1.003.50 years  



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GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





NOTE 9INCOME
TAXES



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



|                                                     |  | Fiscal Year Ended
|---------------------------------------------------- |  | -----------------
|                                                     |  | December 30, 2000
|                                                     |  | (in thousands)   
|Loss from continuing operations before income taxes: |  |                  
|Domestic                                             |  | $                
|Foreign                                              |  |                  
|                                                     |  |                  
|Total                                                |  | $                
|                                                     |  |                  
|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 30, 2000, December 29, 2001 and December 28, 2002, the Company had no provision for federal and state income taxes.



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##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
significant components of net deferred tax assets and liabilities as of December 30, 2000, December 29, 2001 and December 28, 2002 consisted of the following:



|                                        |  | Fiscal Year Ended |        
|--------------------------------------- |  | ----------------- | -------
|                                        |  | December 30, 2000 |        
|                                        |  | (in thousands)    |        
|Deferred tax assets:                    |  |                   |        
|Net operating loss carryforwards        |  | $                 | 71,915 
|Deferred revenue                        |  |                   | 258    
|Employee benefits                       |  |                   | 1,599  
|Inventory                               |  |                   | 1,066  
|Prepaid expenses                        |  |                   |       
|Depreciation                            |  |                   | 3,295  
|Provision for doubtful accounts         |  |                   | 347    
|                                        |  |                   |        
|Gross deferred tax assets               |  |                   | 78,480 
|Deferred tax liabilities:               |  |                   |        
|Prepaid expenses                        |  |                   |       
|                                        |  |                   |        
|Net deferred tax assets and liabilities |  |                   | 78,480 
|Valuation allowance                     |  |                   | (78,480
|                                        |  |                   |        
|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 December 28, 2002, the Company
had available net operating loss carryforwards of approximately $420.0 million which expire in the years 2003 through 2022. The use of certain net operating loss carryforwards are subject to annual limitations based on ownership changes of the
Companys stock, as defined by Section 382 of the Internal Revenue Code. The Company expects that net operating losses of approximately $243.2 million will expire before they can be utilized.



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



|                                             |  | Fiscal Year Ended |   
|-------------------------------------------- |  | ----------------- | --
|                                             |  | December 30, 2000 |   
|Statutory federal income tax rate            |  | (34.0             | )%
|Increase (decrease) in taxes resulting from: |  |                   |   
|Valuation allowance                          |  | 33.8              | % 
|Nondeductible amortization                   |  |                  |   
|Other                                        |  | 0.2               | % 
|                                             |  |                   |   
|Effective income tax rate                    |  | 0.0               | % 
|                                             |  |                   |   



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##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





NOTE 10LOSSES PER
SHARE



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



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



|                                                            |  | Fiscal Year Ended |        
|----------------------------------------------------------- |  | ----------------- | -------
|                                                            |  | December 30, 2000 |        
|                                                            |  | (in thousands)    |        
|Loss from continuing operations                             |  | $                 | (52,160
|Loss on disposition of discontinued operations              |  |                   | (5,850 
|                                                            |  |                   |        
|Net loss                                                    |  | $                 | (58,010
|                                                            |  |                   |        
|Weighted average shares outstandingbasic and diluted       |  |                   | 22,028 
|                                                            |  |                   |        
|Outstanding common stock options having no dilutive effect  |  |                   | 4,552  
|                                                            |  |                   |        
|Outstanding common stock warrants having no dilutive effect |  |                   | 7,251  
|                                                            |  |                   |        



NOTE
11COMPREHENSIVE LOSS





The following table summarizes the components of comprehensive loss:





|                                                      |  | Fiscal Year Ended |        
|----------------------------------------------------- |  | ----------------- | -------
|                                                      |  | December 30, 2000 |        
|                                                      |  | (in thousands)    |        
|Net loss                                              |  | $                 | (58,010
|Other comprehensive income:                           |  |                   |        
|Net unrealized gains on available-for-sale securities |  |                   |       
|                                                      |  |                   |        
|Other comprehensive income                            |  |                   |       
|                                                      |  |                   |        
|Comprehensive loss                                    |  | $                 | (58,010
|                                                      |  |                   |        



NOTE
12SIGNIFICANT TRANSACTIONS/CONCENTRATIONS OF CREDIT RISK



Net revenues included $0, $6.1 million and $2.5 million for the fiscal years ended December 30, 2000, December 29, 2001 and December 28, 2002, respectively, related to bulk sales to one party. As of December 29, 2001 and
December 28, 2002, the amount included in accounts receivable related to these bulk sales was $4.8 million and $2.6 million, respectively.





Net revenues included $8.4 million, $19.1 million and $8.3
million for the fiscal years ended December 30, 2000, December 29, 2001 and December 28, 2002, respectively, from sales of one of the Companys partners products sold primarily through its direct response television campaigns in addition
to Web site and toll-free number sales. As of December 28, 2002, the amount included in accounts receivable related to these sales was $0.



As of December 29, 2001 and December 28, 2002, the Company had $4.3 million and $9.5 million, respectively, of operating cash and $101.6
million and $63.0 million, respectively, of cash equivalents and marketable securities invested with four financial institutions, which are potentially subject to credit risk. The composition of these investments are regularly monitored by
management of the Company.



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##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





NOTE 13MAJOR
SUPPLIERS AND CUSTOMERS/ECONOMIC DEPENDENCY



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



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



During the fiscal year ended December 30, 2000, the Company purchased inventory from a single supplier amounting to $6.0 million or 16% 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 $23.6 million or 14% from Kmart Corporation (Kmart). The Company operates the e-commerce business for Bluelight.com (Bluelight), a subsidiary of Kmart. Bluelight and
Kmart have been operating in bankruptcy since January 2002. In March 2003, the Company and Bluelight modified their agreement to shorten the term, eliminate the last two of eight fixed fee payments required under the agreement and provide for early
termination rights for both the Company and Bluelight. The Company will, however, continue to receive a percentage of sales through the Bluelight Web site for the services that the Company provides under this agreement.



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



NOTE 14COMMITMENTS AND
CONTINGENCIES



Legal Proceedings



The Company is involved in various
litigation relating to its business, including litigation relating to Ashford. The Company believes that the disposition of these matters will not have a material adverse effect on the financial position or results of operations of the Company.



Employment Agreements



As of December 28, 2002, the Company had employment
agreements with several of its employees for an aggregate annual base salary of $2.5 million plus bonuses and increases in accordance with the terms of the agreements. Remaining terms of such contracts range from one to four years.



Advertising and Media Agreements



As of December 28, 2002, the Company was contractually
committed for the purchase of future advertising totaling approximately $267,000 through the fiscal year ending January 3, 2004. 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 December 28,
2002, the Company was contractually committed to minimum cash revenue share payments of $375,000 per fiscal quarter through July, 2011. The Company had additional annual minimum cash revenue share payments of $150,000 in February, 2003, $200,000 in
February, 2004 and $250,000 in February, 2005.



Partner Relationships



The Company operates e-commerce businesses for its partners generally pursuant to exclusive agreements. The Company operates each of these e-commerce businesses based on one of three formats  GSI-owned inventory model,
partner-owned inventory model and business-to-business model.



GSI-Owned Inventory Model  The Company selects and purchases inventory from vendors, sells the inventory directly to customers through the e-commerce businesses that the Company operates, records revenues



F-29



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##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



generated from the sale of products through those businesses and pays a percentage of those revenues to the respective partners in exchange
for the rights to use their brand names and the promotions and advertising that the Companys partners agree to provide.



Partner-Owned Inventory Model  The Company manages certain aspects of its partners overall e-commerce business, including
fulfillment, technology and customer service in exchange for a combination of fixed fees and a percentage of sales. The Companys partners select the merchandise to be sold on the site, own a portion of the inventory and provide marketing of
the e-commerce business at their retail stores and other offline marketing support, including newspaper circular advertising.



Business-to-Business Model  Pursuant to these agreements, the Company provides a product information database to each of these
partners which they use to merchandise the sporting goods department of their flagship Web sites. These partners process orders for sporting goods on their Web sites and deliver the orders to the Company electronically. The Company then sells the
products from its inventory and transfers title to them at a predetermined price and it picks, packs and ships the products to consumers on behalf of these partners. These partners perform all of their own customer service.



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 $132,000, $269,000 and $396,000 for the fiscal years ended December 30,
2000, December 29, 2001 and December 28, 2002, respectively.



NOTE 16SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION



|                                                                                                                                          |  | Fiscal Year Ended |        
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------
|                                                                                                                                          |  | December 30, 2000 |        
|                                                                                                                                          |  | (in thousands)    |        
|Cash paid during the year for interest                                                                                                    |  | $                 | 976    
|Acquisition of Fogdog:                                                                                                                    |  |                   |        
|Fair value of assets acquired (including goodwill)                                                                                        |  | $                 | 60,876 
|Liabilities assumed                                                                                                                       |  |                   | (16,128
|Stock issued                                                                                                                              |  |                   | (42,356
|                                                                                                                                          |  |                   |        
|Cash paid                                                                                                                                 |  |                   | 2,392  
|Cash acquired                                                                                                                             |  |                   | 38,084 
|                                                                                                                                          |  |                   |        
|Net cash received from acquisition of Fogdog                                                                                              |  | $                 | 35,692 
|                                                                                                                                          |  |                   |        
|Acquisition of Ashford:                                                                                                                   |  |                   |        
|Fair value of assets acquired (including goodwill)                                                                                        |  | $                 |       
|Liabilities assumed                                                                                                                       |  |                   |       
|Stock issued                                                                                                                              |  |                   |       
|                                                                                                                                          |  |                   |        
|Cash paid                                                                                                                                 |  |                   |       
|Cash acquired                                                                                                                             |  |                   |       
|                                                                                                                                          |  |                   |        
|Net cash paid for acquisition of Ashford                                                                                                  |  | $                 |       
|                                                                                                                                          |  |                   |        
|                                                                                                                                         
|Noncash Investing and Financing Activities:                                                                                               |  |                   |        
|                                                                                                                                         
|Net unrealized gains on available-for-sale securities                                                                                     |  | $                 |       
|Receipt of a promissory note in connection with the sale of certain assets of
Ashford                                                     |  | $                 |       
|Receipt of shares of, and warrants to purchase, Odimos Series D preferred stock in
connection with the sale of certain assets of Ashford |  | $                 |       
|Issuance of common stock upon exercises of options granted to employees of the
discontinued operations                                    |  | $                 | 103    
|Issuance of common stock upon the exercise of a right in lieu of future cash partner
revenue share payments                               |  | $                 |       



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##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





NOTE 17BUSINESS
SEGMENTS



The Company operates in one
principal business segment which develops and operates the e-commerce businesses for retailers, branded manufacturers, media companies, television networks and professional sports organizations. The e-commerce businesses that we operate include the
sale of products through online retail stores and direct response television campaigns.The Company enables its partners to capitalize on their existing brands to exploit e-commerce opportunities. The Company customizes the design of its
partners e-commerce businesses with a broad range of characteristics that includes differentiated user interfaces on partners Web sites, partner-specific content pages, product descriptions and images, partner specific products for
direct response television campaigns and partner specific customer service and fulfillment. The Company currently derives virtually all of its revenues from the sales 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, as well as 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 sales, operating results and identifiable assets are in the United States.



NOTE 18RELATED PARTY TRANSACTIONS



The Company has entered into a strategic alliance to provide
procurement and fulfillment services for QVC, Inc., which along with its majority stockholder, Comcast Corporation, owns Interactive Technology Holdings, LLC, which is a major stockholder of the Company. The Company recognized net revenues of
$349,000, $1.8 million and $2.7 million on sales to this related party for the fiscal years ended December 30, 2000, December 29, 2001 and December 28, 2002, respectively. The terms of these sales are comparable to those with other
business-to-business partners of the Company. As of December 29, 2001 and December 28, 2002, the amount included in accounts receivable as a result of these sales was $236,000 and $637,000, respectively.



NOTE 19NOTE PAYABLE



Mortgage Note



On April 20, 2000, the Company entered into a $5.3 million
mortgage note collateralized by the land, building and improvements of its corporate headquarters which have a carrying value of $7.4 million. The mortgage note had a term of ten years and bore interest at 8.49% per annum. In November 2002, the
Company pre-paid the $5.2 million outstanding principal balance remaining on the mortgage. In connection with the early retirement of the mortgage, the Company paid a $250,000 early termination fee, which is recorded in interest expense. The Company
recorded $318,000, $453,000 and $690,000 of interest expense related to this note during the fiscal years ended December 30, 2000, December 29, 2001 and December 28, 2002, respectively.



NOTE 20DISCONTINUED OPERATIONS



On May 26, 2000, the Company completed the previously announced sale of its off-price and action sports
division. The Company received $13.2 million in cash proceeds from the sale. This sale completed the disposition of the Companys discontinued operations.



During the fiscal year ended December 30, 2000, the Company recognized an additional loss on the disposition of discontinued operations of
$5.9 million resulting from actual expenses and losses differing from estimated amounts, uncollectible accounts receivable and goodwill impairment related to these businesses. Included in accrued expenses and other as of December 29, 2001 and
December 28, 2002 was $102,000 and $69,000, respectively, related to certain remaining obligations of the discontinued operations.



Net sales of discontinued operations for the fiscal years ended December 30, 2000, December 29, 2001 and December 28, 2002 were $36.2
million, $0 and $0, respectively.



F-31



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##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Concluded)





NOTE 21QUARTERLY
RESULTS (UNAUDITED)



The following tables
contain selected unaudited Statement of Operations information for each quarter of the fiscal years ended December 29, 2001 and December 28, 2002. The Company believes that the following information reflects all normal recurring adjustments
necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.



|                                                |  | For the Fiscal Year Ended December 29, 2001
|----------------------------------------------- |  | -------------------------------------------
|                                                |  | First Quarter                              
|                                                |  | (in thousands, except per share amounts)   
|Net revenues                                    |  | $                                          
|                                                |  |                                            
|Gross profit                                    |  | $                                          
|                                                |  |                                            
|Net income (loss)                               |  | $                                          
|                                                |  |                                            
|Income (losses) per sharebasic and diluted(1): |  |                                            
|Net income (loss)                               |  | $                                          
|                                                |  |                                            
|Weighted average shares outstandingbasic       |  |                                            
|                                                |  |                                            
|Weighted average shares outstandingdiluted     |  |                                            
|                                                |  |                                            

---

|(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.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                      |  | For the Fiscal Year Ended December 28, 2002 |       
|----------------------------------------------------- |  | ------------------------------------------- | ------
|                                                      |  | First Quarter                               |       
|                                                      |  | (in thousands, except per share amounts)    |       
|Net revenues                                          |  | $                                           | 31,925
|                                                      |  |                                             |       
|Gross profit                                          |  | $                                           | 11,570
|                                                      |  |                                             |       
|Net loss                                              |  | $                                           | (5,305
|                                                      |  |                                             |       
|Losses per sharebasic and diluted(1):                |  |                                             |       
|Net loss                                              |  | $                                           | (0.14 
|                                                      |  |                                             |       
|Weighted average shares outstandingbasic and diluted |  |                                             | 38,050
|                                                      |  |                                             |       

---

|(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-32