##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-K/A

AMENDMENT NO. 2



---



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



For the fiscal year ended January 1, 2005



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



---



GSI COMMERCE, INC.

(Exact name of registrant as specified in its charter)



---



|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|DELAWARE                                                      |  | 04-2958132                         
|(State or other jurisdictionof incorporation or organization) |  | (I.R.S. EmployerIdentification No.)
|                                                              | 
|935 FIRST AVENUE, KING OF PRUSSIA, PA                         |  | 19406                              
|(Address of principal executive offices)                      |  | (Zip Code)                         



Registrants
telephone number, including area code: (610) 265-3229



---



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



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



Common Stock, par value $.01 per share

(Title of Class)



---



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



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



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



The aggregate market value of the registrants voting stock held by
non-affiliates of the registrant as of the close of business on July 2, 2004, was approximately $124,261,892 based on a per share price of $9.31, the closing price of the registrants common stock on such date, as reported on the Nasdaq
National Market.(1)



There were 41,731,458 shares of the registrants common stock outstanding as of the close of business on March 15, 2005.



DOCUMENTS INCORPORATED BY REFERENCE

(Specific sections incorporated are identified under applicable items herein)

None.

---

|(1) | This amount equals the number of outstanding shares of the registrants common stock
reduced by the number of shares that may be deemed beneficially owned by the registrants executive officers, directors and stockholders owning in excess of 10% of the registrants common stock, multiplied by the last reported sale price
for the registrants common stock on July 2, 2004. 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 executive 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---



---

##### Table of Contents

EXPLANATORY NOTE



This Amendment No. 2 to this Annual Report on Form 10-K/A (Amendment 2) is being filed in order to restate the previously issued
historical consolidated balance sheets as of January 1, 2005 and January 3, 2004 and consolidated statements of cash flows for GSI Commerce, Inc. for each of the three years in the period ended January 1, 2005 initially filed with the Securities and
Exchange Commission (the SEC) on March 17, 2005, as amended by Form 10-K/A filed with the SEC on May 2, 2005 (the Original Filing).



Subsequent to the Original Filing, we restated the classification of our investments in auction rate securities from as cash and cash equivalents to marketable securities
within current assets on the consolidated balance sheets as of January 1, 2005 and January 3, 2004. We also made corresponding corrections to the consolidated statements of cash flows for the fiscal years ended January 1, 2005, January 3, 2004 and
December 28, 2002, to reflect the gross purchases and sales of these investments as investing activities rather than as a component of cash and cash equivalents. See Note 22: Restatement of the Consolidated Balance Sheets and Consolidated
Statements of Cash Flows under Notes to Consolidated Financial Statements included in Item 15, Exhibits and Financial Statement Schedules. Item 7 and Item 7A have been updated for the effects of the restatement. The
restatement had no impact on previously reported total current assets, total assets, working capital position, results of operations or cash flows from operating activities.



Items 7, 7A, 9A and 15 have been updated for the reasons described above. Item 7 has also been updated to reflect the delay of the adoption
of Financial Accounting Standards No. 123R and to correct minor typographical errors. The disclosure contained in Item 6 has been updated to include information that was inadvertently omitted from the Original Filing and Note 8 to the Consolidated
Financial Statements has been updated to reflect the number of shares available for future grants under our stock option plans. Except for the forgoing amended information, this Amendment 2 continues to describe conditions as of the date of the
Original Filing, and we have not updated the disclosures contained herein to reflect events that occurred at a later date. Item 9A has also been included after consideration of the restatement described above. We are also updating the Signature Page
and certifications contained in Exhibits 31.1, 31.2 and 32.1.



TABLE OF CONTENTS



|         |  |                                                                                      |  |     
|-------- |  | ------------------------------------------------------------------------------------ |  | ----
|         |  |                                                                                      |  | Page
|         |  | PART II                                                                              |  |     
|ITEM 6:  |  | SELECTED FINANCIAL DATA.                                                             |  | 1   
|ITEM 7:  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION |  | 2   
|ITEM 7A: |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           |  | 15  
|ITEM 9A: |  | CONTROLS AND PROCEDURES                                                              |  | 16  
|         |  |                                                                                     
|         |  | PART IV                                                                              |  |     
|ITEM 15: |  | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.                                          |  | 19  



Our fiscal year ends
on the Saturday nearest the last day of December. Accordingly, references to fiscal 1999, fiscal 2000, fiscal 2001, fiscal 2002, fiscal 2003 and fiscal 2004 refer to the years ended January 1, 2000, December 30, 2000, December 29, 2001, December 28
2002, January 3, 2004 and January 1, 2005.



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



i



---

##### Table of Contents

ITEM 6:SELECTED FINANCIAL DATA.



The following tables present portions of our financial statements and are not complete. You should read the following selected consolidated financial data together with our 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 financial data for each of the five years ended in the period January 1, 2005 are
derived from our consolidated financial statements.



|                                                                                                                                       |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ---------------- | - | ------- | ---------------- |  | - | -------------- | - |  | -------------- | ------- | - |  | - | ------- | -
|                                                                                                                                       |  | Fiscal Year Ended                     |        
|                                                                                                                                       |  | December 30,2000                      |         |   | December 29,2001 |   |         | December 28,2002 |  |   | January 3,2004 |   |  | January 1,2005 |        
|                                                                                                                                       |  | (in thousands, except per share data) |        
|STATEMENT OF OPERATIONS DATA:                                                                                                          |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|Revenues:                                                                                                                              |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|Net revenues from product sales                                                                                                        |  | $                                     | 41,808  |   |                  | $ | 98,325  |                  |  | $ | 154,819        |   |  | $              | 216,510 |   |  | $ | 274,988 |  
|Service fee revenues                                                                                                                   |  |                                       | 1,000   |   |                  |   | 4,285   |                  |  |   | 17,819         |   |  |                | 25,409  |   |  |   | 60,344  |  
|                                                                                                                                       |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|Net revenues                                                                                                                           |  |                                       | 42,808  |   |                  |   | 102,610 |                  |  |   | 172,638        |   |  |                | 241,919 |   |  |   | 335,332 |  
|Cost of revenues                                                                                                                       |  |                                       | 29,567  |   |                  |   | 67,586  |                  |  |   | 114,258        |   |  |                | 154,731 |   |  |   | 203,135 |  
|                                                                                                                                       |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|Gross profit                                                                                                                           |  | $                                     | 13,241  |   |                  | $ | 35,024  |                  |  | $ | 58,380         |   |  | $              | 87,188  |   |  | $ | 132,197 |  
|                                                                                                                                       |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|Operating expenses:                                                                                                                    |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|Sales and marketing, exclusive of $1,486, $847, $532, $1,527 and $2,720 reported below as stock-based compensation,
respectively       |  |                                       | 37,730  |   |                  |   | 32,390  |                  |  |   | 50,965         |   |  |                | 59,613  |   |  |   | 78,919  |  
|Product development, exclusive of $0, $461, $(44), $42 and $350 reported below as stock-based compensation, respectively               |  |                                       | 7,292   |   |                  |   | 8,590   |                  |  |   | 11,833         |   |  |                | 14,124  |   |  |   | 20,181  |  
|General and administrative, exclusive of $3,497, $8,974, $(87), $366 and $530 reported below as stock-based compensation,
respectively |  |                                       | 8,730   |   |                  |   | 10,638  |                  |  |   | 14,863         |   |  |                | 13,295  |   |  |   | 18,217  |  
|Restructuring costs related to Ashford.com(1)                                                                                          |  |                                       |        |   |                  |   |        |                  |  |   | 1,680          |   |  |                | 74      |   |  |   |        |  
|Net loss on sale of Ashford.com assets                                                                                                 |  |                                       |        |   |                  |   |        |                  |  |   | 2,566          |   |  |                |        |   |  |   |        |  
|Stock-based compensation                                                                                                               |  |                                       | 4,983   |   |                  |   | 10,282  |                  |  |   | 401            |   |  |                | 1,935   |   |  |   | 3,600   |  
|Depreciation and amortization                                                                                                          |  |                                       | 8,074   |   |                  |   | 6,662   |                  |  |   | 10,509         |   |  |                | 11,386  |   |  |   | 10,944  |  
|                                                                                                                                       |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|Total operating expenses                                                                                                               |  | $                                     | 66,809  |   |                  | $ | 68,562  |                  |  | $ | 92,817         |   |  | $              | 100,427 |   |  | $ | 131,861 |  
|                                                                                                                                       |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|Other (income)/expense:                                                                                                                |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|Other (income)/expense                                                                                                                 |  |                                       |        |   |                  |   | (502    | )                |  |   |               |   |  |                |        |   |  |   | 620     |  
|Interest expense                                                                                                                       |  |                                       | 407     |   |                  |   | 608     |                  |  |   | 749            |   |  |                |        |   |  |   | 538     |  
|Interest income                                                                                                                        |  |                                       | (1,815  | ) |                  |   | (3,049  | )                |  |   | (1,377         | ) |  |                | (1,177  | ) |  |   | (1,162  | )
|                                                                                                                                       |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|Total other (income)/expense                                                                                                           |  | $                                     | (1,408  | ) |                  | $ | (2,943  | )                |  | $ | (628           | ) |  | $              | (1,177  | ) |  | $ | (4      | )
|                                                                                                                                       |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|(Loss)/income from continuing operations before income taxes                                                                           |  |                                       | (52,160 | ) |                  |   | (30,595 | )                |  |   | (33,809        | ) |  |                | (12,062 | ) |  |   | 340     |  
|Benefit from income taxes                                                                                                              |  |                                       |        |   |                  |   |        |                  |  |   |               |   |  |                |        |   |  |   |        |  
|                                                                                                                                       |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|(Loss)/income from continuing operations                                                                                               |  |                                       | (52,160 | ) |                  |   | (30,595 | )                |  |   | (33,809        | ) |  |                | (12,062 | ) |  |   | 340     |  
|Discontinued operations:                                                                                                               |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|Loss on disposition of discontinued operations                                                                                         |  |                                       | (5,850  | ) |                  |   |        |                  |  |   |               |   |  |                |        |   |  |   |        |  
|                                                                                                                                       |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|Net (loss)/income                                                                                                                      |  | $                                     | (58,010 | ) |                  | $ | (30,595 | )                |  | $ | (33,809        | ) |  | $              | (12,062 | ) |  | $ | 340     |  
|                                                                                                                                       |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|Earnings (losses) per sharebasic:                                                                                                     |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|(Loss)/income from continuing operations                                                                                               |  | $                                     | (2.37   | ) |                  | $ | (0.90   | )                |  | $ | (0.88          | ) |  | $              | (0.30   | ) |  | $ | 0.01    |  
|(Loss)/income on disposition of discontinued operations                                                                                |  |                                       | (0.27   | ) |                  |   |        |                  |  |   |               |   |  |                |        |   |  |   |        |  
|                                                                                                                                       |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|Net (loss)/income                                                                                                                      |  | $                                     | (2.64   | ) |                  | $ | (0.90   | )                |  | $ | (0.88          | ) |  | $              | (0.30   | ) |  | $ | 0.01    |  
|                                                                                                                                       |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|Earnings (losses) per sharediluted:                                                                                                   |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|(Loss)/income from continuing operations                                                                                               |  | $                                     | (2.37   | ) |                  | $ | (0.90   | )                |  | $ | (0.88          | ) |  | $              | (0.30   | ) |  | $ | 0.01    |  
|(Loss)/income on disposition of discontinued operations                                                                                |  |                                       | (0.27   | ) |                  |   |        |                  |  |   |               |   |  |                |        |   |  |   |        |  
|                                                                                                                                       |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|Net (loss)/income                                                                                                                      |  | $                                     | (2.64   | ) |                  | $ | (0.90   | )                |  | $ | (0.88          | ) |  | $              | (0.30   | ) |  | $ | 0.01    |  
|                                                                                                                                       |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|Weighted average common shares outstanding:                                                                                            |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|Basic                                                                                                                                  |  |                                       | 22,028  |   |                  |   | 34,033  |                  |  |   | 38,566         |   |  |                | 39,638  |   |  |   | 41,073  |  
|                                                                                                                                       |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|Diluted(2)                                                                                                                             |  |                                       | 22,028  |   |                  |   | 34,033  |                  |  |   | 38,566         |   |  |                | 39,638  |   |  |   | 42,369  |  
|                                                                                                                                       |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  
|Number of common shares outstanding                                                                                                    |  |                                       | 31,925  |   |                  |   | 37,673  |                  |  |   | 38,784         |   |  |                | 40,780  |   |  |   | 41,583  |  
|                                                                                                                                       |  |                                       |         |   |                  |   |         |                  |  |   |                |   |  |                |         |   |  |   |         |  



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

---

|(1) | In conjunction with the sale of certain assets of Ashford.com, we announced a plan to liquidate the remaining inventory, close the Houston, Texas fulfillment center and office and
terminate 71 employees. The costs associated with this plan were $1,680 in fiscal 2002, $74 in fiscal 2003 and $0 in 2004. See Note 3 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K/A.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | For fiscal years 2000, 2001, 2002 and 2003, options and warrants are not included in the diluted weighted average common shares outstanding because the effect would be
anti-dilutive. In fiscal 2004, options and warrants are included in the diluted weighted average common shares outstanding. See Notes 8 and 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K/A.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



1



---

##### Table of Contents

ITEM 7:MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.



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



Overview and
Executive Summary



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



| |  | Based on forecasts of Forrester Research, we expect online general merchandise sales in the United States to expand at approximately a 14.3% compounded annual growth rate from 2004
through 2010.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | While we expect the opportunity for partnered e-commerce to continue to grow, we also anticipate competition to continue to be intense. We compete with traditional, in-house
solutions as well as a variety of third-party vendors that provide e-commerce software or partial e-commerce solutions. To satisfy our existing partners and to continue to attract new partners, we offer what we believe is a comprehensive and
compelling value proposition that includes the provision of expertise and infrastructure to enable our partners to grow their e-commerce businesses and to use their e-commerce businesses as a channel to complement and enhance their offline
businesses. We have built and continue to develop expertise in integrated online technology, marketing and retailing, which we deliver across a shared technology, supporting infrastructure and partner services platform. To differentiate our solution
in the marketplace, we continually add new services and functions to our platform. As part of our continuing efforts to add value to our platform, we evaluate opportunities to acquire complimentary or new businesses or assets.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We grow our business by expanding the e-commerce businesses of our existing partners and by adding new partners. In fiscal 2004, we added nine new partners. As of March 15, 2005, we
have added three new partners in fiscal 2005.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



| |  | Operating expenses as a percentage of net revenues decreased from 41.5% in fiscal 2003 to 39.3% in fiscal 2004, primarily as a result of sales and marketing expenses increasing at a
slower rate than net revenues.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



2



---

##### Table of Contents

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



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



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



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



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



| |  | In December 2004, the Financial Accounting Standards Board, or FASB, issued Financial Accounting Standards Board Statement No. 123R Share-Based Payment, or FAS 123R,
which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. In addition, FAS 123R will cause expense related to options vesting after the
date of initial adoption to be recognized as a charge to results of operations over the remaining vesting period. In April 2005, the initial adoption of FAS 123R was delayed to annual periods that begin after June 15, 2005. We are continuing to
evaluate the requirements of FAS 123R and we expect that the adoption of FAS 123R will have a material impact on our consolidated results of operations and earnings per share. In light of our anticipated adoption of FAS 123R, we and our compensation
committee are reevaluating our current incentive compensation strategies. See Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K/A for an analysis of the impact on our income statement of
recognizing share-based payments based on their fair value in accordance with SFAS No. 123 prior to the adoption of FAS 123R in fiscal 2006.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The accompanying Managements Discussion and Analysis of Financial Condition and Results of Operation gives effect to the restatement discussed in Note 22 to the
Consolidated Financial Statements.



Results of Operations



Comparison of Fiscal 2003 and 2004



Net Revenues



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



|                                                 |  |                       |       |   |             |   |   |                            |       |  |       |          |  |         |      |  |       |  
|------------------------------------------------ |  | --------------------- | ----- | - | ----------- | - | - | -------------------------- | ----- |  | ----- | -------- |  | ------- | ---- |  | ----- | -
|                                                 |  | Fiscal 2003           |       |   | Fiscal 2004 |   |   | Fiscal 2004 vs.Fiscal 2003 |      
|                                                 |  | $                     |       | % |             |   | $ |                            | %     |  |       | $ Change |  | %Change |     
|                                                 |  | (dollars in millions) |      
|Net revenues from product sales  sporting goods |  | $                     | 128.4 |   | 53.1        | % |   | $                          | 165.4 |  | 49.3  | %        |  | $       | 37.0 |  | 28.8  | %
|Net revenues from product sales  other          |  |                       | 88.1  |   | 36.4        | % |   |                            | 109.6 |  | 32.7  | %        |  |         | 21.5 |  | 24.4  | %
|                                                 |  |                       |       |   |             |  
|Net revenues from product sales                  |  |                       | 216.5 |   | 89.5        | % |   |                            | 275.0 |  | 82.0  | %        |  |         | 58.5 |  | 27.0  | %
|Service fee revenues                             |  |                       | 25.4  |   | 10.5        | % |   |                            | 60.3  |  | 18.0  | %        |  |         | 34.9 |  | 137.5 | %
|                                                 |  |                       |       |   |             |  
|Net revenues                                     |  | $                     | 241.9 |   | 100.0       | % |   | $                          | 335.3 |  | 100.0 | %        |  | $       | 93.4 |  | 38.6  | %



3



---

##### Table of Contents

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



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



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



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



Cost of Revenues



Cost of revenues consists of cost of revenues from product sales and cost of service fee revenues. Cost of revenues from product sales includes the cost of products sold and inbound freight related to those products,
as well as outbound shipping and handling costs, other than those related to promotional free shipping and subsidized shipping and handling which are included in sales and marketing expense. We specifically do not record cost of service fee revenue.
The cost of the sales of the merchandise on which we earn service fees are incurred by our service-fee partners because they are the owners and sellers of the merchandise. The following table shows cost of revenues for fiscal 2003 and fiscal 2004,
the percentages that such costs bear to total net revenues and the period over period changes in cost of revenues:



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



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



4



---

##### Table of Contents

Gross Profit



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



|                                |  |             |      |                  |             |   |                 |                           |   |                |      |   |   |   |                  |  |      |                   |  |       |                |  |      |          |  |         |      |  |       |  
|------------------------------- |  | ----------- | ---- | ---------------- | ----------- | - | --------------- | ------------------------- | - | -------------- | ---- | - | - | - | ---------------- |  | ---- | ----------------- |  | ----- | -------------- |  | ---- | -------- |  | ------- | ---- |  | ----- | -
|                                |  | Fiscal 2003 |      |                  | Fiscal 2004 |   |                 | Fiscal 2004vs.Fiscal 2003 |  
|                                |  | $           |      | % ofproductsales |             |   | % ofservicefees |                           |   | % ofnetrevenue |      |   | $ |   | % ofproductsales |  |      | % of service fees |  |       | % ofnetrevenue |  |      | $ Change |  | %Change |     
|Gross profit from product sales |  | $           | 61.8 |                  | 28.5        | % |                 |                           |   |                |      |   |   | $ | 71.9             |  | 26.1 | %                 |  |       |                |  |      |          |  | $       | 10.1 |  | 16.3  | %
|Gross profit from service fees  |  |             | 25.4 |                  |             |   |                 | 100.0                     | % |                |      |   |   |   | 60.3             |  |      |                   |  | 100.0 | %              |  |      |          |  |         | 34.9 |  | 137.5 | %
|Gross profit                    |  | $           | 87.2 |                  |             |   |                 |                           |   |                | 36.0 | % |   | $ | 132.2            |  |      |                   |  |       |                |  | 39.4 | %        |  | $       | 45.0 |  | 51.6  | %



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



Operating Expenses



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



|                                           |  |                       |       |   |             |   |   |                           |       |  |      |         |  |   |         |   |  |      |   
|------------------------------------------ |  | --------------------- | ----- | - | ----------- | - | - | ------------------------- | ----- |  | ---- | ------- |  | - | ------- | - |  | ---- | --
|                                           |  | Fiscal 2003           |       |   | Fiscal 2004 |   |   | Fiscal 2004vs.Fiscal 2003 |      
|                                           |  | $                     |       | % |             |   | $ |                           | %     |  |      | $Change |  |   | %Change |  
|                                           |  | (dollars in millions) |      
|Sales and marketing expenses               |  | $                     | 59.6  |   | 24.6        | % |   | $                         | 78.9  |  | 23.5 | %       |  | $ | 19.3    |   |  | 32.4 | % 
|Product development expenses               |  |                       | 14.1  |   | 5.8         | % |   |                           | 20.2  |  | 6.0  | %       |  |   | 6.1     |   |  | 42.9 | % 
|General and administrative expenses        |  |                       | 13.3  |   | 5.5         | % |   |                           | 18.2  |  | 5.4  | %       |  |   | 4.9     |   |  | 37.0 | % 
|Restructuring costs related to Ashford.com |  |                       | 0.1   |   | 0.0         | % |   |                           |      |  |     |         |  |   | (0.1    | ) |  | NM   |   
|Stock based compensation expense           |  |                       | 1.9   |   | 0.8         | % |   |                           | 3.6   |  | 1.1  | %       |  |   | 1.7     |   |  | 86.0 | % 
|Depreciation and amortization expenses     |  |                       | 11.4  |   | 4.7         | % |   |                           | 10.9  |  | 3.3  | %       |  |   | (0.4    | ) |  | (3.9 | )%
|                                           |  |                       |       |   |             |  
|Total operating expenses                   |  | $                     | 100.4 |   | 41.5        | % |   | $                         | 131.9 |  | 39.3 | %       |  | $ | 31.4    |   |  | 31.3 | % 



Sales and Marketing Expenses.
Sales and marketing expenses include fulfillment costs, customer service costs, credit card fees, net partner revenue share charges, net advertising and promotional expenses incurred by us on behalf of our partners e-commerce businesses and
payroll related to the buying, business management and marketing functions of our company. Net partner revenue share charges are royalty payments made to our partners in exchange for the use of their brands, the promotion of our partners URLs,
Web sites and toll-free telephone numbers in



5



---

##### Table of Contents

their marketing and communications materials, the implementation of programs to provide incentives to customers to shop through the e-commerce businesses
that we operate for our partners and other programs and services provided to the customers of the e-commerce businesses that we operate for our partners, net of amounts reimbursed to us by our partners. Net advertising and promotional expenses
include promotional free shipping and subsidized shipping and handling costs and are net of amounts reimbursed to us by our partners.



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



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



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



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



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



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



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



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



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



Other
(Income) Expense



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



|                       |  |                       |      |   |             |      |   |                           |   |      |   |  |      |          |  |         |     |  |      |   
|---------------------- |  | --------------------- | ---- | - | ----------- | ---- | - | ------------------------- | - | ---- | - |  | ---- | -------- |  | ------- | --- |  | ---- | --
|                       |  | Fiscal 2003           |      |   | Fiscal 2004 |      |   | Fiscal 2004vs.Fiscal 2003 |  
|                       |  | $                     |      |   | %           |      |   | $                         |   |      | % |  |      | $ Change |  | %Change |    
|                       |  | (dollars in millions) |     
|Other (income) expense |  | $                     |     |   |             | 0.0  | % |                           | $ | 0.6  |   |  | 0.2  | %        |  | $       | 0.6 |  | N/A  |   
|Interest expense       |  |                       |     |   |             | 0.0  | % |                           |   | 0.5  |   |  | 0.2  | %        |  |         | 0.5 |  | N/A  |   
|Interest (income)      |  | $                     | (1.2 | ) |             | -0.5 | % |                           | $ | (1.2 | ) |  | -0.3 | %        |  | $       | 0.0 |  | (1.3 | )%



6



---

##### Table of Contents

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



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



Income Taxes



We have not had any taxable income since we entered the e-commerce business in fiscal 1999. Prior year net operating losses generated have
been carried back to offset income taxes paid in prior years. The remaining net operating losses were used in part to offset fiscal 2004 taxable income with the remainder carried forward. As of the end of fiscal 2004, we had available net operating
loss carryforwards of approximately $442.8 million which expire in the years 2005 through 2024. The use of certain net operating loss carryforwards is subject to annual limitations based on ownership changes of our stock, as defined by Section 382
of the Internal Revenue Code. We expect that net operating losses of approximately $246.0 million will expire before they can be used. Any otherwise recognizable deferred tax assets have been offset by a valuation allowance for the net operating
loss carryforwards.



Comparison of Fiscal 2002 and 2003



Net Revenues



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



|                                                 |  |                       |       |   |             |   |   |                           |       |  |       |          |  |   |         |   |  |       |  
|------------------------------------------------ |  | --------------------- | ----- | - | ----------- | - | - | ------------------------- | ----- |  | ----- | -------- |  | - | ------- | - |  | ----- | -
|                                                 |  | Fiscal 2002           |       |   | Fiscal 2003 |   |   | Fiscal 2003vs.Fiscal 2002 |      
|                                                 |  | $                     |       | % |             |   | $ |                           | %     |  |       | $ Change |  |   | %Change |  
|                                                 |  | (dollars in millions) |      
|Net revenues from product sales  sporting goods |  | $                     | 96.7  |   | 56.0        | % |   | $                         | 128.4 |  | 53.1  | %        |  | $ | 31.7    |   |  | 32.8  | %
|Net revenues from product sales  Ashford.com    |  |                       | 21.6  |   | 12.5        | % |   |                           | 1.0   |  | 0.4   | %        |  |   | (20.6   | ) |  | -95.4 | %
|Net revenues from product sales  other          |  |                       | 36.5  |   | 21.2        | % |   |                           | 87.1  |  | 36.0  | %        |  |   | 50.6    |   |  | 138.3 | %
|                                                 |  |                       |       |   |             |  
|Net revenues from product sales                  |  |                       | 154.8 |   | 89.7        | % |   |                           | 216.5 |  | 89.5  | %        |  |   | 61.7    |   |  | 39.8  | %
|Service fee revenues                             |  |                       | 17.8  |   | 10.3        | % |   |                           | 25.4  |  | 10.5  | %        |  |   | 7.6     |   |  | 42.6  | %
|                                                 |  |                       |       |   |             |  
|Net revenues                                     |  | $                     | 172.6 |   | 100.0       | % |   | $                         | 241.9 |  | 100.0 | %        |  | $ | 69.3    |   |  | 40.1  | %



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



7



---

##### Table of Contents

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



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



Cost of Revenues



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



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



As a percentage of net revenues, cost
of revenues from product sales was 66.2% for fiscal 2002 and 64.0% for fiscal 2003. This decrease was due primarily to lower product costs in the sporting goods category in fiscal 2003, a $1.2 million charge in fiscal 2002 for inventory write downs
as a result of the Ashford.com restructuring and the closure of our Kentucky retail store and lower margins associated with a $2.5 million bulk sale which occurred in fiscal 2002, offset, in part, by sales in the consumer electronics category, which
have lower margins and which increased as a percentage of total product sales in fiscal 2003 compared to fiscal 2002.



Gross Profit



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



|                                |  |             |      |                  |             |   |                   |                           |   |                  |      |   |   |   |                    |  |      |                 |  |       |                |  |      |         |  |         |      |  |      |  
|------------------------------- |  | ----------- | ---- | ---------------- | ----------- | - | ----------------- | ------------------------- | - | ---------------- | ---- | - | - | - | ------------------ |  | ---- | --------------- |  | ----- | -------------- |  | ---- | ------- |  | ------- | ---- |  | ---- | -
|                                |  | Fiscal 2002 |      |                  | Fiscal 2003 |   |                   | Fiscal 2003vs.Fiscal 2002 |  
|                                |  | $           |      | % ofproductsales |             |   | % of service fees |                           |   | % of net revenue |      |   | $ |   | % of product sales |  |      | % ofservicefees |  |       | % ofnetrevenue |  |      | $Change |  | %Change |     
|Gross profit from product sales |  | $           | 40.6 |                  | 26.2        | % |                   |                           |   |                  |      |   |   | $ | 61.8               |  | 28.5 | %               |  |       |                |  |      |         |  | $       | 21.2 |  | 52.3 | %
|Gross profit from service fees  |  |             | 17.8 |                  |             |   |                   | 100.0                     | % |                  |      |   |   |   | 25.4               |  |      |                 |  | 100.0 | %              |  |      |         |  |         | 7.6  |  | 42.6 | %
|Gross profit                    |  | $           | 58.4 |                  |             |   |                   |                           |   |                  | 33.8 | % |   | $ | 87.2               |  |      |                 |  |       |                |  | 36.0 | %       |  | $       | 28.8 |  | 49.3 | %



The increase in gross profit for
fiscal 2003 was due primarily to a $61.8 million increase in net revenues from product sales in fiscal 2003. The increase in gross profit percentage for fiscal 2003 was due primarily to higher margins on sales in the sporting goods category in
fiscal 2003, the increase in service fee revenues in fiscal 2003, inventory write downs in fiscal 2002 related to the Ashford.com restructuring and the closure of our Kentucky retail store and lower margins associated with a bulk sale in fiscal
2002, offset, in part, by increased sales in the lower-margin consumer electronics category in fiscal 2003. Gross profit from product sales represented 69.5% of total gross profit in 2002 and 70.9% in fiscal 2003. Gross profit from service fee
revenue represented 30.5% of total gross profit in fiscal 2002 and 29.1% in fiscal 2003.



8



---

##### Table of Contents

Operating Expenses



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



|                                           |  |                       |      |   |             |   |   |                           |       |  |      |          |  |   |         |   |  |       |   
|------------------------------------------ |  | --------------------- | ---- | - | ----------- | - | - | ------------------------- | ----- |  | ---- | -------- |  | - | ------- | - |  | ----- | --
|                                           |  | Fiscal 2002           |      |   | Fiscal 2003 |   |   | Fiscal 2003vs.Fiscal 2002 |      
|                                           |  | $                     |      | % |             |   | $ |                           | %     |  |      | $ Change |  |   | %Change |  
|                                           |  | (dollars in millions) |     
|Sales and marketing expenses               |  | $                     | 51.0 |   | 29.5        | % |   | $                         | 59.6  |  | 24.6 | %        |  | $ | 8.6     |   |  | 17.0  | % 
|Product development expenses               |  |                       | 11.8 |   | 6.9         | % |   |                           | 14.1  |  | 5.8  | %        |  |   | 2.3     |   |  | 19.4  | % 
|General and administrative expenses        |  |                       | 14.9 |   | 8.6         | % |   |                           | 13.3  |  | 5.5  | %        |  |   | (1.6    | ) |  | (10.5 | )%
|Restructuring costs related to Ashford.com |  |                       | 1.7  |   | 1.0         | % |   |                           | 0.1   |  | 0.0  | %        |  |   | (1.6    | ) |  | (95.5 | )%
|Net Loss on Sale of Ashford.com Assets     |  |                       | 2.6  |   | 1.5         | % |   |                           |      |  |     |          |  |   | (2.6    | ) |  | NM    |   
|Stock based compensation expense           |  |                       | 0.4  |   | 0.2         | % |   |                           | 1.9   |  | 0.8  | %        |  |   | 1.5     |   |  | 382.5 | % 
|Depreciation and amortization expenses     |  |                       | 10.5 |   | 6.1         | % |   |                           | 11.4  |  | 4.7  | %        |  |   | 0.9     |   |  | 8.3   | % 
|                                           |  |                       |      |   |             |  
|Total operating expenses                   |  | $                     | 92.8 |   | 53.8        | % |   | $                         | 100.4 |  | 41.5 | %        |  | $ | 7.6     |   |  | 8.2   | % 



Sales and Marketing Expenses.Sales and marketing expenses increased $8.6 million primarily due to a $4.8 million increase in partner revenue share charges, a $3.1 million increase in personnel and related costs attributable to our fulfillment operations, which was primarily
due to increased processing volume in our fulfillment center, and a $2.0 million increase in credit card fees, offset, in part, by a $1.4 million decrease in subsidized shipping and handling costs. The increases in partner revenue share charges and
credit card fees were due principally to increased sales volume in fiscal 2003.



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



General and
Administrative Expenses. General and administrative expenses decreased $1.6 million primarily due to a $2.4 million decrease in bad debt expense and chargebacks related to lower direct response television sales for fiscal 2003 which have a
higher bad debt rate, a lower bad debt rate for sales through our partners e-commerce businesses and a $0.4 million decrease in non-income taxes related primarily to Ashford.com, offset, in part, by a $1.3 million increase in personnel and
related costs. The lower bad debt rate for sales through our partners e-commerce businesses was the result of order processing tools and credit card fraud verification initiatives that we implemented during fiscal 2003.



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



In conjunction with the sale of certain assets of Ashford.com, we also announced and
implemented our plan to cease the operations of Ashford.com, which accounted for approximately $21.6 million of our net revenues in fiscal 2002 and $1.0 million of our net revenues in fiscal 2003. This plan involved the liquidation of
Ashford.coms remaining inventory, the closure of its Houston, Texas fulfillment center and offices and the termination of 71 employees. This plan was substantially completed in January 2003. As of the end of fiscal 2003, 71 employees had been
terminated and actual termination benefits paid were $0.4 million.



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



9



---

##### Table of Contents

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



|                          |  |               |     |             |   |    
|------------------------- |  | ------------- | --- | ----------- | - | ---
|                          |  | Fiscal 2002   |     | Fiscal 2003
|                          |  | (in millions)
|Termination benefits      |  | $             | 0.4 |             | $ |   
|Contractual obligations   |  |               | 0.4 |             |   | 0.1
|Asset impairments         |  |               | 0.8 |             |   |   
|Other restructuring costs |  |               | 0.1 |             |   |   
|                          |  |              
|                          |  | $             | 1.7 |             | $ | 0.1



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



Net Loss on Sale of Ashford.com Assets. We had a net loss on the sale of assets related to Ashford.com of $2.6 million for fiscal
2002. We had acquired these assets in March 2002. This net loss was due to a loss of $2.9 million on the sale in December 2002 of certain assets of Ashford.com to Odimo Acquisition Corp., offset, in part, by a gain of $0.4 million on the sale in
August 2002 of certain assets of a division of Ashford Corporate Gifts, Inc., a subsidiary of Ashford.com. We received $1.2 million in cash proceeds from the sale of this division.



Stock-Based Compensation Expense. Stock-based compensation expense increased $1.5 million primarily due to an increase of $1.4
million in charges related to options subject to variable accounting and an increase of $0.5 million related to the amortization of deferred partner revenue share charges, offset, in part, by a decrease of $0.3 million in charges related to the
issuance of options granted during fiscal 2000 and fiscal 2001 with exercise prices below the then-current market prices of the underlying stock and a decrease of $0.1 million in charges related to the net exercise of warrants during fiscal 2002. As
of the end of fiscal 2003, we had an aggregate of $1.2 million of deferred stock-based compensation remaining to be amortized. We had stock-based compensation expense related to the amortization of deferred partner revenue share charges of $0.9
million for fiscal 2002 and $1.4 million for fiscal 2003.



Depreciation and
Amortization Expenses. Depreciation and amortization expenses increased $0.9 million primarily due to additional assets to build, manage and operate our business, offset, in part, by an impairment charge of $0.6 million in fiscal 2002. The
impairment charge related to the disposal of furniture and computer hardware and software during the fourth quarter of fiscal 2002. We determined that these long-lived assets were no longer being used in our continuing operations and that,
therefore, the carrying amounts of these assets were not recoverable.



Other
(Income) Expense



Interest income consists primarily of interest earned on
cash, cash equivalents, short-term investments and marketable securities, and interest expense consists primarily of interest expense paid in connection with a mortgage note that we previously had on our corporate headquarters and interest expense
on capital leases. The following table shows interest expense and interest income for fiscal 2002 and fiscal 2003, the percentages that such amounts bear to net revenues and the period over period changes in each of interest expense and interest
income:



|                  |  |                       |      |   |             |      |   |                           |   |      |   |  |      |          |  |   |         |   |  |        |  
|----------------- |  | --------------------- | ---- | - | ----------- | ---- | - | ------------------------- | - | ---- | - |  | ---- | -------- |  | - | ------- | - |  | ------ | -
|                  |  | Fiscal 2002           |      |   | Fiscal 2003 |      |   | Fiscal 2003vs.Fiscal 2002 |  
|                  |  | $                     |      |   | %           |      |   | $                         |   |      | % |  |      | $ Change |  |   | %Change |  
|                  |  | (dollars in millions) |     
|Interest (income) |  | $                     | (1.4 | ) |             | -0.8 | % |                           | $ | (1.2 | ) |  | -0.5 | %        |  | $ | 0.2     |   |  | -14.5  | %
|                  |  |                       |      |   |             |     
|Interest expense  |  | $                     | 0.7  |   |             | 0.4  | % |                           | $ |     |   |  | 0.0  | %        |  | $ | (0.7    | ) |  | -100.0 | %



The decrease in interest income of
$0.2 million was due to lower interest rates and lower average balances of cash, cash equivalents, short-term investments and marketable securities during fiscal 2003 compared to fiscal 2002.



10



---

##### Table of Contents

The decrease in interest expense of $0.7 million was due primarily to the early retirement of a mortgage note on our
corporate headquarters in November 2002. We had no debt during fiscal 2003.



Seasonality



We have experienced and expect to continue to
experience seasonal fluctuations in our revenues. These seasonal patterns will cause quarterly fluctuations in our operating results. In particular, 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 20 to our
consolidated financial statements included in this Annual Report on Form 10-K/A.



Liquidity and Capital Resources



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



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



We have incurred substantial costs to develop our e-commerce platform and to recruit, train
and compensate personnel for our creative, engineering, business development, marketing, merchandising, customer service, management information systems and administrative departments. During fiscal 2002, we spent approximately $8.8 million in cash
to purchase our previously-leased fulfillment center in Louisville, Kentucky and approximately $12.2 million on upgrades to our technology infrastructure, including upgrades to our server, storage and telecommunications hardware, as well as on
technical enhancements to our existing software and on new software solutions, including for customer service, marketing, financial management, merchandise planning, fraud detection and enhanced search functionality. In addition, during fiscal 2002,
we spent $1.7 million on the installation of a second, fully redundant data center to increase both our system capacity as well as our system reliability, $4.0 million on the expansion of our Louisville, Kentucky fulfillment center to increase
capacity and $1.2 million to acquire certain assets of and enhance a 500-seat customer service center in Melbourne, Florida to expand our customer service capabilities. During fiscal 2003, we spent approximately $5.8 million on continued upgrades to
our technology infrastructure and $1.3 million on warehouse equipment for our Louisville, Kentucky fulfillment center. During fiscal 2004, we spent approximately $21.1 million on the purchase and improvement to our new corporate headquarters in King
of Prussia, Pennsylvania. Of this amount, we financed $13.0 million, secured through a ten year mortgage on the new corporate headquarters building. In addition, during fiscal 2004, we incurred $6.7 million in capital expenditures to continue to
improve our technology infrastructure and open our second fulfillment center located in Shepherdsville, Kentucky.



During fiscal 2005, we expect to continue to further improve our technology infrastructure and our fulfillment and customer service operations.



We had working capital of $35.3 million as of the end of fiscal 2003 and $29.7 million as of
the end of fiscal 2004, and an accumulated deficit of $177.6 million for fiscal 2003 and $177.3 million for fiscal 2004.



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



11



---

##### Table of Contents

Operating activities during fiscal 2003 were breakeven on a net cash basis. Our principal sources of operating cash
during fiscal 2003 were payments received from customers and fee-based partners, which generally approximate our net revenues from product sales and our service fee revenues, respectively. Our principal uses of operating cash during fiscal 2003 were
cash paid to product suppliers, which generally approximates our cost of revenues from product sales, employee compensation and partner revenue share payments. Changes in our operating assets and liabilities during fiscal 2003 resulted in a net cash
outflow of $1.1 million. The most significant changes were a decrease in accounts payable, accrued expenses and other, offset, in part, by a decrease in inventory compared to fiscal 2002. The decrease in accounts payable, accrued expenses and other
was due primarily to lower payroll and related accruals at the end of fiscal 2003 compared to fiscal 2002, a decrease in accruals related to the operations of Ashford.com and a decrease in trade accounts payable due primarily to lower inventory
levels at the end of fiscal 2003, offset, in part, by an increase in partner revenue share payments at the end of fiscal 2003, which was related to increased sales volume in fiscal 2003. The decrease in inventory was due primarily to an improvement
in inventory turns from approximately 5.0 in fiscal 2002 to 6.5 in fiscal 2003 and the liquidation of the remaining inventory of Ashford.com. Our investing activities during fiscal 2003 consisted primarily of capital expenditures of $7.5 million.
During fiscal 2003, we also purchased $60.4 million and sold $59.8 million of marketable securities, received $2.3 million in gross proceeds from sales of short-term investments and received $0.9 million in principal payments on a note receivable.
Our financing activities during fiscal 2003 consisted primarily of the receipt of $1.1 million in gross proceeds from exercises of common stock options and warrants. During fiscal 2003, we also received $0.3 million in gross proceeds from the sale
of common stock through our Employee Stock Purchase Plan and repaid $0.1 million of capital lease obligations.



Operating activities provided net cash of approximately $9.6 million during fiscal 2002. Our principal sources of operating cash during fiscal 2002 were payments received from customers and fee-based partners. Changes
in our operating assets and liabilities during fiscal 2002 resulted in a net cash inflow of $29.1 million. The most significant changes were increases in accounts payable, accrued expenses and other and deferred revenue as well as a decrease in
accounts receivable and the change in inventory compared to fiscal 2001. The increase in accounts payable, accrued expenses and other was due primarily to increases in trade accounts payable, marketing and shipping expense accruals and amounts owed
to partners, which were related to increased sales volume in fiscal 2002. The increase in deferred revenue was due primarily to an increase in service fees paid to us in advance by certain partners. The decrease in accounts receivable was due
primarily to a net decrease in the receivable related to bulk sales to one entity during fiscal 2001 and fiscal 2002 and increases in our accounts receivable reserves. Inventory at the end of fiscal 2002 was $6.5 million higher than at the end of
fiscal 2001. This increase was driven largely by an increase in inventory related to the consumer electronics category. The change in inventory for fiscal 2002 was a source of operating cash as the $12.0 million of inventory acquired from
Ashford.com was sold through our e-commerce platform during fiscal 2002. Our principal uses of operating cash during fiscal 2002 were cash paid to product suppliers and employee compensation. During fiscal 2002, we incurred capital expenditures of
$29.0 million, purchased $81.4 million and sold $94.2 million of marketable securities, paid $8.9 million for the acquisition of Ashford.com including acquisition costs and received $2.2 million in gross proceeds from the sale of Ashford.com assets.
During fiscal 2002, we prepaid $5.2 million of a mortgage note on our corporate headquarters and we retired for $3.1 million a revolving credit facility that had been maintained by Ashford.com prior to our acquisition of Ashford.com. Also during
fiscal 2002, our board of directors authorized, subject to certain business and market conditions, the purchase of up to $10.0 million of our common stock. Under this program we repurchased 73,000 shares of our common stock for an aggregate purchase
price of $0.4 million.



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



|                                 |  |                        |         |                |   |          |  |          |        |                 |   |        |  |   |       
|-------------------------------- |  | ---------------------- | ------- | -------------- | - | -------- |  | -------- | ------ | --------------- | - | ------ |  | - | ------
|                                 |  | Payments due by period
|                                 |  | Total                  |         | Lessthan 1year |   | 1-3years |  | 3-5years |        | Morethan 5years
|                                 |  | (in thousands)        
|Operating lease obligations      |  | $                      | 10,387  |                | $ | 2,175    |  | $        | 3,616  |                 | $ | 3,168  |  | $ | 1,428 
|Purchase obligations(1)          |  |                        | 42,384  |                |   | 42,384   |  |          |       |                 |   |       |  |   |      
|Advertising and media agreements |  |                        | 130     |                |   | 130      |  |          |       |                 |   |       |  |   |      
|Partner revenue share payments   |  |                        | 37,050  |                |   | 7,450    |  |          | 11,700 |                 |   | 13,000 |  |   | 4,900 
|Accrued interest expense         |  |                        | 72      |                |   | 72       |  |          |       |                 |   |       |  |   |      
|Long-term debt obligations       |  |                        | 12,945  |                |   | 142      |  |          | 313    |                 |   | 354    |  |   | 12,136
|Capital lease obligations        |  |                        | 1,725   |                |   | 912      |  |          | 813    |                 |   |       |  |   |      
|                                 |  |                        |         |                |  
|Total contractual obligations    |  | $                      | 104,693 |                | $ | 53,265   |  | $        | 16,442 |                 | $ | 16,522 |  | $ | 18,464

---

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



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



12



---

##### Table of Contents

Prior to fiscal 2004, we financed our e-commerce operations primarily from the sale of equity securities. While we had
net income of $.03 million for fiscal 2004, we did not realize net income for the full years of fiscal 2001, fiscal 2002 or fiscal 2003. In order to fund our anticipated operating expenses and realize net income, our revenues must continue to
increase significantly.



In the future, we may seek to raise capital through
financing transactions. If we are unable to raise capital, or if we raise less capital than we desire, or 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. Failure to raise future capital when needed could seriously harm our business and operating results. If additional funds are raised through the issuance of equity securities, the
percentage ownership of our current stockholders would be reduced to the extent they did not participate in that financing. Furthermore, these equity securities might have rights, preferences or privileges senior to our common stock.



Critical Accounting Policies



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



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



Revenue Recognition



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



We recognize revenue from product sales, net of estimated returns based on historical experience and current trends, upon shipment of
products to customers. We ship the majority of products from our fulfillment centers in Louisville and Shepherdsville Kentucky. In fiscal 2002, we also shipped products from Ashford.coms jewelry and luxury goods fulfillment center that we
formerly maintained in Houston, Texas. We also rely upon certain vendors to ship products directly to customers on our behalf. We act as principal in these transactions, as orders are initiated directly through the e-commerce businesses that we
operate, we take title to the goods at the shipping point and have the economic risk related to collection, customer service and returns.



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



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



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



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



Accounting for Inventory



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



13



---

##### Table of Contents

for obsolescence based upon, among other factors, the amount of inventory which has an aging of greater than one year and the anticipated mark-downs required
to sell the inventory in the normal course of business. We record a charge for inventory shrinkage for damages and other losses based on rates experienced in our fulfillment centers.



Accounting for Long-Lived Assets



The ability to realize long-lived assets is evaluated periodically, but no less than annually, as events or circumstances indicate a possible inability to recover their
carrying amount. Such evaluation is based on various analyses, including undiscounted cash flow and profitability projections that incorporate, as applicable, the impact on the existing business. The analyses necessarily involve significant
management judgment. Any impairment loss, if indicated, is measured as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.



Accounting for Stock-Based Compensation



We account for stock options granted to employees under our incentive and non-incentive stock option plans using the intrinsic method prescribed in Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation expense for stock options issued to employees is measured as the excess, if any, of the quoted market price of our
stock at the date of the grant over the amount an employee must pay to acquire the stock.



We account for stock options and warrants issued to non-employees using the fair value method prescribed in SFAS No. 123, Accounting for Stock-Based Compensation, and in accordance with the provisions of
EITF No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, and EITF No. 00-18, Accounting Recognition for Certain Transactions
involving Equity Instruments Granted to Other Than Employees. Accordingly, compensation expense for stock options and warrants issued to non-employees is measured using a Black-Scholes multiple option pricing model that takes into account
significant assumptions as to the expected life of the option or warrant, the expected volatility of our common stock and the risk-free interest rate over the expected life of the option or warrant.



We also record stock-based compensation as deferred partner revenue share charges are
amortized. These deferred partner revenue share charges, which are included in other assets, have resulted from the exercise of a right to receive 1,600,000 shares of our common stock in lieu of future cash revenue share payments, and were $11.8
million as of the end of fiscal 2003 and $10.1 million as of the end of fiscal 2004. The deferred partner revenue share charges are amortized as the revenue share expense is incurred based on actual revenues recognized in a given period and the
imputed partner revenue share percentage, which is based on the value of our common stock that was issued upon exercise of the right.



In December 2004, the Financial Accounting Standards Board, or FASB, issued Financial Accounting Standards Board Statement No. 123R Share-Based Payment, or
FAS 123R, which replaces Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation, or FAS 123, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25. FAS
123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. In addition, FAS 123R will cause unrecognized expense (based on the amounts in
our pro forma footnote disclosure) related to options vesting after the date of initial adoption to be recognized as a charge to results of operations over the remaining vesting period. We are required to adopt FAS 123R in our first quarter of
fiscal 2006, beginning January 1, 2006. Under FAS 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of
adoption. We have preliminarily decided to use the prospective method for transition as of the effective date of FAS 123R. The prospective method requires that compensation expense be recorded for all unvested stock options and share awards at the
beginning of the first quarter of adoption of FAS 123R. We are continuing to evaluate the requirements of FAS 123R and we expect that the adoption of FAS 123R will have a material impact on our consolidated results of operations and earnings per
share. In light of our anticipated adoption of FAS 123R, we and our compensation committee are reevaluating our current incentive compensation strategies. See Note 2 to our consolidated financial statements included elsewhere in this Annual Report
on Form 10-K/A for an analysis of the impact on our income statement of recognizing share-based payments based on their fair value in accordance with SFAS No. 123.



Certain Related Party Transactions



In fiscal 2000 and 2001, Interactive Technology Holdings, LLC, a joint venture of Comcast Corporation and QVC, Inc., acquired 10,797,900 shares of our common stock and
warrants to purchase 300,000 shares of our common stock, which accounted for approximately 26.0% of our outstanding common stock as of January 1, 2005. On January 31, 2005, ITH effected a distribution of all of its assets, including shares of GSI
common stock, to entities affiliated with Comcast and QVC. As of March 1, 2005, QVC beneficially owned approximately 20.0% of our outstanding common stock. M. Jeffrey Branman, one of our directors, was the President of Interactive Technology
Services, which served as financial advisor to ITH through its dissolution.



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



14



---

##### Table of Contents

In fiscal 2003, we entered into a services agreement with QVC, Inc. pursuant to which QVC provided shipping services to
us in exchange for fees. The fees charged to us by QVC were determined through arms-length negotiations. We incurred fees of $1.1 million in fiscal 2004. Of those fees, $1.0 million related directly to products shipped and was charged to cost of
revenues from product sales and the remaining $0.1 million related to fulfillment services provided and was charged to sales and marketing expense. We expect that this agreement will terminate in accordance with its terms in April 2005.



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



In February, 2005, Odimo completed an initial public offering through
the issuance of 3,125,000 shares of its common stock. Effective upon completion of Odimos initial public offering, we exercised our warrants to acquire Series C and Series D Convertible Preferred Stock of Odimo and converted all of such
shares, along with our already held shares of Series C and Series D Convertible Preferred Stock of Odimo, into an aggregate of 824,594 shares of common stock of Odimo. We own approximately 11.5% of the outstanding common stock of Odimo Incorporated.
SOFTBANK Capital Partners LLC and its affiliates collectively own approximately 11.9% of the outstanding common stock of Odimo. SOFTBANK Capital Partners LLC and its affiliates collectively own approximately 20.7% of our outstanding common stock.
Ronald D. Fisher, our director, is vice-chairman of SOFTBANK Holdings Inc. and SOFTBANK Corp. and a managing general partner of SOFTBANK Capital Partners LP, which are affiliates of SOFTBANK Capital Partners LLC, and Michael S. Perlis, our director,
is also managing partner of SOFTBANK Capital Partners LP.



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



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, corporate bonds and auction preferred stock. In order to minimize risk and credit exposure, we invest with three financial institutions. We protect and preserve our invested funds by limiting default, market
and reinvestment risk.



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 we are 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 the end of fiscal 2004:



|                                           |  |                                    |        |            |      |       |      |  |                                             |   |      |   |   |  |   |   |  |   |   |  |   |        |   |  |   |       
|------------------------------------------ |  | ---------------------------------- | ------ | ---------- | ---- | ----- | ---- |  | ------------------------------------------- | - | ---- | - | - |  | - | - |  | - | - |  | - | ------ | - |  | - | ------
|                                           |  | Fiscal Year                        |        | Thereafter |      | Total |      |  | EstimatedFair Value atthe End ofFiscal 2004
|                                           |  | 2005                               |        |            | 2006 |       | 2007 |  | 2008                                        |   | 2009 |   |   | 
|                                           |  | (in thousands, except percentages)
|Money market accounts                      |  | $                                  | 7,667  |            |      | $     |     |  | $                                           |  |      | $ |  |  | $ |  |  | $ |  |  | $ | 7,667  |   |  | $ | 7,667 
|Weighted average interest rate             |  |                                    | 2.04   | %          |      |       |     |  |                                             |  |      |   |  |  |   |  |  |   |  |  |   | 2.04   | % |  |   |       
|Auction rate certificates                  |  | $                                  | 39,700 |            |      |       |     |  |                                             |  |      |   |  |  |   |  |  |   |  |  | $ | 39,700 |   |  |   | 39,700
|Weighted average interest rate             |  |                                    | 2.45   | %          |      |       |     |  |                                             |  |      |   |  |  |   |  |  |   |  |  |   | 2.45   | % |  |   |       
|U.S. government agency securities          |  | $                                  | 9,800  |            |      |       |     |  |                                             |  |      |   |  |  |   |  |  |   |  |  | $ | 9,800  |   |  |   | 9,737 
|Weighted average interest rate             |  |                                    | 1.94   | %          |      |       |     |  |                                             |  |      |   |  |  |   |  |  |   |  |  |   | 1.94   | % |  |   |       
|Corporate bonds                            |  | $                                  | 5,963  |            |      |       |     |  |                                             |  |      |   |  |  |   |  |  |   |  |  | $ | 5,963  |   |  |   | 5,922 
|Weighted average interest rate             |  |                                    | 1.74   | %          |      |       |     |  |                                             |  |      |   |  |  |   |  |  |   |  |  |   | 1.74   | % |  |   |       
|                                           |  |                                    |        |            |      |       |      | 
|Cash equivalents and marketable securities |  | $                                  | 63,130 |            |      | $     |     |  | $                                           |  |      | $ |  |  | $ |  |  | $ |  |  | $ | 63,130 |   |  | $ | 63,026



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.



15



---

##### Table of Contents

ITEM 9A:CONTROLS AND PROCEDURES.



Evaluation of disclosure controls and procedures.Our management, with the participation of our chief executive officer and our chief financial officer, conducted an evaluation, as of January 1, 2005, of the effectiveness of our
disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e).



Based on this evaluation, our chief executive officer and our chief financial officer have concluded that, as of the end of the period covered by this Annual Report on Form 10-K/A, our disclosure controls and
procedures were effective in reaching a reasonable level of assurance that management is timely alerted to material information relating to us during the period when our periodic reports are being prepared.



Changes in internal control over financial reporting.We monitor and evaluate on an
ongoing basis our internal control over financial reporting in order to improve its overall effectiveness. In the course of these evaluations, we modify and refine our internal processes and controls as conditions warrant. As required by Rule
13a-15(d), our management, including our chief executive officer and the chief financial officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the quarter ended
January 1, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the period covered by this report.



GSIs annual report on internal control over financial reporting.Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements due to human error, or the improper circumvention or overriding of internal controls. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may change over time.



Our management, with the participation of our chief executive officer and chief financial officer, conducted an evaluation, as of January 1, 2005, of the effectiveness of
our internal control over financial reporting based on the framework in Internal Control - Integrated Frameworkissued by the committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in
Internal Control - Integrated Framework, our management concluded that, as of January 1, 2005 our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles.



Our independent registered public accounting firm, Deloitte & Touche LLP, have issued an attestation report on our assessment of GSIs internal control over
financial reporting. Their report appears below.



16



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders of GSI Commerce, Inc.



King of Prussia, PA



We have audited managements assessment, included in the accompanying Managements Report on Internal Control Over Financial
Reporting that GSI Commerce, Inc. and subsidiaries (the Company) maintained effective internal control over financial reporting as of January 1, 2005, based on criteria established in Internal Control  Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.



A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal
financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.



Because of the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, managements assessment that the Company maintained effective internal
control over financial reporting as of January 1, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 1, 2005, based on the criteria established in Internal Control  Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission.



17



---

##### Table of Contents

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated financial statements as of and for the year ended January 1, 2005 of the Company and our report dated March 16, 2005 (May 4, 2005 as to the effects of the restatement discussed in Note 22) expressed an unqualified opinion on those
financial statements.



|                         
|-------------------------
|/S/ DELOITTE & TOUCHE LLP
|                         
|DELOITTE & TOUCHE LLP    



Philadelphia, Pennsylvania



March 16, 2005



18



---

##### Table of Contents

PART IV



ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.



(a) 1. CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                                 |  |     
|-------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                 |  | Page
|Report of Independent Registered Accounting Firm                                                                                 |  | F-1 
|Consolidated Balance Sheets as of January 3, 2004 and January 1, 2005                                                            |  | F-2 
|Consolidated Statements of Operations for the Fiscal Years Ended December 28, 2002, January 3, 2004 and January 1, 2005          |  | F-3 
|Consolidated Statements of Stockholders Equity for the Fiscal Years Ended December 28, 2002, January 3, 2004 andJanuary 1, 2005 |  | F-4 
|Consolidated Statements of Cash Flows for the Fiscal Years Ended December 28, 2002, January 3, 2004 and January 1, 2005          |  | 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.



3. EXHIBITS



Listed below are the
Exhibits filed as part of this amended report.



|     |  |                                                                                                                                                                              
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|23.1 |  | Consent of Deloitte & Touche LLP                                                                                                                                             
|     | 
|31.1 |  | Certification of Chief Executive Officer pursuant to Rule 13a14(a) under the Securities Exchange Act of 1934                                                                
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Rule 13a14(a) under the Securities Exchange Act of 1934                                                                
|     | 
|32.1 |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



SIGNATURE



Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 2 to the Annual Report on Form 10-K/A to be signed on its behalf on May 6, 2005 by the undersigned, thereunto duly authorized.



GSI Commerce, Inc.By:

/s/ Jordan M CoplandJordan M CoplandChief Financial Officer




19



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



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



King
of Prussia, PA



We have audited the accompanying consolidated balance sheets of
GSI Commerce, Inc. and subsidiaries (the Company) as of January 1, 2005 and January 3, 2004, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three years in the period ended
January 1, 2005. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



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



In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 1, 2005 and January 3, 2004, and the results of its operations and its cash flows for each
of the three years in the period ended January 1, 2005, in conformity with accounting principles generally accepted in the United States of America.



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



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



Philadelphia, Pennsylvania



March 16, 2005

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



F-1



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



(in thousands,
except share data)



|                                                                                                                                                                                                                                                                   |  |                                          |          |   |                                          |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------- | -------- | - | ---------------------------------------- | - | -------- | -
|                                                                                                                                                                                                                                                                   |  | January 3,2004 (as restated, seeNote 22) |          |   | January 1,2005 (as restated, seeNote 22) |  
|                                                                                                                                                                                                                                                                   |  |                                         
|ASSETS                                                                                                                                                                                                                                                             |  |                                          |          |   |                                          |   |          |  
|Current assets:                                                                                                                                                                                                                                                    |  |                                          |          |   |                                          |   |          |  
|Cash and cash equivalents                                                                                                                                                                                                                                          |  | $                                        | 38,808   |   |                                          | $ | 20,064   |  
|Marketable securities                                                                                                                                                                                                                                              |  |                                          | 30,662   |   |                                          |   | 55,359   |  
|Accounts receivable, net of allowance of $709 and $406, respectively                                                                                                                                                                                               |  |                                          | 4,898    |   |                                          |   | 14,908   |  
|Inventory                                                                                                                                                                                                                                                          |  |                                          | 22,910   |   |                                          |   | 37,773   |  
|Current portion  notes receivable                                                                                                                                                                                                                                 |  |                                          | 1,377    |   |                                          |   |         |  
|Prepaid expenses and other current assets                                                                                                                                                                                                                          |  |                                          | 1,848    |   |                                          |   | 2,382    |  
|                                                                                                                                                                                                                                                                   |  |                                          |          |   |                                          |   |          |  
|Total current assets                                                                                                                                                                                                                                               |  |                                          | 100,503  |   |                                          |   | 130,486  |  
|Property and equipment, net                                                                                                                                                                                                                                        |  |                                          | 44,840   |   |                                          |   | 74,286   |  
|Goodwill                                                                                                                                                                                                                                                           |  |                                          | 13,453   |   |                                          |   | 13,453   |  
|Notes receivable                                                                                                                                                                                                                                                   |  |                                          | 2,356    |   |                                          |   |         |  
|Other equity investments                                                                                                                                                                                                                                           |  |                                          | 2,159    |   |                                          |   | 2,847    |  
|Other assets, net of accumulated amortization of $2,644 and $4,416, respectively                                                                                                                                                                                   |  |                                          | 12,272   |   |                                          |   | 10,824   |  
|                                                                                                                                                                                                                                                                   |  |                                          |          |   |                                          |   |          |  
|Total assets                                                                                                                                                                                                                                                       |  | $                                        | 175,583  |   |                                          | $ | 231,896  |  
|                                                                                                                                                                                                                                                                   |  |                                          |          |   |                                          |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                               |  |                                          |          |   |                                          |   |          |  
|Current liabilities:                                                                                                                                                                                                                                               |  |                                          |          |   |                                          |   |          |  
|Accounts payable                                                                                                                                                                                                                                                   |  | $                                        | 27,677   |   |                                          | $ | 58,762   |  
|Accrued expenses and other                                                                                                                                                                                                                                         |  |                                          | 22,538   |   |                                          |   | 31,691   |  
|Deferred revenue                                                                                                                                                                                                                                                   |  |                                          | 14,998   |   |                                          |   | 9,370    |  
|Current portion  long-term debt and other                                                                                                                                                                                                                         |  |                                          |         |   |                                          |   | 971      |  
|                                                                                                                                                                                                                                                                   |  |                                          |          |   |                                          |   |          |  
|Total current liabilities                                                                                                                                                                                                                                          |  |                                          | 65,213   |   |                                          |   | 100,794  |  
|Long-term debt and other                                                                                                                                                                                                                                           |  |                                          |         |   |                                          |   | 13,564   |  
|Mandatorily redeemable preferred stock, Series A, $0.01 par value, 10,000 shares authorized; 0 shares issued as of January 3, 2004 and January
1, 2005; 0 shares outstanding as of January 3, 2004 and January 1, 2005                                             |  |                                          |         |   |                                          |   |         |  
|                                                                                                                                                                                                                                                                   |  |                                          |          |   |                                          |   |          |  
|Total liabilities                                                                                                                                                                                                                                                  |  |                                          | 65,213   |   |                                          |   | 114,358  |  
|                                                                                                                                                                                                                                                                   |  |                                         
|Commitments and contingencies                                                                                                                                                                                                                                      |  |                                          |          |   |                                          |   |          |  
|Stockholders equity:                                                                                                                                                                                                                                              |  |                                          |          |   |                                          |   |          |  
|Preferred stock, $0.01 par value, 4,990,000 shares authorized; 0 shares issued and outstanding as of January 3, 2004 and January 1,
2005                                                                                                                           |  |                                          |         |   |                                          |   |         |  
|Common stock, $0.01 par value, 90,000,000 shares authorized; 40,781,036 and 41,584,061 shares issued as of January 3, 2004 and January 1,
2005, respectively; 40,779,826 and 41,582,851 shares outstanding as of January 3, 2004 and January 1, 2005, respectively |  |                                          | 408      |   |                                          |   | 416      |  
|Additional paid in capital                                                                                                                                                                                                                                         |  |                                          | 287,571  |   |                                          |   | 294,495  |  
|Accumulated other comprehensive income                                                                                                                                                                                                                             |  |                                          |         |   |                                          |   | (104     | )
|Accumulated deficit                                                                                                                                                                                                                                                |  |                                          | (177,609 | ) |                                          |   | (177,269 | )
|                                                                                                                                                                                                                                                                   |  |                                          |          |   |                                          |   |          |  
|Total stockholders equity                                                                                                                                                                                                                                         |  |                                          | 110,370  |   |                                          |   | 117,538  |  
|                                                                                                                                                                                                                                                                   |  |                                          |          |   |                                          |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                                                                                         |  | $                                        | 175,583  |   |                                          | $ | 231,896  |  
|                                                                                                                                                                                                                                                                   |  |                                          |          |   |                                          |   |          |  



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



F-2



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS



(in
thousands, except per share data)



|                                                                                                                       |  |                   |         |   |                 |   |         |                |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | --------------- | - | ------- | -------------- |  | - | ------- | -
|                                                                                                                       |  | Fiscal Year Ended |        
|                                                                                                                       |  | December 28,2002  |         |   | January 3, 2004 |   |         | January 1,2005 | 
|Revenues:                                                                                                              |  |                   |         |   |                 |   |         |                |  |   |         |  
|Net revenues from product sales                                                                                        |  | $                 | 154,819 |   |                 | $ | 216,510 |                |  | $ | 274,988 |  
|Service fee revenues                                                                                                   |  |                   | 17,819  |   |                 |   | 25,409  |                |  |   | 60,344  |  
|                                                                                                                       |  |                   |        
|Net revenues                                                                                                           |  |                   | 172,638 |   |                 |   | 241,919 |                |  |   | 335,332 |  
|Cost of revenues                                                                                                       |  |                   | 114,258 |   |                 |   | 154,731 |                |  |   | 203,135 |  
|                                                                                                                       |  |                   |        
|Gross profit                                                                                                           |  |                   | 58,380  |   |                 |   | 87,188  |                |  |   | 132,197 |  
|                                                                                                                       |  |                   |        
|Operating expenses:                                                                                                    |  |                   |         |   |                 |   |         |                |  |   |         |  
|Sales and marketing, exclusive of $532, $1,527 and $2,720 reported below as stock-based compensation, respectively     |  |                   | 50,965  |   |                 |   | 59,613  |                |  |   | 78,919  |  
|Product development, exclusive of $(44), $42 and $350 reported below as stock-based compensation, respectively         |  |                   | 11,833  |   |                 |   | 14,124  |                |  |   | 20,181  |  
|General and administrative, exclusive of $(87), $366 and $530 reported below as stock-based compensation, respectively |  |                   | 14,863  |   |                 |   | 13,295  |                |  |   | 18,217  |  
|Restructuring costs related to Ashford.com                                                                             |  |                   | 1,680   |   |                 |   | 74      |                |  |   |        |  
|Net loss on sale of Ashford.com assets                                                                                 |  |                   | 2,566   |   |                 |   |        |                |  |   |        |  
|Stock-based compensation                                                                                               |  |                   | 401     |   |                 |   | 1,935   |                |  |   | 3,600   |  
|Depreciation and amortization                                                                                          |  |                   | 10,509  |   |                 |   | 11,386  |                |  |   | 10,944  |  
|                                                                                                                       |  |                   |        
|Total operating expenses                                                                                               |  |                   | 92,817  |   |                 |   | 100,427 |                |  |   | 131,861 |  
|                                                                                                                       |  |                   |        
|Other (income) expense:                                                                                                |  |                   |         |   |                 |   |         |                |  |   |         |  
|Other Expense                                                                                                          |  |                   |        |   |                 |   |        |                |  |   | 620     |  
|Interest expense                                                                                                       |  |                   | 749     |   |                 |   |        |                |  |   | 538     |  
|Interest income                                                                                                        |  |                   | (1,377  | ) |                 |   | (1,177  | )              |  |   | (1,162  | )
|                                                                                                                       |  |                   |        
|Total other (income) expense                                                                                           |  |                   | (628    | ) |                 |   | (1,177  | )              |  |   | (4      | )
|                                                                                                                       |  |                   |        
|Net income (loss)                                                                                                      |  | $                 | (33,809 | ) |                 | $ | (12,062 | )              |  | $ | 340     |  
|                                                                                                                       |  |                   |        
|Income (losses) per share  basic and diluted:                                                                         |  |                   |         |   |                 |   |         |                |  |   |         |  
|Net income (loss)  basic                                                                                              |  | $                 | (0.88   | ) |                 | $ | (0.30   | )              |  | $ | 0.01    |  
|                                                                                                                       |  |                   |        
|Net income (loss)  diluted                                                                                            |  | $                 | (0.88   | ) |                 | $ | (0.30   | )              |  | $ | 0.01    |  
|                                                                                                                       |  |                   |        
|Weighted average shares outstanding:                                                                                   |  |                   |         |   |                 |   |         |                |  |   |         |  
|Basic                                                                                                                  |  |                   | 38,566  |   |                 |   | 39,638  |                |  |   | 41,073  |  
|                                                                                                                       |  |                   |        
|Diluted                                                                                                                |  |                   | 38,566  |   |                 |   | 39,638  |                |  |   | 42,369  |  



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



F-3



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY



(in thousands)



|                                                                                   |  |              |   |  |                          |     |   |                    |   |         |                            |        |   |                                     |         |  |                |         |   |       |   |      |   |  |     |   |  |   |    |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | ------------ | - |  | ------------------------ | --- | - | ------------------ | - | ------- | -------------------------- | ------ | - | ----------------------------------- | ------- |  | -------------- | ------- | - | ----- | - | ---- | - |  | --- | - |  | - | -- | - |  | - | ------- | -
|                                                                                   |  | Common Stock |   |  | AdditionalPaid inCapital |     |   | AccumulatedDeficit |   |         | Comprehensive(Loss) Income |        |   | AccumulatedOtherComprehensiveIncome |         |  | Treasury Stock |         |   | Total |  
|                                                                                   |  | Shares       |   |  | Dollars                  |     |   |                    |   |         |                            | Shares |   |                                     | Dollars |  |               
|Consolidated balance at December 29, 2001                                          |  | 37,674       |   |  | $                        | 377 |   |                    | $ | 277,628 |                            |        | $ | (131,738                            | )       |  |                |         |   |       | $ |     |   |  | 1   |   |  | $ |   |   |  | $ | 146,267 |  
|Net loss                                                                           |  |              |   |  |                          |     |   |                    |   |         |                            |        |   | (33,809                             | )       |  | $              | (33,809 | ) |       |   |      |   |  |     |   |  |   |    |   |  |   | (33,809 | )
|                                                                                   |  |              |   |  |                          |     |   |                    |  
|Net unrealized gains on available-for-sale securities                              |  |              |   |  |                          |     |   |                    |   |         |                            |        |   |                                     |         |  |                | 57      |   |       |   | 57   |   |  |     |   |  |   |    |   |  |   | 57      |  
|Comprehensive loss                                                                 |  |              |   |  |                          |     |   |                    |   |         |                            |        |   |                                     |         |  | $              | (33,752 | ) |       |   |      |   |  |     |   |  |   |    |   |  |   |         |  
|                                                                                   |  |              |   |  |                          |     |   |                    |  
|Issuance of common stock in acquisition of Ashford.com, Inc.                       |  | 430          |   |  |                          | 4   |   |                    |   | 6,877   |                            |        |   |                                     |         |  |                |         |   |       |   |      |   |  |     |   |  |   |    |   |  |   | 6,881   |  
|Issuance of options and warrants to purchase common stock in exchange for services |  |              |   |  |                          |     |   |                    |   | (452    | )                          |        |   |                                     |         |  |                |         |   |       |   |      |   |  |     |   |  |   |    |   |  |   | (452    | )
|Issuance of common stock upon exercise of options and warrants                     |  | 599          |   |  |                          | 6   |   |                    |   | 1,358   |                            |        |   |                                     |         |  |                |         |   |       |   |      |   |  |     |   |  |   |    |   |  |   | 1,364   |  
|Issuance of common stock under Employee Stock Purchase Plan                        |  | 155          |   |  |                          | 2   |   |                    |   | 566     |                            |        |   |                                     |         |  |                |         |   |       |   |      |   |  |     |   |  |   |    |   |  |   | 568     |  
|Purchase of treasury stock Plan                                                    |  |              |   |  |                          |     |   |                    |   | (352    | )                          |        |   |                                     |         |  |                |         |   |       |   |      |   |  | 73  |   |  |   | (1 | ) |  |   | (353    | )
|                                                                                   |  |              |   |  |                          |     |   |                    |  
|Consolidated balance at December 28, 2002                                          |  | 38,858       |   |  | $                        | 389 |   |                    | $ | 285,625 |                            |        | $ | (165,547                            | )       |  |                |         |   |       | $ | 57   |   |  | 74  |   |  | $ | (1 | ) |  | $ | 120,523 |  
|Net loss                                                                           |  |              |   |  |                          |     |   |                    |   |         |                            |        |   | (12,062                             | )       |  | $              | (12,062 | ) |       |   |      |   |  |     |   |  |   |    |   |  |   | (12,062 | )
|                                                                                   |  |              |   |  |                          |     |   |                    |  
|Net unrealized losses on available-for-sale securities                             |  |              |   |  |                          |     |   |                    |   |         |                            |        |   |                                     |         |  |                | (57     | ) |       |   | (57  | ) |  |     |   |  |   |    |   |  |   | (57     | )
|Comprehensive loss                                                                 |  |              |   |  |                          |     |   |                    |   |         |                            |        |   |                                     |         |  | $              | (12,119 | ) |       |   |      |   |  |     |   |  |   |    |   |  |   |         |  
|                                                                                   |  |              |   |  |                          |     |   |                    |  
|Issuance of common stock to ITH in exchange for warrants                           |  | 1,650        |   |  |                          | 16  |   |                    |   | (16     | )                          |        |   |                                     |         |  |                |         |   |       |   |      |   |  |     |   |  |   |    |   |  |   |        |  
|Issuance of options to purchase common stock in exchange for services              |  |              |   |  |                          |     |   |                    |   | 564     |                            |        |   |                                     |         |  |                |         |   |       |   |      |   |  |     |   |  |   |    |   |  |   | 564     | )
|Issuance of common stock upon exercise of options and warrants                     |  | 208          |   |  |                          | 2   |   |                    |   | 1,051   |                            |        |   |                                     |         |  |                |         |   |       |   |      |   |  |     |   |  |   |    |   |  |   | 1,053   |  
|Issuance of common stock under Employee Stock Purchase Plan                        |  | 149          |   |  |                          | 2   |   |                    |   | 347     |                            |        |   |                                     |         |  |                |         |   |       |   |      |   |  |     |   |  |   |    |   |  |   | 349     |  
|Retirement of treasury stock                                                       |  | (73          | ) |  |                          | (1  | ) |                    |   |        |                            |        |   |                                     |         |  |                |         |   |       |   |      |   |  | (73 | ) |  |   | 1  |   |  |   |        |  
|                                                                                   |  |              |   |  |                          |     |   |                    |  
|Other                                                                              |  | (11          | ) |  |                          |    |   |                    |   |        |                            |        |   |                                     |         |  |                |         |   |       |   |      |   |  |     |   |  |   |    |   |  |   |        |  
|                                                                                   |  |              |   |  |                          |     |   |                    |  
|Consolidated balance atJanuary 3, 2004                                             |  | 40,781       |   |  | $                        | 408 |   |                    | $ | 287,571 |                            |        | $ | (177,609                            | )       |  |                |         |   |       | $ |     |   |  | 1   |   |  | $ |   |   |  | $ | 110,370 |  
|Net income                                                                         |  |              |   |  |                          |     |   |                    |   |         |                            |        |   | 340                                 |         |  | $              | 340     |   |       |   |      |   |  |     |   |  |   |    |   |  |   | 340     |  
|                                                                                   |  |              |   |  |                          |     |   |                    |  
|Net unrealized losses on available-for-sale securities                             |  |              |   |  |                          |     |   |                    |   |         |                            |        |   |                                     |         |  |                | (104    | ) |       |   | (104 | ) |  |     |   |  |   |    |   |  |   | (104    | )
|Comprehensive income                                                               |  |              |   |  |                          |     |   |                    |   |         |                            |        |   |                                     |         |  | $              | 236     |   |       |   |      |   |  |     |   |  |   |    |   |  |   |         |  
|                                                                                   |  |              |   |  |                          |     |   |                    |  
|Issuance of options to purchase common stock in exchange for services              |  |              |   |  |                          |     |   |                    |   | 1,859   |                            |        |   |                                     |         |  |                |         |   |       |   |      |   |  |     |   |  |   |    |   |  |   | 1,859   |  
|Issuance of common stock upon exercise of options and warrants                     |  | 803          |   |  |                          | 8   |   |                    |   | 5,065   |                            |        |   |                                     |         |  |                |         |   |       |   |      |   |  |     |   |  |   |    |   |  |   | 5,073   |  
|Consolidated balance atJanuary 1, 2005                                             |  | 41,584       |   |  | $                        | 416 |   |                    | $ | 294,495 |                            |        | $ | (177,269                            | )       |  |                |         |   |       | $ | (104 | ) |  | 1   |   |  | $ |   |   |  | $ | 117,538 |  



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



F-4



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS



(in
thousands)



|                                                                                                   |  |                                             |         |   |                                           |   |         |                                           |  |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------------------------- | ------- | - | ----------------------------------------- | - | ------- | ----------------------------------------- |  | - | ------- | -
|                                                                                                   |  | Fiscal Year Ended                           |        
|                                                                                                   |  | December 28, 2002 (as restated, seeNote 22) |         |   | January 3, 2004 (as restated, seeNote 22) |   |         | January 1, 2005 (as restated, seeNote 22) | 
|Cash Flows from Operating Activities:                                                              |  |                                             |         |   |                                           |   |         |                                           |  |   |         |  
|Net income (loss)                                                                                  |  | $                                           | (33,809 | ) |                                           | $ | (12,062 | )                                         |  | $ | 340     |  
|                                                                                                   |  |                                             |        
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                                             |         |   |                                           |   |         |                                           |  |   |         |  
|Depreciation and amortization                                                                      |  |                                             | 10,509  |   |                                           |   | 11,386  |                                           |  |   | 10,944  |  
|Stock-based compensation                                                                           |  |                                             | 401     |   |                                           |   | 1,935   |                                           |  |   | 3,600   |  
|Non-cash restructuring costs related to Ashford.com                                                |  |                                             | 841     |   |                                           |   |        |                                           |  |   |        |  
|Net loss on sale of Ashford.com assets                                                             |  |                                             | 2,566   |   |                                           |   |        |                                           |  |   |        |  
|Amortization of discount on note receivable                                                        |  |                                             |        |   |                                           |   | (180    | )                                         |  |   |        |  
|Net loss on disposal of assets                                                                     |  |                                             |        |   |                                           |   |        |                                           |  |   | 113     |  
|Changes in operating assets and liabilities:                                                       |  |                                             |         |   |                                           |   |         |                                           |  |   |         |  
|Accounts receivable, net                                                                           |  |                                             | 4,693   |   |                                           |   | (924    | )                                         |  |   | (10,010 | )
|Inventory                                                                                          |  |                                             | 3,978   |   |                                           |   | 1,396   |                                           |  |   | (14,863 | )
|Prepaid expenses and other current assets                                                          |  |                                             | (329    | ) |                                           |   | 230     |                                           |  |   | (399    | )
|                                                                                                   |  |                                             |        
|Notes receivable                                                                                   |  |                                             |        |   |                                           |   | (30     | )                                         |  |   | (201    | )
|Other assets, net                                                                                  |  |                                             | 861     |   |                                           |   |        |                                           |  |   | (325    | )
|Accounts payable and accrued expenses and other                                                    |  |                                             | 13,458  |   |                                           |   | (1,729  | )                                         |  |   | 40,239  |  
|Deferred revenue                                                                                   |  |                                             | 6,431   |   |                                           |   | (27     | )                                         |  |   | (5,627  | )
|                                                                                                   |  |                                             |         |   |                                           |   |         |                                           |  |   |         |  
|Net cash provided by (used in) operating activities                                                |  |                                             | 9,600   |   |                                           |   | (5      | )                                         |  |   | 23,811  |  
|                                                                                                   |  |                                             |         |   |                                           |   |         |                                           |  |   |         |  
|Cash Flows from Investing Activities:                                                              |  |                                             |         |   |                                           |   |         |                                           |  |   |         |  
|Acquisition of property and equipment, net                                                         |  |                                             | (29,039 | ) |                                           |   | (7,519  | )                                         |  |   | (37,434 | )
|                                                                                                   |  |                                             |        
|Proceeds from sale of Ashford.com assets                                                           |  |                                             | 2,151   |   |                                           |   |        |                                           |  |   |        |  
|Net cash paid for acquisition of Ashford.com                                                       |  |                                             | (8,860  | ) |                                           |   |        |                                           |  |   |        |  
|                                                                                                   |  |                                             |        
|Payments received on note receivable                                                               |  |                                             |        |   |                                           |   | 900     |                                           |  |   | 3,246   |  
|Purchases of marketable securities                                                                 |  |                                             | (81,430 | ) |                                           |   | (60,384 | )                                         |  |   | (64,131 | )
|                                                                                                   |  |                                             |        
|Sales of marketable securities                                                                     |  |                                             | 94,194  |   |                                           |   | 59,808  |                                           |  |   | 39,330  |  
|(Purchases) sales of short-term investments                                                        |  |                                             | (38     | ) |                                           |   | 2,280   |                                           |  |   |        |  
|                                                                                                   |  |                                             |         |   |                                           |   |         |                                           |  |   |         |  
|Net cash used in investing activities                                                              |  |                                             | (23,022 | ) |                                           |   | (4,915  | )                                         |  |   | (58,989 | )
|                                                                                                   |  |                                             |         |   |                                           |   |         |                                           |  |   |         |  
|Cash Flows from Financing Activities:                                                              |  |                                             |         |   |                                           |   |         |                                           |  |   |         |  
|Repayments of capital lease obligations                                                            |  |                                             | (429    | ) |                                           |   | (78     | )                                         |  |   | (1,581  | )
|                                                                                                   |  |                                             |        
|Proceeds of mortgage note                                                                          |  |                                             |        |   |                                           |   |        |                                           |  |   | 13,000  |  
|Repayments of mortgage note                                                                        |  |                                             | (5,247  | ) |                                           |   |        |                                           |  |   | (55     | )
|                                                                                                   |  |                                             |        
|Retirement of Ashford.com revolving credit facility                                                |  |                                             | (3,123  | ) |                                           |   |        |                                           |  |   |        |  
|                                                                                                   |  |                                             |        
|Purchases of treasury stock                                                                        |  |                                             | (353    | ) |                                           |   |        |                                           |  |   |        |  
|                                                                                                   |  |                                             |        
|Proceeds from sale of common stock and warrants                                                    |  |                                             | 568     |   |                                           |   | 349     |                                           |  |   |        |  
|Proceeds from exercises of common stock options and warrants                                       |  |                                             | 1,364   |   |                                           |   | 1,053   |                                           |  |   | 5,070   |  
|                                                                                                   |  |                                             |         |   |                                           |   |         |                                           |  |   |         |  
|Net cash provided by (used in) financing activities                                                |  |                                             | (7,220  | ) |                                           |   | 1,324   |                                           |  |   | 16,434  |  
|                                                                                                   |  |                                             |         |   |                                           |   |         |                                           |  |   |         |  
|Net decrease in cash and cash equivalents                                                          |  |                                             | (20,642 | ) |                                           |   | (3,596  | )                                         |  |   | (18,744 | )
|                                                                                                   |  |                                             |        
|Cash and cash equivalents, beginning of year                                                       |  |                                             | 63,046  |   |                                           |   | 42,404  |                                           |  |   | 38,808  |  
|                                                                                                   |  |                                             |         |   |                                           |   |         |                                           |  |   |         |  
|Cash and cash equivalents, end of year                                                             |  | $                                           | 42,404  |   |                                           | $ | 38,808  |                                           |  | $ | 20,064  |  
|                                                                                                   |  |                                             |         |   |                                           |   |         |                                           |  |   |         |  



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



F-5



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(amounts in thousands, except per share data)



NOTE
1DESCRIPTION OF BUSINESS



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



NOTE 2SIGNIFICANT ACCOUNTING POLICIES



The following summarize the Companys significant accounting policies:



Fiscal Year:The Companys fiscal year ends on the Saturday closest to December
31. The fiscal year is named for the calendar year ending on that December 31. The effects on results of operations of the one fewer day in the fiscal year ended December 28, 2002, the six additional days in the fiscal year ended January 3, 2004 and
the two fewer days in the fiscal year ended January 1, 2005 are not significant.



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



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



Fair Values:The estimated fair value amounts presented in these consolidated
financial statements have been determined by the Company using available market information and appropriate methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. The estimates
presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair
value amounts. Such fair value estimates are based on pertinent information available to management as of January 3, 2004 and January 1, 2005, and have not been comprehensively revalued for purposes of these consolidated financial statements since
such dates.



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



F-6



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



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



Marketable Securities:Marketable securities, which consist of investments in various debt securities, are classified as available-for-sale and are reported at fair value, with unrealized gains and losses recorded as a component of
stockholders equity. The Company does not intend to hold its marketable securities for more than one year from the most recent balance sheet date and has therefore classified them as a current asset. All investments with original maturities of
greater than 90 days are accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company determines the appropriate
classification at the time of purchase. At January 1, 2005, the Company held $39,700 and at January 3, 2004, $18,750 of investments in auction rate securities classified as available-for-sale. Investments in these securities are recorded at cost,
which approximates fair value due to their variable interest rates, which reset approximately every 30 to 45 days. Despite the long-term nature of their stated contractual maturities, there is ready liquid market for these securities based on the
interest rate reset mechanism. As a result, there are no cumulative gross realized or unrealized holding gains or (losses) from our auction rate securities. All income generated from these marketable securities was recorded as interest income. As of
January 3, 2004, the aggregate amortized cost of the Companys marketable securities, other than auction rate securities, approximated their fair value. As of January 1, 2005, the Company recorded net unrealized losses on its marketable
securities, other than auction rate securities, of $104. Realized gains or losses and declines in value judged to be other than temporary, if any, on available-for-sale securities are reported in other income or loss.



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



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



| |  | Three to four years for computer hardware and software;
|- |  | -------------------------------------------------------



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



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



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



Thirty years for buildings.



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



Effective December 30, 2001, the Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
142 changed the accounting for goodwill from an amortization method to an impairment-only approach. Under an impairment-only approach, goodwill and certain intangibles are not amortized into results of operations but instead, are reviewed for
impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than their fair value. The Company completed the first step of the impairment test during
the three-month period ended June 29, 2002 and found no instances of impairment of its recorded goodwill. Therefore, the second step of the impairment test was not necessary during fiscal 2002. In addition, upon adoption of SFAS No. 142, the Company
evaluated its goodwill and intangibles acquired prior to June 30, 2001 using the criteria in SFAS No. 141 and determined that no change in previously recognized goodwill was required.



F-7



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



In accordance with the provisions of SFAS No. 142, the Company performed an annual impairment test of its recorded
goodwill in December 2003 and December 2004, and found no instances of impairment.



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 January 1, 2005, the Company determined that certain long-lived assets were no longer being used in its continuing operations and, therefore, that the carrying amounts of these
assets were not recoverable. The long-lived assets consisted of miscellaneous equipment. The Company disposed of these assets during the year ended January 1, 2005 and recorded an impairment charge of $207 which is included in other expense.



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



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



Notes Receivable:Notes receivable consists primarily of a $4,500, five year subordinated secured promissory note, with a stated
interest rate of 7%, received in connection with the sale of certain assets of Ashford.com (see Note 3). The note is due in twenty consecutive quarterly principal payments of $225 each, beginning March 2003 through December 2007. Accrued interest on
the note is payable with each quarterly principal payment. In order to determine the fair value of the note, the Company obtained an independent, third-party valuation. Based upon the valuation, the Company determined that the market interest rate
of the note is 12.5% and therefore valued the note at approximately $4,000. The balance of the note due was $3,976 as of December 28, 2002, $3,076 as of January 3, 2004 and $0 as of January 1, 2005, with $900 classified as current as of December 28,
2002 and January 3, 2004. On April 28, 2004, the Company converted $730 of principal due under the note in exchange for 2,036,830 shares of Odimo Incorporateds (Odimo) Series C preferred stock and a warrant to purchase 305,525
shares of Odimos Series C preferred stock at an exercise price of $0.3584 per share. As a result of the conversion, the principal amount owing under the note as of April 28, 2004 was $2,645 due in eleven consecutive quarterly payments of $225
each, beginning June 2004 through December 2006, and one final payment of $170 due in March 2007. On August 3, 2004, the Company received payment in full of the $2,420 amount then outstanding, together with accrued interest. The Company recorded
interest income on the note of $0 for the fiscal year ended December 28, 2002, $313 for the fiscal year ended January 3, 2004 and $129 for the fiscal year ended January 1, 2005. The $500 discount has been fully amortized and recorded as an increase
in interest income. Amortization of the discount was $0 for the fiscal year ended December 28, 2002, $180 for the fiscal year ended January 3, 2004 and $320 for the fiscal year ended January 1, 2005.



F-8



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



Notes receivable also consists of a $376 full-recourse promissory note with a stated interest rate of 6.71%, received
in connection with the acquisition of Ashford.com (see Note 3). The note was entered into by Ashford.com with a member of its Board of Directors in connection with the exercise of options to purchase Ashford.coms common stock. The balance of
the note including accrued interest due was $447 as of December 28, 2002, $477 as of January 3, 2004 and $0 as of January 1, 2005, with $0 as of December 28, 2002, $477 as of January 3, 2004 and $0 as of January 1, 2005 classified as current. The
principal balance of the note together with accrued interest was paid in full on June 14, 2004. The Company recorded interest income on the note of $24 for the fiscal year ended December 28, 2002, $30 for the fiscal year ended January 3, 2004 and
$10 as of fiscal year ended January 1, 2005.



Other Equity Investments:Other equity investments consist of shares of, and warrants to purchase, Odimo Incorporated (Odimo) Series C and Series D preferred stock convertible into 17.9% of the fully diluted common shares of Odimo, received in connection with
the sale of certain assets of Ashford.com (see Note 3). The Company does not have the ability to exercise significant influence over Odimo and, therefore, the investment is accounted for under the cost method. Under the cost method of accounting,
investments in non-marketable securities are carried at cost and are adjusted only for other-than-temporary declines in fair value, distributions of earnings and additional investments. The initial cost of the Companys investment was
determined based on the fair value of the investment at the time of its acquisition. As an observable market price does not exist for non-marketable securities, estimates of fair value of such securities are more subjective than for securities of
public companies. In order to determine the fair value of the investment in Odimo, the Company obtained an independent, third-party valuation. The valuation incorporated a variety of methodologies to estimate fair value, including comparing the
security with securities of publicly traded companies in similar lines of business, applying price multiples to estimated future operating results for Odimo and estimating discounted cash flows. Factors affecting the valuation included restrictions
on control and marketability of Odimos equity securities and other information available to the Company, such as the Companys knowledge of the industry and knowledge of specific information about Odimo. Using this valuation, the Company
determined the estimated fair value of the investment to be approximately $2,847 as of January 1, 2005. Based on the Companys valuation of the investment as of January 1, 2005, it was determined that there was no impairment of the investment.
In February, 2005, Odimo consummated an initial public offering through the issuance of 3,125,000 shares of its common stock. Based on the current market price of Odimos common stock, the Company determined that there is no impairment in the
carrying value of this investment.



Other Assets, Net:Other assets, net
consists primarily of deferred partner revenue share charges, resulting from the exercise by a partner of a right to receive 1,600,000 shares of the Companys common stock in lieu of future cash revenue share payments (see Note 7). The
1,600,000 shares of GSI common stock issued are subject to restrictions, including the prohibition of the transfer of such shares. These restrictions lapsed as to 90% of such shares on January 1, 2005 and will lapse as to an additional 10% of such
shares on the last day of March 2005, becoming free of all such transfer restrictions on March 31, 2005. Deferred partner revenue share charges were, $13,207 as of December 28, 2002, $11,835 as of January 3, 2004 and $10,097 as of January 1, 2005
and are being amortized as stock-based compensation expense as the partner revenue share expense is incurred. The partner revenue share expense incurred is based on actual revenues recognized in a given period and the imputed partner revenue share
percentage, which is based on the value of the Companys common stock that was issued upon exercise of the right. Stock-based compensation expense related to the amortization of deferred partner revenue share charges was $857 for the fiscal
year ended December 28, 2002, $1,372 for the fiscal year ended January 3, 2004 and $1,738 for the fiscal year ended January 1, 2005.



Deferred Revenue:Deferred revenue consists primarily of fees paid in advance to the Company under agreements to manage some aspects of certain partners
e-commerce businesses, including fulfillment,



F-9



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



technology and customer service, existing at the balance sheet date. Deferred revenue also consists of amounts received from the sale of gift certificates
redeemable through the Companys partners e-commerce businesses.



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



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



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



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



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



Service Fee Revenues:The Company derives its service fee revenues from service fees
earned by it in connection with the development and operation of its partners e-commerce businesses. Service fees primarily



F-10



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



consist of variable fees based on the value of merchandise sold or gross profit generated through its partners e-commerce businesses. To a lesser
extent, service fees include fixed periodic payments by partners for the development and operation of their e-commerce businesses and fees related to the provision of marketing, design, development and other services. The Company recognizes revenues
from services provided when the following revenue recognition criteria are met: persuasive evidence of an arrangement exists, services have been rendered, the fee is fixed or determinable and collectibility is reasonably assured. If the Company
receives payments for services in advance, these amounts are deferred and then recognized over the service period. Cost of service fee revenues includes the cost of products sold and inbound freight related to those products, as well as outbound
shipping and handling costs, other than those related to promotional free shipping and subsidized shipping and handling which would be included in sales and marketing expense. The Company does not specifically record Cost of service fee
revenues as these costs are incurred by the Companys fee-based partners rather than by the Company. Operating expenses relating to service fee revenues consist primarily of personnel and other costs associated with the Companys
engineering, production and creative departments which are included in product development expense, as well as fulfillment costs and personnel and other costs associated with its marketing and customer service departments which are included in sales
and marketing expense.



Cost of Revenues:Cost of revenues consist of
cost of revenues from product sales and cost of service fee revenues. Cost of revenues from product sales include the cost of products sold and inbound freight related to these products, as well as outbound shipping and handling costs, other than
those related to promotional free shipping and subsidized shipping and handling which are included in sales and marketing expense. We specifically do not record cost of service fee revenue. The cost of the sales of the merchandise on which we earn
service fees are incurred by our service-fee partners because they are the owners and sellers of the merchandise.



Sales and Marketing:Sales and marketing expenses include fulfillment costs, customer service costs, credit card fees, net partner revenue share charges, net
advertising and promotional expenses incurred by us on behalf of the Companys partners e-commerce businesses, and payroll related to the buying, business management and marketing functions of its company. Net partner revenue share
charges are royalty payments made to the Companys partners in exchange for the use of their brands, the promotion of its partners URLs, Web sites and toll-free telephone numbers in their marketing and communications materials, the
implementation of programs to provide incentives to customers to shop through the e-commerce businesses that the Company operates for its partners and other programs and services provided to the customers of the e-commerce businesses that the
Company operates for its partners, net of amounts reimbursed to the Company by its partners. Net advertising and promotional expenses include promotional free shipping and subsidized shipping and handling costs and are net of amounts reimbursed to
the Company by its partners. Partner revenue share charges were $5,666 for the fiscal year ended December 28, 2002, $10,499 for the fiscal year ended January 3, 2004 and $9,143 for the fiscal year ended January 1, 2005.



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 $2,895 for the fiscal year ended December 28, 2002, $1,513 for the fiscal year ended January 3, 2004 and $3,530 for the fiscal year ended January 1, 2005 and was charged to sales and marketing expense.



Fulfillment Costs:The Company defines fulfillment costs as personnel, occupancy and
other costs associated with its Kentucky fulfillment centers and Ashford.coms Texas fulfillment center that it formerly



F-11



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



maintained, personnel and other costs associated with its logistical support and vendor operations departments and third-party warehouse and fulfillment
services costs. Fulfillment costs were $12,531 for the fiscal year ended December 28, 2002, $15,631 for the fiscal year ended January 3, 2004 and $24,216 for the fiscal year ended January 1, 2005 and are included in sales and marketing expense.



Advertising:The Company expenses the cost of advertising, which
includes online marketing fees, media, agency and production expenses, in accordance with the AICPA Accounting Standards Executive Committees Statement of Position (SOP) 93-7, Reporting on Advertising Costs. Advertising
production costs are expensed the first time the advertisement runs. Online marketing fees and media (television, radio and print) placement costs are expensed in the month the advertising appears. Agency fees are expensed as incurred. Advertising
costs were $3,377 for the fiscal year ended December 28, 2002, $2,418 for the fiscal year ended January 3, 2004 and $4,843 for the fiscal year ended January 1, 2005 and are included in sales and marketing expenses.



Product Development:Product development expenses consist primarily of expenses
associated with planning, maintaining and operating the Companys partners e-commerce businesses, and payroll and related expenses for the Companys engineering, production, creative and management information systems departments.
Costs incurred to develop internal-use computer software during the application development stage, including those relating to developing the Companys partners Web sites, generally are capitalized. Costs of enhancements to internal-use
computer software are also capitalized, provided that these enhancements result in additional functionality.



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



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



F-12



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



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



|                                                                                               |  |                                          |         |   |                |   |         |                 |  |   |        |  
|---------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | -------------- | - | ------- | --------------- |  | - | ------ | -
|                                                                                               |  | Fiscal Year Ended                        |        
|                                                                                               |  | December 28,2002                         |         |   | January 3,2004 |   |         | January 1, 2005 | 
|                                                                                               |  | (in thousands, except per share amounts) |        
|Net income (loss), as reported                                                                 |  | $                                        | (33,809 | ) |                | $ | (12,062 | )               |  | $ | 340    |  
|Add: Stock-based compensation expense included in reported net loss                            |  |                                          | (21     | ) |                |   | 462     |                 |  |   | 1,738  |  
|Deduct: Total stock-based compensation determined under fair value based method for all awards |  |                                          | (6,508  | ) |                |   | (5,030  | )               |  |   | (6,915 | )
|                                                                                               |  |                                          |        
|Pro forma net loss                                                                             |  | $                                        | (40,338 | ) |                | $ | (16,630 | )               |  | $ | (4,837 | )
|                                                                                               |  |                                          |        
|Income (losses) per sharebasic and diluted:                                                   |  |                                          |         |   |                |   |         |                 |  |   |        |  
|Net income (loss) per share, as reported                                                       |  | $                                        | (0.88   | ) |                | $ | (0.30   | )               |  | $ | 0.01   |  
|                                                                                               |  |                                          |        
|Pro forma net loss per sharebasic                                                             |  | $                                        | (1.05   | ) |                | $ | (0.42   | )               |  | $ | (0.12  | )
|                                                                                               |  |                                          |        
|Pro forma net loss per sharediluted                                                           |  | $                                        | (1.05   | ) |                | $ | (0.42   | )               |  | $ | (0.12  | )



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



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



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



New
Accounting Pronouncements



Certain Consideration Received from a
Vendor:In November 2002, the EITF reached a consensus on EITF No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor. EITF No. 02-16 addresses the accounting of cash consideration
received by a customer from a vendor, 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



F-13



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



refunds can be reasonably estimated, such rebates or refunds should be recognized as a reduction of the cost of sales based on a systematic and rational
allocation of the consideration to be received relative to the transactions that mark the progress of the customer toward earning the rebate or refund. The effective date of this EITF is for fiscal periods beginning after December 15, 2002. The
Company adopted the provisions of this EITF in the first quarter of fiscal 2003 and it did not have a significant impact on the Companys financial position or results of operations.



Consolidation of Variable Interest Entities:In January 2003, the FASB issued Interpretation (FIN) No. 46
Consolidation of Variable Interest Entities, which requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entitys activities or
entitled to receive a majority of the entitys residual returns. In December 2003, the FASB then issued FIN No. 46(R) Consolidation of Variable Interest Entities, which replaced FIN No. 46. Application of FIN No. 46(R) is required
in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special purpose entities for periods ending after December 15, 2003. The Company adopted the
provisions of FIN No. 46 and FIN No. 46(R) effective during fiscal 2003 and FIN No. 46(R)-5 effective during fiscal 2004 and it did not have a significant impact on the Companys financial position or results of operations.



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



Certain Financial Instruments with Characteristics of both
Liabilities and Equity:In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a freestanding financial instrument that is within its scope as a liability. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted this statement, including the deferral of certain effective dates as a
result of the provisions of FASB Staff Position 150-3, Effective Date, Disclosures, and Transition for Mandatorily Redeemable Noncontrolling Interests Under FASB Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity, in the third quarter of fiscal 2003 and it did not have a significant impact on the Companys financial position or results of operations.



Other-Than-Temporary Impairment of Certain Investments:In November 2003, the EITF
reached a consensus on EITF No. 03-01, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments, which establishes additional disclosure requirements for each category of investments in a loss position.
Effective for fiscal years ending after December 15, 2003, companies must disclose the aggregate amount of unrealized losses and the aggregate related fair value of investments with unrealized losses, which are required to be segregated by those
investments in a loss position for less than twelve months and those in a loss



F-14



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



position for greater than twelve months. Certain qualitative disclosures should also be made regarding the information considered in reaching the conclusion
that unrealized losses on investments are not other-than-temporary. The Company adopted the provisions of this consensus in fourth quarter of fiscal 2003 and it did not have a significant impact on the Companys financial position or results of
operations. The accounting guidance of EITF 03-1 relating to the recognition of investment impairment which was to be effective in the third quarter of 2004 has been delayed pending the development of additional guidance.



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



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



Exchanges of Nonmonetary Assets an Amendment of APB Opinion No. 29:In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets an Amendment of APB Opinion No. 29. SFAS No. 153 eliminates the exception
from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29 and replaces it with an exception for exchanges that do not have commercial substance. This Statement specifies that a
nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. The Company anticipates that adoption of SFAS No. 153 will have no significant impact on the Companys financial position or results of operations.



Share-Based Payment. In December 2004, the Financial Accounting Standards Board, or FASB, issued Financial Accounting Standards Board
Statement No. 123R Share-Based Payment, or FAS 123R, which replaces Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation, or FAS 123, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25. FAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements
based on their fair values, beginning with the first interim or



F-15



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



annual period after June 15, 2005, with early adoption encouraged. In addition, FAS 123R will cause unrecognized expense (based on the amounts in our pro
forma footnote disclosure) related to options vesting after the date of initial adoption to be recognized as a charge to results of operations over the remaining vesting period. Under FAS 123R, the Company must determine the appropriate fair value
model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The Company has preliminarily decided to use the prospective method for transition as of
the effective date of FAS 123R. The prospective method requires that compensation expense be recorded for all unvested stock options and share awards at the beginning of the first quarter of adoption of FAS 123R. The Company is evaluating the
requirements of FAS 123R and it expects that the adoption of FAS 123R will have a material impact on its consolidated results of operations and earnings per share.



NOTE 3ACQUISITIONS AND DISPOSITIONS



Ashford.com



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



Acquisition of Ashford.com



As consideration for the purchase, the Company issued to the stockholders of Ashford.com
$7,074 in cash and approximately 430,000 shares of the Companys common stock valued at $6,881 based on a value of $16.00 per share, which was the average closing price of the Companys common stock for the period from September 6, 2001 to
September 18, 2001.



The acquisition was accounted for under SFAS No. 141 as a
purchase, and the acquisition cost of $15,737 was allocated to the assets acquired and the liabilities assumed based upon estimates of their respective fair values. A total of $8,815, representing the excess of the purchase price over fair value of
the net assets acquired, was allocated to goodwill.



During the three-month
period ended June 29, 2002, the Company obtained a third-party valuation relating to intangible assets acquired from Ashford.com that were initially classified as goodwill pending completion of the valuation. The Company reclassified certain other
intangible assets from goodwill and included them in other assets, net. These other intangible assets acquired from Ashford.com consisted of Ashford.coms customer base and trademarks. The Company recorded the customer base at $1,470 and the
trademarks at $1,570.



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



F-16



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



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



Sale of Ashford.com
Assets



During the three-month period ended September 28, 2002, the
Company completed the disposition of a division of Ashford Corporate Gifts, Inc., which is a subsidiary of Ashford.com. The Company received $1,200 in cash proceeds and recognized a gain on the sale of assets of $379.



In December 2002, Ashford.com entered into a definitive agreement with Odimo Acquisition
Corp., a wholly owned subsidiary of Odimo to sell certain assets of Ashford.com, including Ashford.coms trademark, URL, other intangible assets and selected inventory. Under the terms of the agreement, the Company received (i) $956 in cash,
(ii) a $4,500, five year subordinated secured promissory note, valued at approximately $3,976, (iii) shares of, and warrants to purchase, Odimos Series D preferred stock convertible into 19.9% of the fully diluted common shares of Odimo,
valued at approximately $2,159, and (iv) a right to receive 10% of Odimos consolidated EBITDA from 2003 to 2007 up to a maximum aggregate payment of $2,000. EBITDA represents earnings (or loss) before interest income/expense, taxes,
depreciation and amortization and other non-cash expenses, including stock-based compensation. The sale was completed on December 27, 2002 and the Company recognized a loss on the sale of assets of $2,945.



Cessation of Ashford.com Operations



In conjunction with the sale of certain assets of Ashford.com, the Company also announced
and implemented its plan to cease the operations of Ashford.com, which accounted for the Companys net revenues of approximately $21,617 in the fiscal year ended December 28, 2002, $940 in the fiscal year ended January 3, 2004 and $0.0 in the
fiscal year ended January 1, 2005. This plan involved the liquidation of Ashford.coms remaining inventory, the closure of its Houston, TX fulfillment center and offices and the termination of 71 employees. This plan was substantially completed
in January 2003. As of January 3, 2004, 71 employees had been terminated and actual termination benefits paid were $417.



Costs relating to ongoing operations were not included in restructuring costs related to Ashford.com. In accordance with EITF Issue No. 96-9, Classification of
Inventory Markdowns and Other Costs Associated with a Restructuring, all inventory adjustments that resulted from the cessation of operations of Ashford.com are included in cost of revenues from product sales and were recorded in December
2002. As of December 28, 2002, inventory write downs resulting from the restructuring totaled $1,198. No additional inventory write downs from the restructuring were recorded during the fiscal years ended January 3, 2004 and January 1, 2005.



For the fiscal years ended December 28, 2002, January 3, 2004 and January 1,
2005, restructuring costs related to Ashford.com were as follows:



|                          |  |                   |       |                |   |                |  |   |  
|------------------------- |  | ----------------- | ----- | -------------- | - | -------------- |  | - | -
|                          |  | Fiscal Year Ended
|                          |  | December 28,2002  |       | January 3,2004 |   | January 1,2005
|                          |  | (in thousands)   
|Termination benefits      |  | $                 | 417   |                | $ |               |  | $ | 
|Contractual obligations   |  |                   | 402   |                |   | 74             |  |   | 
|Asset impairments         |  |                   | 849   |                |   |               |  |   | 
|Other restructuring costs |  |                   | 12    |                |   |               |  |   | 
|                          |  |                   |      
|                          |  | $                 | 1,680 |                | $ | 74             |  | $ | 



F-17



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



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



At January 1, 2005, the accrued liability associated with the cessation of Ashford.com operations was $370 and consisted of the following (in thousands):



|                          |  |                            |     |                        |   |          |  |   |                          |   |                         |   |                      |  |   |     |  |   |    
|------------------------- |  | -------------------------- | --- | ---------------------- | - | -------- |  | - | ------------------------ | - | ----------------------- | - | -------------------- |  | - | --- |  | - | ---
|                          |  | Balance atDecember 28,2002 |     | SubsequentAccruals,net |   | Payments |  |   | Balance atJanuary 3,2004 |   | Balance January 1, 2005 |   | Due Within 12 Months
|                          |  | (in thousands)            
|Termination benefits      |  | $                          | 417 |                        | $ |         |  | $ | (417                     | ) |                         | $ |                     |  | $ |    |  | $ |   
|Contractual obligations   |  |                            | 402 |                        |   | 74       |  |   | (106                     | ) |                         |   | 370                  |  |   | 370 |  |   | 370
|Other restructuring costs |  |                            | 12  |                        |   |         |  |   | (12                      | ) |                         |   |                     |  |   |    |  |   |   
|                          |  |                            |     |                        |   |         
|                          |  | $                          | 831 |                        | $ | 74       |  | $ | (535                     | ) |                         | $ | 370                  |  | $ | 370 |  | $ | 370



NOTE 4MARKETABLE SECURITIES



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



|                                  |  |                 |        |                      |   |                             |  |   |                     |   |  |   |       
|--------------------------------- |  | --------------- | ------ | -------------------- | - | --------------------------- |  | - | ------------------- | - |  | - | ------
|                                  |  | January 3, 2004
|                                  |  | AmortizedCost   |        | GrossUnrealizedGains |   | Gross Unrealized Losses (1) |  |   | EstimatedFair Value
|                                  |  | (in thousands) 
|Auction rate securities           |  | $               | 18,750 |                      | $ |                            |  | $ |                    |   |  | $ | 18,750
|Corporate bonds                   |  |                 | 2,908  |                      |   | 7                           |  |   | (10                 | ) |  |   | 2,905 
|U.S. government agency securities |  |                 | 9,004  |                      |   | 12                          |  |   | (9                  | ) |  |   | 9,007 
|                                  |  |                 |        |                     
|                                  |  | $               | 30,662 |                      | $ | 19                          |  | $ | (19                 | ) |  | $ | 30,662



|                                  |  |                 |        |                          |   |      |                      |  |   |       
|--------------------------------- |  | --------------- | ------ | ------------------------ | - | ---- | -------------------- |  | - | ------
|                                  |  | January 1, 2005
|                                  |  | AmortizedCost   |        | GrossUnrealizedLosses(1) |   |      | Estimated Fair Value
|                                  |  | (in thousands) 
|Auction rate securities           |  | $               | 39,700 |                          | $ |     |                      |  | $ | 39,700
|Corporate bonds                   |  |                 | 5,963  |                          |   | (41  | )                    |  |   | 5,922 
|U.S. government agency securities |  |                 | 9,800  |                          |   | (63  | )                    |  |   | 9,737 
|                                  |  |                 |       
|                                  |  | $               | 55,463 |                          | $ | (104 | )                    |  | $ | 55,359



|(1) | The fair value of marketable securities with loss positions was $6,071 as of January 3, 2004 and $15,658 as of January 1, 2005, and the gross unrealized losses on these marketable
securities were $19 as of January 3, 2004 and $104 as of January 1, 2005. The Company considered the nature of these marketable securities, which are primarily U.S. government agency securities, corporate bonds and auction preferred stock, the
amount of the impairments relative to the carrying value of the related investments and the duration of the impairments, which are all less than twelve months, and concluded that the impairments were temporary.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-18



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



The amortized cost and estimated fair value of investments in debt securities as of January 1, 2005, by contractual
maturity, are as follows:



|                                       |  |                |        |                     |   |       
|-------------------------------------- |  | -------------- | ------ | ------------------- | - | ------
|                                       |  | AmortizedCost  |        | EstimatedFair Value
|                                       |  | (in thousands)
|Due within one year                    |  | $              | 36,156 |                     | $ | 36,089
|Due after one year through five years  |  |                | 13,307 |                     |   | 13,270
|Due after five years through ten years |  |                |       |                     |   |      
|Due after ten years                    |  |                | 6,000  |                     |   | 6,000 
|                                       |  |               
|                                       |  | $              | 55,463 |                     | $ | 55,359



NOTE 5PROPERTY AND EQUIPMENT



The major classes of property and equipment, at cost, as of January 3,
2004 and January 1, 2005 are as follows:



|                                                |  |                |         |   |                |   |         |  
|----------------------------------------------- |  | -------------- | ------- | - | -------------- | - | ------- | -
|                                                |  | January 3,2004 |         |   | January 1,2005 |  
|                                                |  | (in thousands) |        
|Computer hardware and software                  |  | $              | 44,113  |   |                | $ | 53,381  |  
|Building and building improvements              |  |                | 20,977  |   |                |   | 38,406  |  
|Furniture, warehouse and office equipment       |  |                | 6,712   |   |                |   | 9,696   |  
|Land                                            |  |                | 3,663   |   |                |   | 7,663   |  
|Leasehold improvements                          |  |                | 413     |   |                |   | 479     |  
|Capitalized Lease                               |  |                |        |   |                |   | 2,401   |  
|Construction in progress                        |  |                | 655     |   |                |   | 387     |  
|                                                |  |               
|                                                |  |                | 76,533  |   |                |   | 112,413 |  
|Less: Accumulated depreciation and amortization |  |                | (31,693 | ) |                |   | (38,127 | )
|                                                |  |               
|Property and equipment, net                     |  | $              | 44,840  |   |                | $ | 74,286  |  



NOTE 6LEASES



Capital Leases



During the third quarter of fiscal 2004, the Company entered into capital leases for computer hardware and software. As of January 1, 2005,
the leases had an aggregate outstanding balance of $1,590, with $829 classified as current. The Companys net investment in these capital leases as of January 1, 2005 was $1,594, which is included in property and equipment. Interest expense
recorded on the capital leases for the twelve month period ended January 1, 2005 was $65.



F-19



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



Future minimum lease payments under the capital lease as of January 1, 2005, together with present value of those
future minimum lease payments, are as follows:



|                                                     |  |                |       |  
|---------------------------------------------------- |  | -------------- | ----- | -
|                                                     |  | January 1,2005 |      
|                                                     |  | (in thousands) |      
|2005                                                 |  | $              | 912   |  
|2006                                                 |  |                | 516   |  
|2007                                                 |  |                | 297   |  
|                                                     | 
|Total future minimum lease payments                  |  |                | 1,725 |  
|Less: Interest discount amount                       |  |                | (135  | )
|                                                     | 
|Total present value of future minimum lease payments |  |                | 1,590 |  
|Less: Current portion                                |  |                | (829  | )
|                                                     | 
|Long-term portion                                    |  | $              | 761   |  



During the fourth quarter of fiscal
2000, the Company entered into various capital leases for computer hardware and furniture. As of January 1, 2005, no capital leases on this equipment remained. The Companys net investment in these capital leases as of January 3, 2004 was $347
and as of January 1, 2005 was $0, which is included in property and equipment. Interest expense recorded on the capital leases for the fiscal year ended December 28, 2002 was $59, for fiscal year ended January 3, 2004 was $0 and for fiscal year
ended January 1, 2005 was $0.



Operating Leases



The Company leases its Melbourne, FL customer contact center, as well as, its
Shepherdsville, KY fulfillment center and certain fixed assets under noncancellable operating leases. The Company previously leased Ashford.coms Houston, TX fulfillment center and offices that it formerly maintained and its former Louisville,
KY retail store until the first quarter of fiscal 2003. The Company also previously leased its Louisville, KY fulfillment center until April 2002, at which time it was purchased by the Company and additional office space until the Company completed
its move to its new corporate headquarters. Rent expense under operating lease agreements was $2,349 in fiscal year ended December 28, 2002, $1,346 in fiscal year ended January 3, 2004 and $2,019 for the fiscal years ended January 1, 2005.



Future minimum lease payments under operating leases as of January 1, 2005 are
as follows:



|                                    |  |                 |       
|----------------------------------- |  | --------------- | ------
|                                    |  | OperatingLeases
|                                    |  | (in thousands) 
|2005                                |  | $               | 2,175 
|2006                                |  |                 | 2,025 
|2007                                |  |                 | 1,592 
|2008                                |  |                 | 1,588 
|2009                                |  |                 | 1,579 
|Thereafter                          |  |                 | 1,428 
|                                    | 
|Total future minimum lease payments |  | $               | 10,387



F-20



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



NOTE 7STOCKHOLDERS EQUITY



Preferred Stock:



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



On May 12, 1998, the Company issued 10,000 shares of mandatorily redeemable Series A preferred stock. As of December 28, 2002 all of the
shares of Series A preferred stock had been redeemed. As of September 27, 2003 all of the shares of the Series A preferred stock had been retired.



Common Stock:



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



On July 20, 2001, a right to receive 1,600,000 shares of the
Companys common stock was exercised in lieu of future cash revenue share payments. On the day immediately preceding the exercise of the right, the closing price of a share of the Companys common stock was $9.00, and the shares were
valued at approximately $14,400. The 1,600,000 shares of GSI common stock issued are subject to restrictions which prohibit the transfer of such shares. These restrictions lapsed as to 10% of such shares on December 31, 2002 and will lapse as to an
additional 10% of such shares on the last day of each quarter thereafter, becoming free of all such transfer restrictions on March 31, 2005.



On August 23, 2001, pursuant to the terms of a stock purchase agreement entered into on July 20, 2001, the Company issued to Interactive Technology Holdings, LLC, a joint
venture company formed by Comcast Corporation and QVC, Inc. (ITH), 3,000,000 shares of its common stock at a price of $10.00 per share, for an aggregate purchase price of $30,000. At the same time, ITH acquired 1,000,000 shares of the
Companys common stock from Michael G. Rubin, Chairman, President and Chief Executive Officer of the Company, at a price of $10.00 per share, for an aggregate purchase price of $10,000.



On July 25, 2003, the Company issued 1,650,000 shares of common stock to ITH in exchange for
warrants held by ITH to purchase 4,500,000 shares of the Companys common stock, purchased by ITH on September 13, 2000. On the day immediately preceding the exchange, the closing price of a share of the Companys common stock was $9.05.
Of the warrants exchanged, 2,500,000 have an exercise price of $10.00 per share and expire between September 2005 and October 2005 and 2,000,000 have an exercise price of $8.15 per share and expire between September 2005 and October 2005. Under the
Black-Scholes valuation methodology, the warrants were valued at approximately $23,000 on the date of exchange. As the value of the warrants settled is in excess of the consideration given to ITH by the Company, the Company did not recognize any
stock-based compensation expense relating to this exchange.



F-21



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



Employee Stock Purchase Plan:



In March 2000, the Companys board of directors adopted, and in May 2000, the Companys stockholders approved, the 2000 Employee
Stock Purchase Plan (the ESPP). A total of 400,000 shares of common stock are authorized for issuance under the ESPP, plus an annual increase equal to the lesser of (i) 50,000 shares, or (ii) such smaller number of shares as determined
by the board of directors; provided that the total aggregate number of shares issuable under the ESPP may not exceed 900,000 shares. The ESPP is implemented by the periodic offerings of rights to all eligible employees from time to time, as
determined by the board of directors. The maximum period of time for an offering is 27 months. The purchase price per share at which common stock is sold in an offering is established by the board of directors prior to the commencement of the
offering, but such price may not be less than the lower of (i) 85% of the fair market value of a share of common stock on the date the right to purchase such shares was granted (generally the first day of the offering) or (ii) 85% of the fair market
value of a share of common stock on the applicable purchase date. The shares of common stock issued under the ESPP were 399,201 shares as of December 28, 2002, 548,948 shares as of January 3, 2004 and 548,948 shares as of January 1, 2005. Currently,
there are no shares authorized for issuance under the ESPP by the board of directors.



Treasury Stock:



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



In June 2002, the Companys Board of Directors authorized, subject to certain business and market conditions, the purchase of up to
$10,000 of the Companys common stock. Under this program, the Company repurchased 73,000 shares on the open market during the fiscal year ended December 28, 2002.



NOTE 8STOCK OPTIONS AND WARRANTS



The Company maintains incentive and non-incentive stock option plans for certain employees, directors and other persons (the Plans). Under the terms of the
Plans, the Company may grant incentive and non-incentive options and restricted stock and unrestricted stock awards to purchase up to 10,025,071 shares of common stock. The options granted under the Plans generally vest at various times over periods
ranging up to five years and have terms of up to ten years after the date of grant, unless the optionee leaves the employ of or ceases to provide services to the Company. Stock appreciation rights (SARs) may be granted under the Plans
either alone or in tandem with stock options. Generally, recipients of SARs are entitled to receive, upon exercise, cash or shares of common stock (valued at the then fair market value of the Companys common stock) equal to such fair market
value on the date of exercise minus such fair market value on the date of grant of the shares subject to the SAR, although certain other measurements also may be used. A SAR granted in tandem with a stock option is exercisable only if and to the
extent that the option is exercised. No SARs have been granted to date under the Plans.



F-22



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



The following table summarizes the stock option activity for the fiscal years ended December 28, 2002, January 3,
2004 and January 1, 2005:



|                                      |  |                   |   |                 |                              |                 |                 |       |   |                              |   |                 |  |       |                              |  |   |      
|------------------------------------- |  | ----------------- | - | --------------- | ---------------------------- | --------------- | --------------- | ----- | - | ---------------------------- | - | --------------- |  | ----- | ---------------------------- |  | - | -----
|                                      |  | Fiscal Year Ended
|                                      |  | December 28, 2002 |   | January 3, 2004 |                              | January 1, 2005
|                                      |  | Number ofShares   |   |                 | WeightedAverageExercisePrice |                 | Number ofShares |       |   | WeightedAverageExercisePrice |   | Number ofShares |  |       | WeightedAverageExercisePrice
|                                      |  | (in thousands)    |   |                 |                              |                 | (in thousands)  |       |   |                              |   | (in thousands)  |  |       |                             
|Outstanding, beginning of fiscal year |  | 5,527             |   |                 | $                            | 8.02            |                 | 5,369 |   |                              | $ | 8.30            |  | 6,716 |                              |  | $ | 8.37 
|Granted                               |  | 856               |   |                 |                              | 12.58           |                 | 2,035 |   |                              |   | 9.02            |  | 793   |                              |  |   | 10.18
|Exercised                             |  | (270              | ) |                 |                              | 4.73            |                 | (194  | ) |                              |   | 5.15            |  | (803  | )                            |  |   | 5.89 
|Cancelled                             |  | (744              | ) |                 |                              | 12.85           |                 | (494  | ) |                              |   | 12.12           |  | (597  | )                            |  |   | 11.28
|                                      |  |                   |   |                 |                              |                
|Outstanding, end of fiscal year       |  | 5,369             |   |                 |                              | 8.30            |                 | 6,716 |   |                              |   | 8.37            |  | 6,109 |                              |  |   | 8.50 
|                                      |  |                   |   |                 |                              |                
|Exercisable, end of fiscal year       |  | 2,594             |   |                 |                              | 8.35            |                 | 3,837 |   |                              |   | 8.39            |  | 4,275 |                              |  |   | 8.38 



During the fiscal year ended January
1, 2005, the Company granted to employees options to purchase an aggregate of 730,800 shares of the Companys common stock at prices ranging from $0.01 to $16.10 per share and granted to directors options to purchase an aggregate of 62,500
shares of the Companys common stock at $8.11 per share. The weighted average fair value during the fiscal year ended January 1, 2005 was $7.00 per share and the weighted average exercise price of the options granted with exercise prices at the
then-current market prices of the underlying stock during the fiscal year ended January 1, 2005 was $10.18 per share. The weighted average fair value during the fiscal year ended January 1, 2005 was $9.47 per share and the weighted average exercise
price of the options granted with exercise prices below the then-current market prices of the underlying stock during the fiscal year ended January 1, 2005 was $0.01 per share. For the fiscal year ended January 1, 2005, the Company recorded $1,773
of stock-based compensation expense relating to options and restricted stock, $1,758 relating to employees and $15 relating to consultants.



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



During the fiscal year ended
December 28, 2002, the Company granted to employees options to purchase an aggregate of 807,470 shares of the Companys common stock at prices ranging from $4.03 to $19.94 per share and granted to directors options to purchase an aggregate of
48,750 shares of the Companys common stock at a price of $14.68 per share. The weighted average fair value during the fiscal year ended December 28, 2002 was $8.66 per share and the weighted average exercise price of the options granted with
exercise prices at the then-current market prices of the underlying stock during the fiscal year ended December 28, 2002 was $12.45 per



F-23



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



share. For the fiscal year ended December 28, 2002, the Company recorded a reduction of $508 in stock-based compensation expense relating to options and
restricted stock, $21 relating to employees and $487 relating to consultants.



The following table summarizes the warrant activity for the fiscal years ended December 28, 2002, January 3, 2004 and January 1, 2005:



|                                      |  |                   |   |                 |                              |                 |                 |        |   |                              |   |                  |  |                              |  |   |     
|------------------------------------- |  | ----------------- | - | --------------- | ---------------------------- | --------------- | --------------- | ------ | - | ---------------------------- | - | ---------------- |  | ---------------------------- |  | - | ----
|                                      |  | Fiscal Year Ended
|                                      |  | December 28, 2002 |   | January 3, 2004 |                              | January 1, 2005
|                                      |  | Number ofShares   |   |                 | WeightedAverageExercisePrice |                 | Number ofShares |        |   | WeightedAverageExercisePrice |   | Number of Shares |  | WeightedAverageExercisePrice
|                                      |  | (in thousands)    |   |                 |                              |                 | (in thousands)  |        |   |                              |   | (in thousands)   |  |                             
|Outstanding, beginning of fiscal year |  | 7,817             |   |                 | $                            | 9.27            |                 | 7,082  |   |                              | $ | 9.25             |  | 803                          |  | $ | 7.68
|Granted                               |  |                  |   |                 |                              |                |                 |       |   |                              |   |                 |  | 12                           |  |   | 9.31
|Exercised                             |  | (330              | ) |                 |                              | 9.32            |                 | (13    | ) |                              |   | 5.00             |  |                             |  |   |    
|Cancelled                             |  | (405              | ) |                 |                              | 9.67            |                 | (6,266 | ) |                              |   | 9.46             |  |                             |  |   |    
|                                      |  |                   |   |                 |                              |                
|Outstanding, end of fiscal year       |  | 7,082             |   |                 |                              | 9.25            |                 | 803    |   |                              |   | 7.68             |  | 815                          |  |   | 7.71
|                                      |  |                   |   |                 |                              |                
|Exercisable, end of fiscal year       |  | 6,882             |   |                 |                              | 9.44            |                 | 603    |   |                              |   | 9.40             |  | 615                          |  |   | 9.40



During the fiscal year ended January
1, 2005, the Company granted to a related party warrants to purchase an aggregate of 12,500 shares of the Companys common stock at $9.31 per share. The Company recognized $89 of stock-based compensation for the fiscal year ended January 1,
2005 related to the grant of the warrants.



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



The following table summarizes information regarding options and warrants outstanding and exercisable as of January 1, 2005:



|                         |  |                    |  |                                                 |  |                              |       |                   |       |                              |   |      
|------------------------ |  | ------------------ |  | ----------------------------------------------- |  | ---------------------------- | ----- | ----------------- | ----- | ---------------------------- | - | -----
|                         |  | Outstanding        |  | Exercisable                                    
|Range of Exercise Prices |  | Number Outstanding |  | WeightedAverageRemainingContractualLifeIn Years |  | WeightedAverageExercisePrice |       | NumberExercisable |       | WeightedAverageExercisePrice
|                         |  | (in thousands)     |  |                                                 |  |                              |       | (in thousands)    |       |                             
|$ 0.01  $ 5.56          |  | 2,372              |  | 5.89                                            |  | $                            | 4.44  |                   | 1,749 |                              | $ | 4.65 
|$ 5.69  $10.00          |  | 3,318              |  | 7.22                                            |  |                              | 8.66  |                   | 2,168 |                              |   | 8.29 
|$10.01  $24.69          |  | 1,234              |  | 6.23                                            |  |                              | 15.33 |                   | 973   |                              |   | 15.92
|$ 0.01  $24.69          |  | 6,924              |  | 6.58                                            |  |                              | 8.40  |                   | 4,890 |                              |   | 8.51 



As of January 1, 2005, 1,215,100
shares of common stock were available for future grants under the Plans.



F-24



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



The fair value of options and restricted stock granted under the Plans during the fiscal years ended December 28,
2002, January 3, 2004 and January 1, 2005 were estimated on the date of grant using the Black-Scholes multiple option pricing model, with the following weighted average assumptions:



|                                |  |                   |   |  |                |   |  |                |  
|------------------------------- |  | ----------------- | - |  | -------------- | - |  | -------------- | -
|                                |  | Fiscal Year Ended |  
|Assumption                      |  | December 28, 2002 |   |  | January 3,2004 |   |  | January 1,2005 |  
|Dividend yield                  |  | None              |   |  | None           |   |  | None           |  
|Expected volatility             |  | 102.00            | % |  | 104.00         | % |  | 94.11          | %
|Average risk free interest rate |  | 3.59              | % |  | 2.63           | % |  | 3.22           | %
|Average expected lives          |  | 3.93 years        |   |  | 3.41 years     |   |  | 4.13 years     |  



No warrants were granted or issued by
the Company during the fiscal years ended December 28, 2002 and January 3, 2004, and 12,500 warrants were issued during the fiscal year ended January 1, 2005. The fair value of warrants granted and issued during the fiscal year ended January 1, 2005
were estimated on the date of grant using the Black-Scholes multiple option pricing model, with the following range of assumptions:



|                                |  |                                  |  
|------------------------------- |  | -------------------------------- | -
|Assumption                      |  | Fiscal Year EndedJanuary 1, 2005 |  
|Dividend yield                  |  | None                             |  
|Expected volatility             |  | 100.0                            | %
|Average risk free interest rate |  | 3.93                             | %
|Average expected lives          |  | 5.00 years                       |  



F-25



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



NOTE 9INCOME TAXES



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



|                                                              |  |                   |         |   |                |   |         |                 |  |   |    
|------------------------------------------------------------- |  | ----------------- | ------- | - | -------------- | - | ------- | --------------- |  | - | ---
|                                                              |  | Fiscal Year Ended
|                                                              |  | December 28,2002  |         |   | January 3,2004 |   |         | January 1, 2005
|                                                              |  | (in thousands)   
|Income (loss) from continuing operations before income taxes: |  |                   |         |   |                |   |         |                 |  |   |    
|Domestic                                                      |  | $                 | (33,809 | ) |                | $ | (12,062 | )               |  | $ | 340
|Foreign                                                       |  |                   |        |   |                |   |        |                 |  |   |   
|Total                                                         |  | $                 | (33,809 | ) |                | $ | (12,062 | )               |  | $ | 340
|Benefit from income taxes:                                    |  |                   |         |   |                |   |         |                 |  |   |    
|Current:                                                      |  |                   |         |   |                |   |         |                 |  |   |    
|Federal                                                       |  | $                 |        |   |                | $ |        |                 |  | $ |   
|State                                                         |  |                   |        |   |                |   |        |                 |  |   |   
|Foreign                                                       |  |                   |        |   |                |   |        |                 |  |   |   
|Total Current                                                 |  | $                 |        |   |                | $ |        |                 |  | $ |   
|Deferred:                                                     |  |                   |         |   |                |   |         |                 |  |   |    
|Federal                                                       |  | $                 |        |   |                | $ |        |                 |  | $ |   
|State                                                         |  |                   |        |   |                |   |        |                 |  |   |   
|Foreign                                                       |  |                   |        |   |                |   |        |                 |  |   |   
|Total Deferred                                                |  | $                 |        |   |                | $ |        |                 |  | $ |   
|Total:                                                        |  |                   |         |   |                |   |         |                 |  |   |    
|Federal                                                       |  | $                 |        |   |                | $ |        |                 |  | $ |   
|State                                                         |  |                   |        |   |                |   |        |                 |  |   |   
|Foreign                                                       |  |                   |        |   |                |   |        |                 |  |   |   
|                                                              |  |                   |        
|Total                                                         |  | $                 |        |   |                | $ |        |                 |  | $ |   



For the fiscal years ended December
28, 2002, January 3, 2004 and January 1, 2005, the Company had no provision for federal and state income taxes.



F-26



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



The significant components of net deferred tax assets and liabilities as of January 3, 2004 and January 1, 2005
consisted of the following:



|                                        |  |                   |          |   |                 |   |          |  
|--------------------------------------- |  | ----------------- | -------- | - | --------------- | - | -------- | -
|                                        |  | Fiscal Year Ended |         
|                                        |  | January 3,2004    |          |   | January 1, 2005 |  
|                                        |  |                   |          |   |                 |  
|Deferred tax assets:                    |  |                   |          |   |                 |   |          |  
|Net operating loss carryforwards        |  | $                 | 174,249  |   |                 | $ | 179,495  |  
|Deferred revenue                        |  |                   | 6,104    |   |                 |   | 3,798    |  
|Employee benefits                       |  |                   | 248      |   |                 |   | 91       |  
|Inventory                               |  |                   | 1,149    |   |                 |   | 1,019    |  
|Prepaid expenses                        |  |                   |         |   |                 |   |         |  
|Depreciation                            |  |                   | 914      |   |                 |   | 2,278    |  
|Provision for doubtful accounts         |  |                   | 1,556    |   |                 |   | 1,293    |  
|                                        |  |                  
|Gross deferred tax assets               |  |                   | 184,220  |   |                 |   | 187,974  |  
|Deferred tax liabilities:               |  |                   |          |   |                 |   |          |  
|Prepaid expenses                        |  |                   |         |   |                 |   |         |  
|                                        |  |                  
|Net deferred tax assets and liabilities |  |                   | 184,220  |   |                 |   | 187,974  |  
|Valuation allowance                     |  |                   | (184,220 | ) |                 |   | (187,974 | )
|                                        |  |                  
|Net deferred tax asset                  |  | $                 |         |   |                 | $ |         |  



Due to the uncertainty surrounding the
realization of the Companys tax attributes in future income tax returns, the Company has placed a valuation allowance against its otherwise recognizable deferred tax assets. As of January 1, 2005, the Company had available net operating loss
carryforwards of approximately $442,827 which expire in the years 2005 through 2024. The use of certain net operating loss carryforwards are subject to annual limitations based on ownership changes of the Companys stock, as defined by Section
382 of the Internal Revenue Code. The Company expects that net operating losses of approximately $245,986 will expire before they can be utilized.



Of the net operating losses $14,309 relate to employee related stock options and the tax benefit when realized will reduce equity.



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



|                                             |  |                   |    |  |                |    |  |                |   
|-------------------------------------------- |  | ----------------- | -- |  | -------------- | -- |  | -------------- | --
|                                             |  | Fiscal Year Ended |   
|                                             |  | December 28,2002  |    |  | January 3,2004 |    |  | January 1,2005 |   
|Statutory federal income tax rate            |  | (34.0             | )% |  | (34.0          | )% |  | (34.0          | )%
|Increase (decrease) in taxes resulting from: |  |                   |    |  |                |    |  |                |   
|Valuation allowance                          |  | 33.7              | %  |  | 33.4           | %  |  | 34.0           | % 
|Nondeductible amortization                   |  |                  |    |  |               |    |  |               |   
|Other                                        |  | 0.3               | %  |  | 0.6            | %  |  | 0.0            | % 
|                                             |  |                   |   
|Effective income tax rate                    |  | 0.0               | %  |  | 0.0            | %  |  | 0.0            | % 



F-27



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)





NOTE 10INCOME (LOSS) PER SHARE



Net income (loss) per share has been computed in accordance with SFAS No.
128, Earnings per Share. Basic and diluted income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the fiscal year. In fiscal 2002 and fiscal 2003, the
outstanding common stock options and warrants have been excluded from the calculation of diluted income (loss) per share because their effect would be antidilutive.



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



|                                                            |  |                         |         |   |                |   |         |                |  |   |       
|----------------------------------------------------------- |  | ----------------------- | ------- | - | -------------- | - | ------- | -------------- |  | - | ------
|                                                            |  | Year ended December 31,
|                                                            |  | December 28,2002        |         |   | January 3,2004 |   |         | January 1,2005
|Net income (loss) attributable to common shares             |  | $                       | (33,809 | ) |                | $ | (12,062 | )              |  | $ | 340   
|                                                            |  |                         |        
|Weighted average common shares outstandingbasic            |  |                         | 38,566  |   |                |   | 39,638  |                |  |   | 41,073
|Effective of dilutive securities:                           |  |                         |         |   |                |   |         |                |  |   |       
|Warrants                                                    |  |                         |        |   |                |   |        |                |  |   | 220   
|Employee stock options                                      |  |                         |        |   |                |   |        |                |  |   | 1,076 
|                                                            |  |                         |        
|Weighted average common shares outstandingdiluted          |  |                         | 38,566  |   |                |   | 39,638  |                |  |   | 42,369
|Outstanding common stock options having no dilutive effect  |  |                         | 5,369   |   |                |   | 6,716   |                |  |   | 5,033 
|Outstanding common stock warrants having no dilutive effect |  |                         | 7,082   |   |                |   | 803     |                |  |   | 595   
|                                                            |  |                         |        
|Income (loss) per common sharebasic:                       |  | $                       | (0.88   | ) |                | $ | (0.30   | )              |  | $ | 0.01  
|Income (loss) per common sharediluted:                     |  | $                       | (0.88   | ) |                | $ | (0.30   | )              |  | $ | 0.01  



NOTE 11COMPREHENSIVE INCOME
(LOSS)



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



|                                                               |  |                   |         |   |                |   |         |                |  |   |      |  
|-------------------------------------------------------------- |  | ----------------- | ------- | - | -------------- | - | ------- | -------------- |  | - | ---- | -
|                                                               |  | Fiscal Year Ended |        
|                                                               |  | December 28,2002  |         |   | January 3,2004 |   |         | January 1,2005 | 
|                                                               |  | (in thousands)    |        
|Net income (loss)                                              |  | $                 | (33,809 | ) |                | $ | (12,062 | )              |  | $ | 340  |  
|Other comprehensive income (loss):                             |  |                   |         |   |                |   |         |                |  |   |      |  
|Net unrealized gains (losses) on available-for-sale securities |  |                   | 57      |   |                |   | (57     | )              |  |   | (104 | )
|                                                               |  |                   |        
|Other comprehensive income (loss)                              |  |                   | 57      |   |                |   | (57     | )              |  |   | (104 | )
|                                                               |  |                   |        
|Comprehensive income (loss)                                    |  | $                 | (33,752 | ) |                | $ | (12,119 | )              |  | $ | 236  |  



NOTE 12SIGNIFICANT
TRANSACTIONS/CONCENTRATIONS OF CREDIT RISK



Net revenues included $2,457
for the fiscal year ended December 28, 2002, $0 for the fiscal year ended January 3, 2004 and $0 for the fiscal year January 1, 2005, related to bulk sales to one entity. As of January 3, 2004 and January 1, 2005, the amount included in accounts
receivable related to these bulk sales was $0.



Net revenues included $8,281
for the fiscal year ended December 28, 2002, $0 for the fiscal year ended January 3, 2004 and $0 for the fiscal year ended January 1, 2005 from sales of one of the Companys partners



F-28



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



products sold primarily through its direct response television campaigns in addition to Web site and toll-free number sales. As of January 3, 2004 and
January 1, 2005, the amount included in accounts receivable related to these sales was $0.



The Company had $3,360 as of January 3, 2004 and $12,397 as of January 1, 2005, of operating cash and $66,110 as of January 3, 2004 and $63,026 as of January 1, 2005, of cash equivalents and marketable securities
invested with three financial institutions, which are potentially subject to credit risk. The composition of these investments is regularly monitored by management of the Company.



NOTE 13MAJOR SUPPLIERS AND CUSTOMERS/ECONOMIC DEPENDENCY



During the fiscal year ended January 1, 2005, the Company purchased inventory from one supplier amounting to $80,430 or 43.1% of total
inventory purchased.



During the fiscal year ended January 3, 2004, the Company
purchased inventory from one supplier amounting to $50,434 or 37.7% of total inventory purchased.



During the fiscal year ended December 28, 2002, the Company purchased inventory from one supplier amounting to $19,435 or 20.5% of total inventory purchased.



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



For the fiscal year ended December 28, 2002, net revenues included
$23,559 or 14% from Kmart Corporation (Kmart) in connection the operation of Kmarts e-commerce business. In March 2003, the Company and Kmart modified their agreement to shorten the term, eliminate the last two of eight fixed fee
payments required under the agreement and provide for early termination rights for both the Company and Bluelight. In October 2004, we further modified this agreement following which we only provide sporting goods merchandise to Bluelight on a
business-to-business basis and continue to recognize revenues based on those business-to-business sales.



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



NOTE 14COMMITMENTS AND CONTINGENCIES



Legal Proceedings



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



While the Company sold certain assets of Ashford.com, Inc. in December 2002, Ashford.com continues to be a party to certain litigation that was commenced prior to the Companys acquisition of Ashford.com in March 2002. Since July 11,
2001, several stockholder class action complaints have been filed in the United States District Court of the Southern District of New York against Ashford.com, several of Ashford.coms officers and directors, and various underwriters of
Ashford.coms initial public offering. The purported class actions have all been brought on behalf of purchasers of Ashford.com common stock during various periods beginning on September 22, 1999, the date of Ashford.coms initial public
offering. The plaintiffs allege that Ashford.coms prospectus, included in Ashford.coms Registration Statement on Form S-1 filed with the Securities and Exchange Commission, was materially false and misleading because it failed to
disclose, among other things,



F-29



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



certain fees and commissions collected by the underwriters or arrangements designed to inflate the price of the common stock. The plaintiffs further allege
that because of these purchases, Ashford.coms post-initial public offering stock price was artificially inflated. As a result of the alleged omissions in the prospectus and the purported inflation of the stock price, the plaintiffs claim
violations of Sections 11 and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934. The complaints have been consolidated into a single action, and the consolidated cases against Ashford.com have been
consolidated with similarly consolidated cases filed against 308 other issuer defendants for the purposes of pretrial proceedings. The claims against Ashford.coms officers and directors were dismissed in exchange for tolling agreements which
permit the refiling of claims against officers and directors at a later date. A motion to dismiss filed on behalf of all issuer defendants, including Ashford.com, was denied in all aspects relevant to Ashford.com on February 19, 2003. Ashford.com
and its insurers have entered into a memorandum of understanding regarding terms for settlement of this suit. Under the settlement, plaintiffs claims against Ashford.com and other issuers will be dismissed in exchange for certain consideration
from the issuers insurers and for the issuers assignment to plaintiffs of certain potential claims against the underwriters of the relevant initial public offerings. Formal documentation of the settlement contemplated by the memorandum
of understanding is complete and the Judge presiding over this matter has preliminarily approved the settlement. In the event that a settlement is not finalized, the Company believes that Ashford.com has defenses against these actions.



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



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



Advertising and Media Agreements



As of January 1, 2005, the Company was contractually committed for the purchase of future
advertising totaling approximately $130 through the fiscal year ending December 31, 2005. The expense related to these commitments will be recognized in accordance with the Companys accounting policy related to advertising (see Note 2).



F-30



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



Partner Revenue Share Payments



As of January 1, 2005 and subject to the satisfaction of certain conditions, the Company was contractually committed to future minimum cash
revenue share payments as follows:



|                                                             |  |                               |       
|------------------------------------------------------------ |  | ----------------------------- | ------
|                                                             |  | Partner RevenueShare Payments
|                                                             |  | (in thousands)               
|2005                                                         |  | $                             | 7,450 
|2006                                                         |  |                               | 5,700 
|2007                                                         |  |                               | 6,000 
|2008                                                         |  |                               | 6,350 
|2009                                                         |  |                               | 6,650 
|Thereafter                                                   |  |                               | 4,900 
|                                                             | 
|Total conditional future minimum cash revenue share payments |  | $                             | 37,050



Partner Relationships



The Company operates e-commerce businesses for its partners pursuant to
contractual agreements. The Company generally operates e-commerce businesses for its partners based on one of three models, or, in some circumstances, a combination of these models. The Company refers to these three models as the GSI-owned inventory
model, the partner-owned inventory model and the business-to-business model.



GSI-Owned Inventory Model  The Company selects and purchases inventory from vendors, sells the inventory directly to consumers through its e-commerce platform under its partners names, records revenues generated from the sale by
the Company of these products and generally pays a percentage of these revenues to the respective partners in exchange for the right to use their brand names, logos and Web site address in the operation of their e-commerce business and for their
commitment to promote and advertise their e-commerce business. The Company has a buying organization that procures products in the following merchandise categories: sporting goods, consumer electronics, and licensed entertainment products. Because
the Company operates e-commerce businesses for its sporting good partners using a common pool of owned sporting goods inventory, the Company is able to offer a broad assortment while efficiently managing its inventory. Under the owned-inventory
model, the Company establishes the prices for products that it offers. To the extent possible, the Company strategically prices products sold through a partners e-commerce business to be consistent with the pricing for the same products at
that partners retail stores. Accordingly, prices for the same products may differ across the Companys partners e-commerce businesses. Revenues generated from this model are recorded by the Company as product sales. The Company
believes that it has strong relationships with its vendors and sources of unique products, and it regularly seeks to add new vendors, brands and sources of unique products.



Partner-Owned Inventory Model  The Company operates certain aspects of its partners e-commerce businesses in exchange for
service fees, which primarily consist of variable fees based on the value of merchandise sold or gross profit generated through its partners e-commerce businesses. To a lesser extent, service fees include fixed periodic payments by partners
for the development and operation of their e-commerce businesses and fees related to the provision of marketing, design, development and other services. Under the partner-owned inventory model, its partners select the merchandise to be sold, buy and
own all or a portion of the inventory and provide offline marketing support. The partner is the seller of the merchandise and establishes the prices. Revenues generated from partners in this model are recorded by the Company as service fees.



F-31



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



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



NOTE 15SAVINGS PLAN



The Company sponsors a voluntary defined contribution savings plan covering all U.S.
employees. Company contributions to the plan for each employee may not exceed 3.0% of the employees annual salary. Total Company contributions were $396 for the fiscal year ended December 28, 2004, $419 for the fiscal year ended January 3,
2004 and $540 for the fiscal year ended January 1, 2005.



NOTE
16SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION



|                                                                                                                                               |  |                   |         |   |                |   |     |                |  |   |       |  
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | -------------- | - | --- | -------------- |  | - | ----- | -
|                                                                                                                                               |  | Fiscal Year Ended |        
|                                                                                                                                               |  | December 28,2002  |         |   | January 3,2004 |   |     | January 1,2005 | 
|                                                                                                                                               |  | (in thousands)    |        
|Cash paid during the year for interest                                                                                                         |  | $                 | 749     |   |                | $ |    |                |  | $ | 466   |  
|Acquisition of Ashford.com:                                                                                                                    |  |                   |         |   |                |   |     |                |  |   |       |  
|Fair value of assets acquired (including goodwill)                                                                                             |  | $                 | 27,575  |   |                | $ |    |                |  | $ |      |  
|Liabilities assumed                                                                                                                            |  |                   | (11,834 | ) |                |   |    |                |  |   |      |  
|Stock issued                                                                                                                                   |  |                   | (6,881  | ) |                |   |    |                |  |   |      |  
|                                                                                                                                               |  |                   |        
|Cash paid                                                                                                                                      |  |                   | 8,860   |   |                |   |    |                |  |   |      |  
|Cash acquired                                                                                                                                  |  |                   |        |   |                |   |    |                |  |   |      |  
|                                                                                                                                               |  |                   |        
|Net cash paid for acquisition of Ashford.com                                                                                                   |  | $                 | 8,860   |   |                | $ |    |                |  | $ |      |  
|                                                                                                                                               |  |                   |        
|Noncash Investing and Financing Activities:                                                                                                    |  |                   |         |   |                |   |     |                |  |   |       |  
|Net unrealized gains (losses) on available-for-sale securities                                                                                 |  | $                 | 57      |   |                | $ | (57 | )              |  | $ | (104  | )
|Receipt of a promissory note in connection with the sale of certain assets of Ashford.com                                                      |  | $                 | 3,976   |   |                | $ |    |                |  | $ |      |  
|Receipt of shares of, and warrants to purchase, Odimos Series D preferred stock in connection with the sale of certain assets of
Ashford.com  |  | $                 | 2,159   |   |                | $ |    |                |  | $ |      |  
|Receipt of shares of, and warrants to purchase, Odimos Series C preferred stock in connection with a conversion of principal due under a
note |  | $                 |        |   |                | $ |    |                |  | $ | 688   |  
|Exchange of a portion of a promissory note in connection with a conversion of principal due under the note                                     |  | $                 |        |   |                | $ |    |                |  | $ | (682  | )
|Issuance of common stock upon exercises of options granted to employees of the discontinued operations                                         |  | $                 | 4       |   |                | $ | 3   |                |  | $ |      |  
|Acquisition of property and equipment under a capital lease                                                                                    |  | $                 |        |   |                | $ |    |                |  | $ | 3,170 |  



F-32



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



NOTE 17BUSINESS SEGMENTS



The Company operates in one principal business segment. The Company provides e-commerce solutions that enable retailers, branded
manufacturers, entertainment companies and professional sports organizations to operate e-commerce businesses. The Companys e-commerce platform includes Web site design, e-commerce technology, managed hosting, order fulfillment, customer
service, merchandising and order management, online merchandising, customer relationship management, content development and online marketing. The Company currently derives virtually all of its revenues from the sale of goods through its
partners e-commerce businesses, toll-free telephone number sales, bulk sales, business-to-business and group sales and related outbound shipping charges, net of allowances for returns and discounts. The Company also derives revenue from fixed
and variable fees earned in connection with the development and operation of partners e-commerce businesses and the provision of marketing and other services. All of the Companys net revenues and operating results are in the United
States and Canada. Net revenues and operating results in Canada are not significant. All of the Companys identifiable assets are in the United States.



NOTE 18RELATED PARTY TRANSACTIONS



In fiscal 2000, the Company entered into a website development and distribution agreement with iQVC, a division of QVC, Inc., pursuant to which the Company provides
technology, procurement and fulfillment services for QVC, including selling sporting goods, recreational and/or fitness related equipment and related products, apparel and footwear to QVC for resale through the QVC Web site. Interactive Technology
Holdings, LLC, which is a major stockholder of the Company, is a joint venture company of Comcast Corporation and QVC. The Company recognized net revenues on sales to this related party of $2,711 for fiscal year ended December 28, 2002, $2,145 for
fiscal year ended January 3, 2004 and $1,843 for fiscal year ended January 1, 2005 under this Web site development and distribution agreement. The terms of these sales are comparable to those with other business-to-business partners of the Company.
As of January 1, 2005, the amount included in accounts receivable related to these sales was $88. In the three month period ended September 27, 2003, the Company took a charge of $325 for the settlement of disputed amounts billed to QVC for product
and shipping costs.



In the fiscal year ended January 3, 2004, the Company
entered into a services agreement with QVC pursuant to which QVC provided shipping services to the Company in exchange for fees. The fees charged to us by QVC were determined through arms-length negotiations. The Company incurred fees of $484 for
the fiscal year ended January 3, 2004 and $1,061 for the fiscal year ended January 1, 2005 of which $414 for fiscal year ended January 3, 2004 and $1,009 for the fiscal year ended January 1, 2005 related directly to products shipped and was charged
to cost of revenues from product sales, and $70 for fiscal year ended January 3, 2004 and $52 for fiscal year ended January 1, 2005 related to professional services provided and was charged to sales and marketing expense.



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



F-33



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



NOTE 19LONG-TERM DEBT AND OTHER



The following table summarizes the Companys long-term debt and other long-term liabilities as of January 1, 2005:



|                                                  |  |                |        |  
|------------------------------------------------- |  | -------------- | ------ | -
|                                                  |  | January 1,2005 |       
|                                                  |  | (in thousands) |       
|Note payable                                      |  | $              | 12,945 |  
|Capital lease obligation                          |  |                | 1,590  |  
|                                                  | 
|                                                  |  |                | 14,535 |  
|Less: current portion of note payable             |  |                | (142   | )
|Less: current portion of capital lease obligation |  |                | (829   | )
|                                                  | 
|Long-term debt and other                          |  | $              | 13,564 |  



On March 16, 2004, a wholly-owned
subsidiary of the Company entered into an agreement to purchase a new corporate headquarters in King of Prussia, Pennsylvania, together with an option to purchase an additional parcel of land. The Company closed on the purchase on June 9, 2004 and
the purchase price for the building was $17,000.



In connection with the
purchase of the new corporate headquarters, a wholly-owned subsidiary of the Company entered into a $13,000 mortgage note on June 9, 2004, collateralized by a first lien on substantially all of the assets of that subsidiary, which have a carrying
value of approximately $17,444. The mortgage note has a term of ten years and six months, and bears interest at 6.32% per annum. The Company, in accordance with the provisions of the mortgage note, provided a Letter of Credit in the amount of $3,000
as additional security. Upon completion of initial capital improvements to the building, the Letter of Credit will be reduced to $1,000. The Letter of Credit may be reduced further to $500 if the Company has positive income for calendar years 2006,
2007 and 2008. As of January 1, 2005, the mortgage note had an aggregate outstanding principal balance of $12,945, with $142 classified as current and $12,803 classified as long-term. The Company recorded interest expense related to the note of $209
for the three month period ended January 1, 2005 and $473 for the twelve month period ended January 1, 2005.



Annual maturities of the mortgage note are based on a thirty year amortization and as of January 1, 2005 are as follows:



|                     |  |                |        |  
|-------------------- |  | -------------- | ------ | -
|                     |  | January 1,2005 |       
|                     |  | (in thousands) |       
|Year 1               |  | $              | 142    |  
|Year 2               |  |                | 152    |  
|Year 3               |  |                | 161    |  
|Year 4               |  |                | 170    |  
|Year 5               |  |                | 184    |  
|Thereafter           |  |                | 12,136 |  
|                     | 
|                     |  |                | 12,945 |  
|Less current portion |  |                | (142   | )
|                     | 
|Long-term portion    |  | $              | 12,803 |  



F-34



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



On April 20, 2000, the Company entered into a $5,300 mortgage note collateralized by the land, building and
improvements of its corporate headquarters which have a carrying value of $6,832. The mortgage note had a term of ten years and bore interest at 8.49% per annum. In November 2002, the Company pre-paid the $5,212 outstanding principal balance
remaining on the mortgage note. In connection with the early retirement of the mortgage note, the Company paid a $250 early termination fee, which is recorded in interest expense. The Company recorded interest expense related to this note of $690
during the fiscal year ended December 28, 2002, $0 during the fiscal year ended January 3, 2004 and $0 during the fiscal year ended January 1, 2005.



NOTE 20QUARTERLY RESULTS (UNAUDITED)



The following tables contain selected unaudited Statement of Operations information for each quarter of the fiscal years ended January 3, 2004 and January 1, 2005. The
Company believes that the following information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results
for any future period.



|                                                |  |                                           |        |   |               |   |        |               |  |   |                |   |  |   |       
|----------------------------------------------- |  | ----------------------------------------- | ------ | - | ------------- | - | ------ | ------------- |  | - | -------------- | - |  | - | ------
|                                                |  | For the Fiscal Year Ended January 3, 2004
|                                                |  | FirstQuarter                              |        |   | SecondQuarter |   |        | Third Quarter |  |   | Fourth Quarter
|                                                |  | (in thousands, except per share amounts) 
|Net revenues                                    |  | $                                         | 48,879 |   |               | $ | 50,348 |               |  | $ | 47,483         |   |  | $ | 95,209
|Gross profit                                    |  | $                                         | 17,026 |   |               | $ | 17,041 |               |  | $ | 16,705         |   |  | $ | 36,416
|Net income (loss)                               |  | $                                         | (5,483 | ) |               | $ | (3,777 | )             |  | $ | (5,545         | ) |  | $ | 2,744 
|Income (losses) per sharebasic and diluted(1): |  |                                           |        |   |               |   |        |               |  |   |                |   |  |   |       
|Net income (loss)                               |  | $                                         | (0.14  | ) |               | $ | (0.10  | )             |  | $ | (0.14          | ) |  | $ | 0.07  
|Weighted average shares outstandingbasic       |  |                                           | 38,784 |   |               |   | 38,838 |               |  |   | 40,109         |   |  |   | 40,737
|Weighted average shares outstandingdiluted     |  |                                           | 38,784 |   |               |   | 38,838 |               |  |   | 40,109         |   |  |   | 42,180

---

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



F-35



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(amounts in thousands, except per share data)



|                                                |  |                                           |        |   |               |   |        |               |  |   |               |   |  |   |        
|----------------------------------------------- |  | ----------------------------------------- | ------ | - | ------------- | - | ------ | ------------- |  | - | ------------- | - |  | - | -------
|                                                |  | For the Fiscal Year Ended January 1, 2005
|                                                |  | FirstQuarter                              |        |   | SecondQuarter |   |        | Third Quarter |  |   | FourthQuarter
|                                                |  | (in thousands, except per share amounts) 
|Net revenues                                    |  | $                                         | 66,268 |   |               | $ | 64,689 |               |  | $ | 68,588        |   |  | $ | 135,787
|Gross profit                                    |  | $                                         | 24,760 |   |               | $ | 25,125 |               |  | $ | 26,417        |   |  | $ | 55,895 
|Net income (loss)                               |  | $                                         | (4,028 | ) |               | $ | (3,146 | )             |  | $ | (3,047        | ) |  | $ | 10,561 
|Income (losses) per sharebasic and diluted(1): |  |                                           |        |   |               |   |        |               |  |   |               |   |  |   |        
|Net income (loss)basic                         |  | $                                         | (0.10  | ) |               | $ | (0.08  | )             |  | $ | (0.07         | ) |  | $ | 0.26   
|Net income (loss)diluted                       |  | $                                         |       |   |               | $ |       |               |  | $ |              |   |  | $ | 0.25   
|Weighted average shares outstandingbasic       |  |                                           | 40,868 |   |               |   | 40,991 |               |  |   | 41,081        |   |  |   | 41,351 
|Weighted average shares outstandingdiluted     |  |                                           | 40,868 |   |               |   | 40,991 |               |  |   | 41,081        |   |  |   | 43,076 

---

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



NOTE
21SUBSEQUENT EVENT



The Company was the beneficial owner of Series C
and Series D Convertible Preferred Stock of Odimo Incorporated and warrants to acquire additional shares of Series C and Series D Convertible Preferred Stock of Odimo Incorporated (see footnotes 2 and 3).



In February, 2005, Odimo Incorporated consummated an initial public offering through the
issuance of 3,125,000 shares of its common stock. Effective upon consummation of Odimo Incorporateds IPO, the Company exercised its warrants to acquire Series C and Series D Convertible Preferred Stock of Odimo Incorporated and converted all
of such shares, along with its already held shares of Series C and Series D Convertible Preferred Stock of Odimo Incorporated, into an aggregate of 824,594 shares of common stock of Odimo Incorporated. The Companys investment in Odimo
Incorporateds common stock represents 11.5% of the outstanding common stock of Odimo Incorporated.



NOTE 22RESTATEMENT OF THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF CASH FLOWS



Subsequent to the issuance of our consolidated financial statements for the year ended January 1, 2005, the Company determined that the Companys investments in
auction rate securities should have been classified as marketable securities within current assets. Previously, such investments had been classified as cash and cash equivalents. Accordingly, the Company restated the classification to report these
investments in marketable securities on the consolidated balance sheets as of January 1, 2005 and January 3, 2004. The Company also made corresponding corrections to the consolidated statements of cash flows for the fiscal years ended January 1,
2005, January 3, 2004 and December 28, 2002, to reflect the gross purchases and sales of these investments as investing activities rather than as a component of cash and cash equivalents. In addition, the Company has corrected the number of shares
of common stock available for future grants, in Note 8. The restatement had no impact on previously reported total current assets, total assets, working capital position, results of operations or cash flows from operating activities.



F-36



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Concluded)



(amounts in thousands, except per share data)



The following tables present a summary of the significant effects of the restatement:



|                                          |  |                                      |   |  |             |   |  |             |  
|----------------------------------------- |  | ------------------------------------ | - |  | ----------- | - |  | ----------- | -
|                                          |  | Consolidated Balance Sheets          |  
|                                          |  | As PreviouslyReported                |   |  | Adjustments |   |  | As Restated |  
|As of January 1, 2005                     |  |                                      |   |  |             |   |  |             |  
|                                          |  |                                      |  
|Cash and Cash Equivalents                 |  | 56,564                               |   |  | (36,500     | ) |  | 20,064      |  
|Marketable securities                     |  | 18,859                               |   |  | 36,500      |   |  | 55,359      |  
|                                          |  |                                      |  
|As of January 3, 2004                     |  |                                      |   |  |             |   |  |             |  
|                                          |  |                                      |  
|Cash and Cash Equivalents                 |  | 57,558                               |   |  | (18,750     | ) |  | 38,808      |  
|Marketable securities                     |  | 11,912                               |   |  | 18,750      |   |  | 30,662      |  
|                                          | 
|                                          |  | Consolidated Statement of Cash Flows |  
|Fiscal Year Ended January 1, 2005         |  |                                      |   |  |             |   |  |             |  
|Purchases of marketable securities        |  | (9,656                               | ) |  | (54,475     | ) |  | (64,131     | )
|Sales of marketable securities            |  | 2,605                                |   |  | 36,725      |   |  | 39,330      |  
|Net cash used in investing activities     |  | (41,239                              | ) |  | (17,750     | ) |  | (58,989     | )
|Net decrease in cash and cash equivalents |  | (994                                 | ) |  | (17,750     | ) |  | (18,744     | )
|                                          |  |                                      |  
|Fiscal Year Ended January 3, 2004         |  |                                      |   |  |             |   |  |             |  
|Purchases of marketable securities        |  | (15,976                              | ) |  | (44,408     | ) |  | (60,384     | )
|Sales of marketable securities            |  | 15,550                               |   |  | 44,258      |   |  | 59,808      |  
|Net cash used in investing activities     |  | (4,765                               | ) |  | (150        | ) |  | (4,915      | )
|Net decrease in cash and cash equivalents |  | (3,446                               | ) |  | (150        | ) |  | (3,596      | )
|                                          |  |                                      |  
|Fiscal Year Ended December 28, 2002       |  |                                      |   |  |             |   |  |             |  
|Purchases of marketable securities        |  | (20,578                              | ) |  | (60,852     | ) |  | (81,430     | )
|Sales of marketable securities            |  | 9,092                                |   |  | 85,102      |   |  | 94,194      |  
|Net cash used in investing activities     |  | (47,272                              | ) |  | 24,250      |   |  | (23,022     | )
|Net decrease in cash and cash equivalents |  | (44,892                              | ) |  | 24,250      |   |  | (20,642     | )



F-37