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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



(Mark One)



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | ----------------------------------------------------------------------------------------



FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 2003.



or



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



FOR THE TRANSITION PERIOD FROM
 TO
.



Commission File Number 0-16611



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GSI COMMERCE, INC.

(Exact name of registrant as specified in its charter)



|Delaware                                                       |  | 04-2958132                             
|-------------------------------------------------------------- |  | ---------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|1075 First Avenue, King of Prussia, PA                         |  | 19406                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             



610-265-3229

(Registrants telephone number, including area code)



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



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



Indicate the number of shares outstanding of each of the issuers classes of common stock, as of November 3, 2003:



|Common Stock, $.01 par value |  | 40,738,599        
|---------------------------- |  | ------------------
|(Title of each class)        |  | (Number of Shares)



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##### Table of Contents

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 27, 2003



TABLE OF CONTENTS



|                                                                                                                                                  |  |                                                                                       |  | Page
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART IFINANCIAL INFORMATION                                                                                                                      |  |                                                                                      
|                                                                                                                                                  |  |                                                                                      
|Item 1.                                                                                                                                           |  | Financial Statements:                                                                 |  |     
|Condensed Consolidated Balance Sheets as of December 28, 2002 and September 27, 2003 (Unaudited)                                                  |  | 1                                                                                    
|Condensed Consolidated Statements of Operations for the three- and nine-month periods ended September 28, 2002 and September 27, 2003 (Unaudited) |  | 2                                                                                    
|Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 28, 2002 and September 27, 2003 (Unaudited)            |  | 3                                                                                    
|Notes to Condensed Consolidated Financial Statements (Unaudited)                                                                                  |  | 4                                                                                    
|Item 2.                                                                                                                                           |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 14  
|Item 3.                                                                                                                                           |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 30  
|Item 4.                                                                                                                                           |  | Controls and Procedures                                                               |  | 30  
|                                                                                                                                                  | 
|PART IIOTHER INFORMATION                                                                                                                         |  |                                                                                      
|                                                                                                                                                  |  |                                                                                      
|Item 1.                                                                                                                                           |  | Legal Proceedings                                                                     |  | 31  
|Item 2.                                                                                                                                           |  | Changes in Securities and Use of Proceeds                                             |  | 31  
|Item 3.                                                                                                                                           |  | Defaults Upon Senior Securities                                                       |  | 32  
|Item 4.                                                                                                                                           |  | Submission of Matters to a Vote of Security Holders                                   |  | 32  
|Item 5.                                                                                                                                           |  | Other Information                                                                     |  | 32  
|Item 6.                                                                                                                                           |  | Exhibits and Reports on Form 8-K                                                      |  | 32  
|                                                                                                                                                  | 
|SIGNATURES                                                                                                                                        |  | 34                                                                                   



For all years prior to
1999, our fiscal year ended on December 31. Effective for 1999, we changed our fiscal year from the last day of December to the Saturday nearest the last day of December. Accordingly, references to fiscal 1999, fiscal 2000, fiscal 2001, fiscal 2002,
fiscal 2003 and fiscal 2004 refer to the years ended January 1, 2000, December 30, 2000, December 29, 2001, December 28, 2002 and the years ending January 3, 2004 and January 1, 2005.



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



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##### Table of Contents

PART IFINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



GSI COMMERCE, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)



|                                                                                                                                                                                                                                                                             |  | December 28, 2002 |          |   | September 27,2003 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ----------------- | -
|ASSETS                                                                                                                                                                                                                                                                       |  |                   |          |   |                   |  
|Current assets:                                                                                                                                                                                                                                                              |  |                   |          |   |                   |  
|Cash and cash equivalents                                                                                                                                                                                                                                                    |  | $                 | 61,004   |   |                   | $
|Short-term investments                                                                                                                                                                                                                                                       |  |                   | 2,280    |   |                   |  
|Marketable securities                                                                                                                                                                                                                                                        |  |                   | 11,543   |   |                   |  
|Accounts receivable, net of allowance of $1,533 and $1,293, respectively                                                                                                                                                                                                     |  |                   | 3,974    |   |                   |  
|Inventory                                                                                                                                                                                                                                                                    |  |                   | 24,306   |   |                   |  
|Prepaid expenses and other current assets                                                                                                                                                                                                                                    |  |                   | 2,078    |   |                   |  
|                                                                                                                                                                                                                                                                             |  |                   |          |   |                   |  
|Total current assets                                                                                                                                                                                                                                                         |  |                   | 105,185  |   |                   |  
|Property and equipment, net                                                                                                                                                                                                                                                  |  |                   | 48,669   |   |                   |  
|Goodwill, net                                                                                                                                                                                                                                                                |  |                   | 13,453   |   |                   |  
|Notes receivable                                                                                                                                                                                                                                                             |  |                   | 4,423    |   |                   |  
|Other equity investments                                                                                                                                                                                                                                                     |  |                   | 2,159    |   |                   |  
|Other assets, net of accumulated amortization of $1,250 and $2,042, respectively                                                                                                                                                                                             |  |                   | 13,684   |   |                   |  
|                                                                                                                                                                                                                                                                             |  |                   |          |   |                   |  
|Total assets                                                                                                                                                                                                                                                                 |  | $                 | 187,573  |   |                   | $
|                                                                                                                                                                                                                                                                             |  |                   |          |   |                   |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                                         |  |                   |          |   |                   |  
|Current liabilities:                                                                                                                                                                                                                                                         |  |                   |          |   |                   |  
|Accounts payable                                                                                                                                                                                                                                                             |  | $                 | 31,664   |   |                   | $
|Accrued expenses and other                                                                                                                                                                                                                                                   |  |                   | 20,283   |   |                   |  
|Deferred revenue                                                                                                                                                                                                                                                             |  |                   | 15,025   |   |                   |  
|Current portioncapital lease obligations                                                                                                                                                                                                                                    |  |                   | 78       |   |                   |  
|                                                                                                                                                                                                                                                                             |  |                   |          |   |                   |  
|Total current liabilities                                                                                                                                                                                                                                                    |  |                   | 67,050   |   |                   |  
|Mandatorily redeemable preferred stock, Series A, $0.01 par value, 10,000 shares authorized; 200 and 0 shares issued as of
December 28, 2002 and September 27, 2003, respectively; 0 shares outstanding as of December 28, 2002 and September 27, 2003, respectively         |  |                   |         |   |                   |  
|Commitments and contingencies                                                                                                                                                                                                                                                |  |                   |          |   |                   |  
|Stockholders equity:                                                                                                                                                                                                                                                        |  |                   |          |   |                   |  
|Preferred stock, $0.01 par value, 4,990,000 shares authorized; 0 shares issued and outstanding as of December 28, 2002 and
September 27, 2003, respectively                                                                                                                  |  |                   |         |   |                   |  
|Common stock, $0.01 par value, 90,000,000 shares authorized; 38,857,855 and 40,636,675 shares issued as of December 28, 2002 and
September 27, 2003, respectively; 38,783,645 and 40,635,465 shares outstanding as of December 28, 2002 and September 27, 2003, respectively |  |                   | 389      |   |                   |  
|Additional paid in capital                                                                                                                                                                                                                                                   |  |                   | 285,625  |   |                   |  
|Accumulated other comprehensive income                                                                                                                                                                                                                                       |  |                   | 57       |   |                   |  
|Accumulated deficit                                                                                                                                                                                                                                                          |  |                   | (165,547 | ) |                   |  
|                                                                                                                                                                                                                                                                             |  |                   |          |   |                   |  
|                                                                                                                                                                                                                                                                             |  |                   | 120,524  |   |                   |  
|Less: Treasury stock, at par                                                                                                                                                                                                                                                 |  |                   | 1        |   |                   |  
|                                                                                                                                                                                                                                                                             |  |                   |          |   |                   |  
|Total stockholders equity                                                                                                                                                                                                                                                   |  |                   | 120,523  |   |                   |  
|                                                                                                                                                                                                                                                                             |  |                   |          |   |                   |  
|Total liabilities and stockholders equity                                                                                                                                                                                                                                   |  | $                 | 187,573  |   |                   | $
|                                                                                                                                                                                                                                                                             |  |                   |          |   |                   |  



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



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##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                                                                                             |  | Three Months Ended |        |   | Nine Months Ended  |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ------------------ | -
|                                                                                                                             |  | September 28, 2002 |        |   | September 27, 2003 |  
|Revenues:                                                                                                                    |  |                    |        |   |                    |  
|Net revenues from product sales                                                                                              |  | $                  | 27,778 |   |                    | $
|Service fee revenues                                                                                                         |  |                    | 4,545  |   |                    |  
|                                                                                                                             |  |                    |        |   |                    |  
|Net revenues                                                                                                                 |  |                    | 32,323 |   |                    |  
|Cost of revenues from product sales                                                                                          |  |                    | 20,257 |   |                    |  
|                                                                                                                             |  |                    |        |   |                    |  
|Gross profit                                                                                                                 |  |                    | 12,066 |   |                    |  
|                                                                                                                             |  |                    |        |   |                    |  
|Operating expenses:                                                                                                          |  |                    |        |   |                    |  
|Sales and marketing, exclusive of $154, $419, $155 and $927 reported below as stock-based compensation,
respectively         |  |                    | 11,362 |   |                    |  
|Product development, exclusive of $0, $38, $(44) and $38 reported below as stock-based compensation, respectively            |  |                    | 3,317  |   |                    |  
|General and administrative, exclusive of $27, $171, $(148) and $355 reported below as stock-based compensation,
respectively |  |                    | 3,708  |   |                    |  
|Restructuring costs related to Ashford                                                                                       |  |                    |       |   |                    |  
|Gain on sale of Ashford assets                                                                                               |  |                    | (379   | ) |                    |  
|Stock-based compensation                                                                                                     |  |                    | 181    |   |                    |  
|Depreciation and amortization                                                                                                |  |                    | 2,585  |   |                    |  
|                                                                                                                             |  |                    |        |   |                    |  
|Total operating expenses                                                                                                     |  |                    | 20,774 |   |                    |  
|                                                                                                                             |  |                    |        |   |                    |  
|Other (income) expense:                                                                                                      |  |                    |        |   |                    |  
|Interest expense                                                                                                             |  |                    | 127    |   |                    |  
|Interest income                                                                                                              |  |                    | (270   | ) |                    |  
|                                                                                                                             |  |                    |        |   |                    |  
|Total other (income) expense                                                                                                 |  |                    | (143   | ) |                    |  
|                                                                                                                             |  |                    |        |   |                    |  
|Net loss                                                                                                                     |  | $                  | (8,565 | ) |                    | $
|                                                                                                                             |  |                    |        |   |                    |  
|Losses per sharebasic and diluted:                                                                                          |  |                    |        |   |                    |  
|Net loss                                                                                                                     |  | $                  | (0.22  | ) |                    | $
|                                                                                                                             |  |                    |        |   |                    |  
|Weighted average shares outstandingbasic and diluted                                                                        |  |                    | 38,769 |   |                    |  
|                                                                                                                             |  |                    |        |   |                    |  



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



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GSI COMMERCE, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                            |  | Nine Months Ended  |        
|--------------------------------------------------------------------------- |  | ------------------ | -------
|                                                                            |  | September 28, 2002 |        
|Cash Flows from Operating Activities:                                       |  |                    |        
|Net loss                                                                    |  | $                  | (19,037
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                    |        
|Depreciation and amortization                                               |  |                    | 6,692  
|Stock-based compensation                                                    |  |                    | (37    
|Gain on sale of Ashford assets                                              |  |                    | (379   
|Changes in operating assets and liabilities:                                |  |                    |        
|Accounts receivable, net                                                    |  |                    | 2,812  
|Inventory                                                                   |  |                    | (2,732 
|Prepaid expenses and other current assets                                   |  |                    | (2,058 
|Notes receivable                                                            |  |                    |       
|Other assets, net                                                           |  |                    | 868    
|Accounts payable and accrued expenses and other                             |  |                    | (8,959 
|Deferred revenue                                                            |  |                    | 7,287  
|                                                                            |  |                    |        
|Net cash used in operating activities                                       |  |                    | (15,543
|                                                                            |  |                    |        
|Cash Flows from Investing Activities:                                       |  |                    |        
|Acquisition of property and equipment, net                                  |  |                    | (25,098
|Proceeds from sale of Ashford assets                                        |  |                    | 1,195  
|Net cash paid for acquisition of Ashford                                    |  |                    | (8,772 
|Purchases of marketable securities                                          |  |                    | (10,481
|Sales of marketable securities                                              |  |                    | 555    
|(Purchases) sales of short-term investments                                 |  |                    | (33    
|                                                                            |  |                    |        
|Net cash used in investing activities                                       |  |                    | (42,634
|                                                                            |  |                    |        
|Cash Flows from Financing Activities:                                       |  |                    |        
|Repayments of capital lease obligations                                     |  |                    | (289   
|Repayments of mortgage note                                                 |  |                    | (33    
|Retirement of Ashford revolving credit facility                             |  |                    | (3,123 
|Purchases of treasury stock                                                 |  |                    | (300   
|Proceeds from sale of common stock                                          |  |                    | 314    
|Proceeds from exercises of common stock options and warrants                |  |                    | 1,363  
|                                                                            |  |                    |        
|Net cash provided by (used in) financing activities                         |  |                    | (2,068 
|                                                                            |  |                    |        
|Net decrease in cash and cash equivalents                                   |  |                    | (60,245
|Cash and cash equivalents, beginning of period                              |  |                    | 105,896
|                                                                            |  |                    |        
|Cash and cash equivalents, end of period                                    |  | $                  | 45,651 
|                                                                            |  |                    |        



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



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##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



NOTE 1BASIS OF PRESENTATION



GSI Commerce, Inc. (GSI or the Company), a Delaware
corporation, develops and operates electronic commerce businesses for retailers, branded manufacturers, media companies, television networks and professional sports organizations. The e-commerce businesses that we operate include the sale of
products through online retail stores and direct response television campaigns. The Company enables its partners to capitalize on their existing brands to exploit e-commerce opportunities. The Company customizes the design of its partners
e-commerce businesses with a broad range of characteristics that includes differentiated user interfaces on partners Web sites, partner-specific content pages, product descriptions and images, partner-specific products for direct response
television campaigns and partner-specific customer service and fulfillment. The Company currently derives virtually all of its revenues from the sale of goods through its partners e-commerce businesses, toll-free telephone number sales, bulk
sales, business-to-business and group sales and related outbound shipping charges, net of allowances for returns and discounts, as well as from fixed and variable fees earned in connection with the development and operation of its partners
e-commerce businesses and the provision of marketing and other services.



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



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



This quarterly report should be read in conjunction with the financial statements and notes thereto included in the
Companys audited financial statements presented in the Companys Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 26, 2003.



Certain reclassifications have been made to the prior year condensed consolidated financial statements to conform to those
used in the current period.



NOTE 2ACCOUNTING POLICIES



Marketable Securities:    Marketable
securities, which consist of investments in debt securities, are classified as available-for-sale and are reported at fair value, with unrealized gains and losses recorded as a component of stockholders equity. The Company does not intend to
hold its marketable securities for more than one year from the most recent balance sheet date and has therefore classified them as a current asset. Realized gains or losses and declines in value judged to be other than temporary, if any, on
available-for-sale securities are reported in other income or loss. As of December 28, 2002 and September 27, 2003, the Company recorded net unrealized gains on its marketable securities of $57,000 and $27,000, respectively.



Other Assets, Net:    Other assets, net consists
primarily of deferred partner revenue share charges, resulting from the exercise of a right to receive 1,600,000 shares of the Companys common stock in lieu of future cash partner revenue share payments. The 1,600,000 shares of the
Companys common stock issued are subject to restrictions, including the prohibition of the transfer of such shares. These restrictions lapsed as to 10% of such shares on December 31, 2002, on March 31, 2003, on June 30, 2003 and on September
30, 2003 and will lapse as to an additional 10% of such shares on the last day of each quarter thereafter, becoming free of all such transfer restrictions on March 31, 2005. Deferred partner revenue share charges were $13.2 million and $12.4 million
as of December 28, 2002 and September 27, 2003, respectively, and are being amortized as stock-based compensation expense as the partner revenue share expense is incurred. The partner revenue share expense incurred is based on actual revenues
recognized in a given period and the imputed partner revenue share percentage, which is based on the value of the Companys common stock that was issued upon exercise of the right. Stock-based compensation expense related to the amortization of
deferred partner revenue share charges was $145,000 and $486,000 for the three- and nine-month periods ended September 28, 2002, respectively, and $283,000 and $778,000 for the three- and nine-month periods ended September 27, 2003, respectively.



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GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



Long-Lived Assets:    The ability to realize long-lived assets is evaluated periodically as events or circumstances indicate a
possible inability to recover their carrying amount. Such evaluation is based on various analyses, including undiscounted cash flow and profitability projections that incorporate, as applicable, the impact on the existing business. The analyses
necessarily involve significant management judgment. Any impairment loss, if indicated, is measured as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. During the three-month period ended September
27, 2003, the Company relocated its data centers. In conjunction with the relocation, the Company determined that certain capitalized costs associated with the data centers would no longer be used and, therefore, that the carrying amounts of these
assets were not recoverable. The Company disposed of these assets during the three-month period ended September 27, 2003 and recorded an impairment charge of $284,000 which is included in depreciation and amortization expense.



Shipping and Handling Costs:    The Company
defines shipping and handling costs as only those costs incurred for a third-party shipper to transport products to the customer and these costs are included in cost of revenues from product sales. In some instances, shipping and handling costs
exceed shipping charges to the customer and are subsidized by the Company. Additionally, the Company selectively offers promotional free shipping whereby it ships merchandise to customers free of all shipping and handling charges. The cost of
promotional free shipping and subsidized shipping and handling was $511,000 and $1.2 million for the three- and nine-month periods ended September 28, 2002, respectively, and was $92,000 and $493,000 for the three- and nine-month periods ended
September 27, 2003, respectively, and was charged to sales and marketing expense.



Fulfillment Costs:    The Company defines fulfillment costs as personnel, occupancy and other costs associated with its Kentucky fulfillment center and its former Texas fulfillment center,
personnel and other costs associated with its logistical support and vendor operations departments and third-party warehouse and fulfillment services costs. Fulfillment costs were $3.0 million and $8.0 million for the three- and nine-month periods
ended September 28, 2002, respectively, and $3.0 million and $8.8 million for the three- and nine-month periods ended September 27, 2003, respectively, and are included in sales and marketing expense.



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



The following table illustrates the pro forma net loss and losses per share for the three- and nine-month periods ended September 28, 2002 and the three-
and nine-month periods ended September 27, 2003 as if compensation expense for stock options issued to employees had been determined consistent with SFAS No. 123:



|                                                                                               |  | Three Months Ended |         |   | Nine Months Ended  |  
|---------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ------------------ | -
|                                                                                               |  | September 28, 2002 |         |   | September 27, 2003 |  
|                                                                                               |  | (in thousands)     |         |   | (in thousands)     |  
|Net loss, as reported                                                                          |  | $                  | (8,565  | ) |                    | $
|Add: Stock-based compensation expense included in reported net loss                            |  |                    | 110     |   |                    |  
|Deduct: Total stock-based compensation determined under fair value based method for all awards |  |                    | (1,765  | ) |                    |  
|                                                                                               |  |                    |         |   |                    |  
|Pro forma net loss                                                                             |  | $                  | (10,220 | ) |                    | $
|                                                                                               |  |                    |         |   |                    |  
|Losses per sharebasic and diluted:                                                            |  |                    |         |   |                    |  
|Net loss per share, as reported                                                                |  | $                  | (0.22   | ) |                    | $
|                                                                                               |  |                    |         |   |                    |  
|Pro forma net loss per share                                                                   |  | $                  | (0.26   | ) |                    | $
|                                                                                               |  |                    |         |   |                    |  



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GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



The Company also records stock-based compensation as deferred partner revenue share charges are
amortized. Stock-based compensation expense related to the amortization of deferred partner revenue share charges was $145,000 and $486,000 for the three- and nine-month periods ended September 28, 2002, respectively, and $283,000 and $778,000 for
the three- and nine-month periods ended September 27, 2003, respectively.



New Accounting Pronouncements



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



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



NOTE 3CESSATION OF ASHFORD
OPERATIONS



In December 2002, the Company announced and
implemented its plan to cease the operations of Ashford.com, Inc. (Ashford). This plan involved the liquidation of Ashfords remaining inventory, the closure of its Houston, Texas fulfillment center and offices and the termination
of 71 employees. This plan was substantially completed in January 2003. As of September 27, 2003, 71 employees had been terminated and actual termination benefits paid were $406,000. The operations of Ashford accounted for approximately $4.9 million
and $12.3 million of the Companys total revenue for the three- and nine-month periods ended September 28, 2002, respectively, and approximately $91,000 and $992,000 of the Companys total revenue for the three- and nine-month periods
ended September 27, 2003, respectively. During the three-month period ended September 27, 2003, the Company recorded an additional charge of $19,000 related to a revision to the estimated fair value of an Ashford liability.



At September 27, 2003, the accrued liability associated with the cessation of
Ashford operations was $326,000 and consisted of the following (in thousands):



|                          |  | Balance atJune 28,2003 |     | SubsequentAccruals, net |   | Non-CashSettlementsand OtherAdjustments |  | Payments |   | Balance atSeptember 27,2003 |   | Due Within12 Months |  | Due After12 Months
|------------------------- |  | ---------------------- | --- | ----------------------- | - | --------------------------------------- |  | -------- | - | --------------------------- | - | ------------------- |  | ------------------
|Termination benefits      |  | $                      | 58  |                         | $ |                                        |  | $        |  |                             | $ | 47                  |  | $                 
|Contractual obligations   |  |                        | 296 |                         |   | 19                                      |  |          |  |                             |   |                    |  |                   
|Other restructuring costs |  |                        |    |                         |   |                                        |  |          |  |                             |   |                    |  |                   
|                          |  |                        |     |                         |   |                                         |  |          |   |                             |   |                     |  |                   
|                          |  | $                      | 354 |                         | $ | 19                                      |  | $        |  |                             | $ | 47                  |  | $                 
|                          |  |                        |     |                         |   |                                         |  |          |   |                             |   |                     |  |                   



Termination benefits
are comprised of severance-related payments for all employees terminated in connection with the cessation of Ashford operations. The contractual obligations relate to contracts entered into by Ashford prior to the sale of assets to Odimo Acquisition
Corp. Other restructuring costs include expenses which are directly attributable to the cessation of Ashford operations.



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GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



NOTE 4MARKETABLE SECURITIES



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



|                                  |  | December 28, 2002
|--------------------------------- |  | -----------------
|                                  |  | Amortized Cost   
|                                  |  | (in thousands)   
|Auction preferred stock           |  | $                
|U.S. government agency securities |  |                  
|                                  |  |                  
|                                  |  | $                
|                                  |  |                  



|                                  |  | September 27, 2003
|--------------------------------- |  | ------------------
|                                  |  | Amortized Cost    
|                                  |  | (in thousands)    
|Corporate bonds                   |  | $                 
|U.S. government agency securities |  |                   
|                                  |  |                   
|                                  |  | $                 
|                                  |  |                   



The amortized cost and
estimated fair value of investments in debt securities as of September 27, 2003, by contractual maturity, are as follows:



|                                     |  | Amortized Cost |        | Estimated Fair Value
|------------------------------------ |  | -------------- | ------ | --------------------
|                                     |  | (in thousands)
|Due within one year                  |  | $              | 4,493  |                     
|Due after one year through two years |  |                | 5,508  |                     
|                                     |  |                |        |                     
|                                     |  | $              | 10,001 |                     
|                                     |  |                |        |                     



NOTE 5CHANGES IN
STOCKHOLDERS EQUITY



Preferred Stock:



On August 20, 2003, the Companys Board of Directors
approved the retirement of 200 shares of Series A preferred stock held by the Company. The Series A preferred stock was retired during the three-month period ended September 27, 2003.



Common Stock:



On July 25, 2003, the Company issued 1,650,000 shares of common stock to Interactive Technology Holdings, LLC (ITH) in exchange for warrants
held by ITH to purchase 4,500,000 shares of the Companys common stock. On the day immediately preceding the exchange, the closing price of a share of the Companys common stock was $9.05. Of the warrants exchanged, 2,500,000 have an
exercise price of $10.00 per share and expire between September 2005 and October 2005 and 2,000,000 have an exercise price of $8.15 per share and expire between September 2005 and October 2005. Under the Black-Scholes valuation methodology, the
warrants were valued at approximately $23.0 million on the date of exchange. As the value of the warrants settled is in excess of the consideration given to ITH by the Company, the Company did not recognize any stock-based compensation expense
relating to this exchange.



Treasury Stock:



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



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



The following table summarizes the changes in stockholders equity for the three-month periods
ended September 28, 2002 and September 27, 2003:



|                                                                      |  | Common Stock   |   |  | Additional Paid inCapital |     |   | Accumulated Deficit |   |         | Comprehensive Loss |        |   | Accumulated Other Comprehensive Income (Loss) |         |  | Treasury Stock |        |   | Total |  
|--------------------------------------------------------------------- |  | -------------- | - |  | ------------------------- | --- | - | ------------------- | - | ------- | ------------------ | ------ | - | --------------------------------------------- | ------- |  | -------------- | ------ | - | ----- | -
|                                                                      |  | Shares         |   |  | Dollars                   |     |   |                     |   |         |                    | Shares |   |                                               | Dollars |  |               
|                                                                      |  | (in thousands) |  
|Consolidated balance at June 29, 2002                                 |  | 38,762         |   |  | $                         | 388 |   |                     | $ | 285,628 |                    |        | $ | (142,210                                      | )       |  |                |        |   |       | $
|Net loss                                                              |  |                |   |  |                           |     |   |                     |   |         |                    |        |   | (8,565                                        | )       |  | $              | (8,565 | ) |       |  
|Net unrealized gains on available-for-sale securities                 |  |                |   |  |                           |     |   |                     |   |         |                    |        |   |                                               |         |  |                | 43     |   |       |  
|                                                                      |  |                |   |  |                           |     |   |                     |   |         |                    |        |   |                                               |         |  |                |        |   |       |  
|Comprehensive loss                                                    |  |                |   |  |                           |     |   |                     |   |         |                    |        |   |                                               |         |  | $              | (8,522 | ) |       |  
|                                                                      |  |                |   |  |                           |     |   |                     |   |         |                    |        |   |                                               |         |  |                |        |   |       |  
|Issuance of options to purchase common stock in exchange for services |  |                |   |  |                           |     |   |                     |   | 36      |                    |        |   |                                               |         |  |                |        |   |       |  
|Issuance of common stock upon exercise of options                     |  | 31             |   |  |                           |    |   |                     |   | 72      |                    |        |   |                                               |         |  |                |        |   |       |  
|Purchases of treasury stock                                           |  |                |   |  |                           |     |   |                     |   | (299    | )                  |        |   |                                               |         |  |                |        |   |       |  
|                                                                      |  |                |   |  |                           |     |   |                     |   |         |                    |        |   |                                               |         |  |                |        |   |       |  
|Consolidated balance at September 28, 2002                            |  | 38,793         |   |  | $                         | 388 |   |                     | $ | 285,437 |                    |        | $ | (150,775                                      | )       |  |                |        |   |       | $
|                                                                      |  |                |   |  |                           |     |   |                     |   |         |                    |        |   |                                               |         |  |                |        |   |       |  
|Consolidated balance at June 28, 2003                                 |  | 38,959         |   |  | $                         | 390 |   |                     | $ | 286,133 |                    |        | $ | (174,807                                      | )       |  |                |        |   |       | $
|Net loss                                                              |  |                |   |  |                           |     |   |                     |   |         |                    |        |   | (5,545                                        | )       |  | $              | (5,545 | ) |       |  
|Net unrealized losses on available-for-sale securities                |  |                |   |  |                           |     |   |                     |   |         |                    |        |   |                                               |         |  |                | (8     | ) |       |  
|                                                                      |  |                |   |  |                           |     |   |                     |   |         |                    |        |   |                                               |         |  |                |        |   |       |  
|Comprehensive loss                                                    |  |                |   |  |                           |     |   |                     |   |         |                    |        |   |                                               |         |  | $              | (5,553 | ) |       |  
|                                                                      |  |                |   |  |                           |     |   |                     |   |         |                    |        |   |                                               |         |  |                |        |   |       |  
|Issuance of common stock to ITH in exchange for warrants              |  | 1,650          |   |  |                           | 16  |   |                     |   | (16     | )                  |        |   |                                               |         |  |                |        |   |       |  
|Issuance of options to purchase common stock in exchange for services |  |                |   |  |                           |     |   |                     |   | 345     |                    |        |   |                                               |         |  |                |        |   |       |  
|Issuance of common stock upon exercise of options                     |  | 101            |   |  |                           | 1   |   |                     |   | 517     |                    |        |   |                                               |         |  |                |        |   |       |  
|Retirement of treasury stock                                          |  | (73            | ) |  |                           | (1  | ) |                     |   |        |                    |        |   |                                               |         |  |                |        |   |       |  
|                                                                      |  |                |   |  |                           |     |   |                     |   |         |                    |        |   |                                               |         |  |                |        |   |       |  
|Consolidated balance at September 27, 2003                            |  | 40,637         |   |  | $                         | 406 |   |                     | $ | 286,979 |                    |        | $ | (180,352                                      | )       |  |                |        |   |       | $
|                                                                      |  |                |   |  |                           |     |   |                     |   |         |                    |        |   |                                               |         |  |                |        |   |       |  



NOTE 6STOCK OPTIONS AND
WARRANTS



The Company maintains incentive and
non-incentive stock option plans for certain employees, directors and other persons (the Plans). Under the terms of the Plans, the Company may grant incentive and non-incentive options and restricted stock and unrestricted stock awards
to purchase up to 9,025,071 shares of common stock. The options granted under the Plans generally vest at various times over periods ranging up to five years and have terms of up to ten years after the date of grant, unless the optionee leaves the
employ of or ceases to provide services to the Company. Stock appreciation rights (SARs) may be granted under the Plans either alone or in tandem with stock options. Generally, recipients of SARs are entitled to receive, upon exercise,
cash or shares of common stock (valued at the then fair market value of the Companys common stock) equal to such fair market value on the date of exercise minus such fair market value on the date of grant of the shares subject to the SAR,
although certain other measurements also may be used. A SAR granted in tandem with a stock option is exercisable only if and to the extent that the option is exercised. No SARs have been granted to date under the Plans.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



The following table summarizes the stock option activity for the three-month periods ended September
28, 2002 and September 27, 2003:



|                                 |  | Three Months Ended
|-------------------------------- |  | ------------------
|                                 |  | September 28, 2002
|                                 |  | Number ofShares   
|                                 |  | (in thousands)    
|Outstanding, beginning of period |  | 5,354             
|Granted                          |  | 233               
|Exercised                        |  | (32               
|Cancelled                        |  | (131              
|                                 |  |                   
|Outstanding, end of period       |  | 5,424             
|                                 |  |                   
|Exercisable, end of period       |  | 2,334             
|                                 |  |                   



The following table
summarizes the warrant activity for the three-month periods ended September 28, 2002 and September 27, 2003:



|                                 |  | Three Months Ended
|-------------------------------- |  | ------------------
|                                 |  | September 28, 2002
|                                 |  | Number of Shares  
|                                 |  | (in thousands)    
|Outstanding, beginning of period |  | 7,083             
|Granted                          |  |                  
|Exercised                        |  |                  
|Cancelled                        |  |                  
|                                 |  |                   
|Outstanding, end of period       |  | 7,083             
|                                 |  |                   
|Exercisable, end of period       |  | 6,883             
|                                 |  |                   



During the three-month
period ended September 27, 2003, the Company granted to employees options to purchase an aggregate of 104,800 shares of the Companys common stock at prices ranging from $8.30 to $12.34 per share and granted to directors options to purchase an
aggregate of 48,750 shares of the Companys common stock at a price of $11.66 per share. The weighted average fair value and the weighted average exercise price of the options granted with exercise prices at the then-current market prices of
the underlying stock during the three-month period ended September 27, 2003 was $6.58 and $10.37 per share, respectively. For the three- and nine-month periods ended September 27, 2003, the Company recorded $345,000 and $542,000 of stock-based
compensation expense, respectively, relating to options and restricted stock.



During the three-month period ended September 28, 2002, the Company granted to employees options to purchase an aggregate of 232,950 shares of the Companys common stock at prices ranging from $5.01 to $6.20 per
share. The weighted average fair value and the weighted average exercise price of the options granted with exercise prices at the then-current market prices of the underlying stock during the three-month period ended September 28, 2002 was $4.33 and
$6.18 per share, respectively. For the three- and nine-month periods ended September 28, 2002, the Company recorded $36,000 of stock-based compensation expense and a reduction of $576,000 in stock-based compensation expense, respectively, relating
to options and restricted stock.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



The following table summarizes information regarding options and warrants outstanding and exercisable
as of September 27, 2003:



|                         |  | Outstanding       |  | Exercisable                                        
|------------------------ |  | ----------------- |  | ---------------------------------------------------
|Range of Exercise Prices |  | NumberOutstanding |  | WeightedAverage Remaining Contractual Life In Years
|                         |  | (in thousands)    |  |                                                    
|$  1.00  $  4.94        |  | 1,587             |  | 6.92                                               
|$  5.00  $  6.20        |  | 1,899             |  | 6.58                                               
|$  6.38  $11.63         |  | 1,510             |  | 6.68                                               
|$11.66  $24.69          |  | 1,108             |  | 6.16                                               
|$30.56  $74.54          |  | 14                |  | 3.05                                               
|                         |  |                   |  |                                                    
|$  1.00  $74.54         |  | 6,118             |  | 6.61                                               
|                         |  |                   |  |                                                    



As of September 27,
2003, 2,079,759 shares of common stock were available for future grants under the Plans.



The fair value of options granted under the Plans during the three-month periods ended September 28, 2002 and September 27, 2003 were estimated on the date of grant using the Black-Scholes multiple option pricing
model, with the following weighted average assumptions:



|                                |  | Three Months Ended |  
|------------------------------- |  | ------------------ | -
|Assumption                      |  | September 28,2002  |  
|Dividend yield                  |  | None               |  
|Expected volatility             |  | 103.00             | %
|Average risk free interest rate |  | 2.63               | %
|Average expected lives          |  | 4.02 years         |  



No warrants were
granted or issued by the Company during the three-month periods ended September 28, 2002 and September 27, 2003, respectively.



NOTE 7LOSSES PER SHARE



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



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



|                                                            |  | Three Months Ended |        |   | Nine Months Ended |  
|----------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | -
|                                                            |  | September 28,2002  |        |   | September 27,2003 |  
|                                                            |  | (in thousands)     |        |   | (in thousands)    |  
|Net loss                                                    |  | $                  | (8,565 | ) |                   | $
|                                                            |  |                    |        |   |                   |  
|Weighted average shares outstandingbasic and diluted       |  |                    | 38,769 |   |                   |  
|                                                            |  |                    |        |   |                   |  
|Outstanding common stock options having no dilutive effect  |  |                    | 5,424  |   |                   |  
|                                                            |  |                    |        |   |                   |  
|Outstanding common stock warrants having no dilutive effect |  |                    | 7,083  |   |                   |  
|                                                            |  |                    |        |   |                   |  



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GSI COMMERCE, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



NOTE 8COMPREHENSIVE LOSS



The following table summarizes the components of comprehensive loss:



|                                                               |  | Three Months Ended |        |   | Nine Months Ended |  
|-------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | -
|                                                               |  | September 28,2002  |        |   | September 27,2003 |  
|                                                               |  | (in thousands)     |        |   | (in thousands)    |  
|Net loss                                                       |  | $                  | (8,565 | ) |                   | $
|Other comprehensive income (loss):                             |  |                    |        |   |                   |  
|Net unrealized gains (losses) on available-for-sale securities |  |                    | 43     |   |                   |  
|                                                               |  |                    |        |   |                   |  
|Other comprehensive income (loss)                              |  |                    | 43     |   |                   |  
|                                                               |  |                    |        |   |                   |  
|Comprehensive loss                                             |  | $                  | (8,522 | ) |                   | $
|                                                               |  |                    |        |   |                   |  



NOTE 9SIGNIFICANT
TRANSACTIONS/CONCENTRATIONS OF CREDIT RISK



Net revenues
included $310,000 and $2.5 million for the three- and nine-month periods ended September 28, 2002, respectively, and $0 for the three- and nine-month periods ended September 27, 2003 related to bulk sales to one entity. As of September 27, 2003, the
amount included in accounts receivable related to these bulk sales was not significant.



Net revenues included $0 and $8.3 million for the three- and nine-month periods ended September 28, 2002, respectively, and $0 for the three- and nine-month periods ended September 27, 2003 from sales of one of the
Companys partners products sold primarily through its direct response television campaigns in addition to Web site and toll-free number sales. As of September 27, 2003, the amount included in accounts receivable related to these sales
was $0.



As of September 27, 2003, the Company had $8.2 million
of operating cash and $38.3 million of cash equivalents and marketable securities invested with three financial institutions, which are potentially subject to credit risk. The composition of these investments are regularly monitored by management of
the Company.



NOTE 10MAJOR SUPPLIERS/ECONOMIC DEPENDENCY



During the three-month period ended September 27, 2003,
the Company purchased inventory from one supplier amounting to $11.3 million or 41% of total inventory purchased. During the nine-month period ended September 27, 2003, the Company purchased inventory from one supplier amounting to $32.0 million or
39% of total inventory purchased.



During the three-month
period ended September 28, 2002, the Company purchased inventory from one supplier amounting to $8.9 million or 39% of total inventory purchased. During the nine-month period ended September 28, 2002, the Company purchased inventory from two
suppliers amounting to $8.9 million and $8.0 million or 16% and 14% of total inventory purchased.



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



NOTE 11COMMITMENTS AND CONTINGENCIES



Legal Proceedings



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



The Company sold certain assets of Ashford.com,
Inc. in December 2002 and continues to be a party to certain litigation that was commenced prior to the Companys acquisition of Ashford in March 2002. Since July 11, 2001, several stockholder class action complaints have been filed in the
United States District Court of the Southern District of New York against Ashford, several of Ashfords officers and directors, and various underwriters of Ashfords initial public offering. The purported class actions have all been
brought on behalf of purchasers of Ashford common stock during various periods beginning on September 22, 1999, the date of Ashfords initial public offering. The plaintiffs allege that Ashfords prospectus, included in Ashfords



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



Registration Statement on Form S-1 filed with the Securities and Exchange Commission, was materially false and misleading because it failed to disclose,
among other things, certain fees and commissions collected by the underwriters or arrangements designed to inflate the price of the common stock. The plaintiffs further allege that because of these purchases, Ashfords post-initial public
offering stock price was artificially inflated. As a result of the alleged omissions in the prospectus and the purported inflation of the stock price, the plaintiffs claim violations of Sections 11 and 15 of the Securities Act of 1933 and Section
10(b) of the Securities Exchange Act of 1934. The complaints have been consolidated into a single action, and the consolidated cases against Ashford have been consolidated with similarly consolidated cases filed against 308 other issuer defendants
for the purposes of pretrial proceedings. The claims against Ashfords officers and directors were dismissed in exchange for tolling agreements which permit the refiling of claims against officers and directors at a later date. A motion to
dismiss filed on behalf of all issuer defendants, including Ashford, was denied in all aspects relevant to Ashford on February 19, 2003. Ashford and its insurers have entered into a memorandum of understanding regarding terms for settlement of this
suit. Under the settlement, plaintiffs claims against Ashford and other issuers will be dismissed in exchange for certain consideration from the issuers insurers and for the issuers assignment to plaintiffs of certain potential
claims against the underwriters of the relevant initial public offerings. Formal documentation of the settlement contemplated by the memorandum of understanding is currently in progress. In the event that a settlement is not finalized, the Company
believes that Ashford has defenses against these actions.



In
March 2003, the Company was served with a complaint filed in the Chancery Court of Davidson County, Tennessee, by a private litigant purportedly on behalf of the State of Tennessee under the Tennessee False Claims Act. The complaint alleges that the
Company, along with certain of its partners, wrongfully failed to collect and remit sales and use taxes for sales of personal property to customers in Tennessee and knowingly created records and statements falsely stating the Company was not
required to collect or remit such taxes. The complaint seeks injunctive relief, unpaid taxes, interest, attorneys fees, civil penalties of up to $10,000 per violation, and treble damages under the Tennessee False Claims Act. In September 2003,
the Company learned that it, along with several of its partners, was named in a similar action in the Circuit Court of Cook County, Illinois, by the same private litigant who is alleging similar claims with respect to sales and use taxes for sales
of personal property to customers in Illinois. The Company is aware that this same private litigant has filed similar actions against retailers in other states, and it may be possible that the Company and/or its partners may have been or may be
named in similar cases in other states. The Company does not believe that it is liable under existing laws and regulations for any failure to collect sales or other taxes relating to internet sales and intends to vigorously defend itself in this
matter.



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



Employment Agreements



As of September 27, 2003, the Company had employment agreements with several of its employees for an aggregate annual base salary of $2.6 million plus
bonuses and increases in accordance with the terms of the agreements. Remaining terms of such contracts range from less than one to three years.



Advertising and Media Agreements



As of September 27, 2003, the Company was contractually committed for the purchase of future advertising totaling approximately $29,000 through the fiscal
year ending January 3, 2004. The expense related to these commitments will be recognized in accordance with the Companys accounting policy related to advertising.



Partner Revenue Share Payments



As of September 27, 2003, the Company was contractually committed to minimum cash revenue share payments of $375,000 per
fiscal quarter through July 2011 and annual minimum cash revenue share payments of $200,000 in February 2004, $325,000 in July 2004 and $250,000 in February 2005.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Concluded)

(Unaudited)



NOTE 12SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION



|                                                                                                       |  | Nine Months Ended |        
|------------------------------------------------------------------------------------------------------ |  | ----------------- | -------
|                                                                                                       |  | September 28,2002 |        
|                                                                                                       |  | (in thousands)    |        
|Cash paid during the period for interest                                                               |  | $                 | 389    
|Acquisition of Ashford:                                                                                |  |                   |        
|Fair value of assets acquired (including goodwill)                                                     |  | $                 | 28,070 
|Liabilities assumed                                                                                    |  |                   | (12,337
|Stock issued                                                                                           |  |                   | (6,961 
|                                                                                                       |  |                   |        
|Cash paid                                                                                              |  |                   | 8,772  
|Cash acquired                                                                                          |  |                   |       
|                                                                                                       |  |                   |        
|Net cash paid for acquisition of Ashford                                                               |  | $                 | 8,772  
|                                                                                                       |  |                   |        
|Noncash Investing and Financing Activities:                                                            |  |                   |        
|Net unrealized gains (losses) on available-for-sale securities                                         |  | $                 | 96     
|Issuance of common stock upon exercises of options granted to employees of the discontinued operations |  | $                 | 4      



NOTE 13RELATED PARTY
TRANSACTIONS



The Company has entered into a strategic
alliance to provide technology, procurement and fulfillment services for QVC, Inc. Interactive Technology Holdings, LLC, which is a major stockholder of the Company, is a joint venture company of Comcast Corporation and QVC, Inc. The Company
recognized net revenues of $431,000 and $897,000 on sales to this related party for the three- and nine-month periods ended September 28, 2002, respectively, and $338,000 and $1.3 million for the three- and nine-month periods ended September 27,
2003, respectively. The terms of these sales are comparable to those with other business-to-business partners of the Company. As of September 27, 2003, the amount included in accounts receivable as a result of these sales was $373,000 of which the
Company has taken a charge to bad debt expense of $325,000 for the settlement of disputed amounts billed for product and shipping costs.



The Company has entered into an agreement with QVC, Inc. pursuant to which QVC will provide shipping services to the Company in exchange for variable
fees. The Company incurred fees of $0 for the three- and nine-month periods ended September 28, 2002, respectively, and $38,000 for the three- and nine-month periods ended September 27, 2003, respectively, which were charged to cost of revenues from
product sales.



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|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------



Forward-Looking Statements



All statements made in this Quarterly Report on Form 10-Q, other than statements of historical fact, are forward-looking statements. The words
anticipate, believe, estimate, expect, intend, may, plan, will, would, should, guidance, potential,
continue, project, forecast, confident, prospects, and similar expressions typically are used to identify forward-looking statements. Forward-looking statements are based on the
then-current expectations, beliefs, assumptions, estimates and forecasts about our business and the industry and markets in which we operate. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions
which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. Factors which may affect our business, financial condition and operating results
include the effects of changes in the economy, consumer spending, the stock market and the industries in which we operate, changes affecting the Internet and e-commerce, our ability to maintain relationships with strategic partners and suppliers,
our ability to timely and successfully develop, maintain and protect our technology and product and service offerings and execute operationally, our ability to attract and retain qualified personnel, our ability to successfully integrate our
acquisitions of other businesses and the performance of acquired businesses. More information about potential factors that could affect us are described under the heading Risk Factors. We expressly disclaim any intent or obligation to
update these forward-looking statements, except as otherwise specifically stated by us.



Overview



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



Financial Presentation



Our financial statements present:



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



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



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



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



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



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



| |  | restructuring costs related to Ashford.com, Inc., which consists of an additional charge related to an Ashford liability. In December 2002, we sold certain assets of Ashford, a
wholly-owned subsidiary, to Odimo Acquisition Corp.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | gain on sale of Ashford assets, which relates to the disposition of a division of Ashford Corporate Gifts, Inc., which is a subsidiary of Ashford.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  | depreciation and amortization expenses, which relate primarily to the depreciation of our corporate headquarters and Kentucky fulfillment center, the depreciation and amortization
of the capitalized costs for our purchased and internally developed technology, including a portion of the cost related to the employees that developed such technology, hardware and software and the depreciation of improvements, furniture, and
fulfillment center and office equipment at our corporate headquarters and our fulfillment and call centers.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | other income and expense, which consists primarily of interest income earned on cash, cash equivalents, short-term investments and marketable securities, interest expense paid
primarily in connection with a mortgage note on our corporate headquarters and interest expense on capital leases.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Results of Operations



Comparison of the three- and nine-month periods ended September 27, 2003 and September 28, 2002



Net Revenues from Product Sales.    Net revenues
from product sales increased $14.7 million from $27.8 million for the three-month period ended September 28, 2002 to $42.5 million for the three-month period ended September 27, 2003. Of this increase, $8.2 million was due to an increase in sales in
the sporting goods category and $11.3 million was due to an increase in sales in other product categories in which we own inventory, which include consumer electronics, general merchandise and licensed entertainment products, offset, in part, by a
$4.8 million decrease in sales from our Ashford operations. Net revenues from product sales increased $46.7 million from $85.7 million for the nine-month period ended September 28, 2002 to $132.4 million for the nine-month period ended September 27,
2003. Of this increase, $13.7 million was due to an increase in sales in the sporting goods category and $44.3 million was due to an increase in sales in other product categories, offset, in part, by a $11.3 million decrease in sales from our
Ashford operations.



Service Fee
Revenues.    Service fee revenues increased $417,000 from $4.5 million for the three-month period ended September 28, 2002 to $5.0 million for the three-month period ended September 27, 2003. This increase was primarily due
to increases in variable fees related to partner activities performed in both periods. Service fee revenues increased $2.7 million from $11.6 million for the nine-month period ended September 28, 2002 to $14.3 million for the nine-month period ended
September 27, 2003. This increase was primarily due to a $4.2 million increase in fixed and variable fees related to partner activities performed in both periods, offset, in part, by a $1.5 million decrease related to fixed service fees earned in
connection with the provision of services which were completed in fiscal 2002.



Cost of Revenues from Product Sales.    Cost of revenues from product sales was $20.3 million for the three-month period ended September 28, 2002 and $30.8 million for the three-month period
ended September 27, 2003. As a percentage of net revenues from product sales, cost of revenues from product sales was 72.9% for the three-month period ended September 28, 2002 and 72.4% for three-month period ended September 27, 2003. This decrease
was due primarily to higher margins on sales in the sporting goods category, offset, in part, by sales in new product categories, which have lower margins and which increased as a percentage of total product sales compared to the same period in
fiscal 2002. Cost of revenues from product sales was $61.0 million for the nine-month period ended September 28, 2002 and $95.9 million for the nine-month period ended September 27, 2003. As a percentage of net revenues from product sales, cost of
revenues from product sales was 71.2% for the nine-month period ended September 28, 2002 and 72.5% for the nine-month period ended September 27, 2003. This increase was due primarily to sales in new product categories, which have lower margins and
which increased as a percentage of total product sales compared to the same period in fiscal 2002, offset, in part, by higher margins on sales in the sporting goods category.



Gross Profit.    We had gross profit of $12.1 million and $36.3 million for the three- and
nine-month periods ended September 28, 2002, respectively, and $16.7 million and $50.8 million for the three- and nine-month periods ended September 27, 2003, respectively. As a percentage of net revenues, gross profit was 37.3% for both the three-
and nine-month periods ended September 28, 2002, respectively, and 35.2% and 34.6% for the three- and nine-month periods ended September 27, 2003, respectively. The increases in gross profit dollars for the three- and nine-month periods ended
September 27, 2003 compared to



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the comparable periods in fiscal 2002 were due primarily to the $14.7 million and $46.7 million increases in net revenues from product sales for the three-
and nine-month periods ended September 27, 2003, respectively. The decreases in gross profit percentage for the three- and nine-month periods ended September 27, 2003 compared to the comparable periods in fiscal 2002 were due primarily to sales in
new product categories, which have lower margins and which increased as a percentage of total product sales compared to the same period in fiscal 2002.



Sales and Marketing Expenses.    Sales and marketing expenses increased $427,000 from $11.4 million for the three-month period
ended September 28, 2002 to $11.8 million for the three-month period ended September 27, 2003. This increase was primarily due to a $1.2 million increase in partner revenue share charges and a $379,000 increase in credit card fees, offset, in part,
by a $574,000 decrease in personnel and related costs, a $419,000 decrease in subsidized shipping and handling costs and a $258,000 decrease in occupancy costs. Sales and marketing expenses increased $5.0 million from $30.3 million for the
nine-month period ended September 28, 2002 to $35.3 million for the nine-month period ended September 27, 2003. This increase was primarily due to a $3.9 million increase in partner revenue share charges, a $1.7 million increase in credit card fees
and a $1.6 million increase in personnel and related costs, of which $745,000 was attributable to our fulfillment operations and $585,000 was attributable to our merchandising, marketing and customer service departments, offset, in part, by a $1.8
million decrease in advertising costs relating primarily to direct marketing campaigns and a $671,000 decrease in subsidized shipping and handling costs. The increases in partner revenue share charges and credit card fees are due primarily to
increased sales volume through our partners online retail stores for the three- and nine-month periods ended September 27, 2003.



Product Development Expenses.    Product development expenses increased $543,000 from $3.3 million for the three-month period
ended September 28, 2002 to $3.9 million for the three-month period ended September 27, 2003. This increase was primarily due to a $510,000 increase in personnel and related costs, a $232,000 increase in costs relating to our use of temporary
technical professionals and a $121,000 increase in web hosting and equipment and software maintenance costs related to the increased number of e-commerce businesses that we operated and maintained, offset, in part, by a $325,000 decrease in
communication and bandwidth costs. Product development expenses increased $2.9 million from $8.7 million for the nine-month period ended September 28, 2002 to $11.6 million for the nine-month period ended September 27, 2003. This increase was
primarily due to a $2.2 million increase in personnel and related costs and an $800,000 increase in web hosting and equipment and software maintenance costs related to the increased number of e-commerce businesses that we operated and maintained,
offset, in part, by a $175,000 decrease relating to the closing of our West Coast technology services office in the second quarter of fiscal 2002.



General and Administrative Expenses.    General and administrative expenses decreased $630,000 from $3.7 million for the
three-month period ended September 28, 2002 to $3.1 million for the three-month period ended September 27, 2003. This decrease was primarily due to an $830,000 decrease in bad debt and chargebacks related to a lower bad debt rate for sales through
our partners online stores, a $182,000 decrease in non-income taxes related primarily to Ashford and a $100,000 decrease in personnel and related costs, offset, in part, by a $325,000 charge to bad debt for the settlement of disputed amounts
billed to QVC, Inc. for product and shipping costs and a $167,000 increase in legal and other professional fees. General and administrative expenses decreased $1.1 million from $10.8 million for the nine-month period ended September 28, 2002 to
$9.7 million for the nine-month period ended September 27, 2003. This decrease was primarily due to a $1.6 million decrease in bad debt and chargebacks related to lower direct response television campaign sales for the nine-month period ended
September 27, 2003 and their associated higher bad debt rate and a lower bad debt rate for sales through our partners online stores, offset, in part, by a $617,000 increase in personnel and related costs.



Restructuring Costs Related to Ashford.    We had
restructuring costs related to Ashford of $0 for the three- and nine-month periods ended September 28, 2002, respectively, and $19,000 for the three- and nine-month periods ended September 27, 2003, respectively. These costs consist of an additional
charge related to a revision to the estimated fair value of an Ashford liability.



Gain on Sale of Ashford Assets.    We had a gain on the sale of Ashford assets of $379,000 for the three- and nine-month periods ended September 28, 2002, respectively, and $0 for the three-
and nine-month periods ended September 27, 2003, respectively. This gain related to the disposition of a division of Ashford Corporate Gifts, Inc., which is a subsidiary of Ashford. We received $1.2 million in cash proceeds from the sale of this
division.



Stock-Based Compensation
Expense.    Stock-based compensation expense increased $477,000 from $181,000 for the three-month period ended September 28, 2002 to $628,000 for the three-month period ended September 27, 2003. This increase was primarily
due to an increase of $376,000 in charges related to options subject to variable accounting and an increase of $138,000 related to the amortization of deferred partner revenue share charges, offset, in part, by a decrease of $67,000 in charges
related to the issuance of options granted during fiscal 2000 with exercise prices below the then-current market prices of the underlying stock. Stock-based compensation expense increased $1.3 million from $(37,000) for the nine-month period ended
September 28, 2002 to $1.3 million for the nine-month period ended September 27, 2003. This increase was primarily due to an increase of $1.3 million in charges related to options subject to variable accounting and an increase of $292,000 related to
the amortization of deferred partner revenue share charges, offset, in part, by a decrease of $213,000 in charges related to the issuance of options granted during fiscal 2000 with exercise prices below the then-current market prices of the
underlying stock and a decrease of



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$53,000 in charges related to the net exercise of warrants during the nine-month period ended September 28, 2002. As of September 27, 2003, we had an
aggregate of $1.2 million of deferred stock-based compensation remaining to be amortized. We had stock-based compensation expense related to the amortization of deferred partner revenue share charges of $145,000 and $486,000 for the three- and
nine-month periods ended September 28, 2002, respectively, and $283,000 and $778,000 for the three- and nine-month periods ended September 27, 2003, respectively.



Depreciation and Amortization Expenses.    Depreciation and amortization expenses increased
$534,000 from $2.6 million for the three-month period ended September 28, 2002 to $3.1 million for the three-month period ended September 27, 2003. This increase was due primarily to an impairment charge of $284,000 related to the disposal of
certain capitalized costs associated with our data centers, which were relocated during the third quarter of fiscal 2003, and a $250,000 increase in depreciation expense related to additional assets purchased to build, manage and operate our
e-commerce business. Depreciation and amortization expenses increased $1.9 million from $6.7 million for the nine-month period ended September 28, 2002 to $8.6 million for the nine-month period ended September 27, 2003. This increase was primarily
related to additional assets purchased to build, manage and operate our e-commerce business.



Interest (Income) Expense.    We had interest income of $270,000 and interest expense of $127,000 for the three-month period ended September 28, 2002 compared to interest income of $243,000
and interest expense of $0 for the three-month period ended September 27, 2003. We had interest income of $1.1 million and interest expense of $389,000 for the nine-month period ended September 28, 2002 compared to interest income of $914,000 and
interest expense of $0 for the nine-month period ended September 27, 2003. The decreases in interest income of $27,000 and $182,000 were due to lower interest rates and lower average balances of cash, cash equivalents, short-term investments and
marketable securities during the three- and nine-month periods ended September 27, 2003 compared to the three- and nine-month periods ended September 28, 2002. The decreases in interest expense of $127,000 and $389,000 were due primarily to the
early retirement of a mortgage note on our corporate headquarters in November 2002.



Income Taxes.    Since the sales of our discontinued operations, we have not generated taxable income. Net operating losses generated have been carried back to offset income taxes paid in
prior years. The remaining net operating losses will be carried forward. As of September 27, 2003, we had available net operating loss carryforwards of approximately $420.0 million which expire in the years 2003 through 2022. The use of certain net
operating loss carryforwards are subject to limitations based on ownership changes of our stock, as provided under Section 382 of the Internal Revenue Code. We expect that net operating losses of approximately $243.2 million will expire before they
can be utilized. Any otherwise recognizable deferred tax assets have been offset by a valuation allowance for the net operating loss carryforwards.



Certain Related Party Transactions



We have entered into a strategic alliance to provide technology, procurement and fulfillment services for QVC, Inc. Interactive Technology Holdings, LLC,
which is one of our major stockholders, is a joint venture company of Comcast Corporation and QVC, Inc. We recognized net revenues of $431,000 and $897,000 on sales to this related party for the three- and nine-month periods ended September 28,
2002, respectively, and $338,000 and $1.3 million for the three- and nine-month periods ended September 27, 2003, respectively. The terms of these sales are comparable to those with our other business-to-business partners. Included in accounts
receivable as a result of these sales was $373,000 as of September 27, 2003 of which we have taken a charge to bad debt expense of $325,000 for the settlement of disputed amounts billed for product and shipping costs.



We have entered into an agreement with QVC, Inc. pursuant to which QVC will
provide shipping services to us in exchange for variable fees. We incurred fees of $0 for the three- and nine-month periods ended September 28, 2002, respectively, and $38,000 for the three- and nine-month periods ended September 27, 2003,
respectively, which were charged to cost of revenues from product sales.



Liquidity and Capital Resources



Our principal
source of liquidity is our cash, cash equivalents, short-term investments and marketable securities. Our cash, cash equivalents, short-term investments and marketable securities balances were $46.5 million and $74.8 million as of September 27, 2003
and December 28, 2002, respectively.



We raised an aggregate of
$176.3 million in gross proceeds through equity financings in fiscal 1999, fiscal 2000 and fiscal 2001, as well as $5.3 million in gross proceeds through a mortgage financing in fiscal 2000. We received an aggregate of $23.5 million in proceeds from
the sales of our discontinued operations in fiscal 1999 and fiscal 2000, as well as $35.7 million in net cash from the acquisition of Fogdog in fiscal 2000.



We have incurred substantial costs to develop our e-commerce businesses and to recruit, train and compensate personnel for our creative, engineering,
business development, marketing, merchandising, customer service, management information systems and administrative departments. During the first, second and third quarters of fiscal 2003, we spent approximately $1.4



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million, $855,000 and $2.9 million, respectively, on continued upgrades to our infrastructure. We expect capital expenditures for the remainder of fiscal
2003 to be between $4.8 million and $9.8 million. As of September 27, 2003, we had cash, cash equivalents, short-term investments and marketable securities of $46.5 million, working capital of $29.4 million and an accumulated deficit of $180.4
million.



We used approximately $23.9 million and $15.5 million
in net cash for operating activities during the nine-month periods ended September 27, 2003 and September 28, 2002, respectively. Net cash used for operating activities during the nine-month period ended September 27, 2003 was primarily the result
of net losses and changes in accounts payable and accrued expenses and other, offset, in part, by changes in depreciation and amortization, inventory, stock-based compensation, deferred revenue, notes receivable, accounts receivable and prepaid
expenses and other current assets. Net cash used for operating activities during the nine-month period ended September 28, 2002 was primarily the result of net losses and changes in accounts payable and accrued expenses and other, inventory, prepaid
expenses and other current assets, a gain on the sale of Ashford assets and stock-based compensation, offset, in part, by changes in deferred revenue, depreciation and amortization, accounts receivable and other assets.



Our investing activities during the nine-month period ended September 27,
2003 consisted primarily of purchases of $11.0 million and sales of $12.5 million of marketable securities. During the nine-month period ended September 27, 2003, we also made capital expenditures of $5.1 million and received $2.3 million in gross
proceeds from the sale of short-term investments. During the nine-month period ended September 28, 2002, we made capital expenditures of $25.1 million, purchased $10.5 million and sold $555,000 of marketable securities, paid $8.8 million for the
acquisition of Ashford including acquisition costs and received $1.2 million in gross proceeds from the sale of Ashford assets.



Our financing activities during the nine-month period ended September 27, 2003 consisted primarily of the receipt of $621,000 in gross proceeds from
exercises of common stock options. During the nine-month period ended September 27, 2003, we also received $211,000 in gross proceeds from the sale common stock through our Employee Stock Purchase Plan and repaid $78,000 of capital lease
obligations. During the nine-month period ended September 28, 2002, we retired for $3.1 million a revolving credit facility with Congress Financial Corporation, a unit of First Union National Bank, that had been maintained by Ashford prior to our
acquisition of Ashford. During the nine-month period ended September 28, 2002, we also received $1.4 million in gross proceeds from exercises of common stock options and warrants and we repurchased 60,000 shares of our common stock for an aggregate
purchase price of $300,000.



We had the following commitments
as of September 27, 2003 with respect to our lease obligations, employment agreements, advertising and media agreements and partner revenue share payment obligations.



|                                 |  | ThreeMonths EndingJanuary 3, 2004 |       | Fiscal Year
|-------------------------------- |  | --------------------------------- | ----- | -----------
|                                 |  |                                   | 2004  |            
|                                 |  | (In thousands)                   
|Operating leases                 |  | $                                 | 171   |            
|Employment agreements            |  |                                   | 617   |            
|Advertising and media agreements |  |                                   | 29    |            
|Partner revenue share payments   |  |                                   | 375   |            
|                                 |  |                                   |       |            
|Total commitments                |  | $                                 | 1,192 |            
|                                 |  |                                   |       |            



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



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Seasonality



We have experienced and expect to continue to experience seasonal fluctuations in our revenues. These seasonal patterns have caused and will cause
quarterly fluctuations in our operating results. In particular, our fourth fiscal quarter has accounted for and is expected to continue to account for a disproportionate percentage of our total annual revenues. We believe that results of operations
for a quarterly period may not be indicative of the results for any other quarter or for the full year.



Risk Factors



Any
investment in our common stock or other securities involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information contained in this Quarterly Report on Form 10-Q. If any
of the following risks occur, our business could be materially harmed. In these circumstances, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock.



All statements made in this Quarterly Report on Form 10-Q, other than
statements of historical fact, are forward-looking statements. The words anticipate, believe, estimate, expect, intend, may, plan, will,
would, should, guidance, potential, continue, project, forecast, confident, prospects, and similar expressions typically are used to identify
forward-looking statements. Forward-looking statements are based on the then-current expectations, beliefs, assumptions, estimates and forecasts about our business and the industry and markets in which we operate. These statements are not guarantees
of future performance and involve risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. Factors which
may affect our business, financial condition and operating results include the effects of changes in the economy, consumer spending, the stock market and the industries in which we operate, changes affecting the Internet and e-commerce, our ability
to maintain relationships with strategic partners and suppliers, our ability to timely and successfully develop, maintain and protect our technology and product and service offerings and execute operationally, our ability to attract and retain
qualified personnel, our ability to successfully integrate our acquisitions of other businesses and the performance of acquired businesses. More information about potential factors that could affect us are described below. We expressly disclaim any
intent or obligation to update these forward-looking statements, except as otherwise specifically stated by us.



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



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



We expect continuing losses in fiscal 2003.



We incurred substantial losses in fiscal 1999, fiscal 2000, fiscal 2001 and fiscal 2002, and as of September 27, 2003, we had an accumulated deficit of
$180.4 million. Except for the fourth quarter of fiscal 2001, we have not achieved profitability from our continuing operations, and we do not expect to achieve profitability in fiscal 2003. We may not obtain an appropriate volume of purchases from
the e-commerce businesses that we operate, generate an appropriate amount of service fee revenue from our existing partners or add an appropriate amount of new partners to generate sufficient revenues to achieve profitability. Additionally, in
fiscal 2002 our net loss was greater than the prior year despite an increase in revenue. Therefore, even if we are able to generate increased revenue, there is no assurance that our results will improve. While we expect to be profitable in fiscal
2004, there can be no assurances that we will be able to achieve profitability.



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



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



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



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



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



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



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



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



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



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



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



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



The uncertainty regarding the general economy may reduce our revenues.



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



We have an e-commerce agreement with Bluelight.com, a subsidiary of Kmart, pursuant to which we operate the Kmart.com Web site. Even though Kmart
and Bluelight recently emerged from bankruptcy, we may not realize all of the economic benefits of that agreement.



Kmart, as well as Bluelight.com, operated in bankruptcy from January 2002 until May 2003. In connection with its bankruptcy restructuring plan, Bluelight
assumed its e-commerce agreement with us. In March 2003, we and Bluelight modified our agreement to shorten the term, eliminate the last two of eight fixed fee payments required under the agreement and provide for early termination rights for both
us and Bluelight. We will, however, continue to receive a percentage of sales through the Bluelight Web site for the services that we provide under this agreement. Our agreement with Bluelight accounted for 14% of our annual revenue in fiscal 2002.
Bluelight.com may cease making future payments or terminate its agreement with us early. If Bluelight.com ceases making payments or terminates its e-commerce agreement with us, we will not realize all of the economic benefits of that agreement.



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



The contracts with our partners establish new and complex relationships between our partners and us. We spend a significant amount of time and effort to
maintain our relationships with our partners and address the issues that from time to time may arise from these new and complex relationships. For fiscal 2002, sales to customers through one of our partners e-commerce businesses accounted for
20% of our revenue, sales to customers through another one of our partners e-commerce businesses accounted for 12% of our revenue, sales to Kmart as well as related service fees accounted for 14% of our revenue, and sales through our top four
partners e-commerce businesses and sales to Kmart accounted for 56.4% of our revenue. For fiscal 2001, sales to customers through one of our partners e-commerce businesses accounted for 25% of our revenue, sales to customers through
another of our partners e-commerce businesses accounted for 19% of our revenue and sales through our top five



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partners e-commerce businesses accounted for 62% of our revenue. If we do not maintain good working relationships with our partners or perform as
required under these agreements, our partners could seek to terminate the agreements prior to the end of the term or they could decide not to renew the contracts at the end of the term. This could adversely affect our business, financial condition
and results of operations. Moreover, our partners could decide not to renew these contracts for reasons not related to our performance.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



| |  | seasonality;
| | - | ------------



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



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



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



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



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



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



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



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



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



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



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



For the categories in which we own inventory, we primarily purchase products from the manufacturers and distributors of the
products. For the categories in which we provide e-commerce services to our partners, our partners purchase products from the manufacturers and distributors of products. If we or our partners are unable to develop and maintain relationships with
these manufacturers, we or our partners may be unable to obtain or continue to carry a sufficient assortment and quantity of quality merchandise on acceptable commercial terms and our business could be adversely impacted. We do not have written
contracts with many manufacturers or distributors. During the nine-month period ended September 27, 2003, we purchased 39% of the total amount of inventory we purchased during that period from one manufacturer. In addition, during fiscal 2002, we
purchased 20% of the total amount of inventory we purchased during fiscal 2002 from one manufacturer and during fiscal 2001, we purchased 23% and 16% of the total amount of inventory we purchased during fiscal 2001 from two manufacturers.
Manufacturers could stop selling products to our partners or us and may ask us or our partners to remove their products or logos from our partners Web sites. If our partners or we are unable to obtain products directly from manufacturers,
especially popular brand manufacturers, we may not be able to obtain the same or comparable merchandise in a timely manner or on acceptable commercial terms.



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



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



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



For direct response television
campaigns, our financial performance depends on our ability to develop products or acquire the rights to products that will be appealing to consumers. We select products based on managements retail experience. We may



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not be successful in finding, developing or marketing products that consumers will want to purchase. Any failure to meet consumers desires could result
in lost opportunities and excess inventory which could reduce our revenues. Additionally, we may select products that are not profitable which could result in lower margins.



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



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



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



| |  | power losses, interruptions or brown-outs;
| | - | ------------------------------------------



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



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



| |  | computer viruses; and
| | - | ---------------------



| |  | other similar events.
| | - | ---------------------



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



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



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



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



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



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



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



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



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



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



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



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



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



Our success depends to a significant degree upon the contribution of our executive officers and other key personnel, particularly Michael G. Rubin, Chairman, President and Chief Executive Officer. We have employment
agreements with most of our executive officers and key personnel. Due to the costs associated with compensating executive officers and key personnel and the competition for highly qualified personnel, we cannot be sure that we will be able to retain
or attract executive, managerial or other key personnel. We have obtained key person life insurance for Mr. Rubin in the amount of $8.0 million. We have not obtained key person life insurance for any of our other executive officers or key personnel.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Our success depends, in part, upon our ability and our
partners ability to anticipate and respond to consumer trends with respect to products sold through the e-commerce businesses we operate. Consumers tastes are subject to frequent and significant changes. In order to be successful, our
partners and we must accurately predict consumers tastes and avoid overstocking or understocking products. If we or our partners fail to identify and respond to changes in merchandising and consumer preferences, our sales could suffer and we
and our partners could be required to mark down unsold inventory. This would depress our profit margins. In addition, any failure to keep pace with changes in consumers tastes could result in lost opportunities which could reduce sales.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



| |  | potential adverse tax consequences;
| | - | -----------------------------------



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



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



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



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



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



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



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



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



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



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



| |  | excessive governmental regulation;
| | - | ----------------------------------



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Our long-term future depends heavily upon the general publics
willingness to use the Internet as a means to purchase goods. The failure of the Internet to continue to develop as an effective commercial tool would seriously damage our future operations. E-commerce is still a relatively new concept, and large
numbers of customers may not begin or continue to use the Internet to purchase goods. The demand for and acceptance of products sold over the Internet are highly uncertain, and most e-commerce businesses have a short track record. If consumers are
unwilling to use the Internet to conduct business, our business



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may not develop profitably. The Internet may not succeed as a medium of commerce because of delays in developing elements of the needed Internet
infrastructure, such as a reliable network, high-speed modems, high-speed communication lines and other enabling technologies.



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



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



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



We generally enter into exclusive agreements with media companies, branded manufacturers and other sellers of products to run, their e-commerce businesses, including some of their direct response television campaigns. In those agreements,
the media companies, branded manufacturers and other sellers of products generally agree to certain marketing, advertising and air-time commitments for the promotion of products sold through their e-commerce businesses, including direct response
television and online retail stores. Air-time is very valuable and is essential for the success of direct response television campaigns. If we are unable to negotiate favorable marketing, advertising and air-time commitments in our agreements with
our partners or if our partners do not fulfill their commitments, the amount of products we could sell likely would be lower which would cause our revenues to be lower.



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



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



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



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



In March 2003, we were served with a complaint filed in the Chancery Court of
Davidson County, Tennessee, by a private litigant purportedly on behalf of the State of Tennessee under the Tennessee False Claims Act. The complaint alleges that we, along with certain of our partners, wrongfully failed to collect and remit sales
and use taxes for sales of personal property to customers in Tennessee and knowingly created records and statements falsely stating we were not required to collect or remit such taxes. The complaint seeks injunctive relief, unpaid taxes, interest,
attorneys fees, civil penalties of up to $10,000 per violation, and treble damages under the Tennessee False Claims Act. In September 2003, we learned that we, along with several of our partners, were named in a similar action in the Circuit
Court of Cook County, Illinois, by the same private litigant who is alleging similar claims with respect to sales and uses taxes for sales of personal property to customers in Illinois. We are aware that this same private litigant has filed similar
actions against retailers in other states, and it may be possible that we and/or partners may have been or may be named in similar cases in other states. We do not believe that we are liable under existing laws and regulations for any failure to
collect sales or other taxes relating to internet sales and intend to vigorously defend ourselves in this matter. However, we may incur substantial expenses in defending against this claim. In the event of a determination adverse to us, we may incur
substantial monetary liability, and be required to change our business practices, either of which could have a material adverse effect on our business, financial position or results of operations.



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Existing or future government regulation could harm our business.



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



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



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



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



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



We are controlled by certain principal stockholders.



As of November 3, 2003, Michael G. Rubin, our Chairman, President and Chief
Executive Officer, beneficially owned 18.5%, funds affiliated with SOFTBANK Holdings Inc., or SOFTBANK, beneficially owned 21.2% and Interactive Technology Holdings, LLC, or ITH, a joint venture company of Comcast Corporation and QVC, Inc.,
beneficially owned 27.0% of our outstanding common stock, including currently exercisable warrants and options to purchase common stock. Should they decide to act together, any two of Mr. Rubin, SOFTBANK and ITH would be in a position to exercise
effective control, and all three would be in a position to exercise complete control, over most matters requiring stockholder approval, including the election or removal of directors, approval of significant corporate transactions and the ability
generally to direct our affairs. Furthermore, the stock purchase agreements pursuant to which SOFTBANK and ITH acquired their shares of our common stock provide that SOFTBANK and ITH each have the right to designate up to two members of our board of
directors. This concentration of ownership and SOFTBANKs and ITHs right to designate members to our board of directors may have the effect of delaying or preventing a change in control of us, including transactions in which stockholders
might otherwise receive a premium over current market prices for their shares.



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



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



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merger or business combination or obtain control of us. As many investors consider a change of control as a desirable path to liquidity, delaying or
preventing a change in control of our company may reduce the number of investors interested in our common stock, which could depress our stock price.



There are limitations on the liabilities of our directors.



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



|ITEM 3. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- |  | ----------------------------------------------------------



There have been no significant changes in market risk for the quarter ended September 27, 2003. See the information set
forth in Part II, Item 7A of the Companys Annual Report on Form 10-K for the fiscal year ended December 28, 2002 filed with the Securities and Exchange Commission on March 26, 2003.



|ITEM 4. |  | CONTROLS AND PROCEDURES
|------- |  | -----------------------



(a) Evaluation of Disclosure Controls and Procedures. Based on the evaluation of our disclosure controls and procedures (as defined in Securities
Exchange Act Rules 13a-15(e) or 15d-15(e)), our Chief Executive Officer and our Chief Financial Officer have concluded as of the end of the period covered by this Quarterly Report on Form 10-Q, that our disclosure controls and procedures were
effective.



(b) Changes in Internal Controls.
During the most recently completed fiscal quarter, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART IIOTHER INFORMATION



|ITEM 1. |  | LEGAL PROCEEDINGS
|------- |  | -----------------



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



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



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



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



|ITEM 2. |  | CHANGES IN SECURITIES AND USE OF PROCEEDS
|------- |  | -----------------------------------------



On July 25, 2003, we issued 1,650,000 shares of common stock to Interactive Technology Holdings, LLC (ITH) in exchange for warrants held by
ITH to purchase 4,500,000 shares of our common stock. On the day immediately preceding the exchange, the closing price of a share of our common stock was $9.05. Of the warrants exchanged, 2,500,000 had an exercise price of $10.00 per share and
expired between September 2005 and October 2005 and 2,000,000 had an exercise price of $8.15 per share and expired between September 2005 and October 2005. No underwriter was involved in this exchange of securities. These securities were issued in
reliance upon the exemption set forth in Section 4(2) of the Securities Act of 1933, as amended on the basis that they were issued under circumstances not involving a public offering.



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|ITEM 3. |  | DEFAULTS UPON SENIOR SECURITIES
|------- |  | -------------------------------



None.



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



On September 5, 2003, we held our Annual Meeting of Stockholders. Proxies were solicited for the Annual Meeting pursuant to Regulation 14A of the
Securities Exchange Act of 1934. At the Annual Meeting, the following matters were voted on:



1. Kenneth J. Adelberg, M. Jeffrey Branman, Ronald D. Fisher, Harvey Lamm, Mark S. Menell, Michael S. Perlis, Jeffrey F. Rayport and Michael G. Rubin were elected to serve on the Board of Directors of the Company for
one-year terms and until their respective successors are duly elected and qualified. The votes for and the votes withheld for the election of each director were as follows:



|Name                |  | For        |  | Withhold 
|------------------- |  | ---------- |  | ---------
|Kenneth J. Adelberg |  | 38,050,168 |  | 227,870  
|M. Jeffrey Branman  |  | 36,661,469 |  | 1,616,569
|Ronald D. Fisher    |  | 36,277,531 |  | 2,000,507
|Harvey Lamm         |  | 36,700,964 |  | 1,577,074
|Mark S. Menell      |  | 36,678,669 |  | 1,599,369
|Michael S. Perlis   |  | 36,687,669 |  | 1,590,369
|Jeffrey F. Rayport  |  | 36,700,969 |  | 1,577,069
|Michael G. Rubin    |  | 36,678,654 |  | 1,599,384



2. The amendment and
restatement of GSI Commerces 1996 Equity Incentive Plan was approved by the following vote:



|For        |  | Against   |  | Abstain
|---------- |  | --------- |  | -------
|35,116,905 |  | 3,155,312 |  | 5,821  



|ITEM 5. |  | OTHER INFORMATION
|------- |  | -----------------



None.



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



(a) Exhibits



|     | 
|---- | 
|4.1  | 
|     | 
|10.1 | 
|     | 
|31.1 | 
|     | 
|31.2 | 
|     | 
|32.1 | 



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(b) Reports on Form 8-K



During the fiscal quarter ended September 27, 2003, we filed or furnished to the Securities and Exchange Commission:



| | (i) | a Current Report on Form 8-K under Item 9 dated July 8, 2003 regarding a presentation we gave at the CIBC Third Annual Consumer Growth Conference;
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | a Current Report on Form 8-K under Item 5 dated July 25, 2003 regarding our issuance of 1.65 million shares of our common stock to ITH in exchange for warrants held by ITH to
purchase 4.5 million shares of our common stock; and
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | a Current Report on Form 8-K under Item 12 dated July 30, 2003 regarding our results for the fiscal quarter ended June 28, 2003.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------



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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, hereunto duly authorized.



GSI COMMERCE, INC.By:

/s/    MICHAEL G.
RUBINMichael G. Rubin Chairman, President & Chief Executive Officer (principal executive officer)By:

/s/    JORDAN M.
COPLANDJordan M. Copland Executive Vice President & Chief Financial Officer (principal financial officer)By:

/s/    R. BARRY
SAUDERR. Barry Sauder Vice President of Finance and Controller (principal accounting officer)




Date:    November 7, 2003



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