Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets		F-4
Consolidated Statements of Operations		F-5
Consolidated Statement of ~~Stockholders'~~Stockholders’ Equity and Comprehensive Income		F-6
Consolidated Statements of Cash Flows		F-8
Notes to Consolidated Financial Statements		F-9
Schedule II Valuation and Qualifying Accounts		F-39

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and

Stockholders of Overstock.com, Inc.:

We have completed an integrated ~~audit~~audits of Overstock.com, Inc.'s’s 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, ~~2004~~2005 and ~~audits~~an audit of its 2003 ~~and 2002~~ consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the index appearing ~~on page F-1~~under Item 15(a)(1) present fairly, in all material respects, the financial position of Overstock.com, Inc. and its subsidiaries at December 31, ~~2004~~2005 and ~~2003,~~2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, ~~2004~~2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing ~~on page F-1~~under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the ~~Company's~~Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, ~~in our opinion, management's~~we have audited management’s assessment, included in ~~"Management's~~Management’s Report on Internal Control Over Financial Reporting" appearing inunder Item 9A, that the Company ~~maintained~~did not maintain effective internal control over financial reporting as of December 31, ~~2004~~2005, because the Company did not maintain effective controls over the accounting for inventory, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in~~Internal Control—Integrated Framework~~ ~~issued by the COSO.~~. The ~~Company's~~Company’s management is responsible for maintaining effective internal control over the financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on ~~management's~~management’s assessment and on the effectiveness of the ~~Company's~~Company’s internal control over financial reporting based on our audit.

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

A ~~company's~~company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A ~~company's~~company’s internal
F-2

control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the ~~company's~~company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management’s assessment. As of December 31, 2005, the Company did not maintain effective control over its accounting for inventory. Specifically, the Company did not maintain effective control designed and in place to ensure that inbound freight costs were completely and accurately capitalized as a component of inventory costs in accordance with generally accepted accounting principles. This control deficiency resulted in the restatement of the Company’s annual consolidated financial statements as of and for the years ended December 31, 2004, 2003 and 2002 and the interim consolidated financial statements for each of the quarters within the years ended December 31, 2005, 2004 and 2003. Additionally, this control deficiency could result in a misstatement of the Company’s inventory and cost of goods sold that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2005 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.
In our opinion, management’s assessment that Overstock.com, Inc. did not maintain effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the COSO. Also, in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Overstock.com, Inc. did not maintain effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the COSO.
/~~s/ PricewaterhouseCoopers~~S/ PRICEWATERHOUSECOOPERS LLP
Salt Lake City, Utah
March ~~14, 2005~~

16, 2006

F-3

Overstock.com, Inc.

Consolidated Balance Sheets

December 31,

December 31,

2003
2004

2004

2005

(in thousands)

(in thousands)

Assets Assets

Current assets: Current assets:

Cash and cash equivalents $ 28,846 $ 198,678
Marketable securities 11,500 88,802

Cash, cash equivalents and marketable securities 40,346 287,480
Accounts receivable, net 10,183 5,715
Inventories, net 29,926 45,279
Prepaid inventory 2,946 12,322
Prepaid expenses 1,637 3,444

Total current assets 85,038 354,240
Cash and cash equivalents

$
198,678

$
56,224

Marketable securities

88,802

55,799

Cash, cash equivalents and marketable securities

287,480

112,023

Accounts receivable, net

5,715

11,695

Inventories, net

46,558

93,269

Prepaid inventory

12,322

9,633

Prepaid expenses

3,444

8,508

Total current assets

355,519

235,128

Restricted cash Restricted cash — 1,602

1,602

253

Property and equipment, net Property and equipment, net 9,483 16,122

16,122

61,914

Goodwill Goodwill 2,784 2,784

2,784

13,169

Other long-term assets, net Other long-term assets, net 427 1,516

1,516

15,449

Total assets $ 97,732 $ 376,264

Liabilities, Redeemable Securities and Stockholders' Equity
Total assets

$
377,543

$
325,913

Liabilities, Redeemable Securities and Stockholders’ Equity

Current liabilities: Current liabilities:

Accounts payable $ 30,363 $ 64,060
Accrued liabilities 9,316 22,917
Capital lease obligations, current 75 595

Total current liabilities 39,754 87,572
Accounts payable

$
64,060

$
101,436

Accrued liabilities

22,917

46,847

Capital lease obligations, current

595

6,683

Total current liabilities

87,572

154,966

Capital lease obligations, non-current Capital lease obligations, non-current 86 743

743

3,058

Convertible senior notes Convertible senior notes — 116,251

116,251

74,935

Total liabilities 39,840 204,566

Commitments and contingencies (notes 10, 11 and 12)
Redeemable common stock, $0.0001 par value, 460 shares issued and outstanding as of December 31, 2003 and 2004 2,978 3,166

Stockholders' equity:
Preferred stock, $0.0001 par value, 5,000 shares authorized, no shares issued and outstanding as of December 31, 2003 and 2004 — —
Common stock, $0.0001 par value, 100,000 shares authorized, 16,060 and 19,390 shares issued as of December 31, 2003 and 2004, respectively 2 2
Additional paid-in capital 123,934 243,131
Accumulated deficit (67,815 ) (73,005 )
Unearned stock-based compensation (1,094 ) (1,301 )
Treasury stock, 35 shares at cost (100 ) (100 )
Accumulated other comprehensive loss (13 ) (195 )

Total stockholders' equity 54,914 168,532

Total liabilities, redeemable securities and stockholders' equity $ 97,732 $ 376,264

Total liabilities

204,566

232,959

Commitments and contingencies (notes 11, 12 and 13)

Redeemable common stock, $0.0001 par value, 460 and 446 shares issued and outstanding as of December 31, 2004 and 2005, respectively

3,166

3,205

Stockholders’ equity:

Preferred stock, $0.0001 par value, 5,000 shares authorized, no shares issued and outstanding as of December 31, 2004 and 2005

—

—

Common stock, $0.0001 par value, 100,000 shares authorized, 19,390 and 20,571 shares issued as of December 31, 2004 and 2005, respectively

2

2

Additional paid-in capital

243,131

251,244

Accumulated deficit

(71,726
)
(96,829
)
Unearned stock-based compensation

(1,301
)
(305
)
Treasury stock, 35 and 1,687 shares at cost as of December 31, 2004 and 2005, respectively

(100
)
(65,325
)
Accumulated other comprehensive income (loss)

(195
)
962

Total stockholders’ equity

169,811

89,749

Total liabilities, redeemable securities and stockholders’ equity

$
377,543

$
325,913

The accompanying notes are an integral part of these consolidated financial statements.
F-4

Overstock.com, Inc.

Consolidated Statements of Operations

Year ended December 31,

Year ended December 31,

2002
2003
2004

2003

2004

2005

(in thousands, except per share data)

(in thousands, except per share data)

Revenue Revenue

Direct revenue $ 79,405 $ 138,134 $ 213,210
Fulfillment partner revenue 12,379 100,811 281,425

Total revenue 91,784 238,945 494,635

Direct revenue

$
138,134

$
213,210

$
324,875

Fulfillment partner revenue

100,811

281,425

478,947

Total revenue

238,945

494,635

803,822

Cost of goods sold Cost of goods sold

Direct 70,686 124,302 185,390
Fulfillment partner 2,755 89,190 243,468

Total cost of goods sold (includes amortization of stock-based compensation of $373, $90, and $0, respectively) 73,441 213,492 428,858

Gross profit 18,343 25,453 65,777

Direct

123,963

184,928

282,377

Fulfillment partner

89,190

243,468

400,889

Total cost of goods sold (includes amortization of stock-based compensation of $90, $0, and $0, respectively)

213,153

428,396

683,266

Gross profit

25,792

66,239

120,556

Operating expenses: Operating expenses:

Sales and marketing expenses (excludes amortization of stock-based compensation of $83, $22, and $0, respectively) 8,669 20,173 40,533
General and administrative expenses (excludes amortization of stock-based compensation of $2,820, $734, and $360, respectively) 10,825 16,911 30,235
Amortization of stock-based compensation 2,903 756 360

Total operating expenses 22,397 37,840 71,128

Sales and marketing expenses (excludes amortization of stock-based compensation of $22, $0, and $0, respectively)

20,173

40,533

79,651

Technology

2,424

8,449

28,132

General and administrative expenses (excludes amortization of stock-based compensation of $734, $360, and $72, respectively)

14,487

21,786

36,495

Amortization of stock-based compensation

756

360

72

Total operating expenses

37,840

71,128

144,350

Operating loss Operating loss (4,054 ) (12,387 ) (5,351 )

(12,048
)
(4,889
)
(23,794
)
Interest income 403 461 1,173
Interest income, net

461

1,173

(270
)
Interest expense Interest expense (465 ) (76 ) (775 )

(76
)
(775
)
(5,582
)
Other income (expense), net Other income (expense), net (444 ) 115 (49 )

115

(49
)
4,728

Net loss Net loss (4,560 ) (11,887 ) (5,002 )

(11,548
)
(4,540
)
(24,918
)
Deemed dividend related to redeemable common stock Deemed dividend related to redeemable common stock (406 ) (262 ) (188 )

(262
)
(188
)
(185
)
Deemed dividend related to beneficial conversion feature of preferred stock Deemed dividend related to beneficial conversion feature of preferred stock (6,607 ) — —

—

—

—

Net loss attributable to common shares Net loss attributable to common shares $ (11,573 ) $ (12,149 ) $ (5,190 )

$
(11,810
)
$
(4,728
)
$
(25,103
)

Net loss per common share—basic and diluted Net loss per common share—basic and diluted $ (0.88 ) $ (0.75 ) $ (0.29 )

$
(0.73
)
$
(0.26
)
$
(1.29
)
Weighted average common shares outstanding—basic and diluted Weighted average common shares outstanding—basic and diluted 13,108 16,198 17,846

16,198

17,846

19,429

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

F-5

Overstock.com, Inc.

Consolidated Statements of ~~Stockholders'~~Stockholders’ Equity
and Comprehensive Income

Common stock

Additional
Paid-in

Accumulated

Unearned
stock-based

Treasury stock

Accumulated
Other
Comprehensive
Income

Shares

Amount

capital

Deficit

compensation

Shares

Amount

(Loss)

Total

(amounts in thousands)

Balance at December 31, 2002

13,866

$
1

$
97,282

$
(55,188
)

$
(2,327
)

(35
)
$
(100
)

$
81

$
39,749

Exercise of stock options and warrants

247

—

1,227

—

—

—

—

—

1,227

Issuance of common stock in follow-on offering

1,725

1

23,967

—

—

—

—

—

23,968

Issuance of common stock

—

—

21

—

—

—

—

—

21

Forfeitures of unearned stock-based compensation from options issued to employees

—

—

(478
)

—

478

—

—

—

—

Amortization of stock-based compensation

—

—

—

—

846

—

—

—

846

Stock-based compensation to consultants in exchange for services

—

—

268

—

(91
)

—

—

—

177

Lapse of rescission rights on redeemable common stock

222

—

1,647

—

—

—

—

—

1,647

Deemed dividend related to redeemable common stock

—

—

—

(262
)

—

—

—

—

(262
)
Comprehensive income (loss):

—

Net loss

—

—

—

(11,548
)

—

—

—

—

(11,548
)
Net unrealized loss on marketable securities

—

—

—

—

—

—

—

(93
)

(93
)
Cumulative translation adjustment

—

—

—

—

—

—

—

(1
)

(1
)
Total comprehensive loss

—

(11,642
)
Balance at December 31, 2003

16,060

2

123,934

(66,998
)

(1,094
)

(35
)
(100
)

(13
)

55,731

Exercise of stock options and warrants

650

—

4,288

—

—

—

—

—

4,288

Issuance of common stock in follow-on offerings

2,680

—

113,064

—

—

—

—

—

113,064

Forfeitures of unearned stock-based compensation from options issued to employees

—

—

(198
)

—

198

—

—

—

—

Amortization of stock-based compensation

—

—

—

—

360

—

—

—

360

Stock-based compensation to consultants in exchange for services

—

—

2,043

—

(765
)

—

—

—

1,278

Deemed dividend related to redeemable common stock

—

—

—

(188
)

—

—

—

—

(188
)
Comprehensive income (loss):

—

Net loss

—

—

—

(4,540
)

—

—

—

—

(4,540
)
Net unrealized loss on marketable securities

—

—

—

—

—

—

—

(204
)

(204
)
Cumulative translation adjustment

—

—

—

—

—

—

—

22

22

Total comprehensive loss

(4,722
)
F-6

Common stock

Accumulated
Other
Comprehensive
Income (Loss)

Additional
Paid-in
capital
Accumulated
deficit
Unearned
stock-based
compensation
Treasury
stock

Shares
Amount
Total

(amounts in thousands)

Balance at December 31, 2001 10,327 $ 1 $ 52,187 $ (44,093 ) $ (2,015 ) $ (100 ) $ — $ 5,980
Issuance of common stock 7 — 212 — — — — 212
Exercise of stock options and warrants 149 — 615 — — — — 615
Deemed dividend related to beneficial conversion feature of preferred stock — — 6,607 (6,607 ) — — — —
Conversion of Series A redeemable preferred stock to common stock 959 — 6,582 — — — — 6,582
Issuance of common stock in IPO 2,256 — 26,140 — — — — 26,140
Unearned stock-based compensation from options issued to employees — — 3,481 — (3,481 ) — — —
Amortization of stock-based compensation — — — — 3,276 — — 3,276
Stock-based compensation to consultants in exchange for services — — 131 — (107 ) — — 24
Lapse of rescission rights on redeemable common stock 168 — 1,327 — — — — 1,327
Deemed dividend related to redeemable common stock — — — (406 ) — — — (406 )
Net loss — — — (4,560 ) — — — (4,560 )
Unrealized gain on marketable securities — — — — — — 81 81

Total comprehensive loss (4,479 )

Balance at December 31, 2002 13,866 1 97,282 (55,666 ) (2,327 ) (100 ) 81 39,271
Exercise of stock options and warrants 247 — 1,227 — — — — 1,227
Issuance of common stock in follow-on offering 1,725 1 23,967 — — — — 23,968
Issuance of common stock — — 21 — — — — 21
Forfeitures of unearned stock-based compensation from options issued to employees — — (478 ) — 478 — — —
Amortization of stock-based compensation — — — — 846 — — 846
Stock-based compensation to consultants in exchange for services — — 268 — (91 ) — — 177
Lapse of rescission rights on redeemable common stock 222 — 1,647 — — — — 1,647
Deemed dividend related to redeemable common stock — — — (262 ) — — — (262 )
Net loss — — — (11,887 ) — — — (11,887 )
Realized gain on marketable securities — — — — — — (15 ) (15 )
Unrealized loss on marketable securities — — — — — — (78 ) (78 )
Cumulative translation adjustment — — — — — — (1 ) (1 )

Total comprehensive loss (11,981 )

Balance at December 31, 2003 16,060 2 123,934 (67,815 ) (1,094 ) (100 ) (13 ) 54,914
Exercise of stock options and warrants 650 — 4,288 — — — — 4,288
Issuance of common stock in follow-on offerings 2,680 — 113,064 — — — — 113,064
Forfeitures of unearned stock-based compensation from options issued to employees — — (198 ) — 198 — — —
Amortization of stock-based compensation — — — — 360 — — 360
Stock-based compensation to consultants in exchange for services — — 2,043 — (765 ) — — 1,278
Deemed dividend related to redeemable common stock — — — (188 ) — — — (188 )
Net loss — — — (5,002 ) — — — (5,002 )
Realized gain on marketable securities — — — — — — (2 ) (2 )
Unrealized loss on marketable securities — — — — — — (202 ) (202 )
Cumulative translation adjustment — — — — — — 22 22

Total comprehensive loss (5,184 )

Balance at December 31, 2004 19,390 $ 2 $ 243,131 $ (73,005 ) $ (1,301 ) $ (100 ) $ (195 ) $ 168,532

Overstock.com, Inc.
Consolidated Statements of Stockholders’ Equity (Continued)
and Comprehensive Income
Balance at December 31, 2004

19,390

2

243,131

(71,726
)

(1,301
)

(35
)
(100
)

(195
)

169,811

Exercise of stock options and warrants

1,167

—

7,315

—

—

—

—

—

7,315

Issuance of common stock from treasury

—

—

414

—

—

10

29

—

443

Purchase of treasury stock

—

—

—

—

—

(665
)
(24,133
)

—

(24,133
)
Purchased call options for purchase of treasury stock

—

—

(47,507
)

—

—

—

—

—

(47,507
)
Settlement of purchased call options in exchange for cash

—

—

7,937

—

—

—

—

—

7,937

Settlement of purchased call options in exchange for treasury stock

—

—

41,121

—

—

(997
)
(41,121
)

—

—

Forfeitures of unearned stock-based compensation from options issued to employees

—

—

(69
)

—

69

—

—

—

—

Amortization of stock-based compensation

—

—

—

—

72

—

—

—

72

Stock-based compensation to consultants in exchange for services

—

—

(1,244
)

—

855

—

—

—

(389
)
Lapse of rescission rights on redeemable common stock

14

—

146

—

—

—

—

—

146

Deemed dividend related to redeemable common stock

—

—

—

(185
)

—

—

—

—

(185
)
Comprehensive income (loss):

—

Net loss

—

—

—

(24,918
)

—

—

—

—

(24,918
)
Net unrealized loss on marketable securities

—

—

—

—

—

—

—

(54
)

(54
)
Unrealized gain on marketable securities

—

—

—

—

—

—

—

1,125

1,125

Cumulative translation adjustment

—

—

—

—

—

—

—

86

86

Total comprehensive loss

(23,761
)
Balance at December 31, 2005

20,571

$
2

$
251,244

$
(96,829
)

$
(305
)

(1,687
)
$
(65,325
)

$
962

$
89,749

The accompanying notes are an integral part of these consolidated financial statements.
F-7

Overstock.com, Inc.

Consolidated Statements of Cash Flows

Year ended December 31,

2002
2003
2004

(in thousands)

Cash flows from operating activities:
Net loss $ (4,560 ) $ (11,887 ) $ (5,002 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 1,873 2,325 3,937
Amortization of unearned stock-based compensation 3,276 846 360
Loss on disposition of property and equipment — — 34
Realized loss (gain) on marketable securities 55 (15 ) (2 )
Stock-based compensation to consultants for services 24 177 1,278
Stock issued to employees 181 21 —
Amortization of debt discount and deferred financing fees 242 — 147
Selling shareholder fees 439 — —
Changes in operating assets and liabilities:
Accounts receivable, net (5,429 ) (3,189 ) 4,468
Inventories, net (6,368 ) (15,972 ) (15,353 )
Prepaid inventory (1,099 ) (1,584 ) (9,376 )
Prepaid expenses (758 ) (666 ) (1,807 )
Other long-term assets 246 (7 ) (944 )
Accounts payable 10,051 16,632 33,697
Accrued liabilities 4,316 2,907 13,601

Net cash provided by (used in) operating activities 2,489 (10,412 ) 25,038

Cash flows from investing activities:
Increase in restricted cash — — (1,602 )
Purchases of marketable securities (34,819 ) (41,363 ) (92,877 )
Sales of marketable securities 13,243 51,388 15,373
Expenditures for property and equipment (1,746 ) (6,707 ) (8,734 )
Proceeds from the sale of property and equipment — — 20
Expenditures for other long-term assets (5 ) (172 ) —

Net cash provided by (used in) investing activities (23,327 ) 3,146 (87,820 )

Cash flows from financing activities:
Payments on capital lease obligations (261 ) (141 ) (658 )
Borrowings on related party note payables 1,160 — —
Payments on related party note payables (5,660 ) — —
Drawdown on line of credit — — 1,000
Payments on line of credit — — (1,000 )
Payments of deferred financing fees — — (301 )
Proceeds from the issuance of convertible senior notes — — 116,199
Issuance of redeemable preferred stock 6,582 — —
Issuance of common stock in offerings, net of issuance costs 26,140 23,968 113,064
Payment of selling shareholder fees (439 ) — —
Issuance of common stock 31 — —
Exercise of stock options and warrants 615 1,227 4,288

Net cash provided by financing activities 28,168 25,054 232,592

Effect of exchange rate changes on cash — (1 ) 22

Net increase in cash and cash equivalents 7,330 17,787 169,832
Cash and cash equivalents, beginning of year 3,729 11,059 28,846

Cash and cash equivalents, end of year $ 11,059 $ 28,846 $ 198,678

Supplemental disclosures of cash flow information:
Interest paid $ 222 $ 51 $ 165
Equipment and software acquired under capital leases 25 120 1,835
Deemed dividend on redeemable common stock 406 262 188
Deemed dividend related to beneficial conversion feature of redeemable preferred stock 6,607 — —
Conversion of Series A preferred stock to common stock 6,582 — —
Unearned stock-based compensation (forfeitures) 3,481 (478 ) (198 )
Lapse of rescission rights on redeemable common stock 1,327 1,647 —
~~The accompanying notes are an integral part of these consolidated financial statements.~~

Year ended December 31,

2003

2004

2005

(in thousands)

Cash flows from operating activities:

Net loss

$
(11,548
)
$
(4,540
)
$
(24,918
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Depreciation and amortization

2,325

3,937

15,614

Realized loss (gain) on marketable securities

(15
)
(2
)
3,351

Loss on disposition of property and equipment

—

34

1,457

Amortization of unearned stock-based compensation

846

360

72

Stock-based compensation to consultants for services

177

1,278

(389
)
Stock issued to employees

21

—

—

Issuance of common stock from treasury

—

—

443

Amortization of debt discount and deferred financing fees

—

147

620

Gain from retirement of convertible senior notes

—

—

(6,158
)
Changes in operating assets and liabilities, net of effect of acquisition:

Accounts receivable, net

(3,189
)
4,468

(5,109
)
Inventories, net

(16,311
)
(15,815
)
(46,711
)
Prepaid inventory

(1,584
)
(9,376
)
2,689

Prepaid expenses

(666
)
(1,807
)
(4,939
)
Other long-term assets

(7
)
(944
)
(2,151
)
Accounts payable

16,632

33,697

36,455

Accrued liabilities

2,907

13,601

23,566

Net cash provided by (used in) operating activities

(10,412
)
25,038

(6,108
)
Cash flows from investing activities:

Change in restricted cash

—

(1,602
)
1,349

Purchases of marketable securities

(41,363
)
(92,877
)
(185,543
)
Sales of marketable securities

51,388

15,373

216,265

Expenditures for property and equipment

(6,707
)
(8,734
)
(44,740
)
Acquisition of Ski West (net of cash acquired)

—

—

(24,620
)
Proceeds from the sale of property and equipment

—

20

1

Expenditures for other long-term assets

(172
)
—

—

Net cash provided by (used in) investing activities

3,146

(87,820
)
(37,288
)
Cash flows from financing activities:

Payments on capital lease obligations

(141
)
(658
)
(7,086
)
Drawdown on line of credit

—

1,000

11,868

Payments on line of credit

—

(1,000
)
(11,868
)
Payments of deferred financing fees

—

(301
)
—

Proceeds from the issuance of convertible senior notes

—

116,199

—

Payments to retire convertible senior notes

—

—

(35,670
)
Issuance of common stock in offerings, net of issuance costs

23,968

113,064

—

Purchase of treasury stock

—

—

(24,133
)
Purchased call options for purchase of treasury stock

—

—

(47,507
)
Settlement of call options for cash

—

—

7,937

Exercise of stock options and warrants

1,227

4,288

7,315

Net cash provided by (used in) financing activities

25,054

232,592

(99,144
)
Effect of exchange rate changes on cash

(1
)
22

86

Net increase (decrease) in cash and cash equivalents

17,787

169,832

(142,454
)
Cash and cash equivalents, beginning of year

11,059

28,846

198,678

Cash and cash equivalents, end of year

$
28,846

$
198,678

$
56,224

Supplemental disclosures of cash flow information:

Interest paid

$
51

$
165

$
5,108

Equipment and software acquired under capital leases

120

1,835

15,438

Deemed dividend on redeemable common stock

262

188

185

Unearned stock-based compensation (forfeitures)

(478
)
(198
)
(69
)
Lapse of rescission rights on redeemable common stock

1,647

—

146

Settlement of purchased call options for treasury stock

—

—

41,121

Supplemental disclosure on non-cash activities:

Fair value of assets acquired, net of cash acquired

—

—

25,956

Fair value of liabilities assumed

—

—

(1,336
)
Cash paid to purchase business

—

—

$
24,620

F-8

Overstock.com, Inc.

Notes to Consolidated Financial Statements

(~~all amounts in thousands, except per share data~~)
1.   BUSINESS AND ORGANIZATION
Overstock.com, Inc. (the ~~"Company"~~“Company”) is an online ~~"closeout"~~“closeout” retailer offering discount, brand-name merchandise for sale primarily over the Internet. The ~~Company's~~Company’s merchandise offerings include bed-and-bath goods, furniture, kitchenware, watches, jewelry, computers and electronics, sporting goods, apparel and designer accessories. The Company also sells books, magazines, CDs, DVDs, videocassettes and video ~~games.~~games (“BMV”). The Company’s online auction site was launched in September 2004 as part of the Company’s Website—which acts as an online marketplace for the buying and selling of goods between our customers. In January 2005, the travel store was officially opened offering air, hotel and car reservation services as well as cruise and vacation packages.
The Company was formed on May 5, 1997 as D2—Discounts Direct, a limited liability company. On December 30, 1998, the Company was reorganized as a C Corporation in the State of Utah and reincorporated in Delaware in May 2002. On October 25, 1999, the Company changed its name to Overstock.com, Inc. On November 20, 2000, the Company acquired Gear.com, Inc. On July 23, 2003, the Company formed Overstock Mexico, S. de R. L. de C.V., a wholly owned subsidiary, to distribute products in Mexico. On July 1, 2005, the Company acquired SkiWest, Inc. (“SkiWest”) and integrated the SkiWest travel offerings with the Company’s existing travel offerings.
2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Restatement of prior year financial statements
On February 27, 2006, Overstock.com, Inc. (“Company”) filed a Current Report on Form 8-K with the Securities and Exchange Commission (“SEC”) in which it announced that it was restating previously reported financial statements to correct an error related to the accounting for freight costs incurred to deliver inventory to its warehouses. The Company has determined that the misstatements relate to the Company’s former practice of immediately expensing inbound freight costs in the period incurred rather than capitalizing such costs as a component of inventory and expensing such costs as the related inventory is sold.
With respect to capitalization of inbound freight costs, AICPA Accounting Research Bulletin No. 43, Restatement and Revision of Accounting Research Bulletins, Chapter 4, “Inventory Pricing” sets forth the general principles applicable to the pricing of inventories.
In late 2005, the Company reevaluated its prior accounting policy related to inbound freight charges. As a result, the Company concluded that inbound freight should have been capitalized as a component of inventory cost and expensed as a cost of goods sold as the inventory is sold.
Based upon this determination, the consolidated statements of operations for the years ended December 31, 2004, 2003 and 2002 and the consolidated balance sheets as of December 31, 2004 and 2003 have been restated in the Form 10-K/A for the period ending December 31, 2004 filed on March 15, 2006.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The ~~2004~~ consolidated financial statements also include the accounts of a variable
F-9

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
interest entity for which the Company is the primary beneficiary (Note ~~20)~~25). All significant intercompany account balances and transactions have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair value of financial instruments
Cash equivalents include short-term, highly liquid instruments with original maturities of 90 days or less. At December 31, ~~2003~~2004 and ~~2004,~~2005, three banks held the ~~Company's~~Company’s cash and cash equivalents. The Company does not believe that, as a result of this concentration, it is subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships. The ~~Company's~~Company’s financial instruments, including cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities are carried at cost, which approximates their fair value because of the short-term maturity of these instruments. The estimated fair value of the ~~Company's~~Company’s 3.75% Convertible Senior Notes ~~is approximately $120,000.~~at December 31, 2005 and 2004 was $54.7 million and $116.3 million, respectively.
Marketable securities consist of funds deposited into capital management accounts managed by two financial institutions. The Company generally invests excess cash in “A” rated or higher short- to intermediate-term fixed income securities and money market mutual funds. The financial institutions have invested these funds in municipal, government and corporate bonds and money market securities which are classified as available-for-sale in “Cash or cash equivalents” or “Marketable securities” on the accompany consolidated balance sheets and are reported at fair value using the specific identification method. Realized gains and losses are included in other income (expense), net in the Consolidated Statements of Operations. Unrealized gains and losses are excluded from earnings and reported as a component of other comprehensive income (loss), net of related estimated tax provisions or benefits.
The Company periodically evaluates whether declines in fair values of its investments are other-than-temporary. This evaluation consists of a review of qualitative and quantitative factors, including quoted market prices, if available; other publicly available information; or other conditions that bear on the value of our investments. At December 31, 2005, gross unrealized losses on marketable securities were $54,000 and were determined to be temporary based on the Company’s assessment of the qualitative and quantitative factors discussed above.
Restricted cash
The Company has restricted cash of $1.6 million and $253,000 related to a prepayment agreement with a third party at December 31, 2004 and 2005, respectively.
F-10

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounts receivable
Accounts receivable consist of trade amounts due from customers and from uncleared credit ~~cards billed but not yet received~~card transactions at period end. Accounts receivable are recorded at invoiced amounts and do not bear interest. The Company evaluates its allowance for doubtful accounts monthly. Account balances are written-off against the allowance when it is probable that the receivable will not be recovered. The Company recorded an allowance for doubtful accounts of ~~$650~~$750,000 and ~~$750~~$1.8 million at December 31, ~~2003~~2004 and ~~2004,~~2005, respectively.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash equivalents, investment securities, and receivables. The Company invests its cash primarily in money market, government and corporate securities which are uninsured.
The ~~Company's~~Company’s accounts receivable are derived primarily from revenue earned from customers located in the United States. The Company maintains an allowance for doubtful accounts based upon the expected collectibility of accounts receivable.
~~Prepaid inventory~~Inventories
        ~~Prepaid inventory represents inventory paid for in advance of receipt. Prepaid inventory at December 31, 2003 and 2004 was $2,946 and $12,322, respectively.~~
~~Prepaid expenses~~
        Prepaid expenses represent expenses paid for prior to receipt of the related goods or services, including advertising, maintenance, packaging, insurance and other miscellaneous costs. Total prepaid expenses at December 31, 2003 and 2004 were $1,637 and $3,444, respectively.
~~Inventories~~
Inventories, ~~consist~~consisting of merchandise purchased for resale, are accounted for using a standard costing system which approximates the first-in-first-out (“FIFO”) method of accounting, and are ~~stated~~valued at the lower of ~~average~~ cost or ~~market.~~market value. The Company establishes reserves for estimated obsolescence or damage equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Once established, the original cost of the inventory less the related reserve represents the new cost basis of such products. Reversal of these reserves is recognized only when the related inventory has been sold or scrapped.
Until the time of shipping, inventory ownership related to product sales by third parties through the Company’s website is maintained by the third parties.
Prepaid inventory
Prepaid inventory represents inventory paid for in advance of receipt. Prepaid inventory at December 31, 2004 and 2005 was $12.3 million and $9.6 million, respectively.
Prepaid expenses
Prepaid expenses represent expenses paid for prior to receipt of the related goods or services, including advertising, maintenance, packaging, insurance and other miscellaneous costs. Total prepaid expenses at December 31, 2004 and 2005 were $3.4 million and $8.5 million, respectively.
F-11

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and equipment
Property and equipment, which includes capitalized leases, are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets or the term of the related lease, whichever is shorter, as follows:

Years
~~Computer software~~
3
Computer ~~hardware~~software
~~3-5~~
3
Computer hardware
3-5
Furniture and equipment
3-5

Leasehold improvements are amortized over the shorter of the term of the related leases or estimated service lives. Upon sale or retirement of assets, cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in the consolidated statement of operations.
Internal use software
The Company expenses all costs incurred for the development of internal use software that relate to the planning and post-implementation phases of development. Direct costs incurred in the development phase are capitalized and recognized over the software’s estimated useful life of 3 years. Research and development costs and other computer software maintenance costs related to software development are expensed as incurred.
Asset Retirement Obligation
In accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 143, Accounting for Asset Retirement Obligations, the Company establishes assets and liabilities for the present value of estimated future costs to return certain of our leased facilities to their original condition. Such assets are depreciated over the lease period into operating expense, and the recorded liabilities are accreted to the future value of the estimated restoration costs. At December 31, 2005 and 2004, such amounts are not significant.
Other long-term assets
Other long-term assets include deposits, intangibles, deferred financing and issuance costs and the ~~cost~~fees associated with the acquisition of ~~acquiring the~~ Overstock.com and other related domain names. The cost of the domain names is being amortized using the straight-line method over 5 years.
Goodwill
Goodwill of $2.8 million and $10.4 million was recorded for the purchase of Gear.com in 2000 and Ski West, Inc. in 2005, respectively, and represents the excess of the purchase price paid over the fair value of the tangible net assets ~~acquired for the purchase of Gear.com.~~acquired.
In accordance with Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets, goodwill is not amortized but tested for impairment at least annually. The Company
F-12

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
evaluated the ~~$2,784 of~~ unamortized goodwill during ~~2002,~~ 2003, 2004 and ~~2004,~~2005, and determined that no impairment charge should be recorded.
Impairment of long-lived assets
The Company reviews property and equipment and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the ~~assets'~~assets’ carrying amount to future undiscounted net cash flows the assets are expected to generate. Cash flow forecasts are based on trends of historical performance and ~~management's~~management’s estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future cash flows arising from the assets or their fair values, whichever is more determinable. The Company did not record any ~~impairments~~impairment during ~~2002,~~ 2003, 2004 and ~~2004.~~2005.
Revenue recognition
The Company derives its revenue primarily from two sources: direct revenue and fulfillment partner revenue, including listing fees and commissions collected from products being listed and sold through the Auctions tab of its Website. Both direct revenue and fulfillment partner revenue are recorded net of returns, coupons redeemed by customers, and other discounts. Revenue is recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) the product has been shipped and the customer takes ownership and assumes the risk of loss or the service has been provided; (3) the selling price or fee revenue earned is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. The Company generally requires payment by credit card at the point of sale. Amounts received prior to shipment of products or service is recorded as deferred revenue. In addition, amounts received in advance for Club O and Club O Gold membership fees are recorded as deferred revenue and recognized ratably over the membership

period. The Company maintains a reserve for returns based on estimates of future product returns related to current period revenues.
Direct revenue
Direct revenue consists of merchandise sales made to individual consumers and businesses that are fulfilled from the ~~Company's~~Company’s leased warehouses. The Company generally requires payment by credit card at the point of sale. From time to time, the Company grants credit to its business customers on normal credit terms. Amounts received prior to shipment of goods to customers are recorded as deferred revenue. Direct revenue is recorded net of estimated returns, ~~chargebacks~~fraud and coupons redeemed by customers and other discounts to obtain such sales.
F-13

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fulfillment partner revenue
Fulfillment partner revenue consists of merchandise sold through the ~~Company's~~Company’s Website and shipped by third parties directly to consumers and other businesses, and is recognized when services have been rendered (generally when verification of the shipment of the product is communicated to the Company from the third party that shipped the product). Prior to July 1, 2003, the Company did not physically handle the merchandise sold in these transactions, as the merchandise was shipped directly by a third party vendor, who also handled all customer returns related to these fulfillment partner sales. During that period, the Company recognized as revenue only the net portion of the price customers paid for the purchased products since the Company acted as an agent in such transactions. Beginning July 1, 2003, the Company took responsibility for returned items relating to these sales and began accepting returned items relating to these sales into the ~~Company's~~Company’s warehouse, and the Company now handles the possible resale of returned items. As a result, beginning July 1, 2003, the Company is considered to be the primary obligor for these sales transactions, and assumes the risk of loss on returned items. As a consequence, the Company now records revenue from sales transactions involving fulfillment partners on a gross basis, rather than on a net basis as was recorded prior to July 1, 2003.
During September 2004, the Company added an online auction service to its Website. The Auctions tab allows sellers to list items for sale, buyers to bid on items of interest, and users to browse through listed items online. The Company is not considered the seller of the items sold on the auction site and has no control over the pricing of those items. Therefore, for these sales, only the listing fees for items listed and commissions for items sold are recorded as revenue during the period items are listed or items are sold. Our auction business revenues were insignificant in ~~2004.~~2004 and 2005. Revenue from the auctions business ishas been included in the fulfillment partner segment insince 2004, as it is not large enough to separate out as its own segment at this early stage of the business.
        During the fourth quarter of 2003, the Company added a discount travel store to its Website. The Company used fulfillment partners to supply the travel products and services (flights, hotels, rental cars, etc.). For the products and services sold in the travel store, the Company did not have inventory risk or pricing control, and did not provide customer service. Therefore, for these sales the Company was not considered to be the primary obligor, and recorded only the commission as revenue in the period the transaction occurred. In May 2004, the Company closed its travel store in order to make improvements to the travel product offerings. The Company reopened its travel store in January 2005. During 2003 and 2004, revenues from the Travel store were insignificant.

Fulfillment partner revenue is reduced by the impact of estimated returns, ~~chargebacks~~fraud and coupons redeemed by customers and other discounts to obtain such sales.
Total revenue is recorded net of estimated returns, coupons and other discounts. Our returns policy for all products other than those sold in our Electronics and Computers department provides for a $4.95 restocking fee and the provision that we will not accept product returns initiated more than twenty days after the shipment date. We charge a 15% restocking fee (instead of the $4.95 restocking fee) on all items returned for non-defective reasons from the Electronics and Computers department.
Accounting for merchant and agency revenues for Travel subsidiary
The determination of gross versus net revenue presentation is based principally on the Company’s consideration of Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” and Emerging Issues Task Force Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” including the weighing of the relevant qualitative factors regarding the Company’s status as the primary obligor, and the extent of pricing latitude and inventory risk. The method of merchant revenue presentation by the Company does not impact operating profit, net income, or cash flows, but rather revenues and cost of sales.
The principle factor in determining gross versus net presentation by the Company’s travel subsidiary, OTravel.com, Inc. (“OTravel.com”—see Note 8) is the consideration of who is the primary obligor in the
F-14

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
relationship with the customer. Our Travel business provides extensive customer service and support for its customers; however, the supplier hotel is principally liable to its merchant hotel customers in all situations where the customer does not receive the hotel services booked through OTravel.com. In this case, OTravel.com provides customer service support to help resolve issues, even though such customer support could typically involve issues for which OTravel.com is not principally liable.
OTravel.com generates both merchant hotel revenues and agency air, hotel, car and cruise revenues. Merchant hotel revenues are recognized as net revenue at the time of booking since all transactions are billed directly to customers, are nonrefundable and generally non-cancelable, and require no significant post-delivery obligations for OTravel.com. A reserve for charge-backs and cancellations is recorded at the time of the transaction based on historical experience.
Agency revenues are derived from airline ticket transactions, certain hotel transactions as well as cruise and car rental reservations. Agency revenues are recognized on a net basis on air transactions when the reservation is made and secured by a credit card. A cancellation allowance is recognized on these revenues based on historical experience. OTravel.com recognizes agency revenues on hotel reservations, cruise and car rental reservations, either on an accrual basis for payments from a commission clearinghouse or on receipt of commissions from an individual supplier.
Cost of goods sold
Cost of goods sold include product costs, warehousing costs, inbound and outbound shipping costs, handling and fulfillment costs, customer service costs and credit card fees, and are recorded in the same period in which related revenues have been recorded. Fulfillment costs include warehouse handling labor costs, fixed warehouse costs, credit card fees and customer service costs. For the years ended December 31, ~~2002,~~ 2003, 2004 and ~~2004,~~2005, fulfillment costs totaled ~~$9,373, $20,302~~$20.3 million, $34.3 million and ~~$34,278,~~$59.9 million, respectively.
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. ~~Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be ultimately realized.~~ Income tax expense (benefit) is the tax payable (receivable) for the period and the change during the period in the deferred tax assets and liabilities.
SFAS 109, “Accounting for Income Taxes,” requires that deferred tax assets be evaluated for future realization and be reduced by a valuation allowance to the extent the deferred tax asset will not be realized. The Company considers many factors when assessing the likelihood of future realization of our deferred assets including expectations of future taxable income, the carry-forward periods available for tax reporting purposes, and other relevant factors. Significant judgement is required in making this assessment, and it is very difficult to predict when, if ever, our assessment may conclude that the remaining portion of the deferred tax assets are realizable.
F-15

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-based compensation
The Company measures compensation expense to employees for its equity incentive plan using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 ("(“APB ~~25"~~25”),Accounting for Stock Issued to Employees, and provides pro forma disclosures of net income as if the fair value based method prescribed by ~~Statement of Financial Accounting Standards ("SFAS")~~SFAS No. 123,Accounting for Stock-Based Compensation, had been applied (Note ~~14)~~16). The following table provides a

reconciliation of net loss to pro forma net loss as if the fair value method had been applied to all ~~awards.~~awards (in thousands):

Year ended December 31,

Year ended December 31,

2002
2003
2004

2003

2004

2005

Net loss, as reported Net loss, as reported $ (4,560 ) $ (11,887 ) $ (5,002 )

$
(11,548
)
$
(4,540
)
$
(24,918
)
Add: Stock-based employee compensation expense included in reported net income net of related tax effects Add: Stock-based employee compensation expense included in reported net income net of related tax effects 3,276 846 360

846

360

72

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (4,404 ) (2,714 ) (3,747 )

(2,714
)
(3,747
)
(3,996
)

Pro forma net loss Pro forma net loss $ (5,688 ) $ (13,755 ) $ (8,389 )

$
(13,416
)
$
(7,927
)
$
(28,842
)

Net loss per common share Net loss per common share

Basic and diluted—as reported $ (0.88 ) $ (0.75 ) $ (0.29 )
Basic and diluted—pro forma $ (0.97 ) $ (0.87 ) $ (0.48 )
Basic and diluted—as reported

$
(0.73
)
$
(0.26
)
$
(1.29
)
Basic and diluted—pro forma

$
(0.83
)
$
(0.44
)
$
(1.48
)
The weighted average grant-date fair value of options granted during 2002, 2003 and 2004 was $8.21, $8.27 and $15.39 per share, respectively, and was estimated using the assumptions discussed in Note 14.
Stock-based awards to non-employees are accounted for under the provisions of ~~FAS~~SFAS 123 and Emerging Issues Task Force Issue 96-18,Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.
~~Earnings (loss) per share~~
        ~~Basic earnings (loss) per share~~The fair value of options granted is ~~computed by dividing net income (loss) attributable to~~estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the input of highly subjective assumptions, including the expected stock price volatility. We use the historical stock price volatility of our common ~~shares by~~stock over the ~~weighted average number of common shares outstanding~~most recent period that is generally commensurate with the expected option life as the basis for estimating stock price volatility. For options granted during the ~~period. Diluted earnings (loss) per share assumes~~years ended December 31, 2003, 2004 and 2005, the ~~exercise of all options and warrants which are dilutive~~historical stock price volatility used was based on a daily stock price observation, using the ~~treasury~~closing price, which resulted in an expected stock ~~method (whether exercisable or not)~~price volatility of 104%, 101% and ~~assumes~~73%. For purpose of the ~~conversion~~above pro forma disclosure, the fair value of ~~convertible senior notes, if dilutive,~~options granted is amortized to stock-based employee compensation cost over the period(s) in which the related employee services are rendered. Accordingly, the pro forma stock-based compensation cost for any period will typically relate to options granted in both the current period and prior periods.
In December 2004, the FASB reached a consensus on the effective date for SFAS No. 123R, Share-Based Payment. SFAS 123R requires the Company to measure compensation cost for all outstanding unvested share-based awards at fair value beginning on January 1, 2006. The Company will adopt the provisions of SFAS 123R with an implementation date of January 1, 2006 using the ~~"if converted"~~modified prospective method.

The ~~following table sets forth~~adoption of this standard will result in the ~~computation~~recognition of ~~basic and diluted earnings (loss) per share~~stock-based compensation in future periods for ~~the periods indicated:~~

Year ended December 31,

2002
2003
2004

Net loss attributable to common shares $ (11,573 ) $ (12,149 ) $ (5,190 )

Weighted average common shares outstanding—basic 13,108 16,198 17,846
Effective of dilutive securities:
Warrants — — —
Employee stock options — — —
Convertible senior notes — — —

Weighted average common shares outstanding—diluted 13,108 16,198 17,846

Earnings (loss) per common share—basic: $ (0.88 ) $ (0.75 ) $ (0.29 )
Earnings (loss) per common share—diluted: $ (0.88 ) $ (0.75 ) $ (0.29 )
        ~~The~~remaining unvested stock options ~~warrants and convertible senior notes outstanding were not included in~~as of the computation of diluted earnings per share because to do so would have been antidilutive. The number of shares of stock options and warrants outstanding at each year-end was 2,535 shares, 2,849 shares and 2,399 shares for 2002, 2003 and 2004, respectively.effective date. As of the implementation date of this standard, any employee stock awards subject to variable accounting treatment will be accounted for under
F-16

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
the provisions of SFAS 123R. The Company estimates that stock-based compensation will be approximately $3.8 million for 2006.
The Company generally has two categories of stock-based awards: restricted stock and stock options. Through December 31, ~~2004,~~2005, the Company ~~had $120,000~~accounted for stock-based awards under the intrinsic value method, which follows the recognition and measurement principles of ~~convertible senior notes outstanding (Note 10), which could potentially convert into 1,574 shares~~APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. The intrinsic value method of ~~common stock~~accounting results in ~~the aggregate.~~
~~Internal use software~~
        ~~The Company expenses all costs incurred for the development of internal use software that relate~~compensation expense to the ~~planning and post implementation phases~~extent option exercise prices are set below market prices on the date of grant. Also, to the ~~development. Direct costs incurred in the development phase are capitalized and recognized over the software's estimated useful life of 3 years. Research and development costs and~~extent stock awards were granted subsequent to December 31, 2002, or were subject to an exchange offer, other ~~computer software maintenance costs related~~modifications, or performance criteria, such awards were subject to ~~software development are expensed as incurred.~~variable accounting treatment.
Advertising expense
~~Advertising expense~~
The Company recognizes advertising expenses in accordance with ~~SOP~~Statement of Position (“SOP”) 93-7Reporting on Advertising Costs. As such, the Company expenses the costs of producing advertisements at the time production occurs, and expenses the cost of communicating advertising in the period during which the advertising space or airtime is used. Internet advertising expenses are recognized based on the terms of the individual agreements, which is generally: 1) during the period customers are acquired; or 2) based on the number of clicks generated during a given period over the term of the contract. Advertising expenses totaled ~~$7,043, $18,552~~$18.6 million, $39.2 million and ~~$39,180~~$77.8 million during the years ended December 31, ~~2002,~~ 2003, 2004 and ~~2004,~~2005, respectively.
Foreign currency translation
For the ~~Company's~~Company’s subsidiary located in Mexico, the ~~subsidiary's~~subsidiary’s local currency is considered its functional currency. As a result, all of the ~~subsidiary's~~subsidiary’s assets and liabilities are translated into U.S.

dollars at exchange rates existing at the balance sheet dates, revenue and expenses are translated at weighted average exchange rates, and ~~stockholders'~~stockholders’ equity is recorded at historical exchange rates. The resulting foreign currency translation adjustments are recorded as a separate component of ~~stockholders'~~stockholders’ equity in the consolidated balance sheets as part of accumulated other comprehensive income (loss). Transaction gains and losses are included in other income (expense) in the consolidated financial statements and have not been significant for any periods presented.
Derivative instruments
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” requires companies to recognize their derivative instruments, including certain derivative instruments embedded in other contracts, as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether the instrument has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, a cash flow hedge or a hedge of a net investment in an international operation. For derivatives designated as hedges, the changes in fair value are recorded in the balance sheet as an item in other comprehensive income. Changes in the fair
F-17

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
value of derivatives not designated as hedges are recorded in the statement of operations. As of December 31, 2005, the Company had not designated any derivative instruments as hedges.
Earnings (loss) per share
In accordance with SFAS 128 “Earnings per share”, basic earnings (loss) per share is computed by dividing net income (loss) attributable to common shares by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) attributable to common shares for the period by the weighted average number of common and potential common shares outstanding during the period. Potential common shares, composed of incremental common shares issuable upon the exercise of stock options, warrants and convertible senior notes, are included in the calculation of diluted net loss per share to the extent such shares are dilutive.
The following table sets forth the computation of basic and diluted earnings (loss) per share for the periods indicated (in thousands):

Year ended December 31,

2003

2004

2005

Net loss attributable to common shares

$
(11,810
)
$
(4,728
)
$
(25,103
)
Weighted average common shares outstanding—basic

16,198

17,846

19,429

Effective of dilutive securities:

Warrants

—

—

—

Employee stock options

—

—

—

Convertible senior notes

—

—

—

Weighted average common shares outstanding—diluted

16,198

17,846

19,429

Earnings (loss) per common share—basic:

$
(0.73
)
$
(0.26
)
$
(1.29
)
Earnings (loss) per common share—diluted:

$
(0.73
)
$
(0.26
)
$
(1.29
)
The stock options, warrants and convertible senior notes outstanding were not included in the computation of diluted earnings per share because to do so would have been antidilutive. The number of shares of stock options outstanding at each year-end was 2,849,000 shares, 2,399,000 shares and 1,299,000 shares for 2003, 2004 and 2005, respectively. As of December 31, 2005, the Company had $74.9 million of convertible senior notes outstanding (Note 11), which could potentially convert into 1,010,000 shares of common stock in the aggregate.
Recently issued accounting pronouncements
In March 2005, the FASB issued Financial Interpretation (“FIN”) 47 which clarifies guidance provided by SFAS No. 143, “Accounting for Asset Retirement Obligations.” FIN 47 is effective for the Company beginning the quarter ending March 31, 2006. The adoption of FIN 47 is not expected to have a significant impact on the Company’s financial position, results of operations or cash flows.
In December 2004, the ~~Financial Accounting Standards Board ("FASB")~~FASB issued ~~Statement of Financial Accounting Standard ("SFAS")~~SFAS No. 123 (revised 2004)Share-Based Payment. This standard requires companies to measure and recognize the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value. The effective date is the first ~~interim~~annual reporting period beginning after June 15, 2005. The Company will begin expensing all stock-based
F-18

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
compensation in the first quarter of 2006. See “Stock-based compensation” of this Note 2 for additional discussion, including the anticipated effect on financial as a result of adopting this standard.
On March 29, 2005, the SEC published Staff Accounting Bulletin (“SAB”) No. 107, which provides the Staff’s views on a variety of matters relating to the interaction between “Statement 123R” and certain Securities and Exchange Commission Rules and regulations. The Company is currently evaluating ~~pricing models and~~ the ~~transition~~ provisions of ~~this standard~~the SAB and will ~~begin~~implement it when the Company begins expensing stock options under SFAS 123R in the ~~third~~first quarter of ~~2005.~~2006.
In November ~~2004,~~2005, the FASB issued FASB Staff Position (“FSP”) Nos. SFAS ~~No. 151,~~~~Inventory Costs—an Amendment of ARB No. 43, Chapter 4~~~~. This standard provides clarification that abnormal amounts of idle facility expense, freight, handling costs,~~115-I and spoilage should be recognized as current-period charges. Additionally, this standard requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this standard are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of this standard is not expected to have a material impact to the Company's financial statements.
SFAS 124-I,         ~~In March 2004, the FASB issued EITF Issue No. 03-1 ("EITF 03-1"),~~The Meaning of ~~Other-than-Temporary Impairments~~Other-Than-Temporary Impairment and ~~its~~Its Application to Certain Investments ~~which provides new~~. This FSP addresses the three-step determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance ~~for assessing impairment losses on investments. Additionally, EITF 03-1 includes new disclosure requirements for investments that are deemed~~in this FSP shall be applied to ~~be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF 03-1; however, the disclosure requirements remain effective for annual~~reporting periods ~~ending~~beginning after ~~June~~December 15, ~~2004.~~2005. Earlier application is permitted. The Company will ~~evaluate the impact of EITF 03-1 once final guidance is issued.~~
~~3. PUBLIC OFFERINGS~~
        On June 4, 2002, the Company closed its initial public offering, pursuant to which it sold 2,155 shares of its common stock, and a selling shareholder sold 845 shares of common stock at a price of $13.00 per share. The offering resulted in proceeds to the Company of approximately $24,880, net of $2,014 of issuance costs. As part of the offering, the Company granted the underwriter the right to purchase up to 450 additional shares within thirty days after the offering to cover over-allotments. On June 27, 2002, the underwriter purchased an additional 101 shares of stock for $1,260. At the closing of the offering, all issued and outstanding shares of the Company's redeemable convertible preferred stock were automatically converted into common stock on a 1:1 basis.
        ~~As part of the initial public offering, the Company paid $439 of selling costs on behalf of the selling shareholder. This amount was recorded in other income (expense)~~adopt this FSP in the ~~statement~~quarter ended March 31, 2006 and is currently evaluating the effect of ~~operations for the year ended December 31, 2002.~~adoption on its results of operations.

        In February 2003, the Company closed its follow-on public offering, pursuant to which it sold 1,725 shares of common stock, with proceeds to the Company of approximately $23,968, net of $613 of issuance costs.3.   PUBLIC OFFERINGS
In June 2004, the Company closed its second follow-on public offering, pursuant to which it sold ~~1,300~~1.3 million shares of common stock, with proceeds to the Company of approximately ~~$37,857,~~$37.9 million, net of ~~$405~~$405,000 of issuance costs.
In November 2004, the Company closed another follow-on public offering, pursuant to which it sold ~~1,380~~1.4 million shares of common stock, with proceeds to the Company of approximately ~~$75,207,~~$75.2 million, net of ~~$215~~$215,000 of issuance costs. Concurrently in November 2004, the Company issued convertible senior notes pursuant to which it received ~~$116,199,~~$116.2 million, net of ~~$3,801~~$3.8 million of initial ~~purchaser's~~purchaser’s discount and debt issuance costs.
4.   MARKETABLE SECURITIES
The ~~Company's~~Company’s marketable securities consist of funds deposited into capital management accounts managed by two financial institutions. The financial institutions invested these funds in municipal, government, and corporate bonds at December 31, ~~2003,~~2004, as ~~follows:~~follows (in thousands):

Cost Basis
Unrealized
Gains
Unrealized
Losses
Estimated
Market Value

Cost
Basis

Unrealized
Gains

Unrealized
Losses

Estimated
Market Value

U.S. government and government agency securities $ 9,299 $ 1 $ (7 ) $ 9,293

$
27,326

$
45

$
(218
)

$
27,153

Corporate securities 296 — — 296

55,197

—

(17
)

55,180

Money market securities 748 1 — 749
Mortgage based securities 1,169 — (7 ) 1,162

6,483

—

(14
)

6,469

$
89,006

$
45

$
(249
)

$
88,802

$ 11,512 $ 2 $ (14 ) $ 11,500

F-19

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
4.   MARKETABLE SECURITIES (Continued)
The financial institutions have invested these funds in municipal, government, and corporate bonds at December 31, ~~2004,~~2005, as ~~follows:~~follows (in thousands):

Cost Basis
Unrealized
Gains
Unrealized
Losses
Estimated
Market Value

Cost
Basis

Recognized
Loss on
Derivative
Security

UnrealizedGains
(Losses)

Estimated
Market Value

U.S. government and government agency securities $ 27,225 $ 45 $ (117 ) $ 27,153

$
3,299

$
—

$
(15
)

$
3,284

Corporate securities 55,197 — (17 ) 55,180
Money market securities

2,000

—

—

2,000

Mortgage based securities 6,483 — (14 ) 6,469

2,091

—

(39
)

2,052

Foreign corporate securities

49,949

(2,611
)

1,125

48,463

$
57,339

$
(2,611
)

$
1,071

$
55,799

$ 88,905 $ 45 $ (148 ) $ 88,802

All marketable securities mature between 2005 and ~~2045.~~2045, and are classified as available-for-sale securities. Available-for-sale securities are classified as current as they are deemed available for use if needed in current operations.

The components of realized gains and losses on sales of marketable securities for the years ended December 31, ~~2002,~~ 2003, 2004 and ~~2004 were:~~2005 were (in thousands):

Year ended December 31,

Year ended
December 31,

2002
2003
2004

2003

2004

2005

Gross gains $ — $ 19 $ 2

$
19

$
2

$
—

Gross losses (55 ) (4 ) —

(4
)

—

(3,351
)

Net realized gain (loss) on sales of marketable securities $ (55 ) $ 15 $ 2

$
15

$
2

$
(3,351
)

The Company is required to pledge its foreign derivatives as collateral for a $30.0 million revolving line of credit (see Note 10).
Derivative instruments
During the first quarter of 2005, the Company purchased $49.9 million of Foreign Corporate Securities (“Foreign Notes”) which fully mature for $50.0 million in cash in November 2006. The Foreign Notes do not have a stated interest rate, but are structured to return the entire principal amount and a conditional coupon if held to maturity. The conditional coupon will provide a rate of return dependent on the performance of a “basket” of eight Asian currencies against the U.S. dollar. If the Company redeems the Foreign Notes prior to maturity, the Company may not realize the full amount of its initial investment. At December 31, 2005, the Foreign Notes had a fair value of $48.5 million.
Under SFAS No. 133, the Foreign Notes are considered to be derivative financial instruments and are marked to market quarterly. Any unrealized gain or loss related to the changes in value of the conditional coupon is recorded in the income statement as a component of interest income or expense. Any unrealized gain or loss related to the changes in the value of the Notes is recorded as a component of accumulated other comprehensive income (loss).
For the year ended December 31, 2005, the combined overall fair value of the Foreign Notes decreased $1.5 million. The decrease is attributable to changes in the fair value of the conditional coupon resulting in
F-20

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
4.   MARKETABLE SECURITIES (Continued)
a loss of $2.6 million, which is recorded in net income, and changes in fair value of the bond instrument resulting in a gain of $1.1 million, which is recorded as a component of accumulated other comprehensive income (loss) in the Balance Sheet.
The Company purchased the Foreign Notes to manage its foreign currency risks related to the strengthening of Asian currencies compared to the U.S. dollar, which would reduce the inventory purchasing power of the Company in Asia. However, the Company determined that the Foreign Notes did not qualify as hedging derivative instruments. Nevertheless, management believes that such instruments are useful in managing the Company’s associated risk.
5.   INVENTORIES
Inventories consist of the ~~following:~~following (in thousands):

December 31,

December 31,

2003
2004

2004

2005

Product inventory $ 31,064 $ 46,602

$
47,881

$
98,510

Less: allowance for obsolescence (1,138 ) (1,323 )
Less: reserve for obsolescence

(1,323
)
(5,241
)

$
46,558

$
93,269

$ 29,926 $ 45,279

6.   PROPERTY AND EQUIPMENT
Property and equipment consists of the ~~following:~~following (in thousands):

December 31,

December 31,

2003
2004

2004

2005

Computer hardware and software $ 9,249 $ 16,717

$
16,717

$
73,411

Furniture and equipment 6,738 8,128

8,128

8,920

Leasehold improvements 146 231

231

1,960

25,076

84,291

16,133 25,076
Less: accumulated depreciation and amortization (6,650 ) (8,954 )

(8,954
)
(22,377
)

$
16,122

$
61,914

$ 9,483 $ 16,122

Depreciation and amortization of property and equipment totaled ~~$1,842, $2,289,~~$2.3 million, $3.9 million, and ~~$3,876~~$14.2 million for the years ended December 31, ~~2002,~~ 2003, 2004 and ~~2004,~~2005, respectively.
Property and equipment included assets under capital leases of ~~$976~~$2.8 million and ~~$2,810~~$15.4 million at December 31, ~~2003~~2004 and ~~2004,~~2005, respectively and accumulated amortization related to assets under capital leases of ~~$824~~$1.3 million and ~~$1,330,~~$8.4 million, respectively.

F-21

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
7.   OTHER LONG-TERM ASSETS
Other long-term assets consist of the ~~following:~~following (in thousands):

December 31,

December 31,

2003
2004

2004

2005

Domain names $ 323 $ 323
Domain names and web development costs

$
374

$
667

Intangibles acquired in connection with Ski West acquisition

—

14,313

Less: accumulated amortization (116 ) (177 )

(227
)
(1,687
)

207 146

147

13,293

Deferred financing fees, net — 206

206

208

Deposits and long-term prepaids 220 1,164

1,163

1,948

$
1,516

$
15,449

$ 427 $ 1,516

Amortization of domain names and intangibles totaled ~~$31, $36~~$36,000, $61,000 and ~~$61~~$1.4 million for the years ended December 31, ~~2002,~~ 2003, 2004 and ~~2004,~~2005, respectively.
8.   ACQUISITIONS
On July 1, 2005, the Company acquired all the outstanding capital stock of Ski West, Inc. (“Ski West”) for an aggregate of $25.1 million (including $111,000 of capitalized acquisition related expenses). In addition, the Company may be subject to additional earn out payments (based on a percentage of operating profits for each of the next four years as follows: 50%, 33.3%, 20%, and 10%, respectively), subject to reduction under certain circumstances, pursuant to a Stock Purchase Agreement dated June 24, 2005 and the First Amendment to that Stock Purchase Agreement among the Company, Ski West, and all of the shareholders of Ski West dated March 1, 2006.
Ski West is an on-line travel company whose proprietary technology provides easy consumer access to a large, fragmented, hard-to-find inventory of lodging, vacation, cruise and transportation bargains. The travel offerings are primarily in popular ski areas in the U.S. and Canada, with more recent expansion into the Caribbean and Mexico, as well as cruises. These factors contributed to a purchase price in excess of the fair value of net tangible and intangible assets acquired from Ski West and as a result, the Company has recorded goodwill in connection with this transaction.
Effective upon the closing, Ski West became a wholly-owned subsidiary of the Company, integrated the Ski West travel offerings with the Company’s existing travel offerings and changed its name to OTravel.com, Inc.
F-22

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
8.   ACQUISITIONS (Continued)
Purchase Price Allocations
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed on July 1, 2005. The initial purchase price allocations may be adjusted within one year of the purchase date for changes in estimates of the fair value of assets acquired and liabilities assumed (in thousands):

July 1,
2005

Cash

$
491

Current assets

986

Property and equipment

263

Goodwill

10,385

Intangible assets

14,313

Other assets

9

Assets acquired

26,447

Liabilities assumed

(1,336
)
Net assets acquired

$
25,111

The excess of the purchase price over the fair values of assets acquired and liabilities assumed was allocated to goodwill. Any required earn out payments would further increase goodwill at the time the target operating results for the next four years are successfully achieved. Of the $10.4 million recorded in goodwill, the full amount is expected to be deductible for tax purposes, to the extent the Company has sufficient taxable income in the future.
The amounts allocated to intangible assets, and their estimated useful lives, was determined by management with the assistance of an independent appraisal and were attributed to the following categories (in thousands):

Years

Enterprise information system

$
860

5

Customer list

2,339

4

Supplier contracts

6,271

12

Web sites and destination portal

2,887

5

Non-competition agreements

1,956

2

$
14,313

During the year ended December 31, 2005, the Company recorded amortization expense attributable to the above intangible assets of approximately $1.3 million.
Pro forma results of operations have not been presented because the effect of the acquisition was not material to the results of prior periods presented.
F-23

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
9.   ACCRUED LIABILITIES
Accrued liabilities consist of the ~~following:~~following (in thousands):

December 31,

December 31,

2003
2004

2004

2005

Inventory received but not invoiced $ 1,126 $ 6,593

$
6,593

$
9,614

Reserve for returns 1,110 2,835
Allowance for returns

2,835

5,576

Accrued payroll and other related costs 850 3,289

3,289

6,532

Deferred revenue — 1,048

1,048

1,933

Accrued marketing expenses 2,674 5,236

5,236

10,161

Merchant processing fee accrual 1,313 643

643

841

Accrued freight 661 506

506

202

Accrued professional expenses

339

849

Accrued invoices

992

7,176

Accrued tax expenses

457

2,471

Other accrued expenses 1,582 2,767

979

1,492

$
22,917

$
46,847

$ 9,316 $ 22,917

~~9. BORROWINGS~~
10.   BORROWINGS
In ~~May~~December 2004, the Company entered into a senior secured credit facility for a revolving line of credit of up to the lesser of (i) $20,000, (ii) 60% of eligible inventory, or (iii) 80% times the net liquidation percentage minus the sum of (i) the bank product reserve, and (ii) the aggregate amount of reserves, if any, all as defined in the agreement. The borrowings were collateralized by the assets of the Company and bore interest at a minimum of 3.5% using the Wells Fargo base rate as defined in the agreement, or, at the option of the Company, based on the LIBOR rate. The credit facility was terminated by the Company in December 2004.
        ~~In December 2004, the Company replaced the senior secured credit facility described above with~~ an amendment to a credit agreement ("(“Amended Credit ~~Agreement"~~Agreement”) with Wells Fargo Bank, National Association. The ~~existing~~original credit agreement (originally executed in February 2004) provided the Company with a revolving line of credit for the purpose of issuing up to ~~$10,000~~$10.0 million of letters of credit for

the purchase of inventory. ~~The~~As amended through December 31, 2005, the Amended Credit Agreement ~~provides~~provided a revolving line of credit to the Company of up to ~~$30,000~~$30.0 million and ~~expires~~was scheduled to expire December 31, 2005. ~~The~~On December 31, 2005, the Company ~~has an~~exercised its option to renew the Amended Credit Agreement ~~annually.~~through December 31, 2007. Included in the ~~$30,000~~$30.0 million Amended Credit Agreement is a ~~$10,000~~$15.0 million sub-limit for a revolving line of credit which the Company uses to obtain letters of credit to support inventory purchases. At December 31, 2004 the issuing bank or an affiliate of the bank had letters of credit totaling $8,225 issued on our behalf under this facility. However, the Company has no liability for this amount except
Prior to ~~the extent, if any, that a beneficiary of any of the outstanding letters of credit draws upon a letter of credit.~~
        ~~Interest~~October 18, 2005, interest on borrowings iswas payable monthly and ~~accrues~~accrued at either (i) one-half of one percentage point (0.50%) above LIBOR in effect on the first day of an applicable fixed rate term, or (ii) at a fluctuating rate per annum determined by the bank to be one half a percent (0.50%) above daily LIBOR in effect on each business day a change in daily LIBOR is announced by the bank. Unpaid principal, together with accrued and unpaid interest iswas due on the maturity ~~date, December 31, 2005.~~date. Borrowings under the facility ~~are~~were collateralized by the ~~Company's~~Company’s cash and marketable securities deposited at Wells Fargo or its affiliates, and the Company iswas required to maintain balances with Wells Fargo or its affiliates of up to ~~$37.0~~$21.1 million in order to have the full amount of the credit facility available. ~~At December 31, 2004, there was no outstanding balance on this line.~~
The Amended Credit Agreement requires the Company to comply with certain covenants, including restrictions on mergers, business combinations or transfer of assets. The Company was in compliance with these covenants at December 31, ~~2004.~~2005.
On October 18, 2005, we entered into a sixth amendment to the credit agreement (“Sixth Amended Credit Agreement”). The Sixth Amended Credit Agreement eliminated the requirement that the Company maintain specified cash balances with Wells Fargo as a condition to the availability of advances under the facility, and substituted collateral consisting of foreign bond securities owned by the Company in an aggregate principal amount of $50.0 million to secure the Company’s obligations under the facility. The
F-24

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
10.   BORROWINGS (Continued)
$15.0 million sub-limit used to obtain letters of credit to support inventory purchases remained the same. We have an option to renew the Sixth Amended Credit Agreement annually. The Sixth Amendment increased the interest rate on fixed rate advances under the credit facility to 1.35% above LIBOR on the first day of each fixed rate term.
On December 12, 2005, the Company entered into a Loan and Security Agreement (the “WFRF Agreement”) with Wells Fargo Retail Finance, LLC and related security agreements and other agreements described in the WFRF Agreement.
The WFRF Agreement provides for advances to the Company and for the issuance of letters of credit for its account of up to an aggregate maximum of $40 million. The Company has the right to increase the aggregate maximum amount available under the facility to up to $50 million during the first two years of the facility. The amount actually available to the Company may be less and may vary from time to time, depending on, among other factors, the amount of its eligible inventory. The Company’s obligations under the WFRF Agreement and all related agreements are collateralized by all or substantially all of the Company’s and its subsidiaries’ assets. The Company’s obligations under the WFRF Agreement are cross-collateralized with its obligations under its $30 million credit facility with Wells Fargo Bank, National Association. The term of the WFRF Agreement is three years, expiring on December 12, 2008. The WFRF Agreement contains standard default provisions.
Advances under the WFRF Agreement bear interest at either (a) the rate announced, from time to time, within Wells Fargo Bank, National Association at its principal office in San Francisco as its “prime rate” or (b) a rate based on LIBOR plus a varying percentage between 1.25% and 1.75%; however, the annual interest rate on advances under the WFRF Agreement will be at least 3.50%. The WFRF Agreement includes affirmative covenants as well as negative covenants that prohibit a variety of actions without the lender’s approval, including covenants that limit the Company’s ability to (a) incur or guarantee debt, (b) create liens, (c) enter into any merger, recapitalization or similar transaction or purchase all or substantially all of the assets or stock of another person, (d) sell assets, (e) change its name or the name of any of its subsidiaries, (f) make certain changes to its business, (g) optionally prepay, acquire or refinance indebtedness, (h) consign inventory, (i) pay dividends on, or purchase, acquire or redeem shares of, its capital stock, (j) change its method of accounting, (k) make investments, (l) enter into transactions with affiliates, or (m) store any of its inventory or equipment with third parties.
At December 31, 2005, $0 was outstanding on the line and letters of credit totaling $9.5 million were issued on behalf of the Company under the Amended Credit facility. There were no amounts drawn nor were there any outstanding letters of credit on the WFRF Agreement.
Capital leases
The Company leases certain software and computer equipment under three non-cancelable capital leases that expire at various dates through 2008. The Company expects that in the normal course of business, the leases will expire. Software and equipment acquired relating to the capital leases were $1.8 million and $15.4 million at December 31, 2004 and 2005, respectively, with accumulated depreciation and amortization of $395,000 and $10.1 million at those respective dates. Depreciation of assets recorded under capital leases was $395,000 and $9.7 million for the years ended December 31, 2004 and 2005, respectively.
F-25

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
10.   BORROWINGS (Continued)
Future minimum lease payments under capital leases are as ~~follows:~~follows (in thousands):
Year Ending
December 31,

2005 $ 632
2006 613
2006

$
7,249

2007 168
2007

3,264

2008 7
Thereafter —

2007
2007

7

Total minimum lease payments 1,420
Total minimum lease payments

10,520

Less: amount representing interest (82 )
Less: amount representing interest

(779
)

Present value of capital lease obligations 1,338
Present value of capital lease obligations

9,741

Less: current portion (595 )
Less: current portion

(6,683
)

Capital lease obligations, non-current $ 743
Capital lease obligations, non-current

$
3,058

~~10.~~11.   3.75% CONVERTIBLE SENIOR NOTES
In November 2004, the Company completed an offering of ~~$120,000~~$120.0 million of 3.75% Convertible Senior Notes (the ~~"Senior Notes"~~“Senior Notes”). This includes ~~$20,000~~$20.0 million of additional Senior Notes issued to the initial

purchaser upon exercise of its 30-day purchase option to cover over-allotments. Proceeds to the Company were ~~$116,199,~~$116.2 million, net of ~~$3,801~~$3.8 million of initial ~~purchaser's~~purchaser’s discount and debt issuance costs. The discount and debt issuance costs are being amortized using the straight-line method which approximates the interest method. During 2004 and 2005, the Company recorded amortization of discount and debt issuance costs related to this offering totaling ~~$52.~~$52,000 and $620,000. Interest on the Senior Notes is payable semi-annually on June 1 and December 1 of each year, beginning June 1, 2005. The Senior Notes mature on December 1, 2011 and are unsecured and rank equally in right of payment with all existing and future unsecured, unsubordinated debt and senior in right of payment to any existing and future subordinated indebtedness.
The Senior Notes are convertible at any time prior to maturity into the ~~Company's~~Company’s common stock at the option of the note holders at a conversion price of $76.23 per share or approximately ~~1,574~~1.6 million shares in aggregate (subject to adjustment in certain events, including stock splits, dividends and other distributions and certain repurchases of the ~~Company's~~Company’s stock, as well as certain fundamental changes in the ownership of the Company). Beginning December 1, 2009, the Company has the right to redeem the Senior Notes, in whole or in part, for cash at 100% of the principal amount plus accrued and unpaid interest. Upon the occurrence of a fundamental change (including the acquisition of a majority interest in the Company, certain changes in the ~~Company's~~Company’s board of directors or the termination of trading of the ~~Company's~~Company’s stock) meeting certain conditions, holders of the Senior Notes may require the Company to repurchase for cash all or part of their notes at 100% of the principal amount plus accrued and unpaid interest.
The indenture governing the Senior Notes requires the Company to comply with certain affirmative covenants, including making principal and interest payments when due, maintaining our corporate existence and properties, and paying taxes and other claims in a timely manner. The Company was in compliance with these covenants at December 31, ~~2004.~~2005.
In June and November 2005, under the Share Repurchase Program (see Note 15), the Company retired $33.0 million and $10.0 million of its 3.75% Convertible Senior Notes (the “Senior Notes”), which were due on December 1, 2011 for $27.9 million and $7.8 million in cash for each respective retirement. As a result of the note retirements in June and November, we recognized a gain of $6.2 million, net of the
F-26

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
11.   3.75% CONVERTIBLE SENIOR NOTES (Continued)
associated unamortized discount of $1.2 million for the year ended December 31, 2005. As of December 31, 2005, $74.9 million of the Senior Notes remained outstanding.
12.   COMMITMENTS AND CONTINGENCIES
        ~~The~~Commitments
Through July 2005, the Company ~~leases 43~~leased 43,000 square feet of office space under an operating lease which was originally scheduled to expire in January 2007. However, effective July 2005 this lease ~~will be~~was terminated and replaced with a lease ~~agreement the Company entered into in December 2004~~ for a new office building in the Old Mill Corporate Center III in Salt Lake City, Utah. Pursuant to this agreement, the Company ~~will lease~~began leasing approximately ~~143~~154,000 rentable square feet for a term of 10ten years beginning ~~when the Company occupies the premises, which the Company expects to be in the summer of 2005 when construction is completed. On~~July 2005. In February ~~11,~~ 2005, the Company and Old Mill Corporate Center III, LLC (the ~~"Lessor"~~“Lessor”) entered into a Tenant Improvement Agreement (the ~~"OMIII Agreement"~~“OMIII Agreement”) relating to the office building. The OMIII Agreement sets forth the terms on which the Company will pay the costs of certain improvements to the leased office space. The amount of the costs is estimated to be approximately ~~$2,000.~~$2.0 million. The OMIII Agreement requires the Company to reimburse the Lessor for the amount of the costs within 30thirty days after presentation of invoices or written requests for reimbursement. The OMIII Agreement also requires the Company to provide either a cash deposit or a letter of credit in the amount of ~~$500~~$500,000 to the Lessor to provide funds for the removal of the improvements upon the termination of the lease.

The Company ~~also~~issued a letter of credit for $500,000 to the Lessor.
The Company leases ~~354~~480,000 square feet for its warehouse ~~facility~~facilities in ~~Salt Lake City,~~ Utah under an operating ~~lease~~leases which ~~expires~~expire in August 2012.
In June 2005, the Company entered into a non-cancelable operating lease for certain computer equipment expiring in the next three years. It is expected that such leases will be renewed by exercising purchase options or replaced by leases of other computer equipment.
Minimum future payments under these leases are as ~~follows:~~follows (in thousands):
Year Ending
December 31,

2005 $ 4,099
2006 5,264
2006

$
6,035

2007 4,958
2007

6,656

2008 4,945
2008

7,089

2009 5,078
2009

7,650

2010
2010

7,864

Thereafter 26,321
Thereafter

36,166

$
71,460

$ 50,665

Rental expense for operating leases totaled ~~$1,639, $1,955~~$2.0 million, $1.9 million and ~~$1,933~~$4.0 million for the years ended December 31, ~~2002,~~ 2003, 2004 and ~~2004,~~2005, respectively.
Pledged Securities
The Company is ~~involved in various legal matters arising in the normal course~~required to pledge its foreign derivatives as collateral for a $30.0 million revolving line of ~~business. In the opinion~~credit (see Note 10).
F-27

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
12.   COMMITMENTS AND CONTINGENCIES (Continued)
Legal Proceedings
From time to time, we receive claims of ~~management, the Company's liability, if any, arising from regulatory matters~~ and ~~legal proceedings~~become subject to consumer protection, employment, intellectual property and other commercial litigation related to the conduct of our business. Such litigation could be costly and time consuming and could divert our management and key personnel from our business operations. The uncertainty of litigation increases these ~~matters is~~risks. In connection with such litigation, we may be subject to significant damages or equitable remedies relating to the operation of our business and the sale of products on our websites. Any such litigation may materially harm our business, prospects, results of operations, financial condition or cash flows. However, we do not ~~expected to~~currently believe that any of our outstanding litigation will have a material ~~adverse~~ impact on ~~the Company's~~our financial ~~position, results of operations and cash flows. The outcomes of legal matters in which the Company is presently involved are not probable and reasonably estimable.~~statements.
In October 2003, Tiffany (NJ) Inc. and Tiffany and Company filed a complaint against ~~the Company~~us in the United States District Court for the Southern District of New York alleging that ~~the Company has~~we have distributed counterfeit and otherwise unauthorized Tiffany product in violation of federal copyright and trademark law and related state laws. The complaint seeks statutory and other damages in an unspecified amount and injunctive relief. In January and February 2005, Tiffany (NJ) Inc. and Tiffany and Company filed ~~four~~five additional complaints against ~~the Company~~us in the United States District Court for the Southern District of New York alleging that ~~the Company has~~we have distributed counterfeit and otherwise unauthorized Tiffany product in violation of federal copyright and trademark law and related state laws. These complaints also seek statutory and other damages in an unspecified amount and injunctive relief. Although ~~the Company has~~we have filed answers to these complaints and ~~believes it has~~we believe we have defenses to the allegations and ~~intends~~intend to pursue them vigorously, ~~the Company does~~we do not have sufficient information to assess the validity of the claims or the amount of potential damages alleged in these suits.
        In July 2004, Printmaker International, Ltd. filed a complaint against the Company in the United States District Court for the Southern District of New York alleging that the Company has distributed counterfeit and otherwise unauthorized product in violation of federal copyright and trademark law and related state laws. The complaint seeks statutory and other damages in an unspecified amount and injunctive relief. Although the Company has filed an answer and believes it has defenses to the allegations and intends to pursue them vigorously, the Printmaker lawsuit is in the early stages of discovery, and the Company does not have sufficient information to assess the validity of the claims or the amount of potential damages. The Company's fulfillment partner (who is also a defendant in the

~~case) is conducting the defense of the case and has agreed to indemnify the Company against the claim and any judgment.~~
        In May 2004, the Company filed a complaint against TLMT Holdings, Inc (f/k/a LastMinuteTravel.com, Inc.) in the Superior Court of the State of Delaware alleging that it breached its contract with the Company. In July 2004, TLMT Holdings filed a counterclaim against the Company alleging that the Company has breached the contract. The counterclaim seeks damages in an unspecified amount. The Company has filed an answer to the counterclaim and believes it has defenses to the allegations and intends to pursue them vigorously. At this point in time, the Company does not have sufficient information to assess the validity of the claims or the amount of potential damages.
        In January 2003, the Company received a letter from NCR Corporation claiming that certain of the Company's business practices and information technology systems infringe patents owned by NCR. The letter further stated that NCR would vigorously protect its intellectual property rights if the Company does not agree to enter into licensing arrangements with respect to the asserted patents. On January 31, 2003, the Company filed a complaint in the United States District Court of Utah, Central Division seeking declaratory judgment that the Company does not infringe any valid claim of the patents asserted by NCR. On March 24, 2003, NCR filed an answer and counterclaims alleging that certain of the Company's business practices and information technology systems infringe patents owned by NCR. On April 8, 2003, the Company filed an answer denying the material allegations in NCR's counterclaims. On May 12, 2003, the parties entered into a standstill agreement, agreeing to the dismissal of the complaint and counterclaims without prejudice to either party's ability to renew its claims at a later date. On May 19, 2003, the court entered an order dismissing the complaint and counterclaims without prejudice. The parties each reserved all claims and counterclaims. In August 2004, NCR notified the Company of its intent to terminate the standstill agreement. On September 2, 2004, the Company re-filed its complaint in the United States District Court of Utah, Central Division seeking declaratory judgment that the Company does not infringe any valid claim of the patents asserted by NCR. On October 4, 2004, NCR filed an answer and counterclaims alleging that certain of the Company's business practices and information technology systems infringe patents owned by NCR. On October 12, 2004, the Company filed an answer denying the material allegations in NCR's counterclaims. Although the Company has filed an answer and believes it has defenses to the allegations and intends to pursue them vigorously, the NCR lawsuit is not yet even in the early stages of discovery, and the Company does not have sufficient information to assess the validity of the claims or the amount of potential damages.
In September 2004, ~~the Company~~we received a letter from BTG International Inc. claiming that certain of ~~the Company's~~our business practices and online marketing information technology systems infringe patents owned by BTG. On September 14, 2004, without engaging in any meaningful discussion or negotiation with ~~the Company,~~us, BTG filed a complaint in the United States District Court of Delaware alleging that certain of ~~the Company's~~our business practices and online marketing information technology systems infringe a single patent owned by BTG. On October 21, 2004, ~~the Company~~we filed an answer denying the material allegations in ~~BTG's~~BTG’s claims. We have recently reached an agreement in principle which will settle and dismiss the case. We are currently working on a definitive settlement agreement with BTG.
In December 2003, we received a letter from Furnace Brook claiming that certain of our business practices and our on-line ordering system infringe a patent owned by Furnace Brook. After diligent efforts to show that we do not infringe these patents and Furnace Brook’s continual assertions that it would vigorously protect its intellectual property rights if we did not agree to enter into licensing arrangements with respect to the asserted patents, on August 12, 2005, we filed a complaint in the United States District Court of Utah, Central Division, seeking declaratory judgment that we do not infringe any valid claim of the Furnace Brook patent. Furnace Brook filed a motion to dismiss our complaint for lack of personal jurisdiction over Furnace Brook in Utah. On October 31, 2005, the United States District Court of Utah, Central Division, issued a decision to dismiss our complaint for lack of personal jurisdiction over Furnace Brook. On December 14, 2005, we filed an appeal of the Utah decision with the United States Court of Appeals for the Federal Circuit. On August 18, 2005, shortly after we filed the complaint in Utah, Furnace Brook filed a complaint in the United States District Court for the Southern District of New York, alleging that certain of our business practices and our on-line ordering system infringe a single patent owned by Furnace Brook. On September 9, 2005 we filed an answer denying the material allegations in Furnance
F-28

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
12.   COMMITMENTS AND CONTINGENCIES (Continued)
Brook’s claims. Although ~~the Company has~~we have filed an answer and ~~believes it has~~believe we have defenses to the allegations and ~~intends~~intend to pursue them vigorously, the ~~BTG~~Furnace Brook lawsuit is ~~not yet even~~ in the ~~early stages of~~ discovery stage, and ~~the Company does~~we do not have sufficient information to assess the validity of the claims or the amount of potential damages.

On August 11, 2005, along with a shareholder plaintiff, we filed a complaint against Gradient Analytics, Inc.; Rocker Partners, LP; Rocker Management, LLC; Rocker Offshore Management Company, Inc. and their respective principals. We, along with a second shareholder plaintiff, filed the complaint in the Superior Court of California, County of Marin. On October 12, 2005, we filed an amended complaint against the same entities alleging libel, intentional interference with prospective economic advantage and violations of California’s unfair business practices act. On March 7, 2006, the court denied the defendants demurrers to and motions to strike the amended complaint. The defendants have each filed a motion to appeal the court’s decision. We intend to pursue this action vigorously.

~~12.~~13.   REDEEMABLE SECURITIES
In March 2002, the Company sold approximately ~~959~~959,000 shares of mandatorily redeemable convertible preferred stock ("(“preferred ~~stock"~~stock”) for approximately ~~$6,582,~~$6.6 million, net of issuance costs. The preferred stock automatically converted to common stock on a 1:1 basis in connection with the initial public offering. As the fair value of the common stock to be received upon conversion was greater than the conversion price of the preferred stock at the date the preferred stock was issued, a beneficial conversion feature resulted in the amount of ~~$6,607,~~$6.6 million, which was calculated in accordance with Emerging Issues Task Force No. 98-5Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios. This beneficial conversion feature was reflected as a deemed dividend in the statement of operations during the year ended December 31, 2002.
Redeemable common stock relates to warrants and securities that are subject to rescission. Sales of ~~858~~858,000 shares of the common stock and the issuance of ~~185~~185,000 warrants to certain individuals did not fully comply with certain requirements under applicable State Blue Sky Laws. The offer and sale of these securities were not made pursuant to a registration statement and the Securities Act of 1933, nor were the offer and sale registered or qualified under any state security laws. Although the Company believed at the time that such offers, sales and conversion were exempt from such registration or qualification, they may not have been exempt in several states. As a result, purchasers of our common stock in some states have the right under federal or state securities laws to rescind their purchases for an amount equal to the purchase price paid for the shares, plus interest from the date of purchase until the rescission offer expires, at the annual rate mandated by the state in which such shares were purchased. These interest rates range from 8% to 10% per annum. The rescission rights lapse on various dates through September 2006. At December 31, ~~2004,~~2005, there were ~~460~~446,000 shares of common stock and ~~112~~no warrants subject to rescission rights outstanding.
        ~~At December 31, 2003 and 2004, the~~The Company has classified ~~$2,978 and $3,166, respectively,~~$3.2 million at December 31, 2005 related to the rescission rights outside of ~~shareholders'~~shareholders’ equity, because the redemption features are not within the control of the Company. However, management does not anticipate that holders of the redeemable common stock will exercise their rescission rights. Interest attributable to these securities is recorded as a deemed dividend and reflected as a deduction from net loss to arrive at net loss attributable to common shares in the Statements of Operations.
~~13. STOCKHOLDERS'~~F-29

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
14.   STOCKHOLDERS’ EQUITY
Reincorporation
In May 2002, the Company reincorporated in Delaware. As a result of the reincorporation, the Company is authorized to issue ~~100,000~~100,000,000 shares of $0.0001 par value common stock and ~~5,000~~5,000,000 shares of $0.0001 par value preferred stock. The Board of Directors may issue the undesignated preferred stock in one or more series and determine preferences, privileges and restrictions thereof.
Common Stock
Each share of common stock has the right to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to prior rights of holders of all classes of stock outstanding having priority rights as to dividends. No dividends have been declared or paid on the ~~Company's~~Company’s common stock through December 31, ~~2004.~~

~~Warrants~~2005.
Warrants
In 2000, the Company issued warrants to certain shareholders in connection with the purchase of additional shares of common stock. At December 31, ~~2004,~~2005, there were no warrants outstanding to purchase ~~887~~common stock of the Company. During 2003, 2004 and 2005, the number of warrants exercised was 50,000, 182,000 and 870,000, respectively.
15.   SHARE REPURCHASE PROGRAM
During January 2005, the Company’s Board of Directors authorized a share repurchase program under which the Company was authorized to repurchase up to $50.0 million of its common stock through December 31, 2007. On April 26, 2005, the Board of Directors increased the amount of the share repurchase program to $100.0 million. Additionally, on June 14, 2005, the Board of Directors authorized an amendment of its three-year share repurchase program to include the repurchase of its Convertible Senior Notes.
During 2005, the Company entered into several purchased call options, pursuant to which the Company could have been required to purchase up to 1.3 million shares of its common stock at certain settlement dates during the quarter ended June 30, 2005. In connection with these repurchase transactions; the Company paid approximately $47.5 million, which was recorded in shareholders’ equity in the consolidated balance sheet.
At the Company’s option, the purchased call options were settled in cash or stock, based on the market price of its common stock on the date of the settlement. Upon settlement, the Company either had its capital investment returned with a premium or received shares of its common stock, depending, respectively, on whether the market price of its common stock was above or below a pre-determined price agreed in connection with each such transaction.
Under the repurchase program, the Company repurchased approximately 665,000 shares of its common stock in open market transactions for $24.1 million during the year ended December 31, 2005. In addition, approximately 1.0 million shares of common stock were acquired as a result of the ~~Company were outstanding, as follows:~~
Issuance Date
Exercise
Price
per Share
Warrants
Outstanding
Expiration
Date
May 1, 2000 $ 7.09 163 April 30, 2005
May 15, 2000 $ 7.09 231 May 14, 2005
June 22, 2000 $ 7.09 7 June 21, 2005
September 21, 2000 $ 4.26 486 September 20, 2005
settlement of $41.1 million of structured stock repurchase transactions during the nine months ended September 30, 2005. The ~~number of warrants exercised~~purchased call options that did not settle in ~~2002, 2003 and 2004 were 3, 50 and 182, respectively.~~
        ~~As of December 31, 2004,~~stock settled in cash totaling $7.9 million, which the Company ~~has reserved sufficient shares of common stock~~received in July 2005.
F-30

Overstock.com, Inc.
Notes to meet its stock option and warrant obligations. As stated in Note 12, 112 of these warrants are subject to rescission. At December 31, 2003 and 2004, related parties held 850 of the total warrants outstanding.Consolidated Financial Statements (Continued)
~~14.~~16.   STOCK OPTION PLANS
The ~~Company's~~Company’s board of directors adopted the Amended and Restated 1999 Stock Option Plan and the 2002 Stock Option Plan (collectively, the ~~"Plans"~~“Plans”), in May 1999 and April 2002, respectively. Under these Plans, the Board of Directors may issue incentive stock options to employees and directors of the Company and non-qualified stock options to consultants of the Company. Options granted under these Plans generally expire at the end of five years and vest in accordance with a vesting schedule determined by the ~~Company's~~Company’s Board of Directors, usually over four years from the grant date. As of the initial public offering, the Amended and Restated 1999 Stock Option Plan was terminated. Future shares will be granted under the 2002 Stock Option Plan. As of December 31, ~~2004, 1,184~~2005, 1,100,000 shares are available for future grants under these Plans.
The following is a summary of stock option activity:

2002
2003
2004

2003

2004

2005

Shares
Weighted
Average
Exercise
Price
Weighted Average Fair Value
Shares
Weighted
Average
Exercise
Price

Shares
Weighted
Average
Exercise
Price

Shares

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Exercise
Price

Outstanding—beginning of year Outstanding—beginning of year 1,161 $ 4.68 1,415 $ 5.37 1,780 $ 8.39

1,415

$
5.37

1,780

$
8.39

1,512

$
8.39

Granted at fair value 245 8.05 854 12.77 474 24.14
Granted at price below fair value 543 5.07 $ 9.61 — — — —
Exercised (146 ) 4.22 (197 ) 4.69 (468 ) 6.75
Canceled/forfeited (388 ) 5.15 (292 ) 9.12 (274 ) 13.26

Granted at fair value

854

12.77

474

24.14

220

44.44

Exercised

(197
)

4.69

(468
)

6.75

(298
)

8.56

Canceled/forfeited

(292
)

9.12

(274
)

13.26

(135
)

24.08

Outstanding—end of year Outstanding—end of year 1,415 5.37 1,780 8.39 1,512 12.90

1,780

8.39

1,512

12.90

1,299

18.09

Options exercisable at year-end Options exercisable at year-end 388 4.93 614 5.44 608 7.51

614

5.44

608

7.51

739

11.33

The following table summarizes information about stock options as of December 31, ~~2004:~~2005:

Options Outstanding at
December 31, 2004

Options Exercisable at
December 31, 2004
Range of Exercise Prices
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contract Life
Shares
Weighted
Average
Exercise
Price
$   2.00-$4.99 114 $ 4.05 2.4 63 $ 3.87
$   5.00-$6.99 419 5.07 1.8 320 5.07
$   7.00-$11.99 146 9.55 2.4 94 9.64
$ 12.00-$17.99 401 13.29 3.5 128 13.31
$ 18.00-$53.45 432 23.60 4.2 3 34.06

1,512 12.90 3.0 608 7.51

Options Outstanding at
December 31, 2005

Options Exercisable at
December 31, 2005

Range of Exercise Prices

Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contract Life

Shares

Weighted
Average
Exercise
Price

$  2.00-$  4.99

83

$
4.27

1.50

69

$
4.14

$  5.00-$  6.99

269

5.07

0.94

263

5.07

$  7.00-$11.99

96

10.32

1.78

76

10.71

$12.00-$17.99

303

13.22

2.55

166

13.26

$18.00-$53.45

548

30.62

3.57

165

22.67

1,299

18.09

2.52

739

11.33

The weighted-average grant-date fair value of options granted during ~~2002,~~ 2003, 2004 and ~~2004~~2005 was ~~$8.21,~~ $8.27, $15.39 and ~~$15.39~~$26.81 per share, respectively. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:

2002
2003
2004

2003

2004

2005

Risk-free interest rate 3.31 % 2.63 % 2.61 %

2.63
%
2.61
%
4.44
%
Expected life (in years) 3 3 3

3

3

4

Volatility 100 % 104 % 101 %

104
%
101
%
73
%
Expected dividend yield 0 % 0 % 0 %

0
%
0
%
0
%
F-31

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
16.   STOCK OPTION PLANS (Continued)
Stock-based compensation
In connection with certain stock option grants to employees during the year ended December 31, 2002 the Company recognized approximately ~~$3,481~~$3.5 million of unearned stock-based compensation for the excess of deemed fair value of shares of common stock subject to such options over the exercise price of these options at the date of grant. In ~~2003~~2004 and ~~2004,~~2005, the company reversed ~~$478~~$198,000 and ~~$198,~~$69,000, respectively, of unearned stock-based compensation due to forfeitures of unvested options. Such amounts are included as a component of ~~stockholders'~~stockholders’ equity and are being amortized over the vesting period in accordance with FASB Interpretation Number 28,Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plan. The Company recorded stock-based compensation expense of ~~$3,276, $846~~$846,000, $360,000 and ~~$360~~$72,000 during the years ended December 31, ~~2002,~~ 2003, 2004 and ~~2004,~~2005, respectively.
During the years ended December 31, ~~2002,~~ 2003, 2004 and ~~2004,~~2005, the Company granted ~~177, 18~~18,000, 25,000 and 25zero options to consultants, respectively. The Company recorded unearned stock-based compensation of ~~$131, $268~~$268,000, $2.0 million and ~~$2,043~~$0 related to these grants, of which ~~$24, $177~~$177,000, $1.3 million and ~~$1,278~~$72,000 was recognized in operations in ~~2002,~~ 2003, 2004 and ~~2004,~~2005, respectively. The fair value for these options was measured at the grant date and is remeasured at the end of each quarter until vesting is complete. At December 31, ~~2002,~~ 2003, 2004 and ~~2004,~~2005, the fair value of these options was calculated using a Black-Scholes option pricing model using risk-free rates of ~~3.31%~~2.59%, ~~2.59%~~3.45% and ~~3.45%~~4.34%, respectively, an expected life of 3 years, expected volatility of ~~100%~~105%, ~~105%~~96% and ~~96%~~0%, respectively, and a dividend yield of 0%.

~~15.~~17.   EMPLOYEE STOCK PURCHASE PLAN
Effective January 24, 2001, the Company adopted an Employee Stock Purchase Plan (the ~~"ESPP"~~“ESPP”) to provide certain employees, directors and consultants an opportunity to purchase shares of its common stock annually, up to 5% of eligible compensation. During a specified open period as determined the Board of Directors, participants can purchase shares of stock at a value determined by the ~~Company's~~Company’s board of directors which approximates the deemed fair market value of the stock. As of the initial public offering, the ESPP was terminated. There were 1414,000 and 66,000 shares issued under the ESPP during 2001 and ~~2002, respectively and no shares during 2003 and 2004. The Company recognized approximately $51 of stock-based compensation for~~2002. There have not been any further issuances under the ~~excess of the fair value of the shares of common stock over the purchase price during~~ESPP since 2002.
~~16.~~18.   EMPLOYEE RETIREMENT PLAN
The Company has a 401(k) defined contribution plan which permits participating employees to defer up to a maximum of 25% of their compensation, subject to limitations established by the Internal Revenue Code. Employees who have completed a half-year of service and are 21 years of age or older are qualified to participate in the plan. The Company matches 50% of the first 6% of each ~~participant's~~participant’s contributions to the plan. Participant contributions are immediately vested. Company contributions vest based on the ~~participant's~~participant’s years of service at 20% per year over five years. The ~~Company's cash~~Company’s matching contribution totaled ~~$88, $99~~$99,000, $124,000 and ~~$124~~$261,000 during ~~2002,~~ 2003, 2004 and ~~2004,~~2005, respectively.
~~17.~~F-32

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
19.   OTHER COMPREHENSIVE LOSS
The Company follows SFAS No. 130, Reporting Comprehensive Income. This Statement establishes requirements for reporting comprehensive income and its components. The Company’s comprehensive loss for the years ended December 31, 2003, 2004 and 2005 is as follows (in thousands):

Year ended December 31,

2003

2004

2005

Net loss

$
(11,548
)
$
(4,540
)
$
(24,918
)
Net unrealized (loss) on marketable securities

(93
)
(204
)
(54
)
Unrealized gain on foreign bonds

—

—

1,125

Foreign currency translation adjustment

(1
)
22

86

Comprehensive loss

$
(11,642
)
$
(4,722
)
$
(23,761
)
20.   OTHER INCOME ~~TAXES~~(EXPENSE), NET
Other income (expense), net consisted of the following (in thousands):

Year ended December 31,

2003

2004

2005

Gain from early retirement of convertible senior notes

$
—

$
—

$
6,158

Loss on disposal of software

—

—

(1,457
)
Other

115

(49
)
27

Other income (expense), net

$
115

$
(49
)
$
4,728

21.   INCOME TAXES
The components of the ~~Company's~~Company’s deferred tax assets and liabilities as of December 31, ~~2003~~2004 and ~~2004~~2005 are as ~~follows:~~follows (in thousands):

December 31,

December 31,

2003
2004

2004

2005

Deferred tax assets: Deferred tax assets:

Net operating loss carryforwards $ 24,072 $ 26,121
Accrued expenses 1,371 3,146
Reserves and other 1,208 1,854

Net operating loss carryforwards

$
25,036

$
28,006

Temporary differences:

Accrued expenses

3,146

6,071

Reserves and other

1,865

4,147

26,651 31,121

30,047

38,224

Deferred tax liabilities: Deferred tax liabilities:

Depreciation (986 ) (2,597 )
Temporary differences:

Depreciation

(2,597
)
(1,639
)
Valuation allowance Valuation allowance (25,665 ) (28,524 )

(27,450
)
(36,585
)

Net asset Net asset $ — $ —

$
—

$
—

As a result of the ~~Company's~~Company’s history of losses, a valuation allowance has been provided for the full amount of the ~~Company's~~Company’s net deferred tax assets. In ~~management's~~management’s opinion, it is ~~more likely than not~~unlikely that such benefits will ~~not~~ be realized.
F-33

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
21.   INCOME TAXES (Continued)
At December 31, ~~2003~~2004 and ~~2004,~~2005, the Company had net operating loss carryforwards of approximately ~~$48,018~~$50.5 million and ~~$53,330,~~$58.0 million, respectively, which may be used to offset future taxable income. An additional ~~$14,386~~$14.4 million of net operating losses are limited under Internal Revenue Code Section 382 to ~~$799~~$799,000 a year. These carryforwards begin to expire in 2019.

The income tax benefit differs from the amount computed by applying the U.S. federal income tax rate of 35% to loss before income taxes for the following ~~reasons:~~reasons (in thousands):

Year ended December 31,

Year ended December 31,

2002
2003
2004

2003

2004

2005

U.S. federal income tax benefit at statutory rate $ 1,596 $ 4,166 $ 1,751

$
4,042

$
1,589

$
8,702

State income tax benefit, net of federal expense 38 385 164

372

148

847

Stock compensation expense (1,216 ) (384 ) (127 )

(384
)
(127
)
(25
)
Other (611 ) (71 ) 1,071

(192
)
525

389

Unrecognized benefit due to valuation allowance 193 (4,096 ) (2,859 )

(3,838
)
(2,135
)
(9,135
)

Income tax benefit $ — $ — $ —

$
—

$
—

$
—

~~18.~~22.   RELATED PARTY TRANSACTIONS
As indicated in Note ~~12,~~13, the Company sold shares of mandatorily redeemable convertible preferred stock in March 2002, for which a deemed dividend was recorded as a result of the beneficial conversion feature. The total deemed dividend recorded for the year ended December 31, 2002 was ~~$6,607,~~$6.6 million, of which ~~$1,000~~$1.0 million is attributable to preferred shares purchased by Haverford Internet, ~~$1,200~~$1.2 million is attributable to preferred shares purchased by members of the board of directors, and ~~$1,500~~$1.5 million is attributable to preferred shares purchased by family members of management.
On occasion, Haverford-Valley, L.C. (an entity owned by the ~~Company's~~Company’s president) and certain affiliated entities make travel arrangements for our executives and pay the travel related expenses incurred by our executives on Company business. In ~~2002,~~ 2003, 2004, and ~~2004~~2005 we reimbursed Haverford-Valley L.C. ~~$273, $236,~~$236,000, $256,000, and ~~$256,~~$274,000, respectively, for these expenses.
~~19.~~F-34

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
23.   BUSINESS SEGMENTS
Segment information has been prepared in accordance with SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information. Segments were determined based on products and services provided by each segment. Accounting policies of the segments are the same as those described in Note 2. There were no ~~intersegment~~inter-segment sales or transfers during ~~2002,~~ 2003, 2004 or ~~2004.~~2005. The Company

evaluates the performance of its segments and allocates resources to them based primarily on gross profit. The table below summarizes information about reportable ~~segments.~~segments (in thousands):

Direct
Fulfillment
partner
Consolidated

2002
Revenue $ 79,405 $ 12,379 $ 91,784
Cost of goods sold 70,686 2,755 73,441

Gross profit (loss) 8,719 9,624 18,343
Operating expenses (22,397 )
Other income, net (506 )

Net loss $ (4,560 )

Direct

Fulfillment
partner

Consolidated

2003

Revenue $ 138,134 $ 100,811 $ 238,945

$
138,134

$
100,811

$
238,945

Cost of goods sold 124,302 89,190 213,492

123,963

89,190

213,153

Gross profit 13,832 11,621 25,453

14,171

11,621

25,792

Operating expenses (37,840 )

(37,840
)

Other income, net 500

500

Net loss $ (11,887 )

$
(11,548
)

2004

Revenue $ 213,210 $ 281,425 $ 494,635

$
213,210

$
281,425

$
494,635

Cost of goods sold 185,390 243,468 428,858

184,928

243,468

428,396

Gross profit 27,820 37,957 65,777

28,282

37,957

66,239

Operating expenses (71,128 )

(71,128
)

Other income, net 349

349

Net loss $ (5,002 )

$
(4,540
)

2005

Revenue

$
324,875

$
478,947

$
803,822

Cost of goods sold

282,377

400,889

683,266

Gross profit

42,498

78,058

120,556

Operating expenses

(144,350
)

Other income, net

(1,124
)

Net loss

$
(24,918
)

The direct segment includes revenues, direct costs, and allocations associated with sales fulfilled from our warehouse. Costs for this segment include product costs, inbound freight, warehousing, and fulfillment costs, credit card fees and customer service costs.
The fulfillment partner segment includes revenues, direct costs and cost allocations associated with the ~~Company's~~Company’s third party fulfillment partner sales and are earned from selling the merchandise of third parties over the ~~Company's~~Company’s Websites. Prior to July 1, 2003, this was reported as the ~~"commission revenue"~~“commission revenue” segment, as only the commission portion of the sales transactions were recorded as revenue (i.e., recorded ~~"net"~~“net”). The costs for the previous commission segment only included credit card fees and customer service costs. From July 1, 2003 forward, due to a change in the ~~company's~~company’s business practices, including the partner sales return process, these sales transactions are now recorded ~~gross.~~based upon the gross sales price. As a result, this ~~segment's~~segment’s name has been changed to the ~~"fulfillment partner"~~“fulfillment partner” segment, and the costs for this
F-35

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
23.   BUSINESS SEGMENTS (Continued)
segment include product costs, warehousing and fulfillment costs, credit card fees and customer service costs.
Assets have not been allocated between the segments for management purposes, and as such, they are not presented here.

        ~~In 2002,~~During the years 2003 ~~and 2004,~~through 2005, over 99% of sales were made to customers in the United States of America. ~~No individual geographical area accounted for more than 10% of net sales in any of the periods presented.~~ At December 31, ~~2003~~2004 and ~~2004,~~2005, all of the ~~Company's~~Company’s fixed assets were located in the United States of America.
~~20.~~24.   INDEMNIFICATIONS AND GUARANTEES
During its normal course of business, the Company has made certain indemnities, commitments, and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include, but are not limited to, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. The duration of these indemnities, commitments, and guarantees varies, and in certain cases, is indefinite. In addition, the majority of these indemnities, commitments, and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. As such, the Company is unable to estimate with any reasonableness its potential exposure under these items. The Company has not recorded any liability for these indemnities, commitments, and guarantees in the accompanying consolidated balance sheets. The Company does, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is both probable and reasonably estimable. The Company carries specific and general liability insurance policies that the Company believes would, in most circumstances, provide some, if not total recourse to any claims arising from these indemnifications.
25.   VARIABLE INTEREST ENTITY
In August 2004, the Company entered into an agreement which allows the Company to lend up to ~~$10,000~~$10.0 million to an entity for the purpose of buying ~~inventory,~~diamonds and other jewelry, primarily to supply a new category within our jewelry store which allows customers purchasing diamond rings to select both a specific diamond and ring setting. In November 2004, the Company loaned the entity ~~$8,400.~~$8.4 million. The promissory note bears interest at 3.75% per annum. The Company ~~will also receive~~receives fifty percent (50%) of any profits of the entity. Interest ~~shall be~~on the loan is due and payable quarterly on the fifteenth day of February, May, August and November, commencing on November 15, 2004 until the due date of November 30, 2006, on which all principal and interest accrued and unpaid thereon, shall be due and payable. The promissory note is collateralized by all of the assets of the entity.
The Company has a ten year option to purchase ("(“Purchase ~~Option"~~Option”) 50% of the ownership and voting interest of the entity. The exercise price of the Purchase Option is the sum of (a) one thousand dollars, and (b) $3.0 million, which may be paid, at the ~~Company's~~Company’s election, in cash or by the forgiveness of $3.0 million of the ~~entity's~~entity’s indebtedness to the Company.
The entity was evaluated in accordance with FASB Interpretation No. 46 Revised,Consolidation of Variable Interest Entities—an Interpretation of ARB No. 51, and it was determined to be a variable interest
F-36

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
25.   VARIABLE INTEREST ENTITY (Continued)
entity for which the Company was determined to be the primary beneficiary. As such, the financial statements of the entity are consolidated into the financial statements of the Company.
The carrying amount and classification of the consolidated assets that are collateral for the ~~entity's~~entity’s obligations ~~include:~~include (in thousands):

December 31,
2004

December 31,
2005

Cash $ 979

$
295

Accounts receivable 12

113

Inventory 7,325

7,373

Prepaid expenses 75

—

Property and equipment 224

224

$
8,005

$ 8,615

~~21. SHARE BUY BACK PROGRAM~~
During ~~January 2005,~~ the ~~Company's Board~~first quarter of ~~Directors authorized a stock buyback program under which~~2006, the Company ~~is authorized to repurchase up to $50,000 of its common stock through December 31, 2007.~~
        ~~In February and March 2005~~temporarily removed the Company entered into several purchased call options, pursuant to which the Company may purchase up to 1,250 shares of its common stock at certain settlement dates. In connection with these repurchase transactions, the Company has paid approximately $47,507. Upon

settlement, the Company, at its option, may elect to settle the contracts by physical settlement, net share settlement or net cash settlement. Accordingly, we expect to receive either our capital investment returned with a premium or shares of our common stock, depending on whether the market price of the Company's common stock is above or below a pre-determined price agreed in connection with each such transaction.
        ~~To the extent that shares of common stock are delivered to the Company as a result of the transactions described above, the aggregate amount the Company pays or paid~~functionality for the ~~repurchase of~~customer to design jewelry from its website, and therefore the ~~shares as a result of these transactions~~entity will ~~reduce the amount the Company might otherwise have spent~~sell its inventory through other sales channels.
F-37

Overstock.com, Inc.
Notes to ~~directly repurchase shares from time to time under its stock repurchase program.~~Consolidated Financial Statements (Continued)
~~22.~~26.   QUARTERLY RESULTS OF OPERATIONS (unaudited)
The following tables set forth our unaudited quarterly results of operations data for the eight most recent quarters for the period ended December 31, ~~2004.~~2005. We have prepared this information on the same basis as the Consolidated Statements of Operations and the information includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair statement of our financial position and operating results for the quarters presented. Fiscal 2005 results include the acquisition of Ski West starting from July 1, 2005.

Three Months Ended

Mar. 31,
2003
June 30,
2003
Sept. 30,
2003
Dec. 31,
2003
Mar. 31,
2004
June 30,
2004
Sept. 30,
2004
Dec. 31,
2004

(in thousands, except per share data)

Consolidated Statement of Operations Data:
Revenue
Direct revenue $ 25,198 $ 25,402 $ 29,284 $ 58,250 $ 38,580 $ 41,113 $ 43,928 $ 89,589
Fulfillment partner revenue 3,966 3,431 28,504 64,910 43,498 46,679 59,516 131,732

Total revenue 29,164 28,833 57,788 123,160 82,078 87,792 103,444 221,321

Cost of goods sold
Direct 23,484 23,014 26,674 51,130 34,816 36,786 38,594 75,194
Fulfillment partner 1,055 1,016 26,863 60,256 38,793 41,114 51,103 112,458

Total cost of goods sold 24,539 24,030 53,537 111,386 73,609 77,900 89,697 187,652

Gross profit 4,625 4,803 4,251 11,774 8,469 9,892 13,747 33,669

Operating expenses:
Sales and marketing expenses 3,848 2,572 3,855 9,898 4,377 6,605 9,398 20,153
General and administrative expenses 4,545 3,367 4,059 4,940 6,251 5,567 7,376 11,041
Amortization of stock-based compensation 328 112 171 145 135 123 18 84

Total operating expenses 8,721 6,051 8,085 14,983 10,763 12,295 16,792 31,278

Operating income (loss) (4,096 ) (1,248 ) (3,834 ) (3,209 ) (2,294 ) (2,403 ) (3,045 ) 2,391
Interest income 152 142 98 69 98 127 168 780
Interest expense (7 ) (55 ) (8 ) (6 ) (16 ) (46 ) (77 ) (636 )
Other income (expense), net 10 25 79 1 2 — 3 (54 )

Net income (loss) (3,941 ) (1,136 ) (3,665 ) (3,145 ) (2,210 ) (2,322 ) (2,951 ) 2,481
Deemed dividend related to redeemable common stock (77 ) (78 ) (58 ) (49 ) (48 ) (46 ) (47 ) (47 )
Net income (loss) attributable to common shares $ (4,018 ) $ (1,214 ) $ (3,723 ) $ (3,194 ) $ (2,258 ) $ (2,368 ) $ (2,998 ) $ 2,434

Net income (loss) per common share
—basic $ (0.26 ) $ (0.07 ) $ (0.23 ) $ (0.19 ) $ (0.14 ) $ (0.13 ) $ (0.16 ) $ 0.13
—diluted $ (0.26 ) $ (0.07 ) $ (0.23 ) $ (0.19 ) $ (0.14 ) $ (0.13 ) $ (0.16 ) $ 0.12
Weighted average common shares outstanding
—basic 15,486 16,384 16,419 16,473 16,646 17,577 18,284 19,016
—diluted 15,486 16,384 16,419 16,473 16,646 17,577 18,284 20,780
Three Months Ended
Mar. 31,
2004
June 30,
2004
Sept. 30,
2004
Dec. 31,
2004
Mar. 31,
2005
June 30,
2005
Sept. 30,
2005
Dec. 31,
2005
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Revenue
Direct revenue

$
38,580

$
41,113

$
43,928

$
89,589

$
67,884

$
60,064

$
68,449

$
128,478

Fulfillment partner revenue

43,498

46,679

59,516

131,732

97,997

90,574

100,874

189,502

Total revenue

82,078

87,792

103,444

221,321

165,881

150,638

169,323

317,980

Cost of goods sold

Direct

34,859

36,645

38,491

74,933

58,260

51,562

59,170

113,385

Fulfillment partner

38,793

41,114

51,103

112,458

82,857

76,375

83,589

158,068

Total cost of goods sold

73,652

77,759

89,594

187,391

141,117

127,937

142,759

271,453

Gross profit

8,426

10,033

13,850

33,930

24,764

22,701

26,564

46,527

Operating expenses:

Sales and marketing expenses

4,377

6,605

9,398

20,153

16,825

14,495

17,960

30,371

Technology

1,371

1,830

2,267

2,980

4,095

6,094

8,082

9,861

General and administrative expenses

4,880

3,737

5,109

8,061

7,333

7,531

9,989

11,642

Amortization of stock-based compensation

135

123

18

84

20

53

(8
)

7

Total operating expenses

10,763

12,295

16,792

31,278

28,273

28,173

36,023

51,881

Operating income (loss)

(2,337
)

(2,262
)

(2,942
)

2,652

(3,509
)

(5,472
)

(9,459
)

(5,354
)
Interest income, net

98

127

168

780

644

896

(1,690
)

(120
)
Interest expense

(16
)

(46
)

(77
)

(636
)

(1,445
)

(1,517
)

(1,264
)

(1,356
)
Other income (expense), net

2

—

3

(54
)

—

4,170
(1)

11

547

Net income (loss)

(2,253
)

(2,181
)

(2,848
)

2,742

(4,310
)

(1,923
)

(12,402
)

(6,283
)
Deemed dividend related to redeemable common stock

(48
)

(46
)

(47
)

(47
)

(46
)

(47
)

(47
)

(45
)
Net income (loss) attributable to common shares

$
(2,301
)

$
(2,227
)

$
(2,895
)

$
2,695

$
(4,356
)

$
(1,970
)

$
(12,449
)

$
(6,328
)
Net income (loss) per common share

—basic
$
(0.14
)
$
(0.13
)
$
(0.16
)
$
0.14
$
(0.22
)
$
(0.10
)
$
(0.66
)
$
(0.33
)
—diluted

$
(0.14
)

$
(0.13
)

$
(0.16
)

$
0.13

$
(0.22
)

$
(0.10
)

$
(0.66
)

$
(0.33
)
Weighted average common shares outstanding

—basic

16,646

17,577

18,284

19,016

19,862

19,709

18,844

19,311

—diluted

16,646

17,577

18,284

20,780

19,862

19,709

18,844

19,311

(1)The gain realized during the quarter ended June 30, 2005 resulted from the retirement of $33.0 million of the 3.75% Convertible Senior Notes. See Note 11.
F-38

Schedule II

Valuation and Qualifying Accounts

(dollars in thousands)

Balance at
Beginning of
Year

Charged to
Expense

Deductions

Balance at
End of Year

Year ended December 31, 2003

Deferred tax valuation allowance

$
21,476

$
3,839

$
—

$
25,315

Allowance for sales returns

465

11,463

10,818

1,110

Reserve for inventory obsolescence

1,011

1,763

1,636

1,138

Allowance for doubtful accounts

145

529

24

650

Year ended December 31, 2004

Deferred tax valuation allowance

$
25,315

$
2,135

$
—

$
27,450

Allowance for sales returns

1,110

36,975

35,250

2,835

Reserve for inventory obsolescence

1,138

1,008

823

1,323

Allowance for doubtful accounts

650

976

876

750

Year ended December 31, 2005

Deferred tax valuation allowance

$
27,450

$
9,135

$
—

$
36,585

Allowance for sales returns

2,835

62,178

59,437

5,576

Reserve for inventory obsolescence

1,323

4,706

788

5,241

Allowance for doubtful accounts

750

2,202

1,141

1,811

F-39

Balance at
Beginning of Year
Charged to
Expense
Deductions
Balance at
End of Year
Year ended December 31, 2002
Deferred tax valuation allowance $ 21,762 $ — $ 193 $ 21,569
Reserve for sales returns 496 3,994 4,025 465
Allowance for inventory obsolescence 943 164 96 1,011
Allowance for doubtful accounts — 145 — 145
Year ended December 31, 2003
Deferred tax valuation allowance $ 21,569 $ 4,096 $ — $ 25,665
Reserve for sales returns 465 11,463 10,818 1,110
Allowance for inventory obsolescence 1,011 1,763 1,636 1,138
Allowance for doubtful accounts 145 529 24 650
Year ended December 31, 2004
Deferred tax valuation allowance $ 25,665 $ 2,859 $ — $ 28,524
Reserve for sales returns 1,110 36,975 35,250 2,835
Allowance for inventory obsolescence 1,138 1,008 823 1,323
Allowance for doubtful accounts 650 976 876 750

Page

Part I.

Special Note Regarding Forward-Looking Statements

Item 1.1

Business

Item 2.1A

~~Properties~~Risk Factors

Item 3.1B

Unresolved Staff Comments

Submission of Matters to a Vote of Security Holders

Part II.

Item 5.5

Market for the ~~Registrant's~~Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Item 6.6

Selected Financial Data

Item 7.7

~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of ~~Operation~~Operations

Item ~~7A.~~7A

Quantitative and Qualitative Disclosures About Market Risk

Item 8.

Financial Statements and Supplementary Data

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A.

Controls and Procedures

Item 9B.

Other Information

Part III.

Item 10.

Directors and Executive Officers of the Registrant

Item 11.

Executive Compensation

Item 12.

Security Ownership of Certain Beneficial Owners and Management

Item 13.

Certain Relationships and Related Transactions

Item 14.

Principal Accounting Fees and Services

Part IV.

Item 15.

Exhibits, Financial Statement Schedules

Signatures

Financial Statements

F-1

Common
Stock Price

High

Low

High

Low

Year Ended December 31, 2002

Second Quarter (from May 30, 2002)

14.60

12.25

Third Quarter

14.55

5.40

Fourth Quarter

15.43

4.41

Year Ended December 31, 2003

First Quarter

18.11

9.74

Second Quarter

14.69

8.00

Third Quarter

17.24

10.47

Fourth Quarter

20.92

12.84

Year Ended December 31, 2004

First Quarter

34.84

16.32

Second Quarter

40.23

30.65

Third Quarter

38.27

27.88

Fourth Quarter

76.05

38.43

Year Ended December 31, 2005

First Quarter

65.94

41.75

Second Quarter

45.31

34.15

Third Quarter

46.87

36.44

Fourth Quarter

41.59

28.15

Second Quarter (from May 30, 2002)

14.60

12.25

Third Quarter

14.55

5.40

Fourth Quarter

15.43

4.41

Year Ended December 31, 2003

First Quarter

18.11

9.74

Second Quarter

14.69

8.00

Third Quarter

17.24

10.47

Fourth Quarter

20.92

12.84

Year Ended December 31, 2004

First Quarter

34.84

16.32

Second Quarter

40.23

30.65

Third Quarter

38.27

27.88

Fourth Quarter

76.05

38.43

Year ended December 31,

Year ended December 31,

2000

2001

2002

2003

2004

2001

2002

2003

2004

2005

(in thousands, except per share data)

Consolidated Statement of Operations Data:

Revenue

Direct revenue

24,656

36,038

79,405

138,134

213,210

Fulfillment partner revenue

867

3,965

12,379

100,811

281,425

Total revenue

25,523

40,003

91,784

238,945

494,635

Direct revenue

36,038

79,405

138,134

213,210

324,875

Fulfillment partner revenue

3,965

12,379

100,811

281,425

478,947

Total revenue

40,003

91,784

238,945

494,635

803,822

Cost of goods sold

Direct

27,431

33,497

70,686

124,302

185,390

Fulfillment partner

381

1,143

2,755

89,190

243,468

Total cost of goods sold

27,812

34,640

73,441

213,492

428,858

Gross profit (loss)

(2,289

)

5,363

18,343

25,453

65,777

Direct

33,378

70,445

123,963

184,928

282,377

Fulfillment partner

1,143

2,755

89,190

243,468

400,889

Total cost of goods sold

34,521

73,200

213,153

428,396

683,266

Gross profit

5,482

18,584

25,792

66,239

120,556

Operating expenses:

Sales and marketing expenses

11,376

5,784

8,669

20,173

40,533

General and administrative expenses

7,556

9,441

10,825

16,911

30,235

Amortization of goodwill

226

3,056

—

Amortization of stock-based compensation

—

649

2,903

756

360

Total operating expenses

19,158

18,930

22,397

37,840

71,128

Sales and marketing expenses

5,784

8,669

20,173

40,533

79,651

Technology

1,886

1,922

2,424

8,449

28,132

General and administrative expenses

7,555

8,903

14,487

21,786

36,495

Amortization of stock-based compensation

649

2,903

756

360

Amortization of goodwill

3,056

—

Total operating expenses

18,930

22,397

37,840

71,128

144,350

Operating loss

(21,447

)

(13,567

)

(4,054

)

(12,387

)

(5,351

)

(13,448

)

(3,813

)

(12,048

)

(4,889

)

(23,794

)

Interest income

241

461

403

461

1,173

Interest income, net

461

403

461

1,173

(270

)

Interest expense

(73

)

(729

)

(465

)

(76

)

(775

)

(729

)

(465

)

(76

)

(775

)

(5,582

)

Other income (expense), net

(33

)

(444

)

115

(49

)

(444

)

115

(49

)

4,728

Net loss

(21,312

)

(13,806

)

(4,560

)

(11,887

)

(5,002

)

(13,687

)

(4,319

)

(11,548

)

(4,540

)

(24,918

)

Deemed dividend related to redeemable common stock

(210

)

(404

)

(406

)

(262

)

(188

)

(404

)

(406

)

(262

)

(188

)

(185

)

Deemed dividend related to beneficial conversion feature of preferred stock

—

(6,607

)

—

(6,607

)

—

Net loss attributable to common shares

(21,522

)

(14,210

)

(11,573

)

(12,149

)

(5,190

)

(14,091

)

(11,332

)

(11,810

)

(4,728

)

(25,103

)

Net loss per common share—basic and diluted

(3.63

)

(1.29

)

(0.88

)

(0.75

)

(0.29

)

(1.28

)

(0.86

)

(0.73

)

(0.26

)

(1.29

)

Weighted average common shares outstanding—basic and diluted

5,922

10,998

13,108

16,198

17,846

10,998

13,108

16,198

17,846

19,429

As of December 31,

2000

2001

2002

2003

2004

(in thousands)

Balance Sheet Data:

Cash and cash equivalents

8,348

3,729

11,059

28,846

198,678

Marketable securities

—

21,603

11,500

88,802

Working capital

6,440

3,071

35,679

45,284

266,668

Total assets

30,401

21,714

63,956

97,732

376,264

Total indebtedness

3,591

4,677

182

161

117,589

Redeemable common stock

4,930

5,284

4,363

2,978

3,166

Stockholders' equity

12,349

5,980

39,271

54,914

168,532

Year ended December 31,

Year ended December 31,

2002

2003

2004

2003

2004

2005

Total revenue

91,784

100

238,945

100

494,635

100

238,945

100

494,635

100

803,822

100

Cost of goods sold

Product costs and other cost of goods sold

64,068

193,190

394,580

Fulfillment costs

9,373

20,302

34,278

Total cost of goods sold

73,441

213,492

428,858

Product costs and other cost of goods sold

192,851

394,118

623,335

Fulfillment costs

20,302

34,278

59,931

Total cost of goods sold

213,153

428,396

683,266

Gross profit

18,343

25,453

65,777

25,792

66,239

120,556

Year ended December 31,

2002

2003

2004

(as a percentage of
total revenue)

Revenue

Direct revenue

86.5

57.8

43.1

Fulfillment partner revenue

13.5

42.2

56.9

Total revenue

100.0

Cost of goods sold

Direct

77.0

52.0

37.5

Fulfillment partner

3.0

37.3

49.2

Total cost of goods sold

80.0

89.3

86.7

Gross profit

20.0

10.7

13.3

Operating expenses:

Sales and marketing expenses

9.4

8.4

8.2

General and administrative expenses

11.8

7.1

6.1

Amortization of stock-based compensation

3.2

0.3

0.1

Total operating expenses

24.4

15.8

14.4

Operating loss

(4.4

)

(5.1

)

(1.1

)

Interest income

0.4

0.2

Interest expense

(0.5

)

(0.0

)

(0.1

)

Other income (expense), net

(0.5

)

0.0

Net loss

(5.0

(4.9

(1.0

Three Months Ended

Three Months Ended

Mar. 31,
2003

June 30,
2003

Sept. 30,
2003

Dec. 31,
2003

Mar. 31,
2004

June 30,
2004

Sept. 30,
2004

Dec. 31,
2004

Mar. 31,
2004

June 30,
2004

Sept. 30,
2004

Dec. 31,
2004

Mar. 31,
2005

June 30,
2005

Sept. 30,
2005

Dec. 31,
2005

(in thousands, except per share data)

Consolidated Statement of Operations Data:

Revenue

Direct revenue

25,198

25,402

29,284

58,250

38,580

41,113

43,928

89,589

Fulfillment partner revenue

3,966

3,431

28,504

64,910

43,498

46,679

59,516

131,732

Total revenue

29,164

28,833

57,788

123,160

82,078

87,792

103,444

221,321

Direct revenue

38,580

41,113

43,928

89,589

67,884

60,064

68,449

128,478

Fulfillment partner revenue

43,498

46,679

59,516

131,732

97,997

90,574

100,874

189,502

Total revenue

82,078

87,792

103,444

221,321

165,881

150,638

169,323

317,980

Cost of goods sold

Direct

23,484

23,014

26,674

51,130

34,816

36,786

38,594

75,194

Fulfillment partner

1,055

1,016

26,863

60,256

38,793

41,114

51,103

112,458

Total cost of goods sold

24,539

24,030

53,537

111,386

73,609

77,900

89,697

187,652

Direct

34,859

36,645

38,491

74,933

58,260

51,562

59,170

113,385

Fulfillment partner

38,793

41,114

51,103

112,458

82,857

76,375

83,589

158,068

Total cost of goods sold

73,652

77,759

89,594

187,391

141,117

127,937

142,759

271,453

Gross profit

4,625

4,803

4,251

11,774

8,469

9,892

13,747

33,669

8,426

10,033

13,850

33,930

24,764

22,701

26,564

46,527

Operating expenses:

Sales and marketing expenses

3,848

2,572

3,855

9,898

4,377

6,605

9,398

20,153

General and administrative expenses

4,545

3,367

4,059

4,940

6,251

5,567

7,376

11,041

Amortization of stock-based compensation

328

112

171

145

135

123

Total operating expenses

8,721

6,051

8,085

14,983

10,763

12,295

16,792

31,278

Sales and marketing expenses

4,377

6,605

9,398

20,153

16,825

14,495

17,960

30,371

Technology

1,371

1,830

2,267

2,980

4,095

6,094

8,082

9,861

General and administrative expenses

4,880

3,737

��

5,109

8,061

7,333

7,531

9,989

11,642

Amortization of stock-based compensation

135

123

)

Total operating expenses

10,763

12,295

16,792

31,278

28,273

28,173

36,023

51,881

Operating income (loss)

(4,096

)

(1,248

)

(3,834

)

(3,209

)

(2,294

)

(2,403

)

(3,045

)

2,391

(2,337

)

(2,262

)

(2,942

)

2,652

(3,509

)

(5,472

)

(9,459

)

(5,354

)

Interest income

152

142

127

168

780

Interest income, net

127

168

780

644

896

(1,690

)

(120

)

Interest expense

)

(55

)

(16

)

(46

)

(77

)

(636

)

(16

)

(46

)

(77

)

(636

)

(1,445

)

(1,517

)

(1,264

)

(1,356

)

Other income (expense), net

—

(54

)

—

(54

)

—

4,170

547

Net income (loss)

(3,941

)

(1,136

)

(3,665

)

(3,145

)

(2,210

)

(2,322

)

(2,951

)

2,481

(2,253

)

(2,181

)

(2,848

)

2,742

(4,310

)

(1,923

)

(12,402

)

(6,283

)

Deemed dividend related to redeemable common stock

(77

)

(78

)

(58

)

(49

)

(48

)

(46

)

(47

)

(47

)

(48

)

(46

)

(47

)

(47

)

(46

)

(47

)

(47

)

(45

)

Net income (loss) attributable to common shares

(4,018

)

(1,214

)

(3,723

)

(3,194

)

(2,258

)

(2,368

)

(2,998

)

2,434

(2,301

)

(2,227

)

(2,895

)

2,695

(4,356

)

(1,970

)

(12,449

)

(6,328

)

Net income (loss) per common share

—basic

(0.26

)

(0.07

)

(0.23

)

(0.19

)

(0.14

)

(0.13

)

(0.16

)

0.13

—diluted

(0.26

)

(0.07

)

(0.23

)

(0.19

)

(0.14

)

(0.13

)

(0.16

)

0.12

—basic

(0.14

)

(0.13

)

(0.16

)

0.14

(0.22

)

(0.10

)

(0.66

)

(0.33

)

—diluted

(0.14

)

(0.13

)

(0.16

)

0.13

(0.22

)

(0.10

)

(0.66

)

(0.33

)

Weighted average common shares outstanding

—basic

15,486

16,384

16,419

16,473

16,646

17,577

18,284

19,016

—diluted

15,486

16,384

16,419

16,473

16,646

17,577

18,284

20,780

—basic

16,646

17,577

18,284

19,016

19,862

19,709

18,844

19,311

—diluted

16,646

17,577

18,284

20,780

19,862

19,709

18,844

19,311

Three Months Ended

Mar. 31,
2003

June 30,
2003

Sept. 30,
2003

Dec. 31,
2003

Mar. 31,
2004

June 30,
2004

Sept. 30,
2004

Dec. 31,
2004

Additional Operating Data(1):

Gross bookings (in thousands)(2)

52,270

51,315

61,018

130,155

93,412

96,627

114,381

237,021

Number of orders(3)

491,000

522,000

643,000

1,376,000

1,126,000

1,023,000

1,178,000

2,440,000

Number of new B2C customers(4)

264,000

283,000

342,000

744,000

425,000

414,000

514,000

1,110,000

Average customer acquisition cost(5)

14.06

8.69

10.97

13.19

10.24

15.88

18.30

18.15

Three Months Ended

Mar. 31,
2003

June 30,
2003

Sept. 30,
2003

Dec. 31,
2003

Mar. 31,
2004

June 30,
2004

Sept. 30,
2004

Dec. 31,
2004

(as a percentage of total revenue)

Revenue

Direct revenue

86.4

88.1

50.7

47.3

47.0

46.8

42.5

40.5

Fulfillment partner revenue

13.6

11.9

49.3

52.7

53.0

53.2

57.5

59.5

Total revenue

100.0

Cost of goods sold

Direct

80.5

79.8

46.2

41.5

42.4

41.9

37.3

34.0

Fulfillment partner

3.6

3.5

46.4

48.9

47.3

46.8

49.4

50.8

Total cost of goods sold

84.1

83.3

92.6

90.4

89.7

88.7

86.7

84.8

Gross profit

15.9

16.7

7.4

9.6

10.3

11.3

13.3

15.2

Operating expenses:

Sales and marketing expenses

13.2

8.9

6.7

8.0

5.3

7.5

9.1

General and administrative expenses

15.6

11.7

7.0

4.1

7.6

6.4

7.1

5.0

Amortization of stock-based compensation

1.1

0.4

0.3

0.1

0.2

0.1

0.0

Total operating expenses

29.9

21.0

14.0

12.2

13.1

14.0

16.2

14.1

Operating income (loss)

(14.0

)

(4.3

)

(6.6

)

(2.6

)

(2.8

)

(2.7

)

(2.9

)

1.1

Interest income

0.5

0.2

0.1

0.3

Interest expense

(0.0

)

(0.2

)

(0.0

)

(0.1

)

(0.0

)

(0.0

)

(0.1

)

(0.3

)

Other income (expense), net

0.0

0.1

0.0

(0.0

)

Net income (loss)

(13.5

(3.9

(6.3

(2.6

(2.7

(2.6

(2.9

1.1

Payments Due by Period
(in thousands)

Contractual Obligations

Total

Less than 1
Year

1-3 Years

4-5 Years

After 5
years

Long-term debt arrangements

120,000

—

120,000

Interest on convertible senior notes

31,588

4,588

9,000

Capital lease obligations

1,420

632

781

—

Operating leases

50,665

4,099

10,222

10,023

26,321

Purchase obligations

7,519

—

Total contractual cash obligations

211,192

16,838

19,973

19,030

155,351

Amounts of Commitment Expiration Per Period
(in thousands)

Other Commercial Commitments

Total
Amounts
Committed

Less than
Year 1

1-3 Years

4-5 Years

Over 5
years

Letters of credit

8,225

—

Redeemable common stock

3,166

141

3,025

—

Total commercial commitments

11,391

8,366

3,025

—

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		First Quarter		Second Quarter		Third Quarter		Fourth Quarter
2005		$	165,881		$	150,638		$	169,323		$	317,980
2004	$	82,078		$	87,792		$	103,444		$	221,321		82,078		87,792		103,444	221,321
2003	29,164		28,833		57,788	*		123,160		29,164		28,833		57,788	*	123,160
2002	12,067		14,380		23,808		41,529		12,067		14,380		23,808		41,529
2001	9,578		7,407		8,744		14,274		9,578		7,407		8,744		14,274
2000	2,257		3,795		4,339		15,132		2,257		3,795		4,339		15,132

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

2005

165,881

150,638

169,323

317,980

2004

82,078

87,792

103,444

221,321

82,078

87,792

103,444

221,321

2003

29,164

28,833

57,788

123,160

29,164

28,833

57,788

123,160

2002

12,067

14,380

23,808

41,529

12,067

14,380

23,808

41,529

2001

9,578

7,407

8,744

14,274

9,578

7,407

8,744

14,274

2000

2,257

3,795

4,339

15,132

2,257

3,795

4,339

15,132

Page

Report of Independent Registered Public Accounting Firm

F-2

Consolidated Balance Sheets

F-4

Consolidated Statements of Operations

F-5

Consolidated Statement of ~~Stockholders'~~Stockholders’ Equity and Comprehensive Income

F-6

Consolidated Statements of Cash Flows

F-7

Notes to Consolidated Financial Statements

F-8

Schedule II Valuation and Qualifying Accounts

F-31

		Exhibit Number	~~Exhibit Number~~	Description of Document
3.1	(a)	Amended and Restated Certificate of Incorporation.
3.2	(a)	Amended and Restated Bylaws.
4.1	(b)	Form of specimen common stock certificate.
4.2	(b)	Investor Rights Agreement, dated March 4, 2002.
10.1	(b)	Form of Indemnification Agreement between Overstock.com, Inc. and each of its directors and officers.
10.2	(b)	Amended and Restated 1999 Stock Option Plan and form of agreements thereunder.
10.3	(b)	2001 Stock Purchase Plan and form of agreements thereunder.
10.4	(b)	Gear.com, Inc. Restated 1998 Stock Option Plan and form of agreements thereunder.
10.5		Form of agreements under 2002 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.5 to our Registration Statement on Form S-1 (File No. ~~333- 83728)~~333-83728), which became effective on May 29, 2002).
10.6	(b)	Agreement and Plan of Merger dated November 3, 2000 by and between Overstock.com, Inc. and Gear.com, Inc.
10.7		Lease Agreement dated January 23, 2002 between Overstock.com, Inc. and Holladay Building East L.L.C. (incorporated by reference to Exhibit 10.8 to our Registration Statement on Form S-1 (File No. ~~333- 83728)~~333-83728), which became effective on May 29, 2002).
10.8		Lease Agreement dated November 27, 2001 between Overstock.com and Holladay Building East L.L.C. (incorporated by reference to Exhibit 10.9 to our Registration Statement on Form S-1 (File No. ~~333- 83728)~~333-83728), which became effective on May 29, 2002).
10.9		First Lease Extension Agreement dated January 25, 2002 by and between Overstock.com, Inc. and Holladay Building East L.L.C (incorporated by reference to Exhibit 10.10 to our Registration Statement on Form S-1 (File No. ~~333- 83728)~~333-83728), which became effective on May 29, 2002).
10.10		Lease Agreement by and between Overstock.com, Inc. and Marvin L. Oates Trust dated March 15, 2000 (incorporated by reference to Exhibit 10.12 to our Registration Statement on Form S-1 (File No. ~~333- 83728)~~333-83728), which became effective on May 29, 2002).
10.11		Severance Package Agreement with Douglas Greene dated June 17, 1999 (incorporated by reference to Exhibit 10.13 to our Registration Statement on Form S-1 (File No. ~~333- 83728)~~333-83728), which became effective on May 29, 2002).
10.12		Intellectual Property Assignment Agreement with Douglas Greene dated February 28, 2002 (incorporated by reference to Exhibit 10.14 to our Registration Statement on Form S-1 (File No. ~~333- 83728)~~333-83728), which became effective on May 29, 2002).

Exhibit
Number

~~Exhibit Number~~

Description of Document

3.1

(a)

Amended and Restated Certificate of Incorporation.

3.2

(a)

Amended and Restated Bylaws.

4.1

(b)

Form of specimen common stock certificate.

4.2

(b)

Investor Rights Agreement, dated March 4, 2002.

10.1

(b)

Form of Indemnification Agreement between Overstock.com, Inc. and each of its directors and officers.

10.2

(b)

Amended and Restated 1999 Stock Option Plan and form of agreements thereunder.

10.3

(b)

2001 Stock Purchase Plan and form of agreements thereunder.

10.4

(b)

Gear.com, Inc. Restated 1998 Stock Option Plan and form of agreements thereunder.

10.5

Form of agreements under 2002 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.5 to our Registration Statement on Form S-1 (File No. ~~333- 83728)~~333-83728), which became effective on May 29, 2002).

10.6

(b)

Agreement and Plan of Merger dated November 3, 2000 by and between Overstock.com, Inc. and Gear.com, Inc.

10.7

Lease Agreement dated January 23, 2002 between Overstock.com, Inc. and Holladay Building East L.L.C. (incorporated by reference to Exhibit 10.8 to our Registration Statement on Form S-1 (File No. ~~333- 83728)~~333-83728), which became effective on May 29, 2002).

10.8

Lease Agreement dated November 27, 2001 between Overstock.com and Holladay Building East L.L.C. (incorporated by reference to Exhibit 10.9 to our Registration Statement on Form S-1 (File No. ~~333- 83728)~~333-83728), which became effective on May 29, 2002).

10.9

First Lease Extension Agreement dated January 25, 2002 by and between Overstock.com, Inc. and Holladay Building East L.L.C (incorporated by reference to Exhibit 10.10 to our Registration Statement on Form S-1 (File No. ~~333- 83728)~~333-83728), which became effective on May 29, 2002).

10.10

Lease Agreement by and between Overstock.com, Inc. and Marvin L. Oates Trust dated March 15, 2000 (incorporated by reference to Exhibit 10.12 to our Registration Statement on Form S-1 (File No. ~~333- 83728)~~333-83728), which became effective on May 29, 2002).

10.11

Severance Package Agreement with Douglas Greene dated June 17, 1999 (incorporated by reference to Exhibit 10.13 to our Registration Statement on Form S-1 (File No. ~~333- 83728)~~333-83728), which became effective on May 29, 2002).

10.12

Intellectual Property Assignment Agreement with Douglas Greene dated February 28, 2002 (incorporated by reference to Exhibit 10.14 to our Registration Statement on Form S-1 (File No. ~~333- 83728)~~333-83728), which became effective on May 29, 2002).

Signature

Title

Date

/s/ PATRICK M. BYRNE

President (Principal Executive Officer)

March 16, 2006

Patrick M. Byrne

~~President and Chairman of the Board (Principal Executive Officer)~~

~~March 15, 2005~~

/s/ DAVID K. CHIDESTER

~~David K. Chidester~~

Senior Vice President, Finance (Principal

March 16, 2006

David K. Chidester

Financial Officer and Principal
Accounting Officer)

~~March 15, 2005~~

/s/ GORDON S. MACKLIN

Director

March 16, 2006

Gordon S. Macklin

~~Director~~

~~March 15, 2005~~

/s/ ALLISON H. ABRAHAM

Director

March 16, 2006

Allison H. Abraham

~~Director~~

~~March 15, 2005~~

/s/ JOHN A. FISHER

Director

March 16, 2006

John A. Fisher

~~Director~~

~~March 15, 2005~~

/s/ JACK J. BYRNE

Director (Chairman of the Board)

March 16, 2006

Jack J. Byrne

~~Director~~

/s/ JASON C. LINDSEY

Director

March ~~15, 2005~~16, 2006

Jason C. Lindsey

/s/ RAY GROVES

Director

March 16, 2006

Ray Groves

(Mark One)
ýx		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended December 31, ~~2004~~2005
		OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
~~For the transition period from to~~

Delaware		87-0634302
(State or other jurisdiction of		Identification Number)
incorporation or organization)		~~87-0634302~~ (I.R.S. Employer ~~Identification Number)~~
~~6322~~6350 South 3000 East ~~Suite 100~~
Salt Lake City, Utah 84121
(Address of principal executive offices including zip code)
~~(801) 947-3100~~ ~~(Registrant's telephone number, including area code)~~
~~Securities registered pursuant to Section 12(b) of the Act:None~~ ~~Securities registered pursuant to Section 12(g) of the Act:~~ ~~Common Stock, $0.0001 par value~~ ~~(title of class)~~

Anne Klein	Mai	RCA
AOL Time Warner	~~Mai~~ Meyer Corporation	~~Random House~~ Samsonite
Bissell	~~Meyer Corporation~~ Movado	~~RCA~~ Seiko
Blue Ridge Home Fashions	~~Movado~~ Novica	~~Samsonite~~
~~Cuisinart~~	~~Nicole Miller~~	~~Seiko~~
~~Fuji~~	~~Novica~~	Simon & Schuster
~~Hewlett-Packard~~ Fuji	Linon Home ~~Decor~~Décor	Sony
~~Kelty~~ Hewlett-Packard	Panasonic	Swiss Army
Hoover	Philips	Vera Wang
Kenneth Cole	~~Philips~~ Random House	~~Vera Wang~~ Zegna

Apparel ~~Shoes~~	Home & ~~Accessories~~	~~Gifts & Flowers~~Garden
~~Books, Music~~ Electronics & ~~Videos~~Computers	Jewelry & Watches
~~Electronics & Computers~~ Gifts	~~Recreation & Sports~~ Sporting Goods
~~Home~~ Health & ~~Garden~~Wellness	Worldstock ~~Handcrafted~~

Audio & Video		Home Office Equipment
Cameras & Optics		Computers & Printers
Telephones

Computers		Drives & Storage
Ink Cartridges		Monitors
Networking		PDAs & Handhelds
Peripherals		Printers & Scanners
Upgrades

	As of December 31,
	2001		2002		2003		2004		2005
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	3,729	$	11,059	$	28,846	$	198,678	$	56,224
Marketable securities	—		21,603		11,500		88,802		55,799
Working capital	3,308		36,157		46,101		267,947		80,162
Total assets	21,951		64,434		98,549		377,543		325,913
Total indebtedness	4,677		182		161		117,589		84,676
Redeemable common stock	5,284		4,363		2,978		3,166		3,205
Stockholders’ equity	6,217		39,749		55,731		169,811		89,749

	Years ended December 31,
	2003		2004		2005
	(as a percentage of total revenue)
Revenue
Direct revenue	57.8	%	43.1	%	40.4	%
Fulfillment partner revenue	42.2		56.9		59.6
Total revenue	100.0		100.0		100.0
Cost of goods sold
Direct	51.9		37.4		35.1
Fulfillment partner	37.3		49.2		49.9
Total cost of goods sold	89.2		86.6		85.0
Gross profit	10.8		13.4		15.0
Operating expenses:
Sales and marketing expenses	8.4		8.2		10.0
Technology	1.0		1.7		3.5
General and administrative expenses	6.1		4.4		4.5
Amortization of stock-based compensation	0.3		0.1		0.0
Total operating expenses	15.8		14.4		18.0
Operating loss	(5.0	)	(1.0	)	(3.0	)
Interest income, net	0.2		0.2		0.0
Interest expense	(0.0	)	(0.1	)	(0.7	)
Other income (expense), net	0.0		0.0		0.6
Net loss	(4.8	)%	(0.9	)%	(3.1	)%

	Payments Due by Period (in thousands)
Contractual Obligations	Total		Less than 1 Year			1-3 Years		4-5 Years		After 5 years
Long-term debt arrangements	$	74,935		$	—	$	—	$	—	$	74,935
Interest on convertible senior notes	17,325			2,888		5,775		5,775		2,887
Capital lease obligations	10,520			7,249		3,271		—		—
Operating leases	71,460			6,035		13,746		15,513		36,166
Purchase obligations	37,022			37,022		—		—		—
Total contractual cash obligations	$	211,262		$	53,194	$	22,792	$	21,288	$	113,988

/s/PATRICK M. BYRNE		/s/ DAVID K. CHIDESTER
Patrick M. Byrne President (principal executive officer)		David K. Chidester Senior Vice President, Finance (principal financial officer)

10.13		Amendment No. 1, dated April 29, 2002 to Intellectual Property Assignment Agreement dated February 28, 2002 by and between Overstock.com, Inc. and Douglas Greene. (incorporated by reference to Exhibit 10.18 to our Registration Statement on Form S-1 (File No. ~~333- 83728)~~333-83728), which became effective on May 29, 2002).
10.14		Form of Warrant to purchase Overstock.com, Inc. common stock. (incorporated by reference to Exhibit 10.20 to our Registration Statement on Form S-1 (File No. ~~333- 83728)~~333-83728), which became effective on May 29, 2002).
10.15		Lease Amendment #1 by and between Overstock.com, Inc. and Marvin L. Oates Trust, dated August 28, 2000. (incorporated by reference to Exhibit 10.22 to our Registration Statement on Form S-1 (File No. ~~333- 102763)~~333-102763), which became effective on February 12, 2003).
10.16		Commencement of Lease Amendment #1 by and between Overstock.com, Inc. and Marvin L. Oates Trust, dated October 25, 2000 (incorporated by reference to Exhibit 10.23 to our Registration Statement on Form S-1 (File No. ~~333- 102763)~~333-102763), which became effective on February 12, 2003).
10.17		Lease Amendment #2 by and between Overstock.com, Inc. and Marvin L. Oates Trust, dated November 12, 2001.(incorporated by reference to Exhibit 10.24 to our Registration Statement on Form S-1 (File No. ~~333- 102763)~~333-102763), which became effective on February 12, 2003).
10.18		Lease Amendment #3 by and between Overstock.com, Inc. and Marvin L. Oates Trust, dated July 23, 2002.(incorporated by reference to Exhibit 10.25 to our Registration Statement on Form S-1 (File No. ~~333- 102763)~~333-102763), which became effective on February 12, 2003).
10.19		Lease Amendment #4 by and between Overstock.com, Inc. and Marvin L. Oates Trust, dated August 19, 2002.(incorporated by reference to Exhibit 10.26 to our Registration Statement on Form S-1 (File No. ~~333- 102763)~~333-102763), which became effective on February 12, 2003).
10.20		Lease Amendment #5 by and between Overstock.com, Inc. and Marvin L. Oates Trust, dated October 11, 2002.(incorporated by reference to Exhibit 10.27 to our Registration Statement on Form S-1 (File No. ~~333- 102763)~~333-102763), which became effective on February 12, 2003).
10.21		Lease Amendment #6 by and between Overstock.com, Inc. and Marvin L. Oates Trust, dated December 23, 2002.(incorporated by reference to Exhibit 10.28 to our Registration Statement on Form S-1 (File No. ~~333- 102763)~~333-102763), which became effective on February 12, 2003).
10.22		Old Mill Corporate Center First Amendment to the Lease Agreement by and between Overstock.com, Inc. and Holladay Building East L.L.C., dated September 1, 2002.(incorporated by reference to Exhibit 10.29 to our Registration Statement on Form S-1 (File No. 333-102763), which became effective on February 12, 2003).
10.23		Credit Agreement dated February 13, 2004 between Overstock.com, Inc. and Wells Fargo Bank National Association (incorporated by reference to Exhibit 10.31 to our Annual Report on Form 10-K for the year ended December 31, 2003 filed on February 24, 2004).

10.24		Amendment to Credit Agreement by and between Overstock.com, Inc., and Wells Fargo Bank, National Association dated December 22, 2004. (incorporated by reference to Exhibit 99.1 to our Report on Form 8-K filed on December 27, 2004).
10.25		Term sheet executed February 18, 2005 with Lehman Brothers OTC Derivatives Inc.(incorporated by reference to Exhibit 99.1 to our Report on Form 8-K filed on February 24, 2005).
10.26		Tenant Improvement Agreement by and between Overstock.com, Inc. and old Mill Corporate Center III, LLC entered on February 11, 2005 (incorporated by reference to Exhibit 99.1 to our Report on Form 8-K filed on February 11, 2005).
10.27		Sublease Agreement by and between Overstock.com, Inc., Old Mill Technology Center, LLC, and Old Mill Building LLC. (incorporated by reference to Exhibit 99.1 to our Report on Form 8-K/A filed on December 7, 2004).
10.28		Sublease Agreement by and between Overstock.com, Inc., Document Controls Systems, Inc., and Old Mill Building LLC.(incorporated by reference to Exhibit 99.2 to our Report on Form 8-K/A filed on December 7, 2004).
10.29		Sublease Agreement by and between Overstock.com, Inc., Information Technology International, Inc., and Old Mill Building LLC. (incorporated by reference to Exhibit 99.3 to our Report on Form 8-K/A filed on December 7, 2004).
10.30		Old Mill Corporate Center Fourth Amendment to the Lease Agreement. (incorporated by reference to Exhibit 99.4 to our Report on Form 8-K/A filed on December 7, 2004).
10.31		Co-location Center Agreement. (incorporated by reference to Exhibit 99.5 to our Report on Form 8-K/A filed on December 7, 2004).
10.32		Indenture, dated November 23, 2004, between Overstock.com, Inc. and Wells Fargo Bank, N.A., as trustee. (incorporated by reference to Exhibit 10.1 to our Report on Form 8-K filed on November 24, 2004).
10.33		Registration Rights Agreement, dated November 23, 2004 by and among Overstock.com, Inc., Lehman Brothers., Piper Jaffray & Co., Legg Mason Wood Walker Incorporated and WR Hambrecht + Co, LLC (incorporated by reference to Exhibit 10.2 to our Report on Form 8-K filed on November 24, 2004).
10.34		Purchase Agreement dated November 17, 2004 with Lehman Brothers Inc. as Representative (incorporated by reference to Exhibit 10.34 to our report on Form 10-K for the year ended December 31, 2004 filed on March 16, 2005).
10.35		Underwriting Agreement dated November 17, 2004 with Lehman Brothers Inc. as Representative (incorporated by reference to Exhibit 1.1 to our Report on Form 8-K filed on November 18, 2004)
10.36		Underwriting Agreement dated May 13, 2004 with WR Hambrecht & Co., LLC and JMP Securities LLC. as Representatives (incorporated by reference to Exhibit 1.1 to our Report on Form 8-K filed on May 14, 2004
10.37		2002 Stock Option Plan, as amended (incorporated by reference to Exhibit 99.6 to our Report on Form 8-K filed May 7, 2004)
10.38	(c)	Summary of Compensation Arrangements Applicable to Named Executive Officers.
10.39	(c)	Summary of Compensation Arrangements Applicable to Non-employee Directors.

10.40		2005 Equity Incentive Plan (incorporated by reference to Appendix B to Overstock.com, Inc.’s definitive proxy statement filed with the SEC on March 29, 2005.
21 10.41		Term sheet executed March 14, 2005 with IXIS Derivatives Inc. (incorporated by reference to Exhibit 99.1 to our Report on Form 8-K filed on March 16, 2005)
10.42		Stock Purchase Agreement dated June 24, 2005 with Ski West, Inc. and its shareholders (incorporated by reference to Exhibit 99.1 to our Form 8-K filed on June 24, 2005)
10.43		Letter of Intent dated June 20, 2005 with Ski West, Inc. and certain of its shareholders (incorporated by reference to Exhibit 99.2 to our Form 8-K filed on June 24, 2005)
10.44		Fifth Amendment dated June 21, 2005 to Credit Agreement with Wells Fargo Bank, National Association (incorporated by reference to Exhibit 99.1 to our Form 8-K filed on June 27, 2005)
10.45		First Modification dated June 21, 2005 to Promissory Note payable to Wells Fargo Bank, National Association (incorporated by reference to Exhibit 99.2 to our Form 8-K filed on June 27, 2005)
10.46		Colocation Center Agreement dated July 1, 2005 between OMTek, LLC and Overstock.com, Inc. (incorporated by reference to Exhibit 99.1 to our Form 8-K filed on July 7, 2005)
10.47		Sixth Amendment dated October 18, 2005 to Credit Agreement with Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on October 21, 2005)
10.48		Second Modification dated October 18, 2005 to Promissory Note payable to Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.2 to our Form 8-K filed on October 21, 2005)
10.49		Loan and Security Agreement dated as of December 12, 2005 with Wells Fargo Retail Finance, LLC (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on December 12, 2005)
10.50		Revolving Credit Note dated as of December 12, 2005 relating to Loan and Security Agreement dated as of December 12, 2005 payable to Wells Fargo Retail Finance, LLC (incorporated by reference to Exhibit 10.2 to our Form 8-K filed on December 12, 2005)
10.51		Performance Share Plan adopted by the Compensation Committee and Board of Directors of Overstock.com, Inc. on January 23, 2006 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on January 23, 2006)
10.52		Form of Grant relating to Performance Share Plan adopted by the Compensation Committee and Board of Directors of Overstock.com, Inc. on January 23, 2006 (incorporated by reference to Exhibit 10.2 to our Form 8-K filed on January 23, 2006)
10.53		2006 Bonus Plan adopted by the Compensation Committee of the Board of Directors of Overstock.com, Inc. on January 23, 2006 (incorporated by reference to Exhibit 10.3 to our Form 8-K/A filed on January 31, 2006)

10.54		Amendment No. 1 dated March 1, 2006 to Stock Purchase Agreement with Ski West, Inc. and its shareholders (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on March 6, 2006)
21		Subsidiaries of the Registrant
23.1

~~23.1~~		Consent of Independent Registered Public Accounting Firm
24.1		Power of Attorney (see signature page)
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1		Section 1350 Certification of Chief Executive Officer
32.2		Section 1350 Certification of Chief Financial Officer