<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                   -----------------------------------------


                                   FORM 10-Q


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

                 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001

                                      OR

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


                       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)

                          ---------------------------

     Indicate by check whether the registrant (1) has filed all reports required
to be filed by Sections 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

                                 (1)   Yes     X         No
                                           ---------        ---------
                                 (2)   Yes     X         No
                                           ---------        ---------

  As of June 30, 2001, there were 52,766,732 shares of the Company's common
  stock outstanding.
<PAGE>

                               ASHFORD.COM, INC.
                                   FORM 10-Q
                                     INDEX
<TABLE>
<CAPTION>


PART I.  CONSOLIDATED FINANCIAL INFORMATION                                                         PAGE
                                                                                                   ----
<S>      <C>                                                                                        <C>
Item 1.  Consolidated Financial Statements........................................................     3
         Consolidated Balance Sheets at June 30, 2001 and March 31, 2001..........................     3
         Consolidated Statements of Operations for the three months ended June 30, 2001 and 2000..     4
         Consolidated Statements of Cash Flows for the three months ended June 30, 2001 and 2000..     5
         Notes to Consolidated Financial Statements...............................................     6

ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations....    10

ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk...............................    15

PART II. OTHER INFORMATION
ITEM 1.  Legal Proceedings........................................................................    27
ITEM 6.  Exhibits and Reports on Form 8-K.........................................................    27
SIGNATURES........................................................................................    28
</TABLE>

                                       2
<PAGE>

PART I. CONSOLIDATED FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

                               ASHFORD.COM, INC.
                          CONSOLIDATED BALANCE SHEETS
              (IN THOUSANDS, EXCEPT PAR VALUE AND SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                              June 30,                   March 31,
                                                                                2001                       2001
                                                                        --------------------       --------------------
                                                                              (Unaudited)
<S>                                                                     <C>                        <C>
ASSETS
Current assets:
 Cash and cash equivalents                                                   $   4,571                  $   7,095
 Restricted cash                                                                 1,500                      1,500
 Accounts receivable, net of allowance for doubtful accounts of $280
  and $231, respectively                                                         2,521                      2,559

 Merchandise inventory                                                          18,387                     24,066
 Prepaid and other                                                               1,358                      1,535
                                                                             ---------                  ---------
  Total current assets                                                          28,337                     36,755
Property and equipment, net of accumulated depreciation of $7,191 and            6,909                      8,441
 $5,894, respectively
Purchased intangibles, net of accumulated amortization of $12,871 and
 $10,483, respectively                                                           5,438                     10,162

Other assets                                                                       693                        908
                                                                             ---------                  ---------
Total assets                                                                 $  41,377                  $  56,266
                                                                             =========                  =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable and accrued liabilities                                    $   5,039                  $   8,189
 Revolving credit facility                                                          --                      4,705
 Net assets acquired in excess of purchase price attributed to                   2,880                         --
  discontinued operations
Other long-term liabilities                                                         97                        104
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized, no                  --                         --
 shares issued and outstanding at June 30, 2001 and March 31, 2001
Common stock, $.001 par value, 100,000,000 shares authorized,                       56                         49
 55,833,458 and 48,691,917 shares issued at
June 30, 2001 and March 31, 2001, respectively
Treasury stock, at cost, 3,066,726 and 770,893 at June 30, 2001 and
 March 31, 2001, respectively                                                     (865)                        --

Additional paid-in capital                                                     260,883                    259,365
Subscriptions receivable                                                          (376)                    (1,156)
Deferred compensation                                                           (1,907)                    (4,983)
Accumulated deficit                                                           (224,430)                  (210,007)
                                                                             ---------                  ---------
 Total stockholders' equity                                                     33,361                     43,268
                                                                             ---------                  ---------
Total liabilities and stockholders' equity                                   $  41,377                  $  56,266
                                                                             =========                  =========
</TABLE>

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

                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                              Three months ended
                                                                                   June 30,
                                                                     ----------------------------------
                                                                          2001               2000
                                                                     ---------------   ----------------
<S>                                                                  <C>                  <C>
Net sales                                                                   $ 12,106           $ 13,105
Cost of sales                                                                 10,099             10,666
                                                                     ---------------   ----------------
Gross profit                                                                   2,007              2,439
Operating expenses:
 Marketing and sales (includes non-cash
  amortization of $304 and $26,034,                                            3,096             32,823
  respectively)

 General and administrative (includes non-cash
  amortization of $272 and $847, respectively)                                 5,470              6,748

 Restructuring charge                                                            399                 --
 Settlement loss                                                               2,297                 --
 Loss on sale of assets                                                          620                 --
 Depreciation and amortization                                                 3,882              2,654
                                                                     ---------------   ----------------
  Total operating expenses                                                    15,764             42,225
                                                                     ---------------   ----------------
Loss from operations                                                         (13,757)           (39,786)
Interest income, net                                                               1                684
                                                                     ---------------   ----------------

Net loss before discontinued operations                                      (13,756)           (39,102)
Net loss from discontinued operations                                            667                 --
                                                                     ---------------   ----------------
Net loss                                                                    $(14,423)          $(39,102)
                                                                     ===============   ================
Net loss before discontinued operations per                                 $  (0.27)          $  (0.87)
 share, basic and diluted
Net loss from discontinued operations per                                   $  (0.01)
 share, basic and diluted                                                                            --

Net loss per share, basic and diluted                                       $  (0.28)          $  (0.87)
Shares used to compute net loss per share,
 basic and diluted                                                            51,188             45,099

Supplemental Information (1)
 Net loss, excluding restructuring charge,
  settlement loss, loss on sale of assets,
  depreciation and amortization, and net loss
  from discontinued operations                                              $ (5,982)          $ (9,567)



 Net loss per share, excluding restructuring
  charge, settlement loss, loss on sale of
  assets, depreciation and amortization, and
  net loss from discontinued operations                                     $  (0.12)          $  (0.21)

 </TABLE>

   (1) The accompanying supplemental financial information is presented for
       informational purposes only and should not be considered as a substitute
       for the historical financial information presented in accordance with
       generally accepted accounting principles.

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

                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                            Three months ended
                                                                                                 June 30,
                                                                           ------------------------------------------------
                                                                                   2001                       2000
                                                                           ---------------------      ---------------------
<S>                                                                        <C>                        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                                         $(14,423)                  $(39,102)
Adjustments to reconcile net loss to net cash used in operating
 activities:
 Depreciation and amortization                                                      4,458                     29,535
 Restructuring charge related to issuance of options to purchase
  common stock                                                                        221                        ---
 Settlement loss                                                                    2,297                        ---
 Loss on sale of assets                                                               620                        ---
 Changes in assets and liabilities:
  Accounts receivable, net                                                             38                      1,666
  Merchandise inventory                                                             5,679                      2,274
  Prepaid and other                                                                   177                       (996)
  Other assets                                                                       (200)                       (63)
  Accounts payable and accrued liabilities                                         (3,894)                     1,154
                                                                                 --------                   --------
   Net cash used in operating activities                                           (5,027)                    (5,532)
CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchases of property and equipment                                                 (107)                    (2,741)
 Proceeds from sale of equipment and intangible assets                                 45                        ---
 Net proceeds from acquisition                                                      7,270                        ---
 Internet domain and other intangible asset purchases                                 ---                        (60)
                                                                                 --------                   --------
   Net cash provided by (used in) investing activities                              7,208                     (2,801)
CASH FLOWS FROM FINANCING ACTIVITIES:
 Payments on revolving credit facility                                             (4,705)                       ---
                                                                                 --------                   --------
 Net decrease in cash and cash equivalents                                         (2,522)                    (8,333)
CASH AND CASH EQUIVALENTS:
 Beginning of period                                                                7,095                     46,474
                                                                                 --------                   --------
 End of period                                                                   $  4,571                   $ 38,141
                                                                                 ========                   ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 Issuance of common stock in connection with marketing agreement                 $  ---                     $     74
 Issuance of warrants in connection with purchases of fixed assets                  ---                          221
 Issuance of common stock in connection with acquisition                          3,979                          ---
 Purchase of common stock in connection with employment and
  consultant agreements                                                             865                          ---

</TABLE>

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

                                       5
<PAGE>

                               ASHFORD.COM, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Information

     The accompanying unaudited consolidated financial statements have been
prepared by Ashford.com, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission.  Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations.  In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, and
disclosures necessary for a fair presentation of these financial statements have
been included.  These financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended March 31, 2001.  Results for the three
months ended June 30, 2001, are not necessarily indicative of the results that
may be expected for any future quarter or for the year ending March 31, 2002.

     The Company has suffered significant losses from operations since its
inception.  Management is implementing a strategy to significantly reduce costs
and improve operating efficiencies. Management believes that the Company's
current cash balances 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.

Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of 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.

Reclassification of Prior Period Balances

     Certain prior period balances have been reclassified for consistent
presentation.

Net Loss Per Share

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

Recent Accounting Pronouncements

     In July 2001, the FASB issued Statements No. 141, Business Combinations and
No. 142, Goodwill and Other Intangible Assets requiring the nonamortization
approach to account for purchased goodwill.  Under the nonamortization approach,
goodwill would be tested for impairment based on fair values, rather

                                       6
<PAGE>

than amortized to earnings. Under the new statements, The Company's purchased
intangibles would continue to be amortized consistent with its current policy.
While the Company has not made a final determination, upon adoption of these
standards, the Company expects to record any goodwill as income or expense.

     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.

     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 $0.8 million during both
quarters ended June 30, 2001 and 2000.

2.   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.

     During the first quarter ended June 30, 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, decreasing the Company's
investment in inventory and eliminating certain operating costs, including costs
associated with personnel.  In connection with this review, the Company recorded
charges of approximately $0.5 million for headcount reductions.  Headcount
reductions consisted of approximately 46 employees, or about 19% of the
Company's workforce, across all areas of the Company.

     Total cash outlays during the quarter ended June 30, 2001 were
approximately $0.2 million.  The restructuring accrual was reduced by an
additional $0.2 million through the issuance of options to purchase the
Company's common stock.  Previously recorded allowances for contract
cancellations of approximately $0.1 million were reversed during the quarter
ended June 30, 2001 upon determination that the associated cost would not be
incurred.  The remaining $0.1 million of restructuring costs is expected to be
paid through December 31, 2001.

                                       7
<PAGE>

     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
Provision for quarter ended June 30, 2001                      479                   --                 479
Provision reversed in quarter ended June 30, 2001               --                  (80)                (80)
Amount paid in quarter ended June 30, 2001                    (421)                  --                (421)
                                                             -----                 ----               -----
Balance at June 30, 2001                                     $  88                $  --               $  88
                                                             =====                =====               =====
</TABLE>

3.  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 $8.9 million on June 30, 2001.
Amounts outstanding under the credit facility bear interest at the prime rate or
LIBOR plus 250 basis points, as elected by the Company.  There were no amounts
outstanding under the revolving credit facility as of June 30, 2001.

4.  TREASURY STOCK

     During May 2001, the Company repurchased 1,852,500 shares of its common
stock for approximately $0.9 million in connection with certain employment and
consultant agreements.  Consideration for this purchase was a subscription
receivable of approximately $0.8 million and accrued interest receivable of
approximately $0.1 million.

5.  OTHER MATTERS

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 principals of the online
watch retailer and to resolve litigation between them, the parties began
negotiating a dissolution of that relationship.  The Company and the online
watch retailer 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 recorded a charge of approximately
$2.3 million in connection with this settlement during the quarter ended June
30, 2001.

                                       8
<PAGE>

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 May 2001, 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 accepted, to
assume the prospective operations of the online art retailer as a separately
capitalized entity.  Pursuant to this agreement, the Company contributed 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 entered 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 of the new entity's products generated by the Company's Web site.
The Company will not assume any future operating costs or obligations.  Further,
substantially all Company employees previously employed by the online art
retailer became employees of the new entity or were terminated.

     Activity related to art operations during the period was recorded in
accordance with APB No. 30 "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" and EITF 85-36 "Discontinued
Operations with Expected Gain and Interim Operating Losses".  Accordingly,
losses from the acquisition closing date (May 3, 2001) through the measurement
date (June 13, 2001) have been reflected as net loss from discontinued
operations in the accompanying financial statements.  Losses from the
measurement date through the separation date (July 31, 2001) have been deferred
as there is reasonable assurance that a net gain on disposal will be realized.
For the quarter ended June 30, 2001, net loss on discontinued operations
included net sales commissions of approximately $125,000 and operating expenses
of approximately $792,000.  For the period from the measurement date through
June 30, 2001, net losses of approximately $109,000 representing net sales
commissions of approximately $53,000 and operating expenses of $162,000 were
deferred.  Total net assets acquired in excess of purchase price related to
discontinued operations was approximately $2.9 million at June 30, 2001.  The
Company expects to recognize a net gain on disposal of discontinued operations
of approximately $2.0 million during the quarter ending September 30, 2001.

Sale of Asset

     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 majority of the cash proceeds were received during the
quarter ending September 2001.  The Company recorded a loss on sale of
approximately $0.5 million during the quarter ending June 2001.

                                       9
<PAGE>

ITEM 2.  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 most recent Form 10-K
and 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 have focused 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 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

                                       10
<PAGE>

 .    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.

     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

NET SALES

     Net sales consist of product sales and are net of product returns, coupons
and promotional discounts.  Net sales decreased from $13.1 million for quarter
ended June 30, 2000 to $12.1 million for quarter ended June 30, 2001.  The
decrease in net sales was affected by a general decline in retail spending and
reduced marketing and sales efforts net of an increase in corporate gift
activity attributed to the addition of new salespeople and a business
acquisition during the quarter ended December 2000.

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 decreased as net sales decreased.  Gross profit decreased from $2.4
million for quarter ended June 30, 2000 to $2.0 million for quarter ended June
30, 2001.  Gross margin decreased from 19% for the quarter ended June 30, 2000
to 17% for the quarter ended June 30, 2001.  Gross margin was affected by a
targeted promotional offer implemented with one of our corporate marketing
partners during the June 2001 quarter and by our actions to narrow product
assortment and reduce our overall investment in merchandise inventory net of
increased sales from corporate gifts which generally generate higher gross
margin.  We anticipate gross margin improvements in future periods as we
continue to grow our corporate gift business, develop our newer higher-margin
product categories such as home and lifestyle products and our Ashford
Collection jewelry, and complete our activities to reduce product assortment and
to reduce our overall investment in merchandise inventory.  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

                                       11
<PAGE>

staffing distribution centers, are included in marketing and sales. Marketing
and sales expenses decreased from approximately $32.8 million for quarter ended
June 30, 2000 to $3.1 million for quarter ended June 30, 2001. The decrease in
marketing and sales is attributable to an decrease in non-cash amortization from
$26.0 million for quarter ended June 30, 2000 to $0.3 million for quarter ended
June 30, 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 and implementation of new and modified agreements with
Internet and online media providers at improved advertising rates or with pay-
for-performance provisions. 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 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 decreased from $6.7 million for quarter
ended June 30, 2000 to $5.5 million for quarter ended June 30, 2001.  Our
general and administrative expenses have decreased primarily due to costs
associated with decreased headcount as a result of our restructuring activities
during January 2001 and May 2001 and decreased amortization of related deferred
compensation. We expect our general and administrative expenses to continue to
decline in future periods as we realize a full period of benefit from
restructuring activities during May 2001, and as we implement further operating
cost efficiencies.

     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 $2.7
million for quarter ended June 30, 2000 to $3.9 million for quarter ended June
30, 2001.  The increase is primarily due to depreciation and amortization
expense related to Internet domain and other intangible asset purchases.

     Interest Income.  Interest income consists of earnings on cash and cash
equivalents.  The decrease in interest income for quarter ended June 30, 2001 is
due to lower cash balances during the quarter.  See also "Liquidity and Capital
Resources."

     Interest Expense.  Interest expense consists of interest costs on
borrowings.  The increase in interest expense for quarter ended June 30, 2001 is
due to borrowings on our revolving credit facility entered into during September
2000.

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
$5.5 million for quarter ended June 30, 2000 to $5.0 million for quarter ended
June 30, 2001.  Our net operating cash outflow for quarter ended June 30, 2000
was primarily a result of prepaid marketing agreements, inventory purchases and,
to a lesser extent, operating losses, exclusive of non-cash depreciation and
amortization.  Our operating cash outflow during June 30, 2001 was primarily a
result of operating losses, exclusive of non-cash depreciation and amortization,
restructuring charge, settlement loss, and loss on sale of assets and decreases
in accounts payable and accrued liabilities and merchandise inventory.  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.

                                       12
<PAGE>

     Investing Activities.  Net cash provided by investing activities totaled
$7.2 million for quarter ended June 30, 2001 compared to net cash used in
investing activities of $2.8 million for quarter ended June 30, 2000.  Net cash
provided by investing activities during quarter ended June 30, 2001 primarily
consisted of $7.3 million related to a merger agreement with an online art
retailer and $0.1 related to property and equipment purchases.  Net cash used in
investing activities during quarter ended June 30, 2000 consisted of
approximately $2.8 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.

     Financing Activities.  Net cash used in financing activities totaled $4.7
million during quarter ended June 30, 2001.  Financing activities related to
payments on our revolving credit facility.

     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.

     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 $8.9 million on June 30,
2001.  Amounts outstanding under the credit facility bear interest at the prime
rate or LIBOR plus 250 basis points, as elected by the Company.  There were no
amounts outstanding under the revolving credit facility as of June 30, 2001.

     Financial Condition.  The Company has suffered significant losses from
operations since its inception.  Management is implementing a strategy to
significantly reduce costs and improve operating efficiencies. Management
believes that the Company's current cash balances 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.

     Restructuring and Other Matters. 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.

     During the first quarter ended June 30, 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, decreasing the Company's
investment in inventory and eliminating certain operating costs, including costs
associated with personnel.  In connection with this review, the Company recorded
charges of approximately $0.5 million for headcount reductions.  Headcount
reductions consisted of approximately 46 employees, or about 19% of the
Company's workforce, across all areas of the Company.

                                       13
<PAGE>

     Total cash outlays during the quarter ended June 30, 2001 were
approximately $0.2 million.  The restructuring accrual was reduced by an
additional $0.2 million through the issuance of options to purchase the
Company's common stock.  Previously recorded allowances for contract
cancellations of approximately $0.1 million were reversed during the quarter
ended June 30, 2001 upon determination that the associated cost would not be
incurred.  The remaining $0.1 million of restructuring costs is expected to be
paid through December 31, 2001.

     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
principals of the online watch retailer and to resolve litigation between them,
the parties began negotiating a dissolution of that relationship.  The Company
and the online watch retailer 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 recorded a charge of
approximately $2.3 million in connection with this settlement during the quarter
ended June 30, 2001.

     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 accepted, to assume the prospective operations of the online art
retailer as a separately capitalized entity.  Pursuant to this agreement, the
Company contributed 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 entered 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 of the new entity's products generated by the
Company's Web site.  The Company will not assume any future operating costs or
obligations.  Further, substantially all Company employees previously employed
by the online art retailer became employees of the new entity or were
terminated.

     Activity related to art operations during the period was recorded in
accordance with APB No. 30 "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" and EITF 85-36 "Discontinued
Operations with Expected Gain and Interim Operating Losses".  Accordingly,
losses from the acquisition closing date (May 3, 2001) through the measurement
date (June 13, 2001) have been reflected as net loss from discontinued
operations in the accompanying financial statements.  Losses from the
measurement date through the separation date (July 31, 2001) have been deferred
as there is reasonable assurance that a net gain on disposal will be realized.
For the quarter ended June 30, 2001, net loss on discontinued operations
included net sales commissions of approximately $125,000 and operating expenses
of approximately $792,000.  For the period from the measurement date through
June 30, 2001, net losses of approximately $109,000 representing net sales
commissions of approximately $53,000 and operating expenses of $162,000 were
deferred.  Total net assets acquired in excess of purchase price related to
discontinued operations was approximately $2.9 million at June 30, 2001.  The
Company expects to recognize a net gain on disposal of discontinued operations
of approximately $2.0 million during the quarter ending September 30, 2001.

                                       14
<PAGE>

     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 majority of the cash proceeds were received during the
quarter ending September 2001.  The Company recorded a loss on sale of
approximately $0.5 million during the quarter ending June 2001.

RECENT ACCOUNTING PRONOUNCEMENTS

     In July 2001, the FASB issued Statements No. 141, Business Combinations and
No. 142, Goodwill and Other Intangible Assets requiring the nonamortization
approach to account for purchased goodwill.  Under the nonamortization approach,
goodwill would be tested for impairment based on fair values, rather than
amortized to earnings.  Under the new statements, The Company's purchased
intangibles would continue to be amortized consistent with its current policy.
While the Company has not made a final determination, upon adoption of these
standards, the Company expects to record any goodwill as income or expense.

     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.

     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 $0.8 million during both
quarters ended June 30, 2001 and 2000.

ITEM 3.  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.

                                       15
<PAGE>

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 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

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 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."



                                       16
<PAGE>


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.

     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 Common Stock May be Delisted from the Nasdaq National Market.

     On April 9, 2001, we received notice from Nasdaq that our common stock had
failed to maintain Nasdaq's minimum bid price closing requirement of $1.00 and
that such failure had continued beyond the ninety (90) day probationary period
allowed under the Nasdaq National Marketplace Rules.  The letter specified that,
as a result of our failure to maintain the minimum bid price closing
requirement, our common stock would be delisted at the close of business on July
18, 2001.  However, we appealed the decision, and the delisting was stayed
pending a hearing before the Nasdaq Qualifications Panel.  This hearing is
scheduled to occur on August 24, 2001.

     We will submit to our shareholders for approval at our annual meeting to be
held August 27, 2001, a 1:10 reverse stock split.  We believe the reverse stock
split is the most effective means to avoid a delisting of our common stock from
Nasdaq.  We believe that the review panel from Nasdaq may look favorably on

                                       17
<PAGE>

our reverse split proposal and provide us with the time to effect the split
pending approval by the shareholders at the Annual Meeting. In addition, based
upon the market price of our common stock at the time of this report, the market
value of the public float of our common stock is not sufficient to meet the
continued listing requirements under the Nasdaq National Marketplace Rules. We
can not make any assurances that our common stock will not be delisted or that
the market value of the public float will increase and satisfy the requirement.

  We cannot predict whether our shareholders will approve the reverse stock
split or, if approved, that the reverse stock split will increase the market
price for our common stock.  The history of similar stock split combinations for
companies in like circumstances is varied.  There is no assurance that the
market price per share of our common stock following the reverse stock split
will either exceed or remain in excess of the $1.00 minimum bid price as
required by Nasdaq or that we will otherwise meet the requirements of Nasdaq for
continued inclusion for trading on Nasdaq.  A reverse stock split could
negatively impact the value of the our 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.

     The market price of our common stock will also be based on our performance
and other factors, some of which are unrelated to the number of shares
outstanding.  If the reverse stock split is effected and the market price of our
common stock declines, the percentage decline as an absolute number and as a
percentage of our overall market capitalization may be greater than would occur
in the absence of a reverse stock split.  Furthermore, liquidity of our common
stock could be adversely affected by the reduced number of shares that would be
outstanding after the reverse stock split.

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 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.

                                       18
<PAGE>

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.

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 June 30, 2001, we held approximately $18.4 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.

                                       19
<PAGE>

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.

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

                                       20
<PAGE>

 .    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;

 .  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;

                                       21
<PAGE>

 .  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 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,

                                       22
<PAGE>

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 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

                                       23
<PAGE>

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 online services is a recent
phenomenon. As a result, acceptance and use may not continue to develop at

                                       24
<PAGE>

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,

                                       25
<PAGE>

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. 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 June 30, 2001, the reported
sale price of our common stock on the Nasdaq National Market was as high as
$24.88 and as low as $0.21.  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;

                                       26
<PAGE>

 .    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.

PART II.  OTHER INFORMATION

ITEM 1.  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 6.  EXHIBITS AND REPORTS ON FORM 8-K.

     (a)  Exhibits under Item 601 of Regulation S-K

<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
</TABLE>

                                       27
<PAGE>

<TABLE>
<S>            <C>

*              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.
+              Incorporated by reference to the Company's Annual Report on Form 10-K filed on June 29, 2001.
</TABLE>

     (b)  Reports on Form 8-K:

     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.

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

     On July 19, we filed a Form 8-K under Item 5 announcing that we had
received a letter from The Nasdaq Stock Market notifying us that our common
stock would be delisted unless we requested a hearing.  A hearing was requested.

                                   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:  August 14, 2001           ASHFORD.COM, INC.



                                 By:   /s/ Brian E. Bergeron
                                    ------------------------
                                    Brian E. Bergeron
                                    Chief Financial Officer

                                       28