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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K

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

                    FOR THE FISCAL YEAR ENDED MARCH 31, 2001

                        COMMISSION FILE NUMBER 000-27357

                               ASHFORD.COM, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

              DELAWARE                                 76-0617905
   (State or other jurisdiction of                  (I.R.S. Employer
   incorporation or organization)                Identification Number)

                        3800 BUFFALO SPEEDWAY, SUITE 400
                              HOUSTON, TEXAS 77098
                    (Address of principal executive offices)
                               -----------------
                                 (713) 369-1300
              (Registrant's telephone number, including area code)

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                      NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                         COMMON STOCK, $.001 PAR VALUE

   Indicate by check mark whether the Registrant (1) has filed all reports
required 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 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. [ ]

The aggregate market value of voting stock held by non-affiliates of the
registrant as of May 31, 2001 was $7,623,806.

The number of shares of common stock outstanding as of May 31, 2001 was
55,833,437.

                      DOCUMENTS INCORPORATED BY REFERENCE

   Certain sections of the Registrant's definitive proxy statement filed in
connection with its annual meeting of stockholders to be held on August 27, 2001
are incorporated by reference into Part III of this Form 10-K where indicated.

   Certain exhibits and appendices filed with the Registration Statement on Form
S-1 (File No. 333-82759), as amended, are incorporated by reference into Part IV
of this Form 10-K where indicated.
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                               ASHFORD.COM, INC.

                               TABLE OF CONTENTS


                                     PART I

Item 1.  Business...................................................    3

Item 2.  Properties.................................................   23

Item 3.  Legal Proceedings..........................................   23

Item 4.  Submission of Matters to a Vote of Security Holders........   23

Item 4a. Executive Officers of the Registrant.......................   23

                                    PART II

Item 5.  Market for the Registrant's Common Stock and Related
         Stockholder Matters........................................   25

Item 6.  Selected Consolidated Financial Data.......................   25

Item 7.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations..................................   26

Item 7A. Quantitative and Qualitative Disclosure about Market
         Risk.......................................................   33

Item 8.  Financial Statements and Supplementary Data................   33

Item 9.  Changes in and Disagreements with Accountants on
         Accounting and Financial Disclosure........................   33

                                    PART III

Item 10. Directors and Executive Officers of the Registrant.........   33

Item 11. Executive Compensation.....................................   33

Item 12. Security Ownership of Certain Beneficial Owner and
         Management.................................................   33

Item 13. Certain Relationships and Related Transactions.............   33

                                    PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on
         Form 8-K...................................................   33

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                                     PART I

ITEM 1.  BUSINESS

     The discussion in this Report contains forward-looking statements within
the meaning of Section 21E of the Securities and Exchange Act of 1934, including
statements regarding our expectations, beliefs, hopes, intentions or strategies
regarding the future.  These forward-looking statements involve risks and
uncertainties.  We are under no duty to update any of the forward-looking
statements after the date of this filing on Form 10-K to conform these
statements to actual results. Our actual results could differ materially from
those discussed herein.  Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Risk Factors
That May Affect Future Results" as well as those discussed in this section and
elsewhere in this Report, and the risks discussed in the "Risk Factors" section
included in our Registration Statement on Form S-1 as declared effective by the
Securities and Exchange Commission on September 22, 1999 (Reg. No. 333-82759).

COMPANY OVERVIEW

     We are a Web-based retailer focused on luxury and premium products,
including new and vintage watches, clocks, diamonds, jewelry, leather goods,
writing instruments, fragrances, and sunglasses, altogether offering more than
12,000 styles of products from over 300 leading luxury brands.  During the past
two years we have rapidly expanded our primary product focus from offering only
new watches to offering 11 different product categories.  Our strategy has been
to add complementary products to create a portfolio that combines items
purchased frequently, such as leather and sunglasses, with higher priced items
purchased less frequently, such as watches and diamonds.  In March 2000, we
launched our corporate gift business which offers an additional 800 luxury
products in new categories such as crystal, silver and pewter that are targeted
to the corporate market. By combining our expertise in luxury products and our
commitment to excellent customer service with the benefits of Internet
retailing, we are able to deliver a unique shopping experience to our retail and
corporate consumers. We believe that our current luxury and premium product
offerings are well suited for online commerce given our brand recognition,
generally high average sales prices and relatively low average distribution and
shipping costs.

     Our Web site features detailed product information, helpful and useful
shopping services and innovative merchandising through easy-to-navigate Web
pages. We offer customers the convenience and flexibility of shopping 24 hours a
day, seven days a week, from their homes, offices or other locations. In
addition, with the exception of diamonds, we carry almost all of the products we
sell in inventory, which enables us to ship most products to our customers
within 24 hours. Our customer service representatives are available through
phone and e-mail and are trained to answer a broad array of questions regarding
product styles, features and technical specifications, as well as provide
product recommendations. This informative and high-quality shopping experience
provides luxury brand owners a Web-based retail channel consistent with the
luxury character and premium quality of their products.

INDUSTRY OVERVIEW

GROWTH OF THE INTERNET AND ONLINE COMMERCE

     Internet usage and online commerce continue to grow worldwide.
International Data Corporation, or IDC, estimates that there were 142 million
Web users worldwide at the end of 1998. IDC anticipates that number will grow to
approximately 502 million users by the end of 2003. IDC also estimates that
revenue generated worldwide from online commerce will exceed $1.3 trillion by
2003, although growth rates for online commerce for luxury and premium products
and the growth rate for our business may differ significantly from the growth of
online commerce generally. These projected growth rates can be attributed to
many factors, including:

 .  a large and growing installed base of personal computers and other Internet-
   connected devices in the workplace and home;

 .  advances in performance and speed of personal computers and modems;

 .  improvements in network security, infrastructure and bandwidth;

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 .  easier and cheaper access to the Internet; and

 .  the rapidly expanding availability of online content and commerce sites.

     The growth in online commerce can also be attributed to a number of
advantages the Internet provides to online retailers. Online retailers can
display a larger number of products at a lower cost than traditional store-based
or catalog retailers. In addition, online retailers can rapidly adjust their
selections, editorial content and pricing, providing significant merchandising
flexibility. Online retailers also benefit from the minimal cost to publish on
the Web, the ability to reach a large group of customers from a central
location, and the potential for low-cost customer interaction. Unlike
traditional retail channels, online retailers do not have the cost of managing
and maintaining a retail store infrastructure or the significant printing and
mailing costs of catalogs. Online retailers can also easily obtain demographic
and behavioral data about customers, increasing opportunities for direct
marketing and personalized services. The benefits of online retailing should be
viewed in the context of the inherent challenges of online retailing, such as
the expenses of establishing and maintaining a Web site, reliance on newly
developed Internet technology, coordinating new distribution channels, and the
difficulty of converting a Web site visitor to a purchaser given limitations
such as a customer's inability to physically inspect, try on or use a product.

TRADITIONAL LUXURY GOODS MARKET

     The luxury goods market includes a broad selection of product categories.
Based on data from Global Industry Analysts, or GIA, and DataMonitor, leading
independent market research companies, and our own internal research, we
estimate the worldwide market for luxury and premium lifestyle products to be
greater than $130 billion. This market includes fine watches and other luxury
and premium product categories, such as sunglasses, fragrances, leather goods,
ties and scarves, jewelry and corporate gifts. We believe that our current
luxury and premium product categories represent a significant online commerce
opportunity.

     Traditional Retail Channels for Luxury and Premium Products. We believe
that the traditional retailers for luxury and premium products in the United
States today can be grouped as follows:

 .  high-end department stores and jewelry stores that often strive to provide a
   high level of customer service and a knowledgeable sales staff, but typically
   offer a limited selection of mid-range to high-end products;

 .  national department stores that tend to carry broad selections of low-end to
   mid-range products from brands that are complementary to the stores' other
   offerings, but typically offer limited product-specific customer service;

 .  specialty and single-brand stores, which are retail locations that carry a
   broad selection of specific product categories, but are limited to the
   geographic region in which the few physical stores are located; and

 .  boutiques, which are small stores, often located in malls that generally
   carry a selection of the latest trends in lower-priced fashion products and
   accessories.

     Challenges in Traditional Luxury Goods Retailing. We believe that
traditional store-based retailers face a number of challenges in providing a
satisfactory shopping experience for buyers of luxury and premium products.

 .  Selection is limited because physical retail space constrains the number of
   styles and the amount of product inventory that may be carried by any one
   store. In addition, the significant carrying costs of physical inventory in
   multiple store locations require traditional store-based retailers to focus
   their product selection on the most popular products that produce the highest
   inventory turns, further limiting consumer selection.

 .  Traditional store-based retailers have a high cost structure. Most of the
   leading luxury and premium product retailers are located either in the most
   exclusive and expensive shopping locales or in high-cost retail outlets or
   malls, both of which must be in close proximity to the target buyers. This is
   because their sales are dependent on serving customers who are willing to
   physically visit their stores.

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 .  Traditional retailers sell luxury products often at a significantly higher
   price than wholesale to cover high operating costs. As a result, consumers
   ultimately pay for the high cost structure of the retail store.

 .  The needs of luxury goods customers are changing. Increasingly, luxury goods
   brands are appealing to a broader, time-constrained customer base that is not
   willing or able to spend the time necessary to shop in traditional store-
   based retail locations.

 .  In many cases, customers are served by employees with limited knowledge
   regarding the features of the products they sell, whether due to high
   employee turnover, limited training or other factors.

 .  Traditional store-based retailers can only serve those customers who have
   convenient access to their stores. These store-based retailers must open new
   stores to serve additional geographic areas, resulting in significant
   investments in inventory, physical space, leasehold improvements and the
   hiring and training of store personnel.

     We believe that these challenges facing traditional store-based retailers
limit their ability to offer an extensive selection of luxury and premium
products, broad geographic coverage and convenient access, and staff that is
sufficiently knowledgeable to assist with significant customer decisions
typically involving purchases of several hundred dollars. As a result, we
believe customers often do not find shopping for luxury and premium products to
be a convenient or enjoyable experience.

THE ASHFORD.COM SOLUTION

     Our online store is designed to provide consumers with a convenient and
enjoyable shopping experience in a Web-based retail environment. We provide an
extensive selection, detailed product information that enables consumers to make
informed decisions, competitive pricing compared to traditional retail channels,
a commitment to the highest level of customer service and the convenience of
online shopping. The key components of the Ashford.com experience include:

     Extensive Product Selection. We offer a broad selection of luxury and
premium products that would be economically and physically difficult to offer in
a traditional store, together with the unique environment of the Internet that
enables us to dynamically adjust our product mix and merchandising strategy. Our
online store offers over 12,000 styles of products from over 300 leading luxury
brands across 11 product categories.   Additionally, some of the brands we offer
lack a U.S. distribution network, making them hard to find in traditional retail
outlets. We believe that our extensive selection increases the likelihood that
the consumer will find the product they would like to purchase.

     Compelling Content and Detailed Product Information. Our Web site includes
significant content and detailed product information to provide our customers
with a convenient and enjoyable shopping experience. Our Web site displays
detailed product descriptions and product photos. For certain brands, we have
dedicated pages to communicating specific brand histories and key messages. We
also employ specialists with product expertise, such as master watchmakers and a
certified gemologist, who are available to address detailed customer questions
by phone or e-mail. Our goal is to provide our customers with the product
information they need to make educated and highly satisfactory purchase
decisions.

     Competitive Prices and Compelling Value. We offer our customers products at
competitive prices and, combined with our high-quality shopping experience,
provide compelling value.

     Commitment to Excellent Customer Service. Luxury and premium goods
consumers expect the highest level of personalized customer service, which we
are committed to providing. Our customer service representatives are available
through phone and e-mail and are trained to answer a broad array of questions
regarding product styles, features and technical specifications, as well as
provide product recommendations. Before shipping, we inspect each product, and
in the case of watches, set the time and date for the customer. In addition, we
offer gift-wrapping and same-day shipping on orders placed before 4:00 p.m. CST
(2:00 p.m. CST for items in the diamonds and bridal department) and standard
overnight shipping in the United States.  We also offer a 30-day return policy
on all products to ensure customer satisfaction. We also offer our watch
customers a certification of authenticity, repair and battery replacement
services and an Ashford.com warranty for the length of the manufacturer's
warranty plus an additional two years.

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     Personalized Shopping Experience. We provide a convenient and enjoyable
shopping experience that addresses the dynamic needs of the luxury goods
customer. These services are designed to help consumers search through our
product offerings and make informed selections. Our services include:

 .  Search Capability. Our site offers search capabilities making it easy for
   customers to find products on the site. Search criteria include brand, price,
   keyword, size, features and other criteria.

 .  Real-Time Customer Interaction. Using real-time, online customer interaction
   software, our customer service representatives are able to answer specific
   questions about our products and services. This feature allows customers
   shopping from home with just one phone line to communicate in real-time with
   a customer service representative without losing their Internet connection
   and leaving our online store.

 .  In-Stock Notification. With the exception of diamonds, we carry almost all of
   our products in inventory. For items in stock, we clearly indicate to the
   customer on our Web site that we can ship the product generally within 24
   hours. For an item not currently in stock, we indicate on our Web site that
   the customer can expect a longer delivery time.

 .  Gifts and Wish List. We provide a variety of gift suggestions and feature
   product suggestions for particular holidays. We also provide a wish list
   service that customers can use to provide friends and relatives with gift
   ideas by e-mail. Customers buying gifts can choose among a variety of gift-
   wrap styles at the time of order.

 .  Shopping Hours. Our online store provides consumers the opportunity to shop
   from their homes, offices or other locations 24 hours a day, seven days a
   week.

     Geographic Coverage. By selling online, we are able to sell products
throughout the U.S. and worldwide where the products might not otherwise be
available. In addition, consumers are able to go to one location and find an
extensive selection as opposed to visiting several stores with limited product
offerings.

BUSINESS STRATEGY

     Our objective is to be one of the leading online retailers of luxury and
premium products. Key elements of our strategy include:

     Focus on the Premium Retail Watch Market. We have become what we believe to
be one of the leading sellers of watches on the Internet by providing thousands
of styles of new and vintage watches from premium brands at competitive prices.
We intend to capitalize on our online market position in watches to become the
primary destination for consumers to purchase premium watches. Our objective is
to grow our market position and expand our customer base through superior
execution and strong relationships with luxury and premium brand owners.

     Extend Leadership Position in Fine Watches to Other Product Categories. We
believe that there are excellent online market opportunities for a variety of
luxury and premium products, including leather goods, sunglasses, fragrances,
ties and scarves, diamonds and jewelry. Over the past two years we have enhanced
our product offerings by expanding into these luxury and premium product
categories, which has enabled us to leverage our customer base, brand name,
merchandising expertise and distribution capabilities. We believe that offering
a broad selection of luxury goods will enable us to increase sales per customer
visit, encourage repeat purchases and expand our customer base.

     Leverage Leadership Position in Luxury and Premium Products to the
Corporate Gifts Market.  We believe that there are excellent online
opportunities targeted to the business market for corporate gifts.  We believe
that the combination of our extensive selection, hands-on customer service and
the efficiencies of the Internet allow us to offer corporate accounts a more
convenient, customized and value added service.  Our objective is to grow our
market position in the corporate gift category by adding a regionalized sales
force to provide personalized service and access to premium brands more
conveniently via the Internet.

     Build Ashford.com Experience and Brand. We intend to establish a brand
identity that will support the creation of an Internet luxury community and
provide luxury brand owners a powerful new distribution

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channel consistent with their luxury identities. We will focus our brand
campaign on convenience, value, selection, trust and service. We intend to
create an environment where our shoppers are confident that they have found a
smarter, easier and more compelling way to buy luxury goods. We believe this
approach will support an ongoing relationship with and sales to our target
customers who are more likely to purchase our products.

     Expand Relationships with Leading Luxury Brands. Our intent is to be the
Internet retailer of choice for luxury and premium brands. Direct relationships
enable us to purchase products more efficiently. We believe that our
merchandising history and well-established relationships with brand owners
enable us to provide our customers with compelling product offerings, while
giving us access to additional sources of merchandise.

     Pursue Ways to Increase Our Sales. We intend to pursue new opportunities to
increase our sales by:

 .  continuing to take steps to add new customers and to promote repeat
   purchases;

 .  pursuing international market opportunities;

 .  establishing advantageous relationships with distributors and brand owners;
   and

 .  acquiring complementary businesses, products and technologies.

     Expand Our Operational and Systems Infrastructure. We plan to continue to
devote resources to growing our systems and operational infrastructure to handle
increased volume, enhance our service offerings and take advantage of the unique
characteristics of online luxury goods retailing. We have developed technologies
and implemented systems to support secure and reliable online retailing.  We are
committed to growing capacity rapidly in order to sustain high levels of
customer service.

THE ASHFORD.COM ONLINE RETAIL STORE

     We have designed our online retail store to be the primary place for
consumers to purchase luxury and premium products online. We believe our Web
site provides a secure, reliable and enjoyable shopping experience in an
attractive, easy-to-use online store. The user interface is simple and generally
consistent throughout the site. The interface also has powerful search features
that allow customers to search products by brand, price, keyword, size, features
and other criteria. A consumer on our site can browse the different departments
of our store, conduct targeted searches, view recommended products, verify
product availability, visit our gifts department and participate in promotions.
Unlike a traditional retail store, consumers can shop in the comfort and
convenience of their homes or offices.

OUR STORE DEPARTMENTS

     We have categorized products into different departments, including but not
limited to new watches, vintage watches, diamonds and bridal, jewelry, writing
accessories, sunglasses, fragrances, and leather goods and handbags. Within each
department, products can be viewed by brand, or sorted by price, keyword, size,
features and other criteria. The following is a summary of our most significant
departments.

     New Watches. Since inception, we have focused on becoming the leading
retailer of fine watches on the Internet. Here we offer over 7,500 styles from
over 50 brands, providing outstanding selection for the customer. Our prices in
this department generally range from $75 to over $30,000. To date, our average
purchase price in this department has been approximately $500 per watch.

     Vintage Watches. This department offers our collection of fine, vintage
watches in various price ranges. Vintage watches are generally high-quality
brand, previously owned watches. These watches often attract collectors or watch
enthusiasts in search of a specific model. Unlike many other sellers of vintage
watches, we offer a broad selection combined with outstanding service, including
maintenance, cleaning, a certification of authenticity and extended warranties.

     Diamonds and Bridal.   The diamonds and bridal department offers an
extensive collection of bridal jewelry and certified loose diamonds.  We carry a
broad selection of diamonds of various cuts, sizes and quality with prices
generally ranging from $99 to over $400,000. We offer customers a unique

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diamond purchasing experience through our "Build Your Ring" functionality that
enables customers to build and purchase custom rings interactively.

     Jewelry.  The jewelry department offers a broad selection of jewelry from
semi-precious stones to sterling silver with prices generally from $75 to over
$10,000 from leading jewelry manufacturers as well as our exclusive Ashford
Collection(TM).

     Writing Accessories. The writing accessories department offers fine pens,
pencils and stationery from leading brands, with prices generally ranging from
$20 to over $2,000. The collection includes over 700 styles from over 35 leading
brands.

     Sunglasses. This department offers our growing collection of sunglasses,
with prices generally ranging from $50 to over $350. The collection includes
over 500 styles from 35 brands.

     Fragrances. The fragrance department offers a broad selection of over 200
fragrances. Our prices in this department generally range from $30 to $75.

     Leather Goods and Handbags. This department offers over 500 styles of
leather goods products from 25 brands.  Our prices in this department generally
range from $25 to $1,200.

     In March 2000, we launched our corporate gift business offering an
additional 800 luxury products in new categories such as crystal, silver and
pewter that are targeted for the corporate market.  We believe that the
corporate gift market complements our retail offerings because it is less
seasonal and offers the opportunity for higher margins.  In addition to offering
thematically organized corporate gifts, Ashford.com offers custom engraving,
etching and embossing to our corporate customers.

MERCHANDISING

     We believe that the breadth and depth of our product selection, together
with the flexibility of our online store and our range of helpful and useful
shopping services, enable us to pursue a unique merchandising strategy. Unlike
store-based retail formats, our online store provides us with significant
flexibility with regard to the organization and presentation of our product
selection. To encourage purchases, we feature various promotions on a rotating
basis throughout the store and continually update our online recommendations. We
also actively create and maintain pages that are designed to highlight certain
products and brands. The following are examples of some of our specific
merchandising strategies.

     Featured Products. We frequently give a product prominent placement on the
site, describe its key features and potentially highlight it as our Collector's
Choice. Products that receive this merchandising focus generally receive a boost
in sales.

     Product Bundling. To promote purchases of higher value items, we combine
products from our large selection to offer bundling promotions.

     Special Promotions. We offer certain products on promotion and provide
special pricing. The technological advantages of online retailing, compared to
traditional store-based retailing, allow us to adjust our promotions rapidly to
promote targeted sales.

     We employ a dedicated team of buyers and merchandisers that continually
monitor the consistency and quality of our merchandising efforts. This team,
combined with our technology, is able to pursue a merchandising strategy in
which we dynamically change our product offerings to enhance the consumer's
shopping experience.

MARKETING & PROMOTION

     We have designed our marketing and promotion strategy to build the
Ashford.com brand, increase customer traffic, promote the sales of new products,
maximize repeat purchases and build strong customer loyalty. Our marketing and
promotional activities primarily target a customer demographic that is more
likely to buy our luxury and premium products. These activities include both
offline and online advertising. In the last fiscal year, we spent approximately
$11.9 million on advertising, of which approximately 50% was spent online.

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     Online Advertising. We have agreements with significant Internet
destinations under which our advertisement banner will appear on the screen each
time one of over several hundred watches or fashion accessory-related words is
entered as a search term by a user.  We also have month-to-month banner
advertising agreements with a broad range of online sites, including major
online portals.  These agreements typically provide for minimum impressions and
we renew these agreements on a month-to-month basis depending on results. We
also advertise our site in conjunction with other major online portals, Internet
service providers and luxury and premium market-related Web sites to build our
brand and increase our reach on the Internet. In addition, we have an affiliate
program and other initiatives aimed at increasing traffic and supporting our
brand development. Under our affiliate program, we pay our registered affiliates
referral fees for sales generated via their links to our Web site.

     Online Direct Marketing. As our customer base grows, we continue to collect
significant data about our customers' buying preferences and habits in an effort
to increase repeat purchases. We intend to maximize the value of this
information by delivering meaningful information and special offers to our
customers via e-mail and other means. In addition, we publish a weekly, online
newsletter delivered by e-mail to subscribers in which we highlight important
developments and special promotions.

     Offline Advertising. We have used offline advertising to promote both our
brand and specific merchandising opportunities. Our offline advertising has
primarily consisted of television advertisements and print advertisements in
magazines and newspapers.  During fiscal 2001, we shifted our primary marketing
focus from traditional print and broadcast media to Internet and online media.
We believe Internet and online media provides a more efficient and economical
means of attracting new customers.

     Other Promotional Activities.  During April 2000, we gave away the Ashford
Diamond(TM), a 15-carat, colorless, internally flawless, pear-shaped diamond
worth an estimated $1.5 million as part of the Ashford.com Million Dollar
Diamond Giveaway contest.  The promotion ran for several months during the year
and as part of the promotion we made donations to designated charities.

FULFILLMENT OPERATIONS

     We obtain our products from brands and a diverse network of distributors,
brokers and retailers. We have ongoing efforts to continue to expand the number
of direct relationships with brand owners in all our product categories. For
brands where we do not have direct relationships, we buy products from a network
of distributors, brokers and retailers.

     With the exception of diamonds, we carry inventory on almost all of the
products available for sale on our site. We store our products and conduct our
fulfillment operations in our headquarters facility located in Houston, Texas.
When we receive an order, we immediately begin the packaging and shipping
operation. Most orders are shipped on the date of order entry. Our inventory
management system tracks the quantities of all stock keeping units, which
enables us to display information about the availability of the products on our
Web site.

     We offer overnight shipping on all orders and next-day delivery on orders
placed before 4:00 p.m. CST (2:00 p.m. CST for items in the diamonds and bridal
department) along with a variety of other convenient delivery options.  We have
developed relationships with both United Parcel Service and Federal Express to
maximize our overall service level to all 50 states. The ability to provide
overnight delivery is an important ongoing service for our customers.

CUSTOMER SERVICE

     We believe that our ability to establish and maintain long-term
relationships with our customers, earn their trust and encourage repeat visits
and purchases, largely depends on the strength of our customer support and
fulfillment operations and staff. We are committed to providing the high level
of personalized customer service that luxury and premium goods consumers expect.
We have a high-quality customer service staff with a broad range of experience
and knowledge enabling us to quickly respond to customer phone calls and e-
mails. We provide extensive training to our customer service representatives,
including on-site training from manufacturers, to allow our representatives to
answer a broad array of questions regarding product styles, features and
technical specifications, as well as provide product recommendations.

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     Our customer service representatives are available through phone and e-mail
24 hours a day, 7 days a week. Before shipment, we inspect each product, and in
the case of watches, adjust the date and set the time for the customer. With the
exception of diamonds, we ship almost all of our products on the date of order
entry. Once shipment is made, we immediately send e-mail confirmation to the
customer. We offer a 30-day return policy on all products.  We also offer our
watch customers a certification of authenticity, repair and battery replacement
services and an extended warranty.

OPERATIONS AND TECHNOLOGY

     We have implemented a broad array of site management, search, customer
interaction and distribution services and systems that we use to process
customer orders and payments. These services and systems use a combination of
our own and commercially available, licensed technologies. These applications
also manage the process of accepting, authorizing and charging customer credit
card orders with an address verification and approval system. We focus our
internal development efforts on creating, implementing and enhancing specialized
software that we use to:

 .  accept and validate customer orders;

 .  enable customer service representatives to engage in real-time, online
   interaction with multiple customers simultaneously;

 .  organize, place and manage orders with vendors;

 .  receive product and assign it to customer orders; and

 .  manage shipment of products to customers based on various ordering criteria.

     Our systems are based on industry-standard architectures and have been
designed to reduce downtime in the event of outages or catastrophic occurrences.
Our Web site is available 24 hours a day, 7 days a week. Our system hardware is
hosted at a third-party facility in Houston, Texas, which provides redundant
communications lines and emergency power backup. We have implemented load
balancing systems and redundant servers to provide fault tolerant service.

     The market in which we compete is characterized by rapidly changing
technology, evolving industry standards, frequent new service and product
announcements and enhancements, and changing customer demands. Accordingly, our
future success will depend on our ability to:

 .  adapt to rapidly changing technologies;

 .  adapt our services to evolving industry standards; and

 .  continually improve the performance, features and reliability of our service
   in response to competitive service and product offerings and evolving demands
   of the marketplace.

     Our failure to adapt to market changes could harm our business. In
addition, the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could require
substantial expenditures by us to modify or adapt our services or
infrastructure. This could have a material adverse effect on our business,
results of operations and financial condition.

GOVERNMENT REGULATION

     We are not currently subject to direct federal, state or local regulation
other than regulations applicable to businesses generally and directly
applicable to online commerce, as well as the secondhand watch statutes enacted
in several states, as discussed below. However, as Internet use gains
popularity, it is possible that a number of laws and regulations may be adopted
with respect to the Internet. These laws may cover issues such as user privacy,
freedom of expression, pricing, content and quality of products and services,
taxation, advertising, intellectual property rights and information security.
Furthermore, the growth of online commerce may prompt calls for more stringent
consumer protection laws. Several states have proposed legislation to limit the
uses of personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has also initiated
action against at least one online service regarding the manner in which
personal information is collected from users and

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<PAGE>

provided to third parties. We do not currently provide personal information
regarding our users to third parties. However, the adoption of additional
consumer protection laws could create uncertainty in Web usage and reduce the
demand for our products and services.

     We are not certain how our business may be affected by the application of
existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel, obscenity
and export or import matters. The vast majority of these laws were adopted prior
to the advent of the Internet. As a result, they do not contemplate or address
the unique issues of the Internet and related technologies. Changes in laws that
are intended to address these issues could create uncertainty in the Internet
market place. This uncertainty could reduce demand for our services or our cost
of doing business may increase as a result of litigation costs or increased
service delivery costs.

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

     Several states have laws regulating the sale of secondhand watches. For
example, California, New York and Texas prohibit anyone from representing as
"new" any watch that has had its serial number removed. Pursuant to these laws,
a watch with a serial number removed must clearly be labeled as "secondhand"
even if it has never been worn. We have implemented procedures whereby all of
our buyers explicitly communicate to suppliers that we will only buy a watch if
its serial number has not been removed. In addition, we inspect each watch we
sell that is manufactured with a serial number to ensure it has a serial number
prior to shipment. If a court were to find, however, that we have violated these
statutes, we could be subject to civil or criminal penalties.

COMPETITION

     The online commerce market is new, rapidly evolving and intensely
competitive. Since the introduction of online commerce, the number of online
commerce Web sites competing for customer attention has increased rapidly.  We
expect future competition to intensify given the relative ease with which new
Web sites can be developed.

     We currently or potentially will compete with a variety of competitors,
including the following:

 .  traditional retailers of luxury and premium products, which may compete with
   both an online and offline presence, including high-end department stores
   such as Saks Fifth Avenue and Neiman Marcus, jewelers such as Zales and
   national department stores such as Macy's;

 .  manufacturers of our products that decide to sell directly to end-customers,
   either through physical retail outlets or through an online store;

 .  other online retailers of luxury and premium products, including online
   service providers that feature shopping services; and

 .  catalog retailers of luxury and premium products.

     We believe that the following are the principal competitive factors in our
market:

 .  brand recognition;

 .  selection;

 .  convenience;

 .  order delivery performance;

 .  customer service;

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<PAGE>

 .  site features and content; and

 .  price.

     Many of our current and potential traditional store-based and online
competitors, particularly the traditional store-based retailers and the brand
owners of products we sell, have longer operating histories, larger customer or
user bases, greater brand recognition and significantly greater financial,
marketing and other resources than we do. Many of these current and potential
competitors can devote substantially more resources to Web site and systems
development than we can. In addition, larger, well-established and well-financed
entities may acquire, invest in or form joint ventures with online competitors.

     Our competitors may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than we can. Traditional
store-based retailers also enable customers to see and feel products in a manner
that is not possible over the Internet. Given our limited operating history,
many of our competitors have significantly greater experience selling luxury and
premium products. For example, established catalog retailers may have greater
experience than we do in marketing and selling goods with in-person customer
interaction.

     Our online competitors are particularly able to use the Internet as a
marketing medium to reach significant numbers of potential customers. Finally,
new technologies and the expansion of existing technologies, such as price
comparison programs that select specific titles from a variety of Web sites and
may direct customers to other online retailers, may increase competition.

INTELLECTUAL PROPERTY

     We rely on various intellectual property laws and contractual restrictions
to protect our proprietary rights in products and services. These include
confidentiality, invention assignment and nondisclosure agreements with our
employees, contractors, vendors and strategic partners. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our intellectual property without our authorization. In addition, we
pursue the registration of our trademarks and service marks in the U.S. and
internationally. However, effective intellectual property protection may not be
available in every country in which our services are made available online.

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

     As of the date of this filing, we have not been notified that our
technologies infringe the proprietary rights of third parties. However, there
can be no assurance that third parties will not claim infringement by us with
respect to our current or future technologies. We expect that participants in
our markets will be increasingly subject to infringement claims as the number of
services and competitors in our industry segment grows. Any infringement claim,
with or without merit, could be time-consuming, result in costly litigation,
cause service upgrade delays or require us to enter into royalty or licensing
agreements. These royalty or licensing agreements might not be available on
terms acceptable to us or at all. As a result, any claim of infringement against
us could have a material adverse effect upon our business.

EMPLOYEES

     As of May 31, 2001, we had 234 full-time and part-time employees. We also
employ independent contractors to perform duties in various departments.  None
of our employees is represented by a labor union. We have not had any work
stoppages and consider our employee relations to be good.  We believe that our
success is dependent on our ability to attract and retain qualified personnel in
numerous areas.

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

     The following risk factors and other information included in this Report
should be carefully considered.  The risks and uncertainties described below are
not the only ones we face.  Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may impair our

                                       12
<PAGE>

business operations. If any of the following risks actually occur, our business,
financial condition and operating results could be materially adversely
affected.

RISKS RELATED TO OUR BUSINESS

Our Limited Operating History Makes Future Forecasting Difficult. Because Most
of our Expenses Are Fixed Based on Planned Operating Results, Failure to
Accurately Forecast Revenue Could Cause Net Losses in a Given Quarter to be
Greater than Expected.

     We were incorporated in March 1998 and began selling products on our Web
site in April 1998. Accordingly, we have an extremely limited operating history
upon which to base an evaluation of our business and prospects. Our business and
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets such as online
commerce. As a result of our limited operating history, it is difficult to
accurately forecast our net sales and we have limited meaningful historical
financial data upon which to base planned operating expenses. We base our
current and future expense levels on our operating plans and estimates of future
net sales, and our expenses are to a large extent fixed. Sales and operating
results are difficult to forecast because they generally depend on the volume
and timing of the orders we receive, which is uncertain. As a result, we may be
unable to adjust our spending in a timely manner to compensate for any
unexpected revenue shortfall. This inability could cause our net losses in a
given quarter to be greater than expected.

We Anticipate Future Losses and Negative Cash Flow, which May Limit or Delay Our
Ability to Become Profitable.

     Since our formation, we have made significant expenditures on our
technology, Web site development, advertising, hiring of personnel and startup
costs. As a result, we have incurred losses since our inception and expect to
experience negative cash flow during future periods. We expect to incur
additional costs and expenses related to:

 . brand development, marketing and other promotional activities;

 . the continued maintenance and development of our Web site, the systems and
  staff that process customer orders and payments, and our computer network;

 . the expansion of our product offerings and Web site content; and

 . development of relationships with strategic business partners.

     Our ability to become profitable depends on our ability to generate and
sustain substantially higher net sales while maintaining reasonable expense
levels, both of which are uncertain. If we do achieve profitability, we cannot
be certain that we would be able to sustain or increase profitability on a
quarterly or annual basis in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."


We May Be Unable to Meet Our Future Capital Requirements.

     If our current cash and cash that may be generated from future operations
are insufficient to satisfy our liquidity requirements, we may seek to sell
additional equity or debt securities or to obtain additional credit facilities
from lenders.  We cannot be certain that financing will be available to us on
favorable terms when required, or at all. If we raise funds through the issuance
of equity, equity-related or debt securities, the securities may have rights,
preferences or privileges senior to those of the rights of our common stock and
our stockholders may experience dilution. We require substantial working capital
to fund our business. Since our inception, we have experienced negative cash
flow from operations and expect to experience negative cash flow from operations
in the future. We have sufficient funds for our anticipated needs for working
capital and capital expenditures through at least the next 12 months. After
that, we may need to raise additional funds.

Our Operating Results are Volatile and Difficult to Predict. If We Fail to Meet
the Expectations of Public Market Analysts and Investors, the Market Price of
Our Common Stock May Decline Significantly.


                                       13
<PAGE>


     Our quarterly operating results have fluctuated in the past, and we expect
both our quarterly and annual operating results to fluctuate significantly in
the future. Because our operating results are volatile and difficult to predict,
we believe that quarter-to-quarter comparisons of our operating results are not
a good indication of our future performance. In some future quarter our
operating results may fall below the expectations of securities analysts and
investors. In this event, the trading price of our common stock may decline
significantly. The following are material factors that may harm our business or
cause our operating results to fluctuate:

 . our inability to obtain new customers at reasonable cost, retain existing
  customers or encourage repeat purchases;

 . seasonality;

 . our inability to manage inventory levels or control inventory theft;

 . our inability to manage our fulfillment operations;

 . our inability to adequately maintain, upgrade and develop our Web site, the
  systems that we use to process customer orders and payments or our computer
  network;

 . the ability of our competitors to offer new or enhanced Web sites, services or
  products;

 . our inability to obtain product lines from our suppliers;

 . the availability and pricing of merchandise from vendors; and

 . increases in the cost of online or offline advertising.

  A number of factors will cause our gross margins to fluctuate in future
periods, including the mix of corporate sales to traditional retail sales, the
mix of products we sell, inventory management, marketing and supply decisions,
inbound and outbound shipping and handling costs, the level of product returns
and the level of discount pricing and promotional coupon usage. Any change in
one or more of these factors could reduce our gross margins in future periods.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Our Stock May be Delisted from the Nasdaq National Market.

  On April 9, 2001, we received a notice from Nasdaq that our common stock had
failed to maintain a minimum bid price of one dollar over the preceding 30
consecutive trading days as required for continued listing on the Nasdaq
National Market.  The notice stated that if at any time prior to July 9, 2001,
the closing bid price of our common stock does not sustain at one dollar or more
for at least 10 consecutive trading days, our common stock could be delisted
from the exchange.  If our common stock price fails to sustain the minimum
closing bid price for the requisite number of days, the Nasdaq staff will issue
a determination that the common stock will be delisted.  Thereafter, and prior
to any actual delisting, we will have an opportunity to request a hearing.  At
such hearing, we will have the ability to present a plan demonstrating that we
can come into compliance with the continued listing requirements.  A common
course of action for companies attempting to maintain their listing by ensuring
a bid price in excess of one dollar is the institution of a reverse stock split.
A reverse stock spilt could negatively impact the value of our common stock by
allowing additional downward pressure on the stock price as its relative value
becomes greater following the reverse split.  That is to say, the stock, at its
new, higher price, has farther to fall and therefore more room for investors to
short or otherwise trade the value of the stock downward.  Similarly, a
delisting may negatively impact the value of the stock, as stocks trading on the
over-the-counter market are typically less liquid and trade with larger
variations between the bid and ask price. From the date of the letter through
June 26, 2001, our stock has not traded above one dollar for 10 consecutive
days.

We Expect to Experience Seasonal Fluctuations in Our Net Sales, which Will Cause
Our Quarterly Results to Fluctuate and Could Cause Our Annual Results to be
Below Expectations.

     We expect to experience significant seasonal fluctuations in our net sales
that will cause quarterly fluctuations in our operating results. In particular,
we realized approximately 40%, 50% and 40% of our net

                                       14
<PAGE>

sales for fiscal 2001, 2000 and 1999, respectively, during the fourth calendar
quarter, primarily due to gift purchases made during the holiday season. We
expect this trend to continue in the future.

     Due to our limited operating history, it is difficult to predict the
seasonal pattern of our sales and the impact of seasonality on our business and
financial results. In the future, our seasonal sales patterns may become more
pronounced, may strain our personnel and warehousing and order shipment
activities and may cause a shortfall in net sales as compared to expenses in a
given period. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

If We Are Unable to Purchase or Continue to Purchase Products Directly from the
Brand Owners, Our Net Sales Could Decrease.

     A significant portion of our units sold is purchased directly from the
brand owners. We are negotiating with some of the remaining brand owners to
purchase those brands directly, in all product categories. We believe that
purchasing directly from the brand owners will provide us with a more
predictable supply of products, as well as a lower cost of goods. As a result,
we believe that part of our success is contingent on attaining or maintaining
our ability to buy directly from the brand owners. If we lose or do not improve
our ability to buy directly from the brand owners, our net sales or margins may
decrease.

Our Ability to Meet Consumer Demand is in Part Dependent upon the Availability
of Products Purchased Indirectly from Sources Other than the Brand Owners. If We
Are Unable to Obtain Popular Products Through Indirect Sources, Our Net Sales
Will Decline.

     We purchase brands indirectly from distributors and other third parties
that we do not purchase directly from the brand owners. The availability of
products purchased indirectly depends on many factors, including consumer
demand, manufacturer production and fashion trends. Since there are no
guarantees that we will be able to obtain a sufficient supply of products
indirectly from third-party distributors and other suppliers, customer demand
may, at times, exceed our supply of those products. If this occurs we could lose
customers and our net sales would decline. In addition, the luxury goods brand
owners could establish procedures to limit or control our ability to purchase
products indirectly and several brand owners in the U.S. have distinctive legal
rights rendering them the only legal importer of their respective brands into
the U.S. In the event we acquire such products indirectly from distributors and
other third parties who may not have complied with applicable customs laws and
regulations, such goods can be subject to seizure from our inventory by U.S.
Customs, and the importer may have a civil action for damages against us. As it
is often difficult to ascertain the original circumstances of importation of
certain goods offered to us by our distributors and other third parties, this
could impact our ability to obtain sufficient quantities of popular luxury
goods, such as watches, and cause customer dissatisfaction.

If We Are Unable to Obtain Sufficient Quantities of Popular Luxury and Premium
Products, Our Net Sales Could Decrease.

     If we are not able to offer our customers a sufficient supply and selection
of products in a timely manner, we could lose customers and our net sales could
be below expectations. Our success depends on our ability to purchase products
in sufficient quantities at competitive prices, particularly for the holiday
shopping season. As is common in the industry, we generally do not have long-
term or exclusive arrangements with brand owners, distributors or brokers that
guarantee the availability of products for resale.

     In the luxury goods market, a product or fashion style periodically becomes
intensely popular. From time to time, we may have trouble obtaining sufficient
product allocations of particularly popular brands. In addition, we believe that
some of our suppliers may establish their own online retailing efforts, which
may impact our ability to get sufficient product allocations from suppliers. In
several cases, the brands that we wish to carry have delayed establishing a
relationship with us until they have their own Web site up and running. In other
cases, the brand owners distribute only a small amount of product and rely
partially on the scarcity of that product to provide a merchandising mystique.
It is unlikely that we will obtain products for our Web site from brands who
follow the scarcity mystique, and there is no assurance that we will actually
obtain relationships within all sectors that we have planned to offer.
Therefore, we do not have a predictable or guaranteed supply of products.

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<PAGE>

Because We Carry Almost All of the Products We Sell in Inventory, if We are
Unable to Accurately Predict and Plan for Changes in Consumer Demand Our Net
Sales and Gross Margins May Decrease.

     At March 31, 2001, we held approximately $24.1 million of products in
inventory. The rapidly changing trends in consumer tastes in the market for
luxury and premium products subject us to significant inventory risks. It is
critical to our success that we accurately predict these trends and do not
overstock unpopular products. The demand for specific products can change
between the time the products are ordered and the date of receipt. We are
particularly exposed to this risk because we derive a majority of our net sales
in the fourth calendar quarter of each year. Our failure to sufficiently stock
popular products in advance of the fourth calendar quarter would harm our
operating results for the entire fiscal year. In the event that one or more
products do not achieve widespread consumer acceptance, we may be required to
take significant inventory markdowns, which could reduce our net sales and gross
margins. This risk may be greatest in the first calendar quarter of each year,
after we have significantly increased inventory levels for the holiday season.
We believe that this risk will increase as we begin to offer additional luxury
items due to our lack of experience in purchasing these items. In addition, to
the extent that demand for our products increases over time, we may be forced to
increase inventory levels. Any increase would subject us to additional inventory
risks.

If We Experience Significant Inventory Theft, Our Gross Profit Margin Would
Decrease.

     Although immaterial to date, in the past we have experienced theft of
merchandise shipments in route from our facility to our customers. In the
future, we expect that we may also experience theft of merchandise while it is
being held in our fulfillment facility. We have worked with our shipping
carriers and have taken steps aimed at preventing theft. If these steps are
inadequate or if security measures fail at our fulfillment facility, we could
incur significant inventory theft, which could cause gross profit margins and
results of operations to decrease significantly.

Sales of Luxury Goods Are Particularly Susceptible to General Economic
Downturns. If General Economic Conditions Deteriorate, Our Sales Could Suffer.

     Purchases of luxury products are typically discretionary for consumers and
may be particularly affected by negative trends in the general economy. The
success of our operations depends to a significant extent on a number of factors
relating to discretionary consumer spending and affecting disposable consumer
income, such as employment, wages and salaries, business conditions, interest
rates, exchange rates, availability of credit and taxation. In addition, because
the purchase of luxury products is relatively discretionary, any reduction in
disposable income in general may affect us more significantly than companies in
other industries.

To Manage Our Growth and Expansion, We Need to Improve and Implement Financial
and Managerial Controls and Improve Our Reporting Systems and Procedures. If We
Are Unable to Do So Successfully, We May Not Be Able to Manage Growth
Effectively and Our Operating Results Would Be Harmed.

     Our rapid growth in personnel and operations has placed, and will continue
to place, a significant strain on our management, information systems and
resources. In order to manage this growth effectively, we need to continue to
improve our financial and managerial controls and reporting systems and
procedures. Any inability of our management to integrate additional companies,
employees, customer databases, merchandise lines, categories of merchandise,
technology advances, fulfillment systems, and customer service into operations
and to eliminate unnecessary duplication may have a materially adverse effect on
our business, financial condition and results of operations.

If We Are Unable to Successfully Expand Our Accounting and Financial Reporting
Systems, Our Stock Price Could Decline.

     We continue to expand our financial and management information systems to
accommodate new data. If we fail to successfully implement and integrate our new
financial reporting and management information systems with our existing systems
or if we are not able to expand these systems to accommodate our growth, we may
not have adequate, accurate or timely financial information. Our failure to have
adequate, accurate or timely financial information would hinder our ability to
manage our business and operating results. If we continue to grow rapidly, we
will face additional challenges in upgrading and maintaining our financial and
reporting systems.

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<PAGE>

We May Not Be Able to Compete Successfully Against Current and Future
Competitors.

     We expect competition in the online sale of luxury and premium products to
intensify in the future. Increased competition is likely to result in price
pressure, reduced gross margins and loss of market share, any of which could
seriously harm our net sales and operating results. In addition, the luxury
goods industry is intensely competitive. We currently or potentially compete
with a variety of other companies, including:

 . traditional retailers of luxury and premium products;

 . brand owners of the products we sell;

 . other online retailers of luxury and premium products; and

 . catalog retailers.

     Many of our competitors have advantages over us including longer operating
histories, greater brand recognition and significantly greater financial, sales
and marketing and other resources. In addition, traditional store-based
retailers offer customers benefits that are not obtainable over the Internet,
such as enabling customers to physically inspect a product before purchase and
not incurring costs associated with maintaining a Web site.

If We Are Unable to Build Awareness of the Ashford.com Brand, We May Not Be Able
to Compete Effectively Against Competitors with Greater Name Recognition and Our
Sales Could Be Adversely Affected.

     If we are unable to economically achieve or maintain a leading position in
online commerce or to promote and maintain our brand, our business, results of
operations and financial condition could suffer. We believe that the importance
of brand recognition will increase as more companies engage in commerce over the
Internet. Development and awareness of our brand will depend largely on our
success in increasing our customer base. If the leading brand owners do not
perceive us as an effective marketing and sales channel for their merchandise,
or consumers do not perceive us as offering a desirable way to purchase
merchandise, we may be unsuccessful in promoting and maintaining our brand.

If We Enter New Business Categories That Do Not Achieve Market Acceptance, Our
Brand and Reputation Could Be Damaged and We Could Fail to Attract New
Customers.

     If we launch or acquire a new department or product category that is not
favorably received by consumers, our brand or reputation could be damaged. This
damage could impair our ability to attract new customers, which could cause our
net sales to fall below expectations. An expansion of our business to include
other luxury goods will require significant additional expenses, and strain our
management, financial and operational resources. This type of expansion would
also subject us to increased inventory risk. We may choose to expand our
operations by developing other new departments or product categories, promoting
new or complementary products, expanding the breadth and depth of products and
services offered or expanding our market presence through relationships with
third parties. In addition, we may pursue the acquisition of other new or
complementary businesses, products or technologies.

If Our Strategy to Sell Products Outside of the United States is Not Successful,
Our Increases in Operating Expenses May Not Be Offset by Increased Sales.

     If we are not able to successfully market, sell and distribute our products
in foreign markets or if certain risks and uncertainties of doing business in
foreign markets prove insurmountable then these factors could have a material
adverse effect on our future global operations, and consequently, on our
operating margins. We do not currently have any overseas fulfillment or
distribution facility or arrangement or any Web site content localized for
foreign markets, and we cannot be certain that we will be able to establish a
global presence. In addition, there are certain risks inherent in doing business
on a global level, including:

 . regulatory requirements;

 . export restrictions;

                                       17
<PAGE>

 . tariffs and other trade barriers;

 . difficulties in staffing and managing foreign operations;

 . difficulties in protecting intellectual property rights;

 . longer payment cycles;

 . problems in collecting accounts receivable;

 . political instability;

 . fluctuations in currency exchange rates; and

 . potentially adverse tax consequences.

If We Experience Problems with Our Third-Party Shipping Services, We Could Lose
Customers.

     We rely upon third-party carriers, primarily Federal Express and UPS, for
product shipments, including shipments to and from our warehouse. We are
therefore subject to the risks, including employee strikes and inclement
weather, associated with these carriers' ability to provide delivery services to
meet our shipping needs. In addition, failure to deliver products to our
customers in a timely manner would damage our reputation and brand.

Our Operating Results Depend on Our Internally Developed Web Site, Network
Infrastructure and Transaction-Processing Systems. If We Do Not Successfully
Maintain Our Web Site and the Systems That Process Customer Orders, We Could
Lose Customers and Net Sales Could be Reduced.

     The satisfactory performance, reliability and availability of our Web site,
transaction-processing systems and network infrastructure are critical to our
operating results, as well as to our ability to attract and retain customers and
maintain adequate customer service levels. Any system interruptions that result
in the unavailability of our Web site or reduced performance of the transaction
systems would reduce the volume of sales and the attractiveness of our service
offerings. This would seriously harm our business, operating results and
financial condition.

     We use internally developed systems for our Web site and substantially all
aspects of transaction processing, including customer profiling and order
verifications. We have experienced periodic systems interruptions due to server
failure, which we believe will continue to occur from time to time. If the
volume of traffic on our Web site or the number of purchases made by customers
increases by more than two times our current holiday sales levels, we will need
to further expand and upgrade our technology, transaction processing systems and
network infrastructure. We have experienced and expect to continue to experience
temporary capacity constraints due to sharply increased traffic during sales or
other promotions, which cause unanticipated system disruptions, slower response
times, degradation in levels of customer service, impaired quality and delays in
reporting accurate financial information.

     If we fail to maintain our Web site or toll-free call center in order to
accommodate increased traffic, we may lose customers, which would reduce our net
sales. Furthermore, if we fail to maintain the computer systems that we use to
process and ship customer orders and process payments, we may not be able to
successfully fulfill customer orders. As a result, we could lose customers and
our net sales could be reduced. In addition, our failure to maintain or upgrade
our Web site or these computer systems without system downtime would further
reduce our net sales. We may experience difficulty in improving and maintaining
our systems if our employees or contractors that develop or maintain our
computer systems become unavailable to us. We have experienced periodic systems
interruptions, which we believe will continue to occur, while enhancing and
expanding these computer systems.

Our Facilities and Systems are Vulnerable to Natural Disasters and Other
Unexpected Problems. The Occurrence of a Natural Disaster or Other Unexpected
Problem Could Damage Our Reputation and Brand and Reduce Our Net Sales.

     The occurrence of a natural disaster or unanticipated problems at our
leased or offsite hosting facilities that house substantially all of our
computer and communications hardware systems could cause

                                       18
<PAGE>

interruptions or delays in our business, destroy data or render us unable to
accept and fulfill customer orders. Any of these interruptions or delays at
these facilities would reduce our net sales. In addition, our systems and
operations are vulnerable to damage or interruption from fire, flood, power
loss, telecommunications failure, break-ins, earthquake and similar events. We
have not established specific procedures for handling damage or interruptions
caused by these events and our business interruption insurance may not
adequately compensate us for losses that may occur. In addition, the failure by
the third-party facility to provide the data communications capacity required by
us, as a result of human error, natural disaster or other operational
disruptions, could interrupt our service. The occurrence of any or all of these
events could damage our reputation and brand and impair our business.

Our Net Sales Could Decrease if Our Online Security Measures Fail.

     Our relationships with our customers may be adversely affected if the
security measures that we use to protect their personal information, such as
credit card numbers, are ineffective. If, as a result, we lose many customers,
our net sales could decrease. We rely on security and authentication technology
that we license from third parties. With this technology, we perform real-time
credit card authorization and verification with our bank. We cannot predict
whether events or developments will result in a compromise or breach of the
technology we use to protect a customer's personal information. Furthermore, our
servers may be vulnerable to computer viruses, physical or electronic break-ins
and similar disruptions. We may need to expend significant additional capital
and other resources to protect against a security breach or to alleviate
problems caused by any breaches. We cannot assure that we can prevent all
security breaches.

Our Net Sales and Gross Margins Would Decrease If We Experience Significant
Credit Card Fraud.

     A failure to adequately control fraudulent credit card transactions would
reduce our net sales and our gross margins because we do not carry insurance
against this risk. We have developed procedures to help us to detect the
fraudulent use of credit card information. Under current credit card practices,
we are liable for fraudulent credit card transactions because we do not obtain a
cardholder's signature.

If We Do Not Respond to Rapid Technological Changes, Our Services Could Become
Obsolete and We Could Lose Customers.

     If we face material delays in introducing new services, products and
enhancements, our customers may forego the use of our services and use those of
our competitors. To remain competitive, we must continue to enhance and improve
the functionality and features of our online store. The Internet and the online
commerce industry are rapidly changing. If competitors introduce new products
and services, or if new industry standards and practices emerge, our existing
Web site and proprietary technology and systems may become obsolete. To develop
our Web site and technology entails significant technical and business risks. We
may use new technologies ineffectively or we may fail to adapt our technology to
meet customer requirements or emerging industry standards.

Intellectual Property Claims Against Us Can Be Costly and Could Impair Our
Business.

     Other parties may assert infringement or unfair competition claims against
us. We cannot predict whether they will do so, or whether any future assertions
or prosecutions will harm our business. If we are forced to defend against any
infringement claims, whether they are with or without merit or are determined in
our favor, then we may face costly litigation, diversion of technical and
management personnel, or product shipment delays. Further, the outcome of a
dispute may be that we would need to develop non-infringing technology or enter
into royalty or licensing agreements. Royalty or licensing agreements, if
required, may be unavailable on terms acceptable to us, or at all.

If the Protection of Our Trademarks and Proprietary Rights is Inadequate, Our
Brand and Reputation Could Be Impaired and We Could Lose Customers.

     The steps we take to protect our proprietary rights may be inadequate. We
regard our copyrights, service marks, trademarks, trade dress, trade secrets and
similar intellectual property as critical to our success. We rely on trademark
and copyright law, trade secret protection and confidentiality or license
agreements with our employees, customers, partners and others to protect our
proprietary rights.  We currently have applications for registration in the
United States Patent and Trademark Office, as well as various foreign trademark
offices, of several of the company's trademarks.  In some instances, these
applications span a variety of goods and services.  Effective trademark, service
mark, copyright and trade

                                       19
<PAGE>

secret protection may not be available in every country in which we will sell
our products and services online. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. Therefore, we may be unable to prevent third
parties from acquiring domain names that are similar to, infringe upon or
otherwise decrease the value of our trademarks and other proprietary rights.

The Loss of the Services of One or More of Our Key Personnel, or Our Failure to
Attract, Assimilate and Retain Other Highly Qualified Personnel in the Future,
Could Disrupt Our Operations and Result in Loss of Net Sales.

     Our future performance will depend on the continued services of our
management and key personnel and the ability to attract additional management
and key personnel. The loss of the services of one or more of our key personnel
could seriously interrupt our business. We depend on the continued services and
performance of our senior management and other key personnel. Our future success
also depends upon the continued service of our executive officers and other key
sales, marketing and support personnel. Our relationships with officers and key
employees are at will and none of our officers or key employees is bound by an
employment agreement for any specific term. We currently have key person life
insurance policies covering Kenneth E. Kurtzman and James H. Whitcomb, Jr.
While the proceeds of these policies might assist us in recruiting executive
officers, the proceeds would not address the potential disruption to our
business of recruiting and integrating new senior management.

We May Not Achieve Expected Benefits of Any Investments or Acquisitions That We
Complete.

     As we identify appropriate opportunities, we intend to continue to make
acquisitions of or investments in complementary companies, products or
technologies. We may not correctly identify or realize the anticipated benefits
of any acquisition or investment. For example, we may not be able to
successfully assimilate the additional personnel, operations, acquired
technology and products into our business. Acquisitions may further strain our
existing financial and managerial controls and reporting systems and procedures.
In addition, key personnel of acquired companies may decide not to work for us.
These difficulties could disrupt our ongoing business, distract our management
and employees or increase our expenses. Further, any physical expansion in
facilities due to an acquisition may result in disruptions that seriously impair
our business. We are not experienced in managing facilities or operations in
geographically distant areas. Finally, in connection with any future
acquisitions, we may incur debt or issue equity securities as part or all of the
consideration for the acquired company's assets or capital stock. We may be
unable to obtain sufficient additional financing on favorable terms, or at all.
Equity issuances could be dilutive to our existing stockholders or us.

Executive Officers, Directors and Entities Affiliated with Them Have Substantial
Control over Ashford.com which Could Delay or Prevent a Change in Our Corporate
Control Favored by Our Other Stockholders.

     Executive officers, directors and entities affiliated with them, if acting
together, would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions.

It May Be Difficult for a Third Party to Acquire Us Even if Doing So Would Be
Beneficial to Our Stockholders.

     Provisions of our certificate of incorporation, our by-laws and Delaware
law could make it more difficult for a third party to acquire us, even if doing
so would be beneficial to our stockholders. In particular, our certificate of
incorporation provides for a board of directors that is divided into three
classes which may issue preferred stock without any stockholder action. Our
certificate of incorporation also does not allow stockholders to act by written
consent or for cumulative voting in the election of directors.  Only one class
of directors is up for reelection at each annual meeting.  In addition, Section
203 of the Delaware General Corporation Law places restrictions on business
combinations with interested stockholders.

RISKS RELATED TO OUR INDUSTRY

We Depend on Increasing Use of the Internet and on the Growth of Online
Commerce.

     Our future revenues substantially depend upon the increased acceptance and
use of the Internet and other online services as a medium of commerce. Rapid
growth in the use of the Internet, the Web and

                                       20
<PAGE>

online services is a recent phenomenon. As a result, acceptance and use may not
continue to develop at historical rates and a sufficiently broad base of
customers may not adopt, and/or continue to use, the Internet and other online
services as a medium of commerce. Demand and market acceptance for recently
introduced services and products over the Internet are subject to a high level
of uncertainty and there exist few proven services and products.

     In addition, the Internet may not be accepted as a viable long-term
commercial marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. If the Internet continues to
experience significant expansion in the number of users, frequency of use or
bandwidth requirements, the infrastructure for the Internet may be unable to
support the demands placed upon it. In addition, the Internet could lose its
viability as a commercial medium due to delays in the development or adoption of
new standards and protocols required to handle increased levels of Internet
activity, or due to increased governmental regulation. Changes in, or
insufficient availability of, telecommunications services to support the
Internet also could result in slower response times and adversely affect usage
of the Internet generally.

     Our business, financial condition and results of operations would be
seriously harmed if:

 .  use of the Internet, the Web and other online services does not continue to
   increase or increases more slowly than expected;

 .  the infrastructure for the Internet, the Web and other online services does
   not effectively support expansion that may occur;

 .  the Internet, the Web and other online services do not become a viable
   commercial marketplace; or

 .  traffic to our Web site decreases or fails to increase as expected or if we
   spend more than we expect to attract visitors to our Web site.

If We Are Unable to Acquire the Necessary Web Domain Names, Our Brand and
Reputation Could Be Damaged and We Could Lose Customers.

     We may be unable to acquire or maintain Web domain names relating to our
brand in the United States and other countries in which we may conduct business.
As a result, we may be unable to prevent third parties from acquiring and using
domain names relating to our brand, which could damage our brand and reputation
and take customers away from our Web site. We currently hold, among others, the
"Ashford.com," "newwatch.com," "sunglasses.com," "TimeZone.com,"
"Paris1925.com," "Jasmin.com" and "Ashfordcorporategifts.com" domain names and
may seek to acquire additional domain names. Governmental agencies and their
designees generally regulate the acquisition and maintenance of domain names.
The regulation of domain names in the United States and in foreign countries is
subject to change in the near future. The changes in the United States are
expected to include a transition from the current system to a system that is
controlled by a non-profit corporation and the creation of additional top-level
domains. Governing bodies may establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding domain
names.

We May Need to Change the Manner in Which We Conduct Our Business if Government
Regulation Increases.

     The adoption or modification of laws or regulations relating to the
Internet could adversely affect the manner in which we currently conduct our
business. In addition, the growth and development of the market for online
commerce may lead to more stringent consumer protection laws, both in the United
States and abroad, that may impose additional burdens on us. Laws and
regulations directly applicable to communications or commerce over the Internet
are becoming more prevalent. The United States Congress recently enacted
Internet laws regarding children's privacy, copyrights, taxation and the
transmission of sexually explicit material. The European Union recently enacted
its own privacy regulations. Laws regulating the Internet, however, remain
largely unsettled, even in areas where there has been some legislative action.
It may take years to determine whether and how existing laws such as those
governing intellectual property, privacy, libel, and taxation apply to the
Internet. In order to comply with new or existing laws regulating online
commerce, we may need to modify the manner in which we do business, which may
result in additional expenses. For instance, we may need to spend time and money
revising the process by which we fulfill customer orders to ensure that each
shipment complies with applicable laws.

                                       21
<PAGE>

We may need to hire additional personnel to monitor our compliance with
applicable laws. We may also need to modify our software to further protect our
customers' personal information.

We May Be Subject to Liability for the Internet Content That We Publish.

     As a publisher of online content, we face potential liability for
defamation, negligence, copyright, patent or trademark infringement, or other
claims based on the nature and content of materials that we publish or
distribute. If we face liability, then our reputation and our business may
suffer. In the past, plaintiffs have brought these types of claims and sometimes
successfully litigated them against online companies. In addition, we could be
exposed to liability with respect to the unauthorized duplication of content or
unauthorized use of other parties' proprietary technology. Although we carry
general liability insurance, our insurance currently does not cover claims of
these types. We cannot be certain that we will be able to obtain insurance to
cover the claims on reasonable terms or that it will be adequate to indemnify us
for all liability that may be imposed on us. Any imposition of liability that is
not covered by our insurance or is in excess of insurance coverage could
decrease our gross profit.

Our Net Sales Could Decrease if We Become Subject to Sales or Other Taxes.

     If one or more states or any foreign country successfully asserts that we
should collect sales or other taxes on the sale of our products, our net sales
and results of operations could be harmed.  One or more local, state or foreign
jurisdictions may seek to impose sales tax collection obligations on us. In
addition, any new operation could subject our shipments in other states to state
sales taxes under current or future laws. If we become obligated to collect
sales taxes, we will need to update our system that processes customer orders to
calculate the appropriate sales tax for each customer order and to remit the
collected sales taxes to the appropriate authorities. These upgrades will
increase our operating expenses. In addition, our customers may be discouraged
from purchasing products from us because they have to pay sales tax, causing our
net sales to decrease. As a result, we may need to lower prices to retain these
customers.

RISKS RELATED TO SECURITIES MARKETS

Our Common Stock Price Is Volatile, Which Could Result In Substantial Losses for
Individual Stockholders.

     The trading price of our common stock fluctuates significantly.  For
example, since our initial public offering through March 31, 2001, the reported
sale price of our common stock on the Nasdaq National Market was as high as
$24.88 and as low as $0.30.  Trading prices of our common stock may fluctuate in
response to a number of events and factors, such as:

 . actual or anticipated variations in our quarterly operating results;

 . announcements of technological innovations or new products or services by us
  or our competitors;

 . changes in financial estimates by securities analysts;

 . conditions or trends in the Internet and/or online commerce industries;

 . changes in the economic performance and/or market valuations of other
  Internet, online commerce or retail companies;

 . announcements by us or our competitors of significant acquisitions, strategic
  partnerships, joint ventures or capital commitments;

 . additions or departures of key personnel;

 . release of transfer restrictions on our outstanding shares of common stock or
  sales of additional shares of common stock; and

 . potential litigation.

     In addition, the stock market has from time to time experienced extreme
price and volume fluctuations. These broad market fluctuations may adversely
affect the market price of our common stock.

                                       22
<PAGE>

ITEM 2.  PROPERTIES

     Our corporate offices and fulfillment operations are located in Houston,
Texas, where we lease approximately 76,000 square feet under a lease that
provides for aggregate annual lease payments through the term of the lease
expiring in April 2003.

ITEM 3.  LEGAL PROCEEDINGS

     We are, and from time to time, may be involved in litigation relating to
claims arising out of our ordinary course of business. We believe that there are
no claims or actions pending or threatened against us, the ultimate disposition
of which would materially adversely affect us.

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

     We held a special meeting of our shareholders on April 25, 2001 to vote on
the merger and the merger agreement between Ashford.com, Inc. and Guild.com,
Inc.

     The proposal to approve the adoption of the merger and the merger agreement
was approved by the vote set forth below:

        FOR                        AGAINST                        ABSTAIN
------------------          ---------------------         ---------------------
    27,424,700                      52,094                         10,237

ITEM 4a.  EXECUTIVE OFFICERS OF THE REGISTRANT

     The following tables set forth specific information regarding our executive
officers and directors as of March 31, 2001

<TABLE>
<CAPTION>
Name                         Age                          Position(s)
----                         ---                          -----------
<S>                          <C>        <C>
J. Robert Shaw                  35      Chairman of the Board
Kenneth E. Kurtzman             38      Chief Executive Officer and Director
James H. Whitcomb, Jr.          35      President, Chief Information Officer and Director
William J. Hensler              53      Chief Operating Officer
David F. Gow                    38      Chief Financial Officer
Ryan J. Maierson                29      Vice President, General Counsel and Secretary
Kevin R. Harvey                 36      Director
Colombe M. Nicholas             56      Director
Robert Cohn                     51      Director
Scott Hockler                   39      Director
</TABLE>

     J. ROBERT SHAW is one of our co-founders and has served as the Chairman of
the Board since April 1998.  In 1989, Mr. Shaw founded Synergy Development
Corp., an information-technology consulting firm that provided equipment and
services to online commerce companies, and was President and Chief Executive
Officer since its inception.  In 1999, Synergy Development Corp. reorganized as
Emerging Inc., an online commerce consulting firm.  Mr. Shaw was President,
Chief Executive Officer and Director of Emerging Inc. since its inception.
Emerging Inc. ceased operations in April 2001.  From 1985 to 1989, Mr. Shaw
served as Vice President of Sales and Finance for StyleWare, Inc., a software
company that was subsequently sold to Claris Corporation.  Mr. Shaw received a
Bachelor of Business Administration in Economics cum laude from the University
of St. Thomas.

     KENNETH E. KURTZMAN joined us in May 1999 as our Chief Executive Officer
and a Director. Mr. Kurtzman resigned as our Chief Executive Officer in April
2001 and as a Director in June 2001. From August 1995 to April 1999, Mr.
Kurtzman served as Vice President and General Manager of several divisions of
Compaq Computer Corporation, including the Small and Medium Business Division
and Compaq.com. From September 1989 to August 1995, Mr. Kurtzman worked for
McKinsey & Co., an international consulting firm, where most recently he served
as a Principal working in the computing, telecommunications, systems
integration, banking and energy industries. Mr. Kurtzman received a Bachelor of
Arts degree in Economics magna cum laude from Rice University, an undergraduate
degree in

                                       23
<PAGE>

economics from Cambridge University and a Masters in Business Administration
degree from the Graduate School of Business at Stanford University.

     JAMES H. WHITCOMB, JR. is one of our co-founders and oversees all aspects
of technology. He has served as our President and as a Director since March
1998. From our  inception to May 1999, he served as Chief Executive Officer and
from May 1999 to February 2000 he served as our Chief Operating Officer. From
February 1990 to March 1998, Mr. Whitcomb served as Chief Technology Officer at
Synergy Development Corp, an information-technology consulting firm, and served
as a director since its inception.  In 1999, Synergy Development Corp.
reorganized as Emerging Inc., where Mr. Whitcomb continued as a director.
Emerging, Inc. ceased operations in April 2001. Mr. Whitcomb earned a bachelor's
degree in accounting from the University of Texas at Austin.

     WILLIAM J. HENSLER joined us in February 2000 as our Chief Operating
Officer.  Mr. Hensler oversees all logistical operations, including
distribution, customer service and quality assurance. Prior to joining us, Mr.
Hensler worked for Compaq Computer Corporation, where he held positions such as
Vice President of the Small and Medium Business Division and Vice President of
Quality for the PC Products Group. Prior to joining Compaq, Mr. Hensler directed
Coopers & Lybrand's Total Quality Center of Excellence, where he was responsible
for business development and the creation of the Total Quality intellectual
property. Mr. Hensler has also published numerous articles on management and
customer satisfaction. Mr. Hensler received a Bachelor of Science degree from
the University of Illinois.

     DAVID F. GOW served as our Chief Financial Officer from March 1999 to April
2001, when he was promoted to Chief Executive Officer. From January 1996 to
February 1999, Mr. Gow was the Director of Strategic Planning at Compaq Computer
Corporation. From August 1993 to January 1996, Mr. Gow worked as a consultant
with McKinsey & Co., serving the technology, energy, banking and retail
industries. Mr. Gow received a Bachelor of Arts in Economics from Williams
College and a Masters degree from the Kennedy School of Government at Harvard
University.

     RYAN J. MAIERSON served as our Vice President, General Counsel and
Secretary to the Board of Directors from January 2001 to June 2001. He was
responsible for overseeing all aspects of our legal affairs. Prior to becoming
general counsel, Mr. Maierson served for one year as our assistant general
counsel and director of business development. He began his legal career as a law
clerk to the Supreme Court of Texas and then practiced at the Houston-based law
firm of Bracewell & Patterson, LLP. Mr. Maierson received his undergraduate
degree in economics, magna cum laude, from the Wharton School of the University
of Pennsylvania in 1992 and his law degree, with honors, from The University of
Texas School of Law in 1996, where he was elected to the Order of the Coif
national honorary society.

     KEVIN R. HARVEY has served on our board of directors since December 1998.
Mr. Harvey has been a Managing Member of the general partner of Benchmark
Capital, a venture capital firm, since January 1995. From July 1993 to January
1995, he served as General Manager for Lotus Development Corporation. In August
1990, Mr. Harvey founded Approach Software Corporation, a software company,
where he served as the President and Chief Executive Officer until July 1993
when Approach was sold to Lotus Development Corporation. Prior to founding
Approach, Mr. Harvey founded StyleWare Inc. Mr. Harvey is also a director of
Broadbase Software, a developer and provider of customer relationship
applications, Critical Path, Inc., an e-mail hosting services company, Red Hat
Software, a developer and provider of open source software and services and a
director of several privately held companies. Mr. Harvey received a B.S.E.E.
degree from Rice University.

     COLOMBE M. NICHOLAS has served on our board of directors since August 1999.
Ms. Nicholas served as President and Chief Executive Officer for Anne Klein
Group, a women's fashion apparel company, from August 1996 to July 1999, when
the company was sold to Kasper, ASL. From December 1993 to July 1996, Ms.
Nicholas served as President and Chief Executive Officer of Orr Felt Company, a
family-owned business that provides felt for paper manufacturing. From April
1991 to November 1993, she was the President and Chief Operating Officer of
Giorgio Armani Fashion Corporation, the largest licensee of Armani Spa, Italy.
From May 1980 to January 1989, Ms. Nicholas served as President and Chief
Executive Officer of Christian Dior New York, a designer fashion company. Ms.
Nicholas received a Bachelor of Arts Degree in languages from the University of
Dayton and a J.D. from the University of Cincinnati College of Law.

     ROBERT COHN has served on our board of directors since May 2000.  From
September 1997 until his retirement in May 1999, Mr. Cohn served as Executive
Vice President of Lucent Technologies, Inc.

                                       24
<PAGE>

From June 1982 until September 1997, Mr. Cohn served as founder, Chief Executive
Officer and Chairman of the Board of Octel Communications, a provider of voice
messaging systems. Mr. Cohn presently serves as a director of Chapters Online
Inc., a Canadian internet portal company, and Saba Software, Inc., an enterprise
software company. Mr. Cohn holds a B.S. from the University of Florida and an
M.B.A. from Stanford University.

     SCOTT HOCKLER was appointed to our board of directors during February 2001.
Mr. Hockler resigned from the Company and his board position during June 2001.

                                    PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS

MARKET INFORMATION

     On September 24, 1999, our common stock began trading on the Nasdaq
National Market under the symbol "ASFD."  Prior to that date, there was no
public market for our common stock.  The following table sets forth the high and
low closing sale prices for the common stock for the period indicated, as
reported by the Nasdaq National Market.

                                                       Common Stock Price
                                                 ----------------------------
                                                    High              Low
                                                 -----------      -----------
Year ended March 31, 2000:
   Second Quarter (from September 22, 1999)           $13.00            $9.22
   Third Quarter                                       24.88             9.44
   Fourth Quarter                                      13.13             4.72

Year ended March 31, 2001:                            $ 5.88            $2.50
   First Quarter                                        4.06             2.56
   Second Quarter                                       3.13             0.30
   Third Quarter                                        1.19             0.38
   Fourth Quarter

HOLDERS

     As of May 31, 2001, there were 208 stockholders of record of the common
stock, although there are a larger number of beneficial owners.

DIVIDENDS

     We have never declared or paid cash dividends on our common stock.  We
currently intend to retain all future earnings to finance future growth and,
therefore, do not anticipate paying any cash dividends in the foreseeable
future.

RECENT SALES OF UNREGISTERED SECURITIES

     In February 2001, we issued 1,991,000 shares of our common stock in
exchange for the outstanding capital stock of E.S.T., Inc.

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

     The following selected consolidated financial and operating data should be
read in conjunction with the consolidated financial statements and notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere in this Report.  See Note 2 of Notes
to Consolidated Financial Statements also included elsewhere in this Report for
an explanation of the determination of the number of shares and share
equivalents used in computing the pro forma per share amounts shown below. The
pro forma share amounts reflect the conversion of outstanding preferred stock
into common stock.

     The selected consolidated financial data reflect that prior to March 31,
1998, we had no operations or activities. The following selected consolidated
financial data was derived from our audited consolidated

                                       25
<PAGE>

financial statements appearing elsewhere in this Report. We were incorporated in
March 1998, and did not commence operations or activities until April 1998.

<TABLE>
<CAPTION>
                                                                                                            Period from
                                                          Year Ended               Year Ended                Inception
                                                          March 31,                March 31,             through March 31,
                                                          ----------------------------------------------------------------
                                                                2001                   2000                      1999
                                                              --------               --------                   -------
                                                                    (in thousands, except per share amounts)
<S>                                                         <C>                      <C>                        <C>
STATEMENT OF OPERATIONS DATA:
Net sales                                                    $  67,195                 $ 39,931                   $ 5,938
Cost of sales                                                   56,348                   33,487                     5,110
                                                             ---------                 --------                   -------
Gross profit (1)                                                10,847                    6,444                       828
Operating expenses:
 Marketing and sales (includes non-cash amortization
  of $79,735, $27,525 and $0, respectively)                    105,895                   60,806                     1,013

 General and administrative (includes non-cash
  amortization of $2,633, $3,003 and $0,
  respectively) (2)                                             27,929                   17,093                     1,019

 Restructuring charge                                              662                        -                         -
 Impairment loss                                                 1,094                        -                         -
 Depreciation and amortization                                  13,460                    3,277                        67
                                                             ---------                 --------                   -------
   Total operating expenses                                    149,040                   81,176                     2,099
                                                             ---------                 --------                   -------
Loss from operations                                          (138,193)                 (74,732)                   (1,271)
Interest income                                                  1,644                    2,677                        13
Interest expense                                                  (132)                      (7)                       (6)
                                                             ---------                 --------                   -------
Net loss                                                     $(136,681)                $(72,062)                  $(1,264)
                                                             =========                 ========                   =======
Net loss per share, basic and diluted                           $(2.99)                  $(2.65)                   $(0.12)
                                                             =========                 ========                   =======
Pro forma net loss per share, basic and diluted (3)             $(2.99)                  $(2.05)                   $(0.10)
                                                             =========                 ========                   =======
Shares used to compute net loss per share:
 Basic and diluted                                              45,725                   27,197                    10,397
 Pro forma basic and diluted (3)                                45,725                   35,071                    13,264


                                                             March 31,                March 31,                  March 31,
                                                               2001                     2000                       1999
                                                             ---------                ---------                  ---------
                                                                                    (in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents                                    $   7,095                 $ 46,474                   $   893
Working capital                                                 23,861                  148,898                     2,555
Total assets                                                    56,266                  177,608                     5,108
Total stockholders' equity                                      43,268                  171,270                     2,808
</TABLE>

(1)  Includes the reclassification of certain promotional costs from marketing
     and sales to cost of sales related to the adoption of the Emerging Issues
     Task Force Issue No. 00-14, "Accounting for Certain Sales Incentives."  All
     periods presented have been reclassified for consistent presentation.  Also
     includes a charge of approximately $1.8 million during the year ended March
     31, 2001, relating to inventory valuation reserves.  See Note 2 of Notes to
     Consolidated Financial Statements included elsewhere in this Report.
(2)  Includes non-recurring charges of approximately $400,000 during the year
     ended March 31, 2001, relating to the pending settlement of litigation.
     See Note 12 of Notes to Consolidated Financial Statements included
     elsewhere in this Report.
(3)  See Note 2 of Notes to Consolidated Financial Statements included elsewhere
     in this Report for an explanation of the determination of the number of
     shares and share equivalents used in computing pro forma per share amounts.

                                       26
<PAGE>

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

     The discussion in this Report contains forward-looking statements (as such
term is defined in Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934) that involve risks and uncertainties. Our
actual results could differ materially from those discussed herein.  Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed in "Risk Factors That May Affect Future Results" as well as
those discussed in this section and elsewhere in this Report, and the risks
discussed in the "Risk Factors" section included in our Registration Statement
on Form S-1 as declared effective by the Securities and Exchange Commission on
September 22, 1999 (Reg. No. 333-82759).

OVERVIEW

     We were incorporated on March 6, 1998 and commenced operations and began
offering products for sale on our Web site in April 1998. We initially focused
exclusively on the sale of new and vintage watches.  Since inception, we have
focused on broadening our product offerings, establishing relationships with
luxury and premium brand owners, generating sales momentum and expanding our
operational and customer service capabilities.  We have grown rapidly since
launching our site in April 1998 and have experienced significant increases in
our net sales and corresponding cost of sales since inception.  We currently
offer more than 12,000 styles of products from over 300 leading luxury brands.
We are currently focusing our efforts on continuing to increase net sales while
maintaining or decreasing current expense levels.  We plan to continue the
growth of our corporate gift business, which generally generates higher margin
sales and is less seasonal in nature than our traditional retail sales, and our
newer, higher margin product categories, such as our Ashford Collection jewelry.
As part of a larger effort to improve overall operating efficiencies and lower
total operating costs as a percentage of sales, we have specifically reduced our
traditional print and media marketing activities and broadened our focus on
Internet and online media, which we believe to be a more efficient and
economical means of attracting new customers.  Other specific initiatives
designed to improve financial performance and liquidity management include
reducing the scope of product offerings, decreasing our investment in inventory
and eliminating certain operating costs, including personnel costs.

     As stated above, we plan to continue the growth of our corporate gift
business which was introduced in March 2000.  Our corporate gift business offers
over 800 luxury products such as crystal, silver and pewter that appeal to the
corporate market.  These products usually generate higher margin sales and are
less seasonal in nature than our traditional retail sales.  Also, many corporate
gift products are finished with custom engraving, etching or embossing which
further increases our margin.

     The market for luxury and premium products is highly seasonal, with a
disproportionate amount of net sales occurring during the fourth calendar
quarter.  Therefore, we increase our purchases of inventory during and in
advance of that quarter.  Although less significant, seasonal sales periods
occur in February due to Valentine's Day and in May and June due to graduation
gift giving, Mother's Day and Father's Day.  We expect that these trends will
continue in future periods.

Our gross margin will fluctuate in future periods based on factors such as:

 .  product sales mix;

 . the mix of direct and indirect sources of inventory;

 . pricing strategy;

 . promotional activities;

 . inventory management; and

 . inbound and outbound shipping costs.

     We have incurred net losses since inception and expect to generate negative
cash flows during future periods. Our ability to become profitable depends on
our ability to generate and sustain substantially higher net sales while
maintaining reasonable expense levels, both of which are uncertain. If we do
achieve profitability, we cannot be certain that we would be able to sustain or
increase profitability on a quarterly or annual basis in the future.

                                       27
<PAGE>

     We have a limited operating history upon which to base an evaluation of our
business and prospects.  As a result of our limited operating history, it is
difficult to accurately forecast our net sales and we have limited meaningful
historical financial data upon which to base projected operating expenses.  We
base our current and future expense levels on our operating plans and estimates
of future net sales, and our expenses are fixed to a large extent.  Sales and
operating results are difficult to forecast because they generally depend on the
volume and timing of the orders we receive.  As a result, we may be unable to
adjust our spending in a timely manner to compensate for any unexpected revenue
shortfall.  This inability could cause our net losses in a given quarter to be
greater than expected and could significantly limit or delay our ability to
generate net profits in any future period.

     The SEC is conducting an investigation concerning our accounting and
disclosures relating to certain marketing activities during fiscal years 2000
and 2001. We have been cooperating with the SEC, and we will continue to do so.
Our audit committee also has completed an internal review of certain matters
related to the SEC review. We do not believe that any of the accounting issues
raised by the SEC will have a material effect on our financial statements.

RESULTS OF OPERATIONS

FISCAL 2001 COMPARED WITH FISCAL 2000

NET SALES

     Net sales consist of product sales and are net of product returns, coupons
and promotional discounts.  Net sales increased from $39.9 million for fiscal
2000 to $67.2 million for fiscal 2001.  The growth in net sales is primarily
related to an increase in units sold due to the growth of our customer base and
the growth of our corporate gift business, including a business acquisition.
The growth in the rate of repeat purchases from existing customers and the
introduction of new product lines during the latter part of fiscal 2000 also
contributed to our net sales growth.  Net sales were adversely affected during
the latter part of fiscal 2001 by a general decline in retail spending and
reduced marketing and sales efforts.

COST OF SALES

     Cost of sales consists primarily of the cost of products sold, free product
and service incentives delivered to customers at the time of sale, inbound and
outbound shipping costs and warranty and inventory obsolescence costs.  Cost of
sales increased as net sales increased.  Gross profit increased from $6.4
million for fiscal 2000 to $10.8 million for fiscal 2001.  The increase in gross
profit is due to several factors.  The primary factor is the continued growth of
our corporate gift business, including a recent acquisition, which has generated
higher-margin sales to date than our traditional retail sales.  In addition, we
have reduced the amount of free product and service incentives offered to
customers at the time of purchase.  See also "Recent Accounting Pronouncements."
Finally, we continue to see a favorable shift in the mix of products sold from
lower-margin products to higher-margin products due to the addition and
continued expansion of new product categories.  Gross margin was adversely
affected by an inventory obsolescence charge of approximately $1.8 million
recorded during the fourth quarter of fiscal 2001 as a result of our focus on
reducing inventory levels.  We anticipate continued gross margin improvements in
future periods as we continue to grow our corporate gift business and our newer
higher-margin product categories such as home and lifestyle products and our
Ashford Collection jewelry.  We also expect gross margin improvements in future
periods as a result of our efforts to reduce certain expenses such as outbound
shipping costs which now are paid by the customer on most orders.

OPERATING EXPENSES

     Marketing and Sales.  Marketing and sales expenses consist primarily of
advertising costs, credit card fees, fulfillment activities and related employee
salary and benefit expenses and amortization of related deferred compensation.
Fulfillment activities include receiving of goods, picking of goods for shipment
and packaging of goods for shipment.  Fulfillment costs, including the cost of
operating and staffing distribution centers, are included in marketing and
sales.  Marketing and sales expenses increased from approximately $60.8 million
for fiscal 2000 to $105.9 million for fiscal 2001.  The increase in marketing
and sales is attributable to an increase in non-cash amortization from $27.5
million for fiscal 2000 to $79.7 million for fiscal 2001 primarily relating to a
marketing contract entered into with another online retailer during the latter
part of fiscal 2000 that expired in fiscal 2001.  Excluding non-cash
amortization, the decrease in marketing and sales is primarily attributable to a
reduction in traditional print and media marketing activities.  During fiscal
2001, we shifted our primary marketing focus from traditional print and
broadcast media to Internet and online media.  We believe Internet and online
media provides a more efficient and economical means of attracting new
customers.  Our advertising and promotional expenditures are generally intended
to build brand awareness, generate site traffic and increase overall sales.  We
expect our marketing and sales expense to continue to decline as a percentage of
sales in

                                       28
<PAGE>

future periods as we continue our focus of becoming more efficient and
economical at acquiring customers. See also "Recent Accounting Pronouncements."

     General and Administrative. General and administrative expenses include
executive, finance and administrative employee salaries and benefits,
amortization of related deferred compensation, professional fees, Web site
maintenance, office lease expenses and other general corporate expenses.
General and administrative expenses increased from $17.1 million for fiscal 2000
to $27.9 million for fiscal 2001.  Our general and administrative expenses have
increased primarily as a result of costs associated with increased headcount,
property and franchise taxes and legal costs related to our overall growth and
expanded activities. In the future, we expect our general and administrative
expenses to decrease as a result of our restructuring activities during January
2001 and May 2001.

     Depreciation and Amortization.  Depreciation and amortization expense
includes depreciation related to property and equipment and amortization related
to intangible assets.  Depreciation and amortization expense increased from $3.3
million for fiscal 2000 to $13.5 million for fiscal 2001.  The increase is
primarily due to depreciation and amortization expense related to Internet
domain and other intangible asset purchases as well as Web site development
costs and technology equipment purchases beginning in the latter half of fiscal
1999 and continuing through the latter part of fiscal 2001.

     Interest Income.  Interest income consists of earnings on cash and cash
equivalents.  Interest income decreased from $2.7 million for fiscal 2000 to
$1.6 million for fiscal 2001.  The decrease is due to lower cash balances during
the current year.  See also "Liquidity and Capital Resources."

     Interest Expense.  Interest expense consists of interest costs on
borrowings.  The increase in interest expense for fiscal 2001 is due to
borrowings on our revolving credit facility entered into during September 2000.

FISCAL 2000 COMPARED WITH FISCAL 1999

NET SALES

     Net sales consist of product sales and are net of product returns, coupons
and promotional discounts. Net sales increased from $5.9 million for fiscal 1999
to $39.9 million for fiscal 2000. The growth in net sales reflects a significant
increase in units sold principally due to the growth in our customer base and
repeat purchases from our existing customers, in addition to the introduction of
new product lines during fiscal 2000. The increase in site traffic and awareness
results primarily from advertising expenditures and additional product offerings
and availability that were financed through our convertible preferred and common
stock offerings.

COST OF SALES

     Cost of sales consists primarily of the cost of products sold, free product
and service incentives delivered to customers at the time of sale, inbound and
outbound shipping costs and warranty and inventory obsolescence costs.  Cost of
sales increased as net sales increased.  Gross profit increased from $828,000
for fiscal 1999 to $6.4 million for fiscal 2000. Gross margin increased from 14%
during fiscal 1999 to 16% during fiscal 2000.  The increase in gross margin is
principally due to the addition of new product categories, the mix of products
sold and abnormally low margins during the prior year resulting from start-up
activities.

OPERATING EXPENSES

     Marketing and Sales.  Marketing and sales expenses consist primarily of
advertising costs, credit card fees, fulfillment activities and related employee
salary and benefit expenses and amortization of related deferred compensation.
Fulfillment activities include receiving of goods, picking of goods for shipment
and packaging of goods for shipment.  Fulfillment costs, including the cost of
operating and staffing distribution centers, are included in marketing and
sales.  Marketing and sales expenses increased from approximately $1.0 million
for fiscal 1999 to $60.8 million for fiscal 2000.  The increase in marketing and
sales is partially attributable to an increase in non-cash amortization from $0
for fiscal 1999 to $27.5 million for fiscal 2000 primarily relating to a
marketing contract entered into with another online retailer during the latter
part of fiscal 2000 which expired in fiscal 2001. The remaining increase during
fiscal 2000 is primarily due to increased advertising and promotional
expenditures, amortization of deferred compensation, and increased payroll and
related costs associated with fulfilling customer demand.  Our

                                       29
<PAGE>

advertising and promotional expenditures are intended to build brand awareness,
generate site traffic and increase overall sales.

     General and Administrative.  General and administrative expenses include
executive, finance and administrative employee salaries and benefits,
amortization of related deferred compensation, professional fees, Web site
maintenance, office lease expenses and other general corporate expenses.
General and administrative expenses increased to $17.1 million for fiscal 2000
compared to $1.0 million for fiscal 1999.  The increase in general and
administrative expenses was primarily a result of expenses associated with
increased headcount, new office space and professional fees related to our
growth and expanded activities.

     Depreciation and Amortization. Depreciation and amortization expense
includes depreciation related to property and equipment as well as amortization
related to purchased intangibles and other assets. Depreciation and amortization
expense was $3.3 million for fiscal 2000 compared to $67,000 in fiscal 1999. The
increase relates to Internet domain names and other intangible assets purchased
during fiscal 2000 and technology and other equipment purchased in the latter
half of fiscal 1999 and continuing through fiscal 2000. Internet domain names
and related intangible assets purchased in connection with business acquisitions
are amortized over their estimated useful lives, which is deemed to be two
years.

     Interest Income.  Interest income consists of earnings on cash and cash
equivalents.  The increase during fiscal 2000 relates to interest earned on cash
balances resulting from our Series B and Series C convertible preferred stock
offerings in April 1999 and July 1999, respectively, and interest earned on cash
balances resulting from our initial public offering in late September 1999.
Interest income was $2.7 million during fiscal 2000 compared to $13,000 during
fiscal 1999.

LIQUIDITY AND CAPITAL RESOURCES

     General.  We have financed our operations primarily through private sales
of convertible preferred stock, an initial public offering and the private sale
of our common stock.  The proceeds from these offerings have been used primarily
to fund our operations, including inventory purchases, marketing and advertising
campaigns, employee salaries and equipment purchases.

     Operating Activities.  Net cash used in operating activities decreased from
$68.7 million for fiscal 2000 to $32.5 million for fiscal 2001.  Our net
operating cash outflow for fiscal 2000 was primarily a result of prepaid
marketing agreements, inventory purchases and, to a lesser extent, operating
losses, exclusive of depreciation and amortization.  Our operating cash outflow
during fiscal 2001 was primarily a result of operating losses, exclusive of
depreciation and amortization and impairment loss.  The decrease in net cash
used in operating activities during fiscal 2001 compared to fiscal 2000
primarily relates to a lower level of inventory purchases and prepaid
advertising during the current year. We anticipate our net cash used in
operating activities to continue to decline in future periods in connection with
our efforts to improve overall operating efficiencies, lower total operating
costs as a percentage of sales and improve inventory management practices and
procedures, exclusive of any non-cash charges taken in future periods in
connection with these efforts.

     Investing Activities.  Net cash used in investing activities totaled $11.5
million  for fiscal 2001 compared to $14.8 million for fiscal 2000.  Net cash
used in investing activities during fiscal 2001 consisted of $6.8 million
related to property and equipment purchases primarily associated with technology
and Web site enhancements, $3.3 million of Internet domain and other intangible
asset purchases and a $1.4 million increase in restricted cash pledged as
collateral against potential credit card chargebacks.  The increase in
restricted cash is consistent with our increased sales levels.  Net cash used in
investing activities during fiscal 2000 consisted of approximately $6.9 million
related to the purchase of computer and office equipment and Web site
enhancements as well as leasehold improvements associated with leased office and
warehouse facilities and $7.9 million of Internet domain and other intangible
asset purchases.

     Financing Activities.  Net cash provided by financing activities totaled
$4.7 million during fiscal 2001.  Financing activities during fiscal 2001
primarily related to net proceeds from our revolving credit facility. Net cash
provided by financing activities during fiscal 2000 totaled $129.1 million. The
majority of the cash related to net proceeds from our initial public offering in
September 1999.

     Commitments.  As of March 31, 2001, our principal commitments consisted of
obligations outstanding under non-cancelable operating leases.  We have no
material commitments for capital expenditures.
                                       30
<PAGE>

     Credit Facility.  During September 2000, we executed a three-year revolving
credit facility with Congress Financial Corporation, a unit of First Union
National Bank.   The credit facility is to be used for working capital needs and
is secured by our assets.  Availability under the credit facility is determined
pursuant to a borrowing base related to our assets, as defined in the agreement,
and was $6.9 million at March 31, 2001.  Approximately $4.7 million was
outstanding under the revolving credit facility as of March 31, 2001.  Amounts
outstanding under the credit facility bear interest at the prime rate or LIBOR
plus 250 basis points, as elected by us.  In addition to the amount outstanding
at March 31, 2001, $250,000 was reserved against the issuance of a standby
letter of credit.

     Financial Condition.  We believe that current cash balances and borrowing
capacity will be sufficient to meet anticipated cash needs for at least the next
12 months.  However, any projections of future cash needs and cash flows are
subject to substantial uncertainty.  If current cash and cash that may be
generated from future operations are insufficient to satisfy our liquidity
requirements, we may seek to sell additional equity or debt securities or to
obtain additional credit facilities from lenders. There can be no assurance that
financing will be available in amounts or on terms acceptable to us, if at all.
Our ability to raise cash through the sale of additional equity or convertible
debt securities may be affected by market conditions and other factors, and if
available could result in additional dilution to our stockholders.  In addition,
we will, from time to time, consider the acquisition of or investment in
complementary businesses, products, services and technologies, which might
impact our liquidity requirements or cause us to issue additional equity or debt
securities.

     Restructuring. During May 2001, management initiated a review of our lines
of business, cost structure and general activities. The objective of this review
was to identify opportunities for improved financial performance and liquidity
management in light of economic conditions and market forces. Specific
initiatives resulting from this review include reducing the scope of product
offerings, decreasing our investment in inventory and eliminating certain
operating costs, including personnel costs.

     In February 2001, the Company entered into a merger agreement with an
online watch retailer. During June 2001, as a result of certain business
difficulties that arose in the relationship between the Company and the former
principles of the online watch retailer and to resolve litigation between them,
the parties began negotiating a dissolution of that relationship. The online
watch retailer tentatively agreed to a settlement whereby the online watch
retailer and certain of it's management will receive aggregate consideration of
approximately $800,000, consisting of $200,000 of inventory, $100,000 of
severance pay and 1.5 million shares of our common stock to settle all potential
future claims and obligations. We expect to record a charge of approximately
$2.4 million during the quarter ending June 2001 in connection with this
settlement.

     During January 2001, we entered into a merger agreement with an online art
dealer.  Final closing of the merger occurred in May 2001.  In connection with
the closing of the transaction, the stockholders of the online art dealer
received approximately 7.1 million shares of our common stock.  In addition, all
of the acquired company's outstanding warrants and stock options were converted
to outstanding warrants and options to acquire approximately 1.6 million shares
of our common stock.  The aggregate purchase price was approximately $4.3
million, consisting of $3.3 million of our common stock, $700,000 of options and
warrants to purchase shares of our common stock and $300,000 of business
combination costs.  The principle assets received include $7.3 million of cash,
an Internet domain name and related trademarks and other tangible and intangible
assets related to Internet retail operations.  The total value of net tangible
assets acquired exceeded the $4.3 million purchase price.  The acquisition will
be accounted for using the purchase method of accounting.

     In connection with the May 2001 review, management concluded that the
operating cost structure of the online art retailer was inconsistent with the
level of sales activity and our revised objectives.  In June 2001, the prior
management of the online art retailer made a proposal to our management and
Board of Directors, which we have agreed to accept, to assume the prospective
operations of the online art retailer as a separately capitalized entity.
Pursuant to this agreement, we will retain the cash from the acquisition, and we
will contribute assets of approximately $500,000, including $400,000 of cash, an
Internet domain name and related trademarks and other intangible assets in
return for 5% ownership interest in the new entity.  In addition, we will enter
into a revenue sharing agreement with the new entity whereby we will offer the
new entity's product on our Web site in return for 50% of the gross profit from
sales generated by the Company's Web site.  We will not assume any future
operating costs or obligations.  Further, substantially all employees previously
employed by the online art retailer will become employees of the new entity or
will be terminated.

                                       31
<PAGE>

     In connection with the May 2001 review, during June 2001, we sold two
Internet domain names and related trademarks related to a product information
Internet site in exchange for $400,000 cash.  We expect to record a loss on sale
of approximately $500,000 during the quarter ending June 2001.

  In connection with the May 2001 review, we entered into severance agreements
with 41 employees.  We expect to record a charge of $80,000 during the quarter
ending June 2001 related to these headcount reductions.

RECENT ACCOUNTING PRONOUNCEMENTS

  The FASB issued an Exposure Draft, Business Combinations and Intangible
Assets, containing tentative decisions about requiring the use of a
nonamortization approach to account for purchased goodwill.  Under the
nonamortization approach, goodwill would be tested for impairment, rather than
being amortized to earnings.  Under the Exposure Draft, the Company's purchased
intangibles would continue to be amortized consistent with its current policy.
Upon adoption of the principles in this Exposure Draft, the Company would record
any goodwill as income or expense.

     In March 2000, the Financial Accounting Standards Board (FASB) issued
Financial Interpretation (FIN) No. 44, Accounting for Certain Transactions
Involving Stock Compensation."  FIN 44 clarifies the application of Accounting
Principles Board (APB) Opinion No. 25 for certain issues, such as the definition
of an employee for purposes of applying APB Opinion No. 25, the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award and the accounting for an exchange of stock compensation awards
in a business combination.  Adoption of FIN 44 did not change our existing
accounting policies or disclosures.

     In May 2000, EITF issued EITF 00-14 "Accounting for Certain Sales
Incentives," which provides guidance on the accounting for certain sales
incentives offered by companies to their customers such as discounts, coupons,
rebates and products or services.  EITF 00-14 addresses the recognition,
measurement and income statement classification for sales incentives offered
voluntarily by a vendor without charge to customers that can be used in, or that
are exercisable by a customer as a result of a single exchange transaction.  The
accompanying financial statements include the reclassification of free product
and service incentives delivered to customers at the time of sale, from
marketing and sales expense to cost of sales, related to the adoption of EITF
00-14.  All periods presented have been reclassified for consistent
presentation.

     In July 2000, the EITF reached a consensus on EITF 00-10, "Accounting for
Shipping and Handling Fees and Costs."  This consensus requires that all amounts
billed to a customer in a sale transaction related to shipping and handling, if
any, represent revenue and should be classified as revenue.  We have
historically classified shipping charges to customers as revenue. In September
2000, the EITF concluded that the classification of shipping and handling costs
should be disclosed pursuant to Accounting Principles Board (APB) Opinion No.
22, "Disclosure of Accounting Policies."  If shipping and handling costs are
significant and are not included in cost of sales, companies should disclose
both the amount of such costs and which line item on the income statement
includes that amount. Shipping and handling costs cannot be netted against
sales.  We classify inbound and outbound shipping costs as costs of sales.  We
generally do not impose separate handling charges on customers. However, during
fiscal 2001, we began charging for shipping costs.  We began charging for
packaging costs during fiscal 2002.  Costs attributable to receiving, inspecting
and warehousing inventories and picking, packaging and preparing customers'
orders for shipment are classified as marketing and sales expense and totaled
$3.8 million, $1.9 million and $65,000 during the years ended March 31, 2001 and
2000 and the period from Inception through March 31, 1999, respectively.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We have assessed our vulnerability to certain market risks, including
interest rate risk associated with financial instruments included in cash, cash
equivalents and short-term investments.  Due to the short-term nature of these
investments and our investment policies and procedures, we have determined that
the risk associated with interest rate fluctuations related to these financial
instruments does not pose a material risk to us.

                                       32
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     See Exhibit (a) (1)

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

     Not Applicable.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information regarding directors is incorporated by reference from the
section entitled "Proposal No. 1 - Election of Directors" of our definitive
Proxy Statement to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934, as amended, for the registrant's Annual Meeting of
Stockholders to be held on August 27, 2001.  The Proxy Statement is anticipated
to be filed within 120 days after the end of the registrant's fiscal year ended
March 31, 2001.  For information regarding executive officers of the Company,
see the information appearing under the caption "Executive Officers of the
Registrant" in Part I, Item 4a of this Report on Form 10-K.

ITEM 11.  EXECUTIVE COMPENSATION

     Information regarding executive compensation is incorporated by reference
from the section entitled "Executive Compensation and Related Information" of
the Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information regarding security ownership of certain beneficial owners and
management is incorporated by reference from the section entitled "Stock
Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information regarding certain relationships and related transactions is
incorporated by reference from the section entitled "Certain Relationships and
Related Transactions" of the Proxy Statement.

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A) (1)      Financial Statements:                             Page

             Report of Independent Public Accountants          F-1

             Consolidated Balance Sheets                       F-2

             Consolidated Statements of Operations             F-3

             Consolidated Statements of Stockholders' Equity   F-4

             Consolidated Statements of Cash Flows             F-5

             Notes to Consolidated Financial Statements        F-6

                                       33
<PAGE>

(A) (2)  Exhibits

<TABLE>
<CAPTION>
  Exhibit
  Number                                   Description
----------                                 -----------
<C>            <S>
2.1**          Option Agreement dated August 17, 1999 by and between the Company and Power Reserve, Inc. and
               Richard E. Paige
2.2**          Asset Acquisition Agreement dated October 26, 1999 by and between the Company and Power Reserve,
               Inc.
2.3**          Asset Acquisition Agreement dated October 26, 1999 by and between the Company and Richard E. Paige
2.4***         Agreement and Plan of Reorganization dated as of January 14, 2000 by and among the Company,
               Ashford-Jasmin Fragrance Company and Jasmin.com Corporation
2.5******      Merger Agreement by and among the Company, Ashford-Watchnetwork Company, and EST, Inc.
2.6            Agreement and Plan of Reorganization dated January 3, 2001 by and among the Company, Guild.com,
               Inc., and Ashford-Guild Art Corporation
3.1*           Amended and Restated Certificate of Incorporation of the Company
3.2*           By-laws of the Company
4.1*           Amended and Restated Investors' Rights Agreement, dated July 9, 1999, among the Company and the
               investors and founders named therein
4.2*           Specimen Certificate of the Company's common stock
4.3            Reference is made to Exhibits 3.1 and 3.2
10.1*          Form of Indemnification Agreement entered into between the Company and its directors and officers
10.2*          1998 Stock Incentive Plan
10.3*          1999 Equity Incentive Plan
10.4*          1999 Employee Stock Purchase Plan
10.5*          Office Lease dated July, 1999 between the Company and Crescent Real Estate Funding III, L.P.
10.6*          Employment Agreement dated May 10, 1999 between the Company and Kenneth E. Kurtzman
10.7*          Employment Agreement dated November 28, 1998 between the Company and James H. Whitcomb, Jr.
10.8*          Advertising Agreement dated July 30, 1999 between the Company and America Online, Inc.
10.9*          Credit Agreement dated August 9, 1999 between the Company and Chase Bank of Texas, National
               Association
10.10****      Stock Purchase Agreement dated as of November 29, 1999 by and among the Company, Amazon.com, Inc.
               and Amazon.com Advertising Services NV, Inc.
10.11*****     Loan and Security Agreement by and among Congress Financial Corporation (Southwest) as Lender and
               Ashford.com, Inc., Ashford Buying Company, Ashford Corporate Gifts, Inc., and Ashford-Jasmin
               Fragrance Company
21.1           Subsidiaries of the Registrant
23.1           Consent of Independent Public Accountants
*              Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-82759).
**             Incorporated by reference to the Company's Current Report on Form 8-K/A filed on November 12, 1999.
***            Incorporated by reference to the Company's Current Report on Form 8-K/A filed on
               February 1, 1999.
****           Incorporated by reference to the Company's Current Report on Form 8-K filed on
               December 15, 1999.
*****          Incorporated by reference to the Company's Current Report on Form 8-K filed on October 3, 2000.
******         Incorporated by reference to the Company's Current Report on Form 8-K filed on March 21, 2001.
</TABLE>

(B)    Reports on Form 8-K:

       On March 21, 2001, we filed a Form 8-K under Item 2 announcing the
       execution of a merger agreement with E.S.T., Inc. (dba The Watch
       Network).

       On April 19, 2001, we filed a Form 8-K under Item 5 announcing the
       receipt of a letter from The Nasdaq Stock Market advising that our common
       stock had failed to maintain a minimum bid price of $1.00 over the last
       30 consecutive trading days preceding April 10, 2001 as required by The
       Nasdaq National Marketplace Rule 4450(a)5. We will be provided 90
       calendar days, or until July 9, 2001 to regain compliance by maintaining
       a bid price of at least $1.00 for a minimum of ten consecutive trading
       days.

       On April 27, 2001 we filed a Form 8-K under Item 5 announcing that David
       Gow had been named Chief Executive Officer to replace Kenny Kurtzman, who
       was named Vice Chairman of the Board of Directors. Mr. Gow was also
       appointed to our Board of Directors.

                                       34
<PAGE>

       On May 9, we filed a Form 8-K under Item 2 announcing the closing of a
       merger agreement with Guild.com, Inc.

                                       35
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Date:  June 29, 2001          ASHFORD.COM, INC.


                              By: /s/ David F. Gow
                                 --------------------------
                                 David F. Gow
                                 Chief Executive Officer

     Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the 29th day of June:

            SIGNATURE                              TITLE
            ---------                              -----

/s/  DAVID F. GOW                        Chief Executive Officer, Director
---------------------------------
     David F. Gow

/s/  JAMES H. WHITCOMB, JR.              President, Chief Information Officer,
---------------------------------         Director
     James H. Whitcomb, Jr.

/s/  BRIAN E. BERGERON                   Chief Financial Officer
---------------------------------
     Brian E. Bergeron

/s/  J. ROBERT SHAW                      Chairman of the Board
---------------------------------
     J. Robert Shaw

/s/  KEVIN R. HARVEY                     Director
---------------------------------
     Kevin R. Harvey

/s/  COLOMBE M. NICHOLAS                 Director
---------------------------------
     Colombe M. Nicholas

/s/ ROBERT COHN                          Director
---------------------------------
    Robert Cohn

/s/ J. TERRY MANNING                     Director
---------------------------------
    J. Terry Manning

/s/ GORDON MAYER                         Director
---------------------------------
    Gordon Mayer

                                       36
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors
of Ashford.com, Inc.:

We have audited the accompanying consolidated balance sheets of Ashford.com,
Inc. and subsidiaries (the Company), a Delaware corporation, as of March 31,
2001 and 2000, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended March 31, 2001 and the period from inception (March 6, 1998) through March
31, 1999.  These financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States.  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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ashford.com, Inc.
and subsidiaries as of March 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the two years in the period ended
March 31, 2001 and the period from inception (March 6, 1998) through March 31,
1999, in conformity with accounting principles generally accepted in the United
States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in Note 1 to the
financial statements, the Company has suffered significant losses from
operations since its inception, losses are expected to continue through fiscal
2002 and its financial resources are limited.  These matters raise substantial
doubt about its ability to continue as a going concern.  Management's plans in
regards to these matters are also described in Note 1.  The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.



Houston, Texas
June 13, 2001
<PAGE>

                               ASHFORD.COM, INC.
                          CONSOLIDATED BALANCE SHEETS
                      (In thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                             March 31,              March 31,
                                                                               2001                    2000
                                                                             ---------              ---------
<S>                                                                        <C>                    <C>
ASSETS
Current assets:
 Cash and cash equivalents                                                  $   7,095              $ 46,474
 Restricted cash                                                                1,500                   120
 Accounts receivable, net of allowance for doubtful
  accounts of $231 and $25, respectively                                        2,559                 4,527
 Merchandise inventory                                                         24,066                24,205
 Prepaid and other                                                              1,535                79,793
                                                                            ---------              --------
  Total current assets                                                         36,755               155,119

 Property and equipment, net of accumulated depreciation
  of $5,894 and $1,159, respectively                                            8,441                 7,837
 Purchased intangibles, net of accumulated amortization of
  $10,483 and $2,141, respectively                                             10,162                11,365
 Other assets                                                                     908                 3,287
                                                                            ---------              --------
Total assets                                                                $  56,266              $177,608
                                                                            =========              ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable and accrued liabilities                                   $   8,189              $  6,221
 Revolving credit facility                                                      4,705                     -

Other long-term liabilities                                                       104                   117

Commitments and contingencies

Stockholders' equity:
 Preferred stock, $.001 par value, 10,000,000
  shares authorized, no shares issued and outstanding
  at March 31, 2001 and 2000                                                        -                     -
 Common stock, $.001 par value, 100,000,000 shares authorized,
  48,691,917 and 44,956,224 shares issued at
  March 31, 2001 and 2000, respectively                                            49                    45
 Treasury stock, at cost, 770,893 and no shares outstanding
  at March 31, 2001 and 2000, respectively                                          -                     -
 Additional paid-in capital                                                   259,365               260,563
 Subscriptions receivable                                                      (1,156)                 (780)
 Deferred compensation                                                         (4,983)              (15,232)
 Accumulated deficit                                                         (210,007)              (73,326)
                                                                            ---------              --------
  Total stockholders' equity                                                   43,268               171,270
                                                                            ---------              --------
Total liabilities and stockholders' equity                                  $  56,266              $177,608
                                                                            =========              ========
</TABLE>


  The accompanying notes are an integral part of these financial statements.
<PAGE>

                               ASHFORD.COM, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except share amounts)

<TABLE>
<CAPTION>

                                                                                                                   Period from
                                                                                                                    Inception
                                                                                                                 (March 6, 1998)
                                                                  Year Ended               Year Ended           through March 31,
                                                                March 31, 2001           March 31, 2000               1999
                                                                --------------           --------------         -----------------
<S>                                                               <C>                      <C>                      <C>
Net sales                                                           $  67,195                $ 39,931                $ 5,938
Cost of sales                                                          56,348                  33,487                  5,110
                                                                    ---------                --------                -------
Gross profit                                                           10,847                   6,444                    828

Operating expenses:
 Marketing and sales (includes non-cash amortization of
  $79,735, $27,525 and $0, respectively)                              105,895                  60,806                  1,013
 General and administrative (includes non-cash amortization
  of $2,633, $3,003 and $0, respectively)                              27,929                  17,093                  1,019
 Restructuring charge                                                     662                       -                      -
 Impairment loss                                                        1,094                       -                      -
 Depreciation and amortization                                         13,460                   3,277                     67
                                                                    ---------                --------                -------
   Total operating expenses                                           149,040                  81,176                  2,099
                                                                    ---------                --------                -------
Loss from operations                                                 (138,193)                (74,732)                (1,271)
Interest income                                                         1,644                   2,677                     13
Interest expense                                                         (132)                     (7)                    (6)
                                                                    ---------                --------                -------
Net loss                                                            $(136,681)               $(72,062)               $(1,264)
                                                                    =========                ========                =======
Net loss per share, basic and diluted                               $   (2.99)               $  (2.65)               $ (0.12)
                                                                    =========                ========                =======
Shares used to compute net loss per share
 Basic and diluted                                                     45,725                  27,197                 10,397
</TABLE>



   The accompanying notes are an integral part of these financial statements.
<PAGE>

                               ASHFORD.COM, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (In thousands)

<TABLE>
<CAPTION>

                        Preferred Stock  Common Stock  Treasury Stock
                       ----------------------------------------------
                                                                     Additional                                           Total
                                 Par             Par                  Paid-In  Subscription    Deferred   Accumulated  Stockholders'
                        Shares  Value  Shares   Value  Shares  Cost   Capital   Receivable   Compensation   Deficit        Equity
                       ------------------------------------------------------------------------------------------------------------
<S>                       <C>      <C>       <C>   <C>    <C>     <C>      <C>        <C>           <C>            <C>        <C>
Balance at Inception,
 March 6, 1998               -   $  -        -   $  -   $  -    $  -   $    -    $    -         $    -       $     -         $   -
 Issuance of common
  stock for cash upon
  formation on
  March 6, 1998              -      -    6,313      6      -       -       (5)        -              -             -             1
 Issuance of common
  stock for services in
  April 1998                 -      -    4,375      4      -       -       50         -              -             -            54
 Issuance of Series A
  preferred stock in
  exchange for cash
  and conversion of
  note payable on
  December 4, 1998       9,500      9        -      -      -       -    3,991         -              -             -         4,000
 Deferred compensation
  related to grants of
  options to purchase
  common stock               -      -        -      -      -       -      431         -           (431)            -             -
 Amortization of
  deferred
  compensation               -      -        -      -      -       -        -         -             17             -            17
 Net loss                    -      -        -      -      -       -        -         -              -        (1,264)       (1,264)
                       -------    ---   ------    ---    ---    ----  -------   -------       --------     ---------     ---------
Balance at
 March 31, 1999          9,500      9   10,688     10      -       -    4,467         -           (414)       (1,264)        2,806

 Deferred compensation
  related to grants of
  options to purchase
  common stock               -      -        -      -      -       -   19,123         -        (19,123)            -             -
 Issuance of Series B
  preferred stock in
  exchange for cash
  and conversion of
  note payable on
  April 17, 1999         7,149      7        -      -      -       -   30,083         -              -             -        30,090
 Officer exercise of
  options to purchase
  common stock
  pursuant to note
  receivable                 -      -    1,852      2      -       -      778      (780)             -             -             -
 Issuance of Series C
  preferred stock in
  exchange for cash
  on July 8, 1999        1,425      2        -      -      -       -   16,302         -              -             -        16,304
 Conversion of
  preferred stock into
  common stock in
  connection with
  initial public
  offering on
  September 22, 1999   (18,074)   (18)  18,074     18      -       -        -         -              -             -             -
 Issuance of common
  stock in exchange
  for cash in
  connection with
  initial public
  offering on
  September 22, 1999,
  net of offering
  expenses of $1.9
  million                    -      -    6,250      6      -       -   73,642         -              -             -        73,648
 Issuance of warrants in
  connection with
  execution of
  distribution and
  marketing
  agreements                 -      -        -      -      -       -    4,182         -              -             -         4,182

</TABLE>
<PAGE>

<TABLE>
<CAPTION>

<S>                       <C>      <C>       <C>   <C>    <C>     <C>      <C>        <C>           <C>            <C>        <C>
 Issuance of common
  stock in connection
  with Internet
  domain and other
  intangible asset
  purchases                  -      -      685      1      -       -    7,374         -              -             -         7,375
 Issuance of common
  stock for cash and
  marketing
  agreement                  -      -    7,407      8      -       -  104,612         -              -             -       104,620
 Amortization of
  deferred
  compensation               -      -        -      -      -       -        -         -          4,305             -         4,305
 Net loss                    -      -        -      -      -       -        -         -              -       (72,062)      (72,062)
                       -------    ---   ------    ---    ---    ----  -------   -------       --------     ---------     ---------
Balance at
 March 31, 2000              -      -   44,956     45      -       -  260,563      (780)       (15,232)      (73,326)      171,270

 Director exercise of
  options to purchase
  common stock
  pursuant to note
  receivable                 -      -      143      -      -       -      376      (376)             -             -             -
 Issuance of warrants in
  connection with
  execution of
  distribution and
  marketing
  agreements                 -      -        -      -      -       -      118         -              -             -           118
 Issuance of warrants in
  connection with
  purchases of fixed
  assets                     -      -        -      -      -       -      914         -              -             -           914
 Issuance of common
  stock in connection
  with internet
  domain and other
  intangible asset
  purchases                  -      -    3,004      3      -       -    4,238         -              -             -         4,241
 Issuance of common
  stock in connection
  with employee stock
  purchase plan              -      -       79      -      -       -      191         -              -             -           191
 Exercise of common
  stock options              -      -      510      1      -       -      161         -              -             -           162
 Common stock
  reacquired for cash        -      -        -      -    771       -        -         -              -             -             -
 Recapture of deferred
  compensation, net          -      -        -      -      -       -   (7,196)        -          7,196             -             -
 Amortization of
  deferred
  compensation               -      -        -      -      -       -        -         -          3,053             -         3,053
 Net loss                    -      -        -      -      -       -        -         -              -      (136,681)     (136,681)
                       -------    ---   ------    ---    ---    ----  -------   -------       --------     ---------     ---------
Balance at
 March 31, 2001              -    $ -   48,692    $49    771    $  - $259,365   $(1,156)      $ (4,983)    $(210,007)    $  43,268
                       =======    ===   ======    ===    ===    ==== ========   =======       ========     =========     =========
</TABLE>


   The accompanying notes are an integral part of these financial statements.
<PAGE>

                               ASHFORD.COM, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                                                         Period
                                                                                                                          from
                                                                                                                       Inception
                                                                                                                       (March 6,
                                                                                                                          1998)
                                                                     Year Ended                Year Ended                through
                                                                      March 31,                March 31,                March 31,
                                                                        2001                      2000                    1999
                                                                     ----------                ----------              ----------
<S>                                                                    <C>                       <C>                       <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss                                                              $(136,681)                $(72,062)               $(1,264)
 Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation and amortization                                           95,828                   33,805                     67
  Impairment loss                                                          1,094                        -                      -
  Compensation expense related to issuance of common stock                     -                        -                     52
 Changes in assets and liabilities, net of effects of
  acquisitions:
  Accounts receivable                                                      1,968                   (4,391)                  (136)
  Merchandise inventory                                                      762                  (20,635)                (3,273)
  Prepaid and other                                                        1,780                   (8,911)                  (453)
  Other assets                                                              (354)                    (201)                     -
  Accounts payable and accrued liabilities                                 3,054                    3,733                  1,300
                                                                       ---------                 --------                -------
     Net cash used in operating activities                               (32,549)                 (68,662)                (3,707)
                                                                       ---------                 --------                -------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchases of property and equipment                                      (6,859)                  (6,853)                  (302)
 Internet domain and other intangible asset purchases                     (3,306)                  (7,936)                     -
 Restricted cash                                                          (1,380)                     (20)                  (100)
                                                                       ---------                 --------                -------
     Net cash used in investing activities                               (11,545)                 (14,809)                  (402)
                                                                       ---------                 --------                -------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Net proceeds from initial public offering                                     -                   73,648                      -
 Proceeds from issuance of common stock                                      353                   10,000                      2
 Issuance of Series A preferred stock                                          -                        -                  3,245
 Issuance of Series B preferred stock                                          -                   29,100                      -
 Issuance of Series C preferred stock                                          -                   16,304                      -
 Debt issuance costs                                                        (343)                       -                      -
 Proceeds from revolving credit facility                                   4,705                        -                      -
 Proceeds from notes payable                                                   -                        -                  1,755
                                                                       ---------                 --------                -------
     Net cash provided by financing activities                             4,715                  129,052                  5,002
                                                                       ---------                 --------                -------
Net (decrease) increase in cash and cash equivalents                     (39,379)                  45,581                    893

CASH AND CASH EQUIVALENTS:
 Beginning of period                                                      46,474                      893                      -
                                                                       ---------                 --------                -------
 End of period                                                         $   7,095                 $ 46,474                $   893
                                                                       =========                 ========                =======
</TABLE>


   The accompanying notes are an integral part of these financial statements.
<PAGE>

                               ASHFORD.COM, INC.
               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                                                                         Period
                                                                                                                          from
                                                                                                                       Inception
                                                                                                                       (March 6,
                                                                                                                          1998)
                                                                     Year Ended                Year Ended                through
                                                                      March 31,                March 31,                March 31,
                                                                        2001                      2000                    1999
                                                                     ----------                ----------              ----------

<S>                                                                    <C>                        <C>                     <C>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
 ACTIVITIES:
  Issuance of preferred stock upon conversion of note
   payable, including accrued interest                                  $    -                  $    -                     $ 755

  Issuance of common stock in connection with marketing
   agreement                                                                 -                   94,620                        -

  Issuance of common stock in connection with Internet domain            4,241                    7,375                        -
   and other intangible asset purchases

  Issuance of warrants in connection with purchases of fixed
   assets                                                                  914                        -                        -

  Issuance of warrants in connection with execution of
   distribution and marketing agreements                                   118                    4,182                        -


</TABLE>


   The accompanying notes are an integral part of these financial statements.
<PAGE>

                               ASHFORD.COM, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2001



1.  OPERATIONS AND ORGANIZATION OF BUSINESS

BACKGROUND

Ashford.com, Inc. (the Company), formerly NewWatch Company, is a Delaware
corporation which was incorporated on March 6, 1998 (Inception), and commenced
operations in April 1998.  The Company is engaged in the distribution of luxury
and premium products including new and vintage watches, diamonds, jewelry,
fragrances, leather accessories, sunglasses and writing instruments, primarily
through online retail sales and corporate sales.

The Company has suffered significant losses from operations since its inception.
Management is implementing a strategy to significantly reduce costs and improve
operating efficiencies (see Note 4). Management believes that the Company's
current cash balances, including those obtained from the merger with an online
art retailer, and borrowing capacity will be sufficient to meet anticipated
needs for at least the next 12 months, assuming it executes according to its
restructured operating plans.  However, any projections of future cash needs and
cash flows are subject to substantial uncertainty.  Accordingly, there is
substantial doubt as to the Company's ability to continue as a going concern.
If current cash and cash that may be generated from future operations are
insufficient to satisfy the Company's liquidity requirements, management may
seek to sell additional equity or debt securities or to obtain additional credit
facilities from lenders.  There can be no assurance that financing will be
available in amounts or on the terms acceptable to the Company, if at all.  The
Company's ability to raise cash through the sales of additional equity or
convertible debt securities may be difficult depending on market conditions and
other factors, and if available could result in additional dilution to the
Company's stockholders.  In addition, management will, from time to time,
consider the acquisition of or investment in complementary businesses, products,
services and technologies, which might impact the Company's liquidity
requirements or cause the Company to issue additional equity or debt securities.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries.  All significant intercompany balances have been
eliminated.

ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the Company's 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.

REVENUE RECOGNITION

Revenue is generally recognized on sales of merchandise held for sale when the
product is sold and shipped, net of coupons, discounts and estimated returns.
Amounts billed for shipping are included in revenue.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash on hand and short-term, highly liquid
investments with original maturities of three months or less.
<PAGE>

                               ASHFORD.COM, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


RESTRICTED CASH

Restricted cash in the amounts of $1.5 million and $120,000 at March 31, 2001
and 2000, respectively, were pledged as collateral against potential credit card
chargebacks.  The increase in restricted cash is consistent with the Company's
increased sales levels.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to a concentration of
credit risk consist of cash, cash equivalents, restricted cash and accounts
receivable.  Cash, cash equivalents and restricted cash are deposited with high
credit, quality financial institutions.  Concentration of credit risk with
respect to accounts receivable are limited due to the Company's large number of
customers and their dispersion substantially throughout the United States.  A
substantial portion of the Company's net sales is derived from customer credit
cards.  As a result, the related accounts receivable from these sales are
collected within a few days of processing the credit card transactions.  Credit
is also extended to a select group of customers based upon an evaluation of the
customer's financial condition and collateral is generally not required.  The
Company maintains an allowance for doubtful accounts receivable based upon
expected collectibility.  Credit losses have not been significant to date.

During the years ended March 31, 2001 and 2000 and for the period from Inception
through March 31, 1999, no single customer accounted for more than 10% of net
revenues.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments, including cash, cash equivalents,
restricted cash, accounts receivable and accounts payable are carried at cost,
which approximates their fair value because of the short-term nature of these
instruments.

MERCHANDISE INVENTORY

Inventory consists of merchandise held for sale, and is stated at the lower of
cost or market.  The Company uses the average cost method of determining the
cost of its inventory and evaluates the market value of its inventory quarterly
based on known market prices available directly from manufacturers and key
suppliers.  Inventory balances are reviewed monthly for slow moving inventories.
Based on changes in business conditions and expected future cash flows, the
Company recorded cost of sales of approximately $1.8 million during the fourth
fiscal quarter of 2001 relating to inventory valuation charges.

PURCHASED INTANGIBLES

Purchased intangibles include Internet domain names, related trademarks and
other identifiable intangible assets purchased by the Company and are presented
net of related accumulated amortization.  As a result of rapid technological and
industry changes occurring in the Internet industry, purchased intangibles are
amortized over estimated useful lives of two years.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company evaluates the recoverability of long-lived assets in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
SFAS 121 requires recognition of impairment of long-lived assets in the event
the net book value of such assets exceeds the future estimated undiscounted cash
flows attributable to such assets.  The carrying value of intangible assets and
other long-lived assets is reviewed on a regular basis
<PAGE>

                               ASHFORD.COM, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


for the existence of facts or circumstances, both internally and externally,
that may suggest impairment. See discussion of impairment of long-lived assets
in Note 3.

FULFILLMENT COSTS

Included in marketing and sales expense are fulfillment costs, which consist of
the cost of operating and staffing warehousing and distribution centers.  Such
costs include those attributable to receiving, inspecting and warehousing
inventories and picking, packaging and preparing customers' orders for shipment.

ADVERTISING COSTS

The Company recognizes advertising expenses in accordance with the American
Institute of Certified Public Accountants' Statement of Position (SOP) 93-7,
"Reporting on Advertising Costs."  As such, the Company expenses the cost of
communicating advertising in the period in which the advertising takes place.
Internet advertising expenses are recognized based on the terms of the
individual agreements, but generally on a straight-line basis over the term of
the contract.   No direct-response advertising has been incurred.  During the
years ended March 31, 2001 and 2000 and for the period from Inception through
March 31, 1999, the Company incurred advertising expense of approximately $11.9
million, $23.7 million, and $694,000, respectively.

TECHNOLOGY, CONTENT AND WEB SITE DEVELOPMENT COSTS

Technology and content costs consist principally of payroll and related expenses
for development, systems and telecommunications operations personnel and
consultants.  Technology and content costs are generally expensed as incurred,
except for certain costs relating to Web site development the development of
internal-use software.

Costs incurred in connection with developing or obtaining software for internal
use are capitalized in accordance with SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use."  Costs associated
with developing the Company's Web site are accounted for in accordance with
Emerging Issues Task Force (EITF) Issue No. 00-2, "Accounting for Web Site
Development Costs," which requires certain Web site development costs to be
capitalized.  Capitalized Web site development costs at March 31, 2001 and 2000,
primarily relate to external direct costs incurred in developing and obtaining
software utilized on the Company's Web site.

START-UP COSTS

In accordance with SOP 98-5, the Company has expensed all start-up costs,
including organization costs, as incurred.

WARRANTY

The Company guarantees its watches to be genuine, in new condition and free from
defects for a period of at least two years.  If the Company is an authorized
agent or service center for the manufacturer, it will extend the original
manufacturer's warranty for a period of two years.  The Company estimates future
warranty costs not covered by the original manufacturer's warranty.  Warranty
expense is accrued at the date revenue is recognized on the sale of merchandise
held for sale. The Company has not incurred significant warranty claims to date.
As discussed in Note 12, the Company recorded a $400,000 expense to settle a
lawsuit related to watches it sold.
<PAGE>

                               ASHFORD.COM, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


INCOME TAXES

The Company is a C Corporation for U.S. federal income tax purposes and uses the
liability method in accounting for income taxes.  Under this method, deferred
taxes are recorded based upon differences between the financial reporting and
tax bases of assets and liabilities and are measured using the enacted rates and
laws that will be in effect when the differences are expected to reverse.  A
valuation allowance has been established where necessary to reduce deferred tax
assets to the amount more likely than not expected to be realized in future tax
returns.

COMPREHENSIVE INCOME

The Company has adopted the provisions of SFAS 130, "Reporting Comprehensive
Income."  SFAS 130 establishes standards for reporting comprehensive income and
its components in financial statements.  Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from nonowner
sources.  To date, the Company has not engaged in transactions that are required
to be reported in comprehensive income.

SEGMENT INFORMATION

The Company complies with SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information."  The Company identifies its operating segments based
on business activities and management responsibility.  The Company operates in a
single business segment:  the retail sale of luxury products in the United
States.

STOCK-BASED COMPENSATION

SFAS 123, "Accounting for Stock-Based Compensation", establishes a fair value-
based method of accounting for stock-based compensation plans.  SFAS 123 allows
the Company to adopt one of two methods for accounting for stock options.  The
Company has elected the method that requires disclosure only of stock-based
compensation.  Because of this election, the Company accounts for its employee
stock-based compensation plans under Accounting Principles Board (APB) Opinion
No. 25 and the related interpretations. Accordingly, deferred compensation is
recorded for stock-based compensation grants based on the excess of the
estimated fair value of the common stock on the measurement date over the
exercise price. The deferred compensation is amortized over the vesting period
of each unit of stock-based compensation grant. If the exercise price of the
stock-based compensation grants is equal to the estimated fair value of the
Company's stock on the date of grant, no compensation expense is recorded.

NET LOSS PER SHARE

Net loss per share is computed using the weighted average number of shares of
common stock outstanding.  Shares associated with stock options, warrants,
convertible preferred stock and contingently issuable common stock are not
included because they are antidilutive.

PRO FORMA NET LOSS PER SHARE (UNAUDITED)

Pro forma net loss per share is computed using the weighted average number of
common shares outstanding, including the pro forma effects of the automatic
conversion of outstanding preferred stock into shares of the Company's common
stock effective upon the closing of the Company's initial public offering as if
such conversion occurred on the dates of original issuance (See Note 9).

The following table sets forth the computation of basic and dilutive, and pro
forma basic and dilutive, net loss per share (in thousands, except per share
amounts):
<PAGE>

                               ASHFORD.COM, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>
                                                                                                              Period from
                                                                                                               Inception
                                                             Year Ended               Year Ended                through
                                                              March 31,                March 31,                March 31,
                                                                 2001                     2000                    1999
                                                             ----------               ----------               ---------
<S>                                                              <C>                      <C>                     <C>
Numerator-
 Net loss                                                     $(136,681)                $(72,062)                $(1,264)
                                                              =========                 ========                 =======
Denominator-
 Weighted average common shares                                  45,725                   27,197                  10,397
                                                              =========                 ========                 =======
 Denominator for basic and diluted calculation                   45,725                   27,197                  10,397
 Weighted average effect of pro forma securities-
    Series A preferred stock                                        ---                    4,503                   2,867
    Series B preferred stock                                        ---                    3,075                     ---
    Series C preferred stock                                        ---                      296                     ---
                                                              ---------                 --------                 -------
 Denominator for pro forma basic and diluted
  calculation                                                    45,725                   35,071                  13,264
                                                              =========                 ========                 =======


Net loss per share-
 Basic and diluted                                            $   (2.99)                $  (2.65)                $ (0.12)
                                                              =========                 ========                 =======
 Pro forma basic and diluted                                  $   (2.99)                $  (2.05)                $ (0.10)
                                                              =========                 ========                 =======
</TABLE>

RECLASSIFICATION OF PRIOR PERIOD BALANCES

Certain prior period balances have been reclassified for consistent
presentation.

RECENT ACCOUNTING PRONOUNCEMENTS

The FASB issued an Exposure Draft, Business Combinations and Intangible Assets,
containing tentative decisions about requiring the use of a nonamortization
approach to account for purchased goodwill.  Under the nonamortization approach,
goodwill would be tested for impairment, rather than being amortized to
earnings.  Under the Exposure Draft, the Company's purchased intangibles would
continue to be amortized consistent with its current policy. Upon adoption of
the principles in this Exposure Draft, the Company would record any goodwill as
income or expense.

In March 2000, the FASB issued Financial Interpretation (FIN) No. 44, Accounting
for Certain Transactions Involving Stock Compensation."  FIN 44 clarifies the
application of APB 25 for certain issues, such as the definition of an employee
for purposes of applying APB 25, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award and the
accounting for an exchange of stock compensation awards in a business
combination.  Adoption of FIN 44 did not change the Company's existing
accounting policies or disclosures.

In May 2000, the EITF issued EITF 00-14 "Accounting for Certain Sales
Incentives," which provides guidance on the accounting for certain sales
incentives offered by companies to their customers such as discounts, coupons,
rebates and products or services.  EITF 00-14 addresses the recognition,
measurement and income statement classification for sales incentives offered
voluntarily by a vendor without charge to customers that can be used in, or that
are exercisable by a customer as a result of a single exchange transaction.  The
accompanying financial statements include the reclassification of free product
and service incentives delivered to customers at the time of sale, from
marketing and sales expense to cost of sales, related to the adoption of EITF
00-14.  All periods presented have been reclassified for consistent
presentation.
<PAGE>

                               ASHFORD.COM, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


In July 2000, the EITF reached a consensus on EITF 00-10, "Accounting for
Shipping and Handling Fees and Costs."  This consensus requires that all amounts
billed to a customer in a sale transaction related to shipping and handling, if
any, represent revenue and should be classified as revenue.  The Company
historically has classified shipping charges to customers as revenue. In
September 2000, the EITF concluded that the classification of shipping and
handling costs should be disclosed pursuant to Accounting Principles Board (APB)
Opinion No. 22, "Disclosure of Accounting Policies."  If shipping and handling
costs are significant and are not included in cost of sales, companies should
disclose both the amount of such costs and which line item on the income
statement includes that amount. Shipping and handling costs cannot be netted
against sales.  The Company classifies inbound and outbound shipping costs as
costs of sales.  The Company generally does not impose separate handling charges
on customers. However, during fiscal year 2001, the Company began charging for
shipping costs.  The Company began charging for packaging costs during fiscal
2002.  Costs attributable to receiving, inspecting and warehousing inventories
and picking, packaging and preparing customers' orders for shipment are
classified as marketing and sales expense and totaled $3.8 million, $1.9 million
and $65,000 during the years ended March 31, 2001 and 2000 and the period from
Inception through March 31, 1999, respectively.

3.  IMPAIRMENT OF LONG-LIVED ASSETS

During the fourth quarter ended March 31, 2001, the Company determined that the
carrying value of certain assets exceeded its net realizable value.  In
accordance with SFAS 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," the Company recorded an impairment
loss of $1.1 million during the fourth quarter ended March 31, 2001.

In connection with management's plan to reduce costs and improve operating
efficiencies, the Company discontinued the use of several third party software
contracts and wrote down fixed assets of approximately $0.6 million.  The
Company also decided not to further pursue the utilization of certain marketing
and distribution arrangements and wrote down intangible assets associated with
these arrangements of approximately $0.5 million.

4.  RESTRUCTURING AND RELATED CHARGES

During the fourth quarter ended March 31, 2001, in connection with management's
plan to reduce costs and improve operating efficiencies, the Company recorded
restructuring charges of approximately $0.7 million, consisting of approximately
$0.5 million for headcount reductions and approximately $0.2 million for
contract cancellations.  Headcount reductions consisted of approximately 40
employees, or about 17% of the Company's workforce, across all areas of the
Company.

Total cash outlays associated with the restructuring were $0.6 million.  The
remaining $0.1 million of restructuring costs is expected to be paid through
December 31, 2001.

The restructuring accrual consists of the following:

<TABLE>
<CAPTION>
                                               Severance and         Contract
                                                  Benefits        Cancellations          Total
                                           ---------------------------------------------------------
<S>                                           <C>                <C>                <C>
Provision for fiscal year 2001                      $502               $160               $662
Amount paid in fiscal year 2001                      472                 80                552
                                                    ----               ----               ----
Balance at March 31, 2001                           $ 30               $ 80               $110
                                                    ====               ====               ====
</TABLE>

During May 2001, the Company initiated a review of its lines of business, cost
structure and general activities.  The objective of this review was to identify
opportunities for improved financial performance and liquidity management.
Specific initiatives resulting from this review include reducing the scope of
product offerings,
<PAGE>

                               ASHFORD.COM, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


decreasing the Company's investment in inventory and eliminating certain
operating costs, including costs associated with personnel. In connection with
this review, the Company expects to record charges during the quarter ending
June 2001 attributed to the following matters.

REDUCTION OF PERSONNEL

In connection with the May 2001 review, the Company entered into severance
agreements with 41 employees.  The Company expects to record a charge of $80,000
during the quarter ending June 2001 in connection with these headcount
reductions.

DISPOSITION OF ONLINE WATCH RETAILER

In February 2001, the Company entered into a merger agreement with an online
watch retailer. In connection with the agreement, the Company paid an aggregate
purchase price of $2.3 million representing the assumption of liabilities and
direct acquisition costs of approximately $650,000, and 1,991,000 shares of the
Company's common stock. The agreement further provided that the Company issue up
to an additional 5,500,000 shares of its common stock to the online retailer
upon resolution of certain authorized dealer relationship contingencies and in
connection with the online retailer meeting certain gross profit targets as set
forth in the agreement. Further, certain key members of the online watch
retailer's management entered into separate employment agreements with the
Company which provide for employment for eighteen months following the merger
and representation on the board of directors of the Company. Principal assets
acquired include inventory, supplier relationships and intellectual property.

During June 2001, as a result of certain business difficulties that arose in the
relationship between the Company and the former principles of the online watch
retailer and to resolve litigation between them, the parties began negotiating a
dissolution of that relationship. The online watch retailer tentatively agreed
to a settlement whereby the online watch retailer and certain of it's management
will receive aggregate consideration of approximately $0.8 million representing
$0.2 million of inventory, $0.1 million of severance pay and 1,500,000 shares of
the Company's common stock to settle all potential future claims and
obligations. The Company expects to record a charge of approximately $2.4
million in connection with this settlement.

OUTSOURCING OF ONLINE ART OPERATIONS

In May 2001, the Company closed a merger agreement with an online art retailer.
In connection with the agreement, the Company issued approximately 7.1 million
shares of the Company's common stock and options and warrants to purchase
approximately 1.6 million shares of the Company's common stock, in exchange for
all of the fully diluted shares of the online art retailer's capital stock.  The
purchase price was approximately $4.3 million, consisting of $3.3 million of the
Company's common stock, $0.7 million of options and warrants to purchase shares
of the Company's common stock and $0.3 million of business combination costs.
The principle assets received include $7.3 million of cash, an Internet domain
name and related trademarks and other tangible and intangible assets related to
Internet retail operations.  The total value of net tangible assets acquired
exceeded the $4.3 million purchase price.

In connection with the May 2001 review, the Company concluded that the operating
cost structure of the online art retailer was inconsistent with the level of
sales activity and overall Company objectives.  In June 2001, the prior
management of the online art retailer made a proposal to the Company, which the
Company has agreed to accept, to assume the prospective operations of the online
art retailer as a separately capitalized entity.  Pursuant to this agreement,
the Company will contribute assets of approximately $0.5 million, including $0.4
million of cash, an Internet domain name and related trademarks and other
intangible assets in return for 5% ownership interest in the new entity.  In
addition, the Company and the new entity will enter into a revenue sharing
agreement whereby the Company will offer the new entity's product on its Web
site in return for half of the gross profit from sales generated by the
Company's Web site.  The Company will not
<PAGE>

                            ASHFORD.COM, INC.
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


assume any future operating costs or obligations. Further, substantially all
Company employees previously employed by the online art retailer will become
employees of the new entity or will be terminated.
<PAGE>

                               ASHFORD.COM, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



SALE OF ASSET

In connection with the May 2001 review, during June 2001, the Company sold two
Internet domain names and related trademarks related to a product information
Internet site in exchange for $0.4 million cash.  The Company expects to record
a loss on sale of approximately $0.5 million during the quarter ending June
2001.

5.  OTHER SIGNIFICANT ACQUISITIONS

In August 1999, the Company entered into an option agreement to purchase two
Internet domain names and related trademarks (the "Purchased Assets") from a
product information Internet site (the "Option Agreement").  In connection with
the Option Agreement, the Company paid $300,000 in cash upon execution of the
Option Agreement for the exclusive right to acquire the Purchased Assets.  In
October 1999, the Company exercised its option to acquire the Purchased Assets.
The Company paid an aggregate purchase price of $4.3 million representing
$940,000 of cash (including the aforementioned payment in connection with the
Option Agreement) and 332,500 shares of the Company's common stock.

In September 1999, the Company entered into an asset purchase agreement to
purchase an Internet domain name and related trademarks from a luxury goods
retailer.  In connection with this agreement, the Company paid $1.6 million in
cash upon execution for the domain name, related trademarks and non-competition
covenants.  The asset purchase agreement further provided that the Company pay
an additional $20,000 of cash consideration for each authorized dealer
relationship successfully transitioned to the Company by the luxury goods
retailer, not to exceed $160,000, all of which was paid as of March 31, 2000.

In January 2000, the Company entered into a merger agreement with an online
fragrance retailer.  In connection with the agreement, the Company paid an
aggregate purchase price of $7.5 million representing $3.7 of cash, including
the assumption of certain liabilities, and 330,354 shares of the Company's
common stock.  The principal assets received include an Internet domain name and
related trademarks, inventory and other tangible and intangible assets related
to Internet retail operations.  The agreement further provided that the Company
issue up to an additional 736,514 shares of its common stock to the Internet
retailer upon the resolution of certain authorized dealer relationship
contingencies as set forth in the agreement.  In August 2000, the Company issued
658,998 shares of its common stock in connection with the resolution of the
authorized dealer relationship contingencies.  The fair market value of the
shares issued totaled approximately $1.8 million.  This acquisition was
accounted for using the purchase method of accounting.  The purchase price was
allocated in accordance with APB 16, "Business Combinations," as follows (in
thousands):

            Property and equipment                          $    780
            Intangible assets                                  7,962
            Net working capital items                            613
                                                            --------
            Total purchase price                            $  9,355
                                                            ========

Property and equipment relate primarily to computer equipment and software
costs.  Intangible assets resulting from the acquisition relate to an Internet
domain name, related trademarks, customer lists and direct brand relationships
and is being amortized using the straight-line method over an expected useful
life of 2 years.

The following unaudited pro forma data is presented to show pro forma revenues,
net loss and basic and diluted net loss per share as if the acquisition of the
online fragrance retailer had occurred as of the Company's Inception.
<PAGE>

                               ASHFORD.COM, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


                                                              Period from
                                                               Inception
                                                Year Ended      through
                                                 March 31,     March 31,
                                                   2000          1999
                                                ----------    -----------

     Revenues                                   $   40,177    $     5,952
                                                ==========    ===========
     Net loss                                   $  (77,603)   $    (1,372)
                                                ==========    ===========
     Basic and diluted net loss per share       $    (2.82)   $     (0.12)
                                                ==========    ===========

In October 2000, the Company entered into an asset purchase agreement with a
retailer principally engaged in the business of selling customized gifts to
clients in the investment banking industry.  The agreement provided for an
aggregate purchase price of approximately $3.3 million representing $1.9 million
of cash paid at closing, 392,037 shares of the Company's common stock and an
additional $600,000 to be paid in cash over the following twelve months.
Principal assets acquired include a customer base, supplier relationships and
intellectual property.

6.  PROPERTY AND EQUIPMENT

Property and equipment is stated at cost.  Depreciation is computed based on the
straight-line method over the estimated useful lives of the respective assets.
Repair and maintenance costs are charged to expense as incurred.  Property and
equipment consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                               Estimated               March 31,            March 31,
                                                              Useful Life                2001                 2000
                                                         ---------------------     ---------------       ---------------
<S>                                                      <C>                       <C>                   <C>
      Software and Web site development costs                    2 years               $ 8,200              $  4,290
      Computer and office equipment                            3 to 5 years              4,653                 3,978
      Machinery and equipment                                    5 years                   331                   134
      Leasehold improvements                                   3 to 5 years              1,151                   594
                                                                                       -------              --------

                                                                                        14,335                 8,996
      Less- Accumulated depreciation                                                    (5,894)               (1,159)
                                                                                       -------              --------

      Property and equipment, net                                                      $ 8,441              $  7,837
                                                                                       =======              ========
</TABLE>

Depreciation expense totaled approximately $5.3 million, $1.1 million and
$49,000 during the years ended March 31, 2001 and 2000 and the period from
Inception through March 31, 1999, respectively.

7.  NOTE PAYABLE

In March 1999, the Company received $1.0 million cash from a stockholder in
exchange for a note payable bearing interest at an annual rate of 6%.  The note
payable had a maturity date of June 1999.  The note payable was converted into
preferred stock in April 1999 (see Note 9).  In management's opinion, the terms
of this note and its subsequent conversion were at arms length.

8.  REVOLVING CREDIT FACILITY

During September 2000, the Company executed a three-year revolving credit
facility with a maximum available credit of $25 million with Congress Financial
Corporation, a unit of First Union National Bank.  The credit facility is to be
used for working capital needs and is secured by the Company's assets.
Availability under the credit facility is determined pursuant to a borrowing
base as defined in the agreement, and was $6.9 million on March 31, 2001.
Amounts outstanding under the credit facility bear interest at the prime rate or
LIBOR plus 250 basis points (8.50% at March 31, 2001), as elected by the
Company.  Approximately $4.7 million was outstanding under the revolving credit
facility as of March 31, 2001.  In addition to the amount outstanding at
March 31, 2001, $250,000 was reserved against the issuance of a standby letter
of credit.
<PAGE>

                               ASHFORD.COM, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



9.  STOCKHOLDERS' EQUITY

PREFERRED STOCK

In December 1998, the Company entered into a stock purchase agreement with an
investor whereby the Company issued 9,500,000 shares of Series A convertible
preferred stock in exchange for approximately $3,245,000 in cash and conversion
of a $755,000 note payable, including accrued interest.

In April 1999, the Company increased the number of authorized shares of its
convertible preferred stock to 17,100,000 with a par value of $.001 per share.
In addition, 7,600,000 shares of the Company's preferred stock was designated as
Series B preferred stock.  Also in April 1999, the Company entered into a stock
purchase agreement with five investors whereby 7,148,750 shares of the Company's
Series B convertible preferred stock was issued in exchange for approximately
$29.1 million in cash and conversion of a $1.0 million note payable, including
accrued interest.

In July 1999, the Company increased the number of authorized shares of its
convertible preferred stock to 19,166,250 shares with a par value of $.001 per
share.  In addition, 2,066,250 shares of the Company's convertible preferred
stock was designated as Series C convertible preferred stock.  Also in July
1999, the Company entered into a stock purchase agreement with six investors
whereby 1,425,679 shares of the Company's Series C convertible preferred stock
were issued in exchange for approximately $16.3 million in cash.

On September 22, 1999, the Company completed its initial public offering of
6,250,000 shares of its common stock.  Net proceeds before expenses to the
Company were approximately $73.6 million.  As of the closing date of the
offering, all of the Series A, Series B and Series C convertible preferred stock
was converted into an aggregate of 18,074,429 shares of common stock.
Concurrent with the initial public offering, the Board of Directors were
authorized, without further action by the stockholders, to issue up to
10,000,000 shares of preferred stock in one or more series and to designate the
rights, preferences, privileges and restrictions of each preferred stock series.

WARRANTS

In connection with a number of distribution and marketing agreements entered
into with luxury brand owners and representatives during fiscal 2000, the
Company has issued 494,930 warrants which are fully vested and may be exercised
for 494,930 shares of common stock.  The warrants are exercisable through
January 2002 at a weighted average exercise price of $8.91 per share.  The
agreements are for periods up to twenty-four months and provide the Company with
certain exclusive online distributor rights, allow the Company to utilize
certain trademarks and images in connection with its marketing and advertising
activities and require the Company to fund certain marketing and advertising
activities.  The Company has recorded the estimated fair value of the warrants
on the date of grant as deferred marketing expense which is being amortized over
the terms of the related agreements.  During the fourth quarter ended March 31,
2001, the Company decided not to further pursue the utilization of certain of
its marketing and distribution agreements recording an impairment charge of $0.5
million.  See Note 3 for discussion of related impairment losses.  Deferred
marketing expense totaled $0.2 million and $2.4 million at March 31, 2001 and
2000, respectively, and is included in other assets in the accompanying
consolidated balance sheet.

In July 2000, the Company issued a warrant to a company to purchase 100,000
shares of common stock at $2.81 in exchange for software maintenance services
rendered by the company.  50,000 shares were immediately exercisable and the
remaining 50,000 shares vest monthly through December 2001.  These warrants
expire on July 1, 2005.  In March 2001, the Company issued a warrant to a
company to purchase 75,000 shares of common stock at $0.66 in exchange for a
marketing services agreement.  37,500 shares were
<PAGE>

                               ASHFORD.COM, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



immediately exercisable and the remaining 37,500 shares vest on December 31,
2001. These warrants expire in March 2006. The Company has recorded the
estimated fair value of the warrants on the date of grant as intangible assets
which are being amortized over the terms of the related agreements. The unvested
warrants are subject to variable accounting, with fair value re-measurements at
the end of each quarterly reporting period. Intangible assets associated with
these warrants totaled $0.1 million at March 31, 2001 and are included in other
assets in the accompanying consolidated balance sheet.

During fiscal year 2001, the Company issued warrants, which are fully vested, to
a related party to purchase 258,706 shares of common stock at $0.01 in exchange
for Web site development services rendered by the related party.  129,353 of the
warrants expire in September 2005 and the remaining warrants expire in December
2005.  The Company has recorded the fair value of the services rendered, which
management believes are equivalent to those available and transacted with
unrelated parties, as software and Web site development costs.  Software and Web
site development costs associated with these warrants totaled $0.7 million and
are included in fixed assets in the accompanying consolidated balance sheet.

No warrants were outstanding at March 31, 1999 and none have been exercised
through March 31, 2001.

RESTRICTED STOCK

On December 4, 1998, the Company entered into an agreement with its founding and
key management employees whereby the employees agreed to allow 5,957,099 shares
of previously issued common stock to be subject to certain restrictions
(Restricted Stock).  The restrictions provide the Company with the right, but
not the obligation, to repurchase any unvested shares of Restricted Stock upon
termination of employment.  Under this agreement, one holder's Restricted Stock,
representing 1,895,849 shares, vests ratably over a 39-month service period.  Of
the other holders' Restricted Stock, 1,015,313 shares vested on March 6, 1999;
the remaining shares vest ratably over a 36-month service period.  Restrictions
on 1,203,633, 1,598,305 and 1,268,929 shares lapsed into unrestricted common
stock during fiscal 2001, 2000 and 1999, respectively.  The Company repurchased
770,893 shares during fiscal 2001 which are recorded as treasury stock in the
accompanying consolidated balance sheet.  The Company paid par value for the
shares.  With the exception of the vesting period, holders of Restricted Stock
retain all the rights of common stockholders including voting, dividend and
liquidation rights.  The remaining 1,115,339 shares subject to restrictions are
included in outstanding common stock in the accompanying balance sheet at
March 31, 2001.

COMMON STOCK

The holders of the common stock are entitled to receive dividends when and as
declared by the board of directors.  Upon the liquidation, dissolution or
winding up of the Company, all of the remaining assets of the Company available
for distribution after that required for holders of preferred stock shall be
distributed among the holders of common stock pro rata based on the number of
shares held by each.  The common stock is not redeemable.  The holders of
outstanding common stock are entitled to elect two directors of the Company at
each annual election of directors.

In August 1999, the Company's board of directors declared a stock split of 4.75
shares for every 1 share of common stock or preferred stock then outstanding.
The stock split became effective on September 21, 1999.  Accordingly, the
accompanying financial statements and footnotes have been restated to reflect
the stock split, including an assumed increase in authorized shares of common
stock and preferred stock.  The par value of the shares of common stock to be
issued in connection with the stock split was credited to common stock and a
like amount charged to additional paid-in capital.

The Company's board of directors is authorized to issue up to 100,000,000 shares
of common stock with a par value of $.001 per share.
<PAGE>

                               ASHFORD.COM, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



In December 1999, the Company sold 707,964 shares of its common stock to a
leading online retailer for $10.0 million in cash.  The Company also issued an
additional 6,698,664 shares of its common stock to the online retailer in
exchange for par value and advertising placements targeted at the online
retailer's customer base with the intent of delivering new customers to the
Company (the "Advertising Placements").  The fair market value of the shares
issued in connection with the Advertising Placements totaled $94.6 million and
were amortized over the one-year term of the agreement and is fully amortized as
of March 31, 2001.  As of March 31, 2000, the net amount related to this
agreement included in prepaid and other current assets in the accompanying
consolidated balance sheet totaled $71.0 million.

EQUITY INCENTIVE COMPENSATION PLANS

In April 1998, the Company adopted an incentive compensation plan (the 1998
Stock Incentive Plan) which provided the ability to grant incentive stock
options, nonqualified stock options and restricted stock.  The Company does not
intend to grant any additional options or stock awards under this plan.

In July 1999, the Company adopted an incentive compensation plan (the 1999 Stock
Incentive Plan) which provides the ability to award incentive stock options,
nonqualified stock options, restricted stock, stock units and stock appreciation
rights.  The aggregate number of awards under the 1999 Stock Incentive Plan
shall not exceed 6,175,000 shares of common stock.  The 1999 Stock Incentive
Plan allows for annual increases of the lesser of 5% of the total number of
shares of common stock then outstanding or 1,900,000 shares of common stock.  In
February 2000, the Company adopted an incentive compensation plan (the 2000 Non-
Officer Stock Plan) which provides the ability to grant up to 2,490,000
incentive stock options to non-officer employees.  The maximum number of options
allowed to be granted under the 2000 Non-Officer Stock Plan was increased to
4,090,000 in May 2000.  The 1999 Stock Incentive Plan and the 2000 Non-Officer
Stock Plan are administered by the board of directors of the Company, which has
the authority to determine the type, number, vesting requirements and other
features and conditions of such awards.

Generally, the Company grants stock options with exercise prices equal to the
fair market value of the common stock on the date of grant.  Options generally
vest over a four-year period and expire ten years from the date of grant.

The following table summarizes stock option activity under the plans:

<TABLE>
<CAPTION>
                                                                 Weighted           Weighted
                                                                 Average            Average
                                                Number of        Exercise          Grant Date
                                                  Shares           Price           Fair Value
                                      ----------------------------------------------------------
<S>                                      <C>                 <C>                <C>
Balance at Inception                                  -               -
Options granted                                 1,258,750        $  0.05            $   0.16
Options forfeited                                    (190)       $  0.05
                                      ---------------------------------------
Outstanding at March 31, 1999                   1,258,560        $  0.05
Options granted                                 7,269,976        $  4.70            $   4.02
Options exercised                              (1,852,500)       $  0.43
Options forfeited                                (252,644)       $  4.91
                                      ---------------------------------------
Outstanding at March 31, 2000                   6,423,392        $  5.01
Options granted                                 6,521,637        $  1.41            $   1.10
Options exercised                                (653,008)       $  0.82
Options forfeited                              (2,441,259)       $  4.39
                                      ---------------------------------------
Outstanding at March 31, 2001                   9,850,762        $  3.06
                                      =======================================
</TABLE>
<PAGE>

                               ASHFORD.COM, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



The following table summarizes information regarding stock options outstanding
and exercisable as of March 31, 2001:

<TABLE>
<CAPTION>
                                         Outstanding Options                                     Vested and Exercisable
                    ----------------------------------------------------------      ---------------------------------------------
                                             Weighted-
                                              Average
                                             Remaining           Weighted-                                       Weighted-
                          Number of         Contractual           Average                   Number                Average
Exercise Price              Shares              Life          Exercise Price              of Shares           Exercise Price
------------------------------------------------------------------------------      ---------------------------------------------
<S>                    <C>                <C>                <C>                       <C>                <C>
$  0.05                     955,625              8               $   0.05                  542,466                $     0.05
$  0.30  -  $  0.43       3,550,675             10                   0.32                  813,903                      0.33
$  0.56                      35,000             10                   0.56                      417                      0.56
$  0.88  -  $  1.00         173,000             10                   0.95                    5,987                      0.95
$  1.50  -  $  2.13         247,000             10                   1.54                   28,521                      1.53
$  2.44  -  $  3.57       2,360,841              9                   2.60                  567,793                      2.63
$  3.79  -  $  4.72         107,610              9                   4.14                   44,213                      4.14
$  5.88  -  $  8.75       1,126,892              9                   7.40                  376,220                      7.59
$  9.16  -  $ 13.50       1,250,619              9                  10.26                  545,921                     10.45
$ 14.19  -  $ 14.94          43,500              9                  14.90                   14,051                     14.90
                    ---------------                                                 --------------
Total                     9,850,762                                                      2,939,492
</TABLE>

Under APB 25, no compensation expense is recognized when the exercise price of
the Company's employee stock options equals the fair value of the underlying
stock on the date of grant.  Deferred compensation has been recorded for those
situations where the exercise price of an option was lower than the deemed fair
value of the underlying common stock.  Prior to the Company's initial public
offering, the fair value of the common stock on the date of grant was determined
based upon valuations in relation to preferred stock financings and an
independent appraisal.  For the year ended March 31, 2000 and the period from
Inception through March 31, 1999, the Company recorded aggregate deferred
compensation of $19.1 million and $431,500, respectively, which is being
amortized over the vesting period of the underlying options.  No deferred
compensation was recorded during the year ended March 31, 2001.  For the years
ended March 31, 2001 and 2000 and the period from Inception through March 31,
1999, total amortization of deferred compensation totaled $3.1 million, $4.3
million and $17,500, respectively.

Had compensation expense been determined consistent with the provisions of SFAS
123, the Company's net loss for the years ended March 31, 2001 and 2000 and the
period from Inception through March 31, 1999, would have been adjusted to the
following pro forma amounts (in thousands, except per share data):

<TABLE>
<CAPTION>

                                                                                 Period from
                                                                                  Inception
                                Year Ended              Year Ended                 through
                                 March 31,               March 31,                 March 31,
                                    2001                    2000                     1999
                            ------------------       ------------------      -------------------
<S>                            <C>                      <C>                     <C>
Net loss-
  As reported                    $   (136,681)            $  (72,062)             $   (1,264)
  Pro forma                      $   (137,660)            $  (71,607)                 (1,255)
Basic and diluted net loss
 per share-
  As reported                    $      (2.99)            $    (2.65)             $    (0.12)
  Pro forma                      $      (3.01)            $    (2.63)             $    (0.12)

</TABLE>
<PAGE>

                               ASHFORD.COM, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



<TABLE>
<CAPTION>

<S>                            <C>                      <C>                     <C>
Pro forma basic and
 diluted net loss per share-
  As reported                    $      (2.99)            $    (2.05)             $    (0.10)
  Pro forma                      $      (3.01)            $    (2.04)             $    (0.10)
</TABLE>

Prior to the Company's initial public offering, the Company computed the fair
value of options granted using the minimum value method.  Significant weighted
average assumptions used to estimate fair value of options granted prior to the
Company's initial public offering include a risk-free interest rate of 5.6
percent, expected lives of 10 years and no expected dividends.  Subsequent to
the Company's initial public offering, the Company computed the fair value of
options granted using the Black-Scholes option pricing model.  Significant
weighted average assumptions used to estimate fair value of options granted
subsequent to the Company's initial public offering are as follows:

                                          Year Ended           Year Ended
                                           March 31,            March 31,
                                             2001                 2000
                                       -----------------------------------------
Risk-free interest rate                       5.9%                 6.4%
Expected volatility                         123.8%                98.4%
Expected life                                 3.3 years            3.3 years

EMPLOYEE STOCK PURCHASE PLAN

On July 9, 1999, the Company adopted a compensatory employee stock purchase
plan, effective September 22, 1999, for up to 950,000 shares of common stock.
During February 2001, the maximum number of shares to be issued under the plan
was increased to 1,662,500.  Participation is voluntary and substantially all
full-time employees meeting limited eligibility requirements may participate.
Contributions are made through payroll deductions and may not be less than 1% or
more than 15% of the participant's base pay, as defined.  The participant's
option to purchase common stock is deemed to be granted on the first day and
exercised on the last day of the fiscal quarter at a price which is the lower of
85% of the market price on the first or last day of the fiscal quarter.  During
the year ended March 31, 2001, 79,415 shares of common stock were issued under
the plan.  Through March 31, 2000, no shares of common stock had been issued
under the plan.

OFFICER AND DIRECTOR AND EMPLOYEE LOANS

In May 1999, the Company entered into a $780,000 full-recourse promissory note
bearing 5% interest with an officer, in connection with the exercise of options
to purchase 1,852,500 shares of common stock.  The shares of common stock
purchased were pledged as collateral against the note.  In April 2001, the
officer resigned from the Company and the Company agreed to repurchase all of
the shares of common stock from the officer at the price paid by the officer in
exchange for payment in full on the loan, including all principal and related
interest.

In June 2000, the Company entered into a $375,888 full-recourse promissory note
with one of its members of its board of directors in connection with the
exercise of options to purchase 143,250 shares of common stock.  The note bears
interest at 6.71% per annum, is secured by a pledge of the shares acquired and
is payable in full by April 2004.

10.  INCOME TAXES

A reconciliation of income tax expense computed at the U.S. statutory rate to
the provision reported in the consolidated statements of operations is as
follows:
<PAGE>

                               ASHFORD.COM, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



<TABLE>
<CAPTION>

                                                                                                                   Period
                                                                                                                    from
                                                                      Year                    Year              Inception
                                                                      Ended                   Ended                through
                                                                    March 31,               March 31,            March 31,
                                                                      2001                    20000                 1999
                                                                ------------------       ---------------       ----------------
<S>                                                              <C>                      <C>                   <C>
Income tax at the statutory rate                                   $       (46,472)         $   (24,501)          $       (496)
Increase (decrease) resulting from:
 Increase in valuation allowance                                            45,578               23,650                    495
 Incentive stock options                                                       842                  533                      -
 Non-deductible expenses                                                        52                  318                      1
                                                                ------------------       ---------------       ----------------
   Total                                                           $            -           $        -            $          -
                                                                ==================       ===============       ================
</TABLE>


Deferred taxes result from the effect of transactions that are recognized in
different periods for financial and tax reporting purposes.  The primary
components of the Company's deferred tax assets and liabilities are as follows
(in thousands):

<TABLE>
<CAPTION>
                                                           March 31,             March 31,
                                                             2001                  2000
                                                       ----------------      ----------------
<S>                                                       <C>                   <C>
Deferred tax assets-
 Net operating loss carryforward                            $    61,492           $     22,075
 Amortization of intangibles                                      4,148                 1,045
 Non-qualified stock options                                      1,132                   936
 Inventory                                                        1,341                     -
 Property and equipment                                             821                     -
 Accruals and reserves                                              722                   162
 Other                                                               67                    48
                                                            -----------           -----------

         Total deferred tax assets                               69,723                24,266

Deferred tax liabilities-
 Difference between book and tax basis of property and
  equipment                                                           -                  (121)
                                                            -----------           -----------
         Total deferred tax liabilities                               -                  (121)

Less- Valuation allowance                                       (69,723)              (24,145)
                                                            -----------           -----------

         Deferred tax assets, net                           $         -           $        -
                                                            ===========           ===========
</TABLE>

Due to the uncertainty surrounding the realization of these assets, a valuation
allowance has been provided to fully offset the deferred tax assets.  As of
March 31, 2001 and 2000, Ashford.com had net operating loss carryforwards of
approximately $180.9 million and $64.9 million, respectively, which may be used
to offset taxable income in future years.  The net operating loss carryforward
will begin to expire in fiscal year 2014.  A change in control, as defined by
federal income tax regulations, could significantly limit the Company's ability
to utilize its carryforwards.

11.  RELATED PARTY TRANSACTIONS

Certain key members of the Company's management and the board of directors are
stockholders of a company from which the Company purchases computer equipment,
receives consulting services and rented certain office space at prices and terms
that management believes are equivalent to those available to and
<PAGE>

                               ASHFORD.COM, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



transacted with unrelated parties. During two years ended March 31, 2001 and
2000 and the period from Inception, through March 31, 1999, charges for
consulting services and office rent, and payments for Web site development costs
and computer equipment to this related party totaled $3.6 million, $2.5 million
and $172,848, respectively. Payments made during fiscal year 2001 include $2.9
million of cash and 258,706 warrants to purchase the Company's common stock for
$0.01. See Note 9.

In December 1999, the Company entered into a marketing agreement with a minority
interest stockholder for the delivery of new customers at a price and terms that
management believes are equivalent to those available and transacted with
unrelated parties.  Total net payments of $0.5 million and $6.0 million were
made during fiscal 2001 and 2000, respectively, pursuant to this agreement.

12.  COMMITMENTS AND CONTINGENCIES

LEASES

Rent expense for the years ended March 31, 2001 and 2000 and for the period from
Inception through March 31, 1999, was approximately $1.3 million, $853,000 and
$47,000, respectively.

Future minimum lease payments relating to noncancelable operating leases,
primarily for office space and equipment, are as follows:

                For the year ending March 31-
                  2002                                   1,291
                  2003                                   1,208
                  2004                                      93
                                                        ------
                                                        $2,592
                                                        ======

401(k) PLAN

Effective February 1, 1999, the Company established a defined contribution
401(k) plan.  Employees eligible to join the plan are those 21 years of age or
older and have a minimum of 1,000 hours of service within a 12-month period
after their date of hire.  Eligible employees may enter the plan on the
effective date and thereafter on any January 1 or July 1.  The service
requirement is waived for those employed on the effective date.  The Company
does not contribute to the plan.

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with each of its employees.
Either party may terminate such employment agreement at any time.  The
employment agreements provide for employees to receive the compensation and
benefits offered to and accepted by them.  The employment agreements also
provide the Company with protection for its trade secrets, intellectual property
rights and other confidential information.

LITIGATION

During the fourth quarter of fiscal 2001, the Company recorded a charge of
approximately $400,000 relating to the pending settlement of a lawsuit filed
against the Company and certain of its officers during 1999.  The final
settlement of this lawsuit is contingent upon court approval; however,
management does not expect a material change in the settlement amount upon
obtaining court approval.

The SEC is conducting an investigation concerning our accounting and disclosures
relating to certain marketing activities during fiscal years 2000 and 2001. We
have been cooperating with the SEC, and we will continue to do so. Our audit
committee also has completed an internal review of certain matters related to
the SEC review. We do not believe that any of the accounting issues raised by
the SEC will have a material effect on our financial statements.
<PAGE>

                               ASHFORD.COM, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



The Company is, and from time to time may be, a party to various other claims
and legal proceedings generally incidental to its business.  Although the
ultimate disposition of these matters is not presently determinable, management
does not believe that ultimate settlement of any or all of such matters will
have a material adverse effect upon the Company's financial condition or results
of operations.

13.  QUARTERLY RESULTS (UNAUDITED)

The following tables contain selected unaudited Consolidated Statement of
Operations information for each quarter of fiscal year 2001 and fiscal year
2000.  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.


<TABLE>
<CAPTION>
                                                                             Year Ended March 31, 2001
                                                    ------------------------------------------------------------------------
                                                         Fourth              Third              Second              First
                                                         Quarter            Quarter            Quarter             Quarter
                                                    -------------      -------------      --------------      --------------
                                                                       (in thousands, except per share data)
<S>    <C>                                             <C>                <C>                <C>                 <C>
Net sales                                                $ 14,328           $ 27,750            $ 12,013            $ 13,105
Gross profit (1)                                              843              5,273               2,293               2,439
Net loss                                                  (17,001)           (40,022)            (40,556)            (39,102)
Net loss per share, basic and diluted                      $(0.37)            $(0.87)             $(0.89)             $(0.87)
Pro forma net loss per share, basic and diluted            $(0.37)            $(0.87)             $(0.89)             $(0.87)
Shares used to compute net loss per share:
       Basic and diluted                                   46,456             45,758              45,598              45,099
       Pro forma basic and diluted  (2)                    46,456             45,758              45,598              45,099
</TABLE>


<TABLE>
<CAPTION>
                                                                               Year Ended March 31, 2000
                                                    ----------------------------------------------------------------------------
                                                          Fourth              Third               Second            First Quarter
                                                         Quarter             Quarter              Quarter
                                                    --------------      --------------      ---------------      ---------------
                                                                         (in thousands, except per share data)
<S>    <C>                                             <C>                 <C>                 <C>                  <C>
Net sales                                                 $ 11,804            $ 20,104              $ 4,400              $ 3,623
Gross profit (1)                                             2,174               3,427                  225                  620
Net income (loss)                                          (41,292)            (19,038)              (8,553)              (3,178)
Net income (loss) per share, basic and diluted              $(0.92)             $(0.51)              $(0.57)              $(0.27)
Pro forma net income (loss) per share, basic and
 diluted                                                    $(0.92)             $(0.51)              $(0.27)              $(0.12)
Shares used to compute net income (loss) per
 share:
       Basic and diluted                                    44,909              37,198               14,920               11,604
       Pro forma basic and diluted  (2)                     44,909              37,198               31,117               26,995
</TABLE>

(1)  Includes the reclassification of certain promotional costs from marketing
     and sales to cost of sales related to the adoption of the Emerging Issues
     Task Force Issue No. 00-14, "Accounting for Certain Sales Incentives."  All
     periods presented have been reclassified for consistent presentation.  Also
     includes a charge of approximately $1.8 million during the fourth quarter
     of the year ended March 31, 2001, relating to inventory valuation reserves.
     See Note 2.
(2)  Includes shares associated with the conversion of preferred stock into
     common stock as if the conversion occurred on the dates of original
     issuance.  See Note 2.