UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1


(Mark One)
ý
x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the fiscal year ended December 31, ~~2007~~2008
		OR
	OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

~~For the transition period from to~~

Commission file number 000-49799

OVERSTOCK.COM, INC.

(Exact name of Registrant as specified in its charter)

~~Delaware~~		~~87-0634302~~
Delaware (State or other jurisdiction of incorporation or organization)		87-0634302 (I.R.S. Employer Identification Number)

6350 South 3000 East

Salt Lake City, Utah 84121

(Address of principal executive offices including zip code)

(801) 947-3100

(~~Registrant’s~~Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:Common Stock, $0.0001 par value (title of class)

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ýx

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ýx

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of ~~“accelerated filer”~~"accelerated filer", ~~“large~~"large accelerated filer,”" and ~~“smaller~~"smaller reporting ~~company”~~company" in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer ýx	Non-accelerated filer o	~~Smaller reporting company~~ o
	(do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the act). Yes o No ýx

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of the last business day of the ~~registrant’s~~registrant's most recently completed second quarter (June 30, ~~2007)~~2008), was approximately ~~$160.4~~$245.5 million based upon the last sales price reported by NASDAQ. For purposes of this disclosure, shares of Common Stock held by persons who hold more than 5% of the outstanding shares of Common Stock and shares held by officers and directors of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination is not necessarily conclusive.

As of ~~March 14, 2008~~February 23, 2009 there were ~~22,712,522~~22,813,812 shares of the ~~registrant’s~~registrant's Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required by Part III of Form 10-K/A is incorporated by reference to the ~~Registrant’s~~Registrant's proxy statement for the ~~2008~~2009 Annual Stockholders Meeting, which will be filed with the Securities and Exchange ~~Commission.~~Commission within 120 days after the end of the fiscal year to which this Report relates.

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EXPLANATORY NOTE

~~EXPLANATORY NOTE~~

Overstock.com, Inc. ~~(the “Company”)~~ is ~~amending~~filing this Amendment No. 1 to its ~~Annual Report on~~ Form 10-K ~~(“Form 10-K” or “Original Filing”)~~ for the fiscal year ended December 31, 2008 (the "Form 10-K"), originally filed with the Securities and Exchange Commission on February 23, 2009, for the purpose of correcting the following typographical errors:

•

In the table of Quarterly Results of Operations (unaudited), appearing in Item 7, we have corrected "Fulfillment partner revenue" for the quarterly period ended June 30, 2008 to read $149,004 (in thousands) rather than $149,044 (in thousands) as originally reported;

•

In the table of Contractual Obligations appearing in Item 7, we have corrected the "Total contractual cash obligations" for 2009 to total $17,096 (in thousands) rather than $17,906 (in thousands) as originally reported;

•

In the Consolidated Balance Sheets appearing in Item 15, we have corrected "Total liabilities" for 2007 to ~~restate (1) its consolidated financial statements~~total $212,931 (in thousands) rather than $212,913 (in thousands) as originally reported;

•

In the Consolidated Statements of ~~December 31, 2007~~Cash Flows appearing in Item 15, we have corrected "Less change in cash and ~~2006 and~~cash equivalents from discontinued operations" for the years ended December 31, 2007, 2006 and 2005; (2) its selected financial data as of and for the years ended December 31, 2007, 2006, 2005, 2004 and 2003 and (3) its quarterly results of operations for all quarters in the years ended December 31, 2007 and 2006 to ~~correct errors related to the accounting~~be a positive $1,016 (in thousands) rather than a negative $(1,016) (in thousands) as originally reported.

•

In Schedule II, "Valuation and Qualifying Accounts" in Item 15, we have corrected "Deductions" for ~~customer refunds and credits and the accounting~~"Allowance for ~~gift cards issued to customers. This Amendment to Form 10-K (“Amendment”) amends the Annual Report on Form 10-K~~doubtful accounts" for ~~the year ended December 31,~~ 2007 ~~as filed on March 17, 2008.~~

The Company’s decision to restate the aforementioned financial information was made on October 20, 2008 as a result of management’s identification of errors related to the accounting for customer refunds and credits. Management subsequently determined that a portion of the error previously believed to be ~~related~~$855 (in thousands) rather than $0 as originally reported and we have corrected "Allowance for sales returns" for 2008 to ~~the accounting for customer refunds and credits~~total $5,098 (in thousands) rather than $5,099 (in thousands) as originally reported.

We are also refiling exhibit 10.37, which was ~~actually related to the accounting for gift cards issued to customers.~~

~~As more fully described~~inadvertently filed in Note 3 of the financial statements (see Item 15 of Part IV, “Financial Statements (Restated)” – Note 3 – “Restatement of Financial Statements”) management, including our CEO (principal executive officer) and Senior Vice President, Finance (principal financial officer), concluded, and the Board of Directors agreed with management’s conclusions that:

The Company’s controls were not designed or operating effectively to ensure all refunds and credits issued to customers and gift cards issued to customers were completely and accurately recorded in the consolidated financial statements. These control failures impacted accounts receivable and deferred revenue in the consolidated balance sheetdraft form, as well as revenue and returns expense (a component of revenue), in the consolidated statement of operations. As a result, revenue, net of returns expense, was misstated in the consolidated statement of operations and accounts receivable and deferred revenue were misstated in the consolidated balance sheet as of and for the years ended December 31, 2007, 2006, 2005, and 2004 and the related interim periods. The amounts of these errors were determined to be material to the consolidated financial statements.

In addition, from the Company’s inception through the third quarter of 2007, the Company had recorded revenue based on product ship date. As disclosed the Annual Report on Form 10-K for the year ended December 31, 2007, the Company determined that it should not record revenue until product delivery date because risk of loss transfers to the customer upon delivery and acceptance. In the fourth quarter of 2007, the Company performed a detailed analysis of this error and determined that the impact of this error on any prior annual or interim period was not material and the impact of recording the cumulative effect of the error in the fourth quarter of 2007 was immaterial to the full year. Therefore, the Company recorded the cumulative effect of the error in the fourth quarter of 2007. As the Company is now restating its previously issued consolidated financial statements to correct accounting errors related to customer refunds and credits and gift cards issued to customers, it has reversed the cumulative effect of the correction of the error in the fourth quarter of 2007 and restated all prior periods to reflect revenue recognition based on the product’s estimated delivery date in its consolidated financial statements for the years ended December 31, 2007, 2006, 2005, 2004 and 2003 (see Item 15 of Part IV, “Financial Statements (Restated)” - Note 3 – “Restatement of Financial Statements”). The Company also recorded other miscellaneous adjustments as part of this restatement that were previously identified but determined to be immaterial.

In addition, the control failures described above constitute a material weakness in the Company’s internal control over financial reporting as of December 31, 2007 (see Item 9A of Part II, “Controls and Procedures (Restated)”).

Except as required to reflect the effects of the restatement for the items above, no additional modifications or updates in this Amendment have been made to the Original Filing on Form 10-K. Information not affected by the restatement remains unchanged and reflects the disclosures made at the time of the Original Filing. This amendment does not describe other events occurring after the original filing, including exhibits, or modify or update those disclosures affected by subsequent events. This Amendment should be read in conjunction with the Company’s filings made with the SEC subsequent to the filing of the Original Filing, as those filings may have been amended, as information in such reports and documents may update or supersede certain information contained in this Amendment. Accordingly, this Amendment only amends and restates Item 1 of Part I, Items 6,7,8, and 9A of Part II, and Item 15 of Part IV of the Original Filing, in each case, solely as a result of, and to reflect, the restatement, and no other information in the Original Filing is amended hereby. Additionally, pursuant to the rules of the SEC, Item 15 of Part IV of the Original Filing has been amended to contain currently dated certifications of the Chief Executive Officer and Senior Vice President, Finance. As required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, theupdated certifications of our Chief Executive Officer and ~~Senior Vice President, Finance, are attached to this Amendment~~Chief Financial Officer required by Rules 13a-14(a) and 13a-14(b) under the Securities Exchange Act of 1934.

Except as ~~Exhibits 31.1, 31.2, 32.1 and 32.2.~~described above, the information set forth in the Form 10-K/A has not been modified or updated in any way from the information included in the Form 10-K as originally filed.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K/A ~~contains~~and the documents incorporated herein by reference contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are therefore entitled to the protection of the safe harbor provisions of these laws. These forward-looking statements involve risks and uncertainties, and relate to future events or our future financial or operating performance. These statements include, but are not limited to, statements concerning:

•: the anticipated benefits and risks of our business relationships;
·
•: our ability to attract retail and business customers; our belief that we can attract customers in a cost-efficient manner; the ability of our online marketing campaigns to be a cost-effective method of attracting customers; our belief that we can internally develop cost-effective branding campaigns;
·
•: the anticipated benefits and risks associated with our business strategy;
·
•: our future operating results;
·
•: the anticipated size or trends of the market segments in which we compete and the anticipated competition in those markets;
·
•: potential government regulation;
·
•: our future capital requirements and our ability to satisfy our capital needs;
·~~our expansion in international markets;~~
·the potential for additional issuances of our securities;
·
•: our future ability to repurchase or retire our publicly traded debt;
•: our expansion in international markets;
•: our plans to devote substantial resources to our sales and marketing teams;
·

~~the possibility of future acquisitions of businesses, products or technologies;~~
·~~our belief that we can attract customers in a cost-efficient manner;~~
·
•: our strategy to develop strategic business relationships with additional wholesalers and distributors;
·our ~~strategy to reduce costs associated with our existing expense structure and the anticipated associated benefits;~~belief that manufacturers will recognize us as an efficient liquidation solution;
·
•: our belief that current or future litigation will likely not have a material adverse effect on our business;
·

~~the anticipated anti-takeover effects of certain provisions of our charter documents;~~
·~~the ability of our online marketing campaigns to be a cost-effective method of attracting customers;~~
·~~our belief that we can internally develop cost-effective branding campaigns;~~
·
•: the results of upgrades to our infrastructure and the likelihood that additional future upgrades can be implemented without disruption of our business;
·

~~our belief that manufacturers will recognize us as an efficient liquidation solution;~~
·
•: our belief that we can meet our published product shipping standards even during periods of relatively high sales activity;
·
•: our belief that we can maintain or improve upon customer service levels that we and our customers consider acceptable;
·
•: our belief that our information technology infrastructure can and will support our operations and will not suffer significant downtime;
·
•: the potential effects of our facilities consolidation and restructuring program and of the various actions we have taken in connection with that program;
·
•: the possibility that we will relocate our corporate offices;
4

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•

statements about our community site business and its anticipated functionality;

•

our belief that we can maintain inventory levels at appropriate levels despite the seasonal nature of our business; and

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•

our belief that we can successfully offer and sell a constantly changing mix of products and services.

Furthermore, in some cases, you can identify forward-looking statements by terminology such as may, will, could, should, expect, plan, intend, anticipate, believe, estimate, predict, potential or continue, the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider the risks outlined in this Form 10-K/A, including those described in Item 1A under the caption ~~“Risk~~"Risk Factors.”" These factors may cause our actual results to differ materially from those contemplated by any forward-looking statement. Except as otherwise required by law, we expressly disclaim any obligation to release publicly any update or revisions to any forward-looking statements to reflect any changes in our expectations or any change in events, conditions or circumstances on which any of our forward-looking statements are based. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

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PART I

ITEM 1. BUSINESS

The following description of our business contains forward-looking statements relating to future events or our future financial or operating performance that involve risks and uncertainties, as set forth above under ~~“Special~~"Special Note Regarding Forward-Looking Statements.”" Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in Section 1A under the heading ~~“Risk Factors”~~"Risk Factors" and elsewhere in this Form 10-K/A.

We are an online closeout retailer offering discount brand name merchandise, including bed-and-bath goods, home décor, kitchenware, watches, jewelry, electronics and computers, sporting goods, apparel, and designer accessories, among other products. We also sell books, magazines, CDs, DVDs, ~~videocassettes~~ and video games ~~(“BMMG”~~("BMMG"). We also operate as ~~part of~~a section on our Website an online auction site—a marketplace for the buying and selling of goods and services—as well as ~~an online site~~the section on our Website for listing cars and real estate for sale.

Our company, based in Salt Lake City, Utah, was founded in 1997, and we launched our first Website through which customers could purchase products in March 1999. Our Website offers our customers an opportunity to shop for bargains conveniently, while offering our suppliers an alternative inventory liquidation or sales channel. We continually add new, limited inventory products to our Website in order to create an atmosphere that encourages customers to visit frequently and purchase products before our inventory sells out. We offer approximately ~~63,000~~201,000 products under multiple departments under the Shopping section of our Website, and offer ~~almost 724,000~~approximately 450,000 additional media products in the Books etc. department on our Website.

Closeout merchandise is typically available in inconsistent quantities and prices and often is only available to consumers after it has been purchased and resold by disparate liquidation wholesalers. We believe that the traditional liquidation market is therefore characterized by fragmented supply and fragmented demand. We utilize the Internet to aggregate ~~both~~this fragmented supply and demand and create a more efficient market for liquidation merchandise. Our objective is to provide a one-stop discount shopping destination for products and services sold through the Internet.

As used herein, "Overstock.com," "we," "our" and similar terms include Overstock.com and its subsidiaries, unless the context indicates otherwise.

Industry Overview

Manufacturers and retailers traditionally hold inventory to buffer against uncertain demand within their normal, ~~“inline”~~"inline" sales channels. Inline sales channels are ~~manufacturers’~~manufacturers' primary distribution channels, which are characterized by regularly placed orders by established retailers at or near wholesale prices. In recent years, several dynamics have shifted inventory risk from retailers to manufacturers, including:

•: dominant retailers insist on just-in-time deliveries from manufacturers;
·
•: dominant retailers cancel orders mid-production and return unsold merchandise;
·
•: style, color or model changes quickly turn inventory into closeout merchandise;
·
•: incorrect estimates of consumer demand lead to overproduction; and
·
•: changes in a ~~retailer’s~~retailer's financial situation or strategy result in cancelled orders.

The disposal of excess, or overstock, inventory represents a substantial burden for many manufacturers, especially those who produce high-quality branded merchandise. Manufacturers seek to avoid liquidating through traditional retail channels where the ~~manufacturer’s~~manufacturer's discounted products may

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be sold alongside other full-price products. This can result in weaker pricing and decreased brand strength, and is known as channel conflict or sales channel pollution. As a result, many manufacturers turn to liquidation wholesalers and discount retailers. These liquidation channels provide manufacturers limited control of distribution and are, we believe, unreliable and expensive to manage when compared with their inline channels.

Despite the challenges manufacturers encountered ~~by manufacturers~~ in the liquidation market, the proliferation of outlet malls, wholesale clubs, and discount chains is evidence of the strong level of consumer demand for discount and closeout merchandise. However, consumers face several difficulties in shopping for ~~closeout and overstock~~this merchandise. For example, many traditional ~~merchandise~~ liquidation outlets are ~~located~~ in remote locations and have limited shopping hours, which we believe makes shopping burdensome and ~~infrequent for many consumers.~~inconvenient. In addition, in the ~~space available in a~~ traditional ~~merchandise~~ liquidation outlet there are space constrains limiting the number of products that ~~a traditional merchandise liquidation outlet~~ can ~~offer~~be offered at any given time.

~~However, we~~We also believe that the market for online liquidation is characterized by a limited number of competitors, some of which ~~utilize~~use an auction model to price their goods. Furthermore, we believe that many of the online companies that do offer overstock or liquidation merchandise are focused on single product lines.

Lastly, small retailers are under competitive pressure from large national retailers. Small retailers generally do not have purchasing leverage with manufacturers; consequently, they are more likely to pay full wholesale prices and are more likely to receive inferior service. We believe that small retailers generally do not have access to the liquidation market because liquidation wholesalers are most often interested in liquidating large volumes of merchandise, rather than the small quantities appropriate for small, local retailers.

In the fourth quarter 2008, we faced unusual competition from brick and mortar retailers seeking to liquidate inventory directly. The macroeconomic slowdown and discounting by brick and mortar retailers have mixed effects on us. The effects include increased price competition and cautious consumers, but also include opportunities for us to acquire inventory at unusually low prices.

The Overstock Solution

Overstock provides manufacturers with a one-stop liquidation channel to sell both large and small quantities of excess and closeout inventory without disrupting sales through traditional channels. Key advantages for manufacturers liquidating their excess inventory through Overstock include:

•

·Resolution of channel conflict. Channel conflicts arise when a ~~manufacturer’s~~manufacturer's excess inventory is sold through the same channel as their full-priced product offerings. Since excess inventory is usually sold at a discount, sales of the ~~manufacturer’s~~manufacturer's full-priced product offerings may be impacted as a consumer in a retail store may opt for the excess product or become confused by the pricing and model discrepancies. By using Overstock, manufacturers have an alternative and independent channel where they can sell excess inventory without the fear of hindering the sale of their full-priced products.

•

Single point of distribution. Manufacturers often use multiple liquidation sources to clear their excess inventory. Multiple sources create additional logistics issues that they would rather avoid. By using Overstock, manufacturers have a single source for the distribution of excess inventory.

•

Improved control of distribution. By using Overstock, manufacturers can monitor what kind of customer, whether individual consumer or small retailer, ultimately

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purchases their merchandise. In addition, a manufacturer can request that its products be offered in only one of our sales channels in order to avoid sales channel pollution.

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•: Improved transaction experience. By having a reliable inventory clearing channel, manufacturers are able to more quickly and easily dispense of their excess merchandise, raw materials or production capacity.

Overstock also offers consumers a compelling alternative for bargain shopping. Key advantages for consumers include:

•: ·High quality and broad product selection. Much of the merchandise offered on our Website is from well-known, brand-name manufacturers. In the Shopping section of our Website, we currently have approximately ~~63,000~~201,000 non-BMMG products and ~~almost 724,000~~approximately 450,000 BMMG products (books, magazines, CDs, DVDs, ~~video cassettes~~ and video games) in eight major departments.
·
•: Convenient access on a secure site. Our customers are able to access and purchase our products 24 hours a day from the convenience of their computer. We do not sell any personal information about our customer base to third parties.
·
•: Responsive customer service and positive shopping experience. Our team of customer service representatives assists customers by telephone, instant online chat and e-mail. Our customer service staff answers approximately ~~85%~~98% of phone calls within 3060 seconds, and responds to approximately ~~98%~~93% of e-mail messages within one business day. For our consumer business, we include a return shipment label in our ~~customer’s~~customer's shipment to facilitate product returns and, subject to certain conditions, we allow customers to return most purchased merchandise for a refund. In addition, we continually update and monitor our Website to enhance the shopping experience for our customers.

Our objective is to become the dominant Internet-based closeout solution for holders of brand-name merchandise, allowing them to dispose of that merchandise discreetly and with high recovery values, and to ultimately become a one-stop Internet-based discount shopping destination. We are pursuing this objective through the following key strategies:

•: ·Establish strong relationships with manufacturers and distributors. With the growth in the scale of our operations, we believe we are becoming an efficient liquidation channel for manufacturers and distributors. With scale comes the ability to buy in volume, and we believe manufacturers appreciate our ability to liquidate their products without disturbing their traditional channels. Generally, manufacturers do not want their product offerings sold as heavily discounted, closeout products in brick-and-mortar retailers, as is common today. We believe that as manufacturers learn of our capabilities, they will increasingly recognize the attractiveness of Overstock as an efficient liquidation solution.
·
•: Optimize inventory management through the use of technology. Our merchandise buyers are supported by proprietary software that provides information on product sales, margins and inventory levels. This technology enables us to make informed decisions and quickly change prices in an effort to maximize sales volume, gross profit and return on inventory capital.
·
•: Optimize online marketing initiatives through the use of technology. Our marketing team is supported by technologically advanced software supplied by third party vendors, as well as proprietary software that enhances the level of service provided to our customers and takes advantage of the unique characteristics of online distribution. ~~Our~~This software provides us immediate feedback on the effectiveness of various marketing campaigns, allowing us to optimize our online marketing expenditures.
·
•: Loyalty programs. We have a frequent ~~buyer’s~~buyer's club called Club O. Members of Club O pay an annual fee of ~~$29.95~~$19.95 and receive a 5% discount on non-BMMG products and free shipping, along with access to a special customer service hotline. Additionally, ~~in November 2005,~~ we partnered with Chase Card Services to launch an Overstock.com Co-Branded Rewards Visa credit card program,

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currently offering our customers a $30 store credit ~~(for existing Club O members) or a free Club O membership for one year (for non-Club O members)~~towards their next Overstock purchase and the opportunity to earn rewards certificates to redeem on our Website.

Our Business

We ~~utilize~~use the Internet to create a more efficient market for liquidation, closeout and other discount merchandise. We provide consumers and businesses with quick and convenient access to high-quality, brand-name merchandise at discount prices. Our shopping business (sales of product offered through the Shopping section of our Website) includes both a ~~“direct”~~"direct" business and a ~~“fulfillment partner”~~"fulfillment partner" business (see Item 15 of Part IV, ~~“Financial Statements (Restated)”~~"Financial Statements"—Note ~~24—“~~23—"Business ~~Segments”~~Segments"). Products from our direct segment and fulfillment partner segments (including products from various industry verticals, such as florist supplies, restaurant supplies, and office supplies) are also available in bulk to both consumers and businesses through the Wholesale product category on our Website. During the years ended December 31, ~~2005,~~ 2006, 2007, and ~~2007,~~2008, no single customer accounted for more than 1% of our total revenue.

Unless otherwise indicated or required by the context, the discussion herein of our financial statements, accounting policies and related matters, pertains to the Shopping section of our Website and not necessarily to the Auctions, Cars, Real Estate, or Community sections of our Website.

Direct business

Our direct business includes sales made to individual consumers and businesses, which are fulfilled from our warehouses in Salt Lake City, ~~Utah.~~Utah (see Item 2 of Part I, "Properties"). During the twelve months ended December 31, ~~2007,~~2008, we fulfilled approximately ~~25%~~21% of all orders through our warehouses. Our warehouses generally ship between 5,000 and 8,000 orders per day and up to approximately ~~34,000~~32,000 orders per day during peak periods, using overlapping daily shifts.

Fulfillment partner business

For our fulfillment partner business, we sell merchandise of other retailers, cataloguers or manufacturers (“("fulfillment ~~partners”~~partners") through our Website. We are considered to be the primary obligor for the majority of these sales transactions and record revenue from the majority of these sales transactions on a gross basis. Our use of the term ~~“partner”~~"partner" or ~~“fulfillment partner”~~"fulfillment partner" does not mean that we have formed any legal partnerships with any of our fulfillment partners. We currently have approximately 1,200 fulfillment ~~partner relationships with approximately 730 third parties that~~partners which post approximately ~~57,000~~196,000 non-BMMG products, as well as most of the BMMG products (found in the Books etc. department) on our Website.

Our revenue from sales from both the direct and fulfillment partner businesses is recorded net of returns, coupons and other discounts. During the third quarter, we updated our returns policy. For products other than computers, electronics and mattresses the returns policy provides for a full refund of the cost of the merchandise and all shipping charges if the product shipped is returned unopened within 30 days of delivery. If the product is returned after 30 days of delivery, is opened or shows signs of wear, the transaction may only be eligible for a partial refund. For items shipped from our Computers and Electronics department, returns must be initiated within 20 days of the purchase date and must be received in the original condition within 30 days of purchase. Computer and Electronics products returned opened or received at our warehouse after 30 days may only qualify for up to a 70 percent refund. Damaged or defective mattresses qualify for a full refund only if the items are refused at the time of delivery.

Seasonality

Both direct and fulfillment partner revenues are seasonal, with revenues historically being the highest in the fourth quarter, which ends December 31, reflecting higher consumer holiday spending. We anticipate this will continue in the foreseeable future.

~~For 2005, 2006 and 2007, the percentages of gross sales contributed by similar classes of products were as follows:~~

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Product class

2005

2006

2007

Home and garden(1)

41
%
42
%
44
%
Jewelry, watches, clothing and accessories

28
%
27
%
25
%
BMMG(2), electronics and computers

23
%
23
%
23
%
Other

8
%
8
%
8
%

Total

100
%
100
%
100
%

~~(1)~~~~Home and garden includes home décor, bedding, bath, furniture, housewares, garden, patio and other related products.~~

~~(2)~~~~BMMG stands for “Books, Music, Movies and Games”.~~

Auctions business

We operate an online auction service as part of our Website. Our auction service allows sellers to list items for sale, buyers to bid on items of interest, and users to browse through listed items online. We record only our listing fees and commissions for items sold as revenue. From time to time, we also sell items returned from our shopping business through our auction service, and for these sales, we record the revenue on a gross basis. Revenue from our auction business is included in the fulfillment partner segment, as it is not significant enough to segregate as ~~its own~~a segment.

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Car listing business

We operate an online site for listing cars for sale as a part of our Website. The car listing service allows sellers to list vehicles for sale and allows buyers to review vehicle descriptions, post offers to purchase, and provides the means for purchasers to contact sellers for further information and negotiations on the purchase of an advertised vehicle. Revenue from our car listing business is included in the fulfillment partner segment, as it is not significant enough to ~~separate out~~segregate as ~~its own~~a segment.

~~Business Restructuring~~Real Estate listing business

~~During~~We operate an online site for listing real estate for sale as a part of our Website. The real estate listing service allows customers to search active listings across the ~~fourth quarter of 2006, we began a facilities consolidation~~country. Listing categories include foreclosures, live and ~~restructuring program designed to reduce~~on-line auctions, for sale by owner listings, broker/agent listings and numerous aggregated classified ad listings. Revenue from the overall expense structure in an effort to improve future operating performance (see Item 15 of Part IV, “Financial Statements (Restated)”—Note 4—“Restructuring Expense”). The facilities consolidation and restructuring program was substantially completed by the end of the second quarter of 2007. We incurred no restructuring charges during the third or fourth quarters of 2007.

~~During fiscal year 2006, we recorded $5.7 million of restructuring charges, of which $4.6 million related to costs to terminate a co-location data center lease. Other costs~~real estate business is included in the ~~restructuring charge related~~fulfillment partner segment, as it is not significant enough to $638,000 of accelerated depreciation of leasehold improvements in our current office facilities that we are attempting to sublease, and $450,000 of costs to return these office facilities to their original conditionsegregate as ~~required by the lease agreement.~~a segment.

International business

We ~~also recorded an additional $2.2 million of restructuring charges related~~began selling products through our website to ~~accelerated depreciation of leasehold improvements located~~customers outside the United States in late August 2008. The initial launch included Canada and 33 European countries, including the ~~abandoned office~~U.K. and ~~co-location data center space~~Germany. We do not have operations outside the United States, and ~~$200,000 of other miscellaneous restructuring charges.~~

~~Under the restructuring program, we have recorded $18.0 million~~are utilizing a U.S. based third party to provide logistics and fulfillment for all international orders. Revenue generated from our international business is included in restructuring charges through the end of fiscal year 2007, including $5.7 million in fiscal year 2006 and $12.3 million in fiscal year 2007, respectively. The costs incurred to date within each restructuring category approximate the costs that we had anticipated at the beginning of the program. We believe that the restructuring program is nearing completion. However, as part of the program, we are still considering a complete relocation of our corporate office facilities, which would result in additional restructuring charges, primarily for lease and contract termination costs.

~~Cost of goods sold~~

~~Cost of goods sold consists of the cost of~~either direct or fulfillment partner revenue, depending on whether the product ~~as well as inbound and outbound freight, warehousing and~~is shipped from our warehouses or from a fulfillment ~~costs (including payroll and related expenses and stock-based compensation), credit card fees and customer service costs.~~partner.

~~Operating expenses~~

Sales and marketing expenses consist of advertising, public relations and promotional expenditures, as well as payroll and related expenses, including stock-based compensation, for personnel engaged in marketing and selling activities.

Advertising expense is the largest component of our sales and marketing expenses and is primarily attributable to expenditures related to online marketing activities and offline national radio and television advertising. For the years ended December 31, 2005, 2006 and 2007, our advertising expense totaled approximately $75.3 million, $68.1 million and $51.0 million, respectively, representing 98%, 96% and 92% of sales and marketing expenses for those respective periods.

Technology expenses consist of wages and benefits, including stock-based compensation, for technology personnel, rent, utilities, connectivity charges, as well as support and maintenance and depreciation and amortization related to software and computer equipment.

General and administrative expenses consist of wages and benefits, including stock-based compensation, for executive, legal, accounting, merchandising and administrative personnel, rent and utilities, travel and entertainment, depreciation and amortization of intangible assets and other general corporate expenses.

We have recorded no provision or benefit for federal and state income taxes as we have incurred net operating losses since inception. We have provided a full valuation allowance on the net deferred tax assets, consisting primarily of net operating loss carry-forwards, because of uncertainty regarding their realizability.

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Key Relationships

Manufacturer, Supplier and Distribution ~~Relationships.~~Relationships

It is difficult to establish closeout buying relationships with manufacturers. Trust and experience gained through past interactions are important. We believe our business model reduces the risk to the manufacturer that its discounted products are sold alongside its full-priced products. Our supplier relationships provide us with recognized, brand-name products. The table below identifies some of the brand names that generate significant revenues in various departments:

~~Anne Klein~~	~~Hoover~~	~~Random House~~
~~AOL Time Warner~~ Anne Klein	Joseph Abboud	RCA
Bissell	JVC	Samsonite
Blue Ridge Home Fashions	Kodak	Seiko
~~Canon~~ Broyhill	~~Mai~~ Movado	Simon & Schuster
~~Charles David~~ Canon	~~Movado~~ Novica	Sony
~~Dyson~~ Charles David	~~Novica~~ Panasonic	~~Swiss Army~~	Steve Madden
~~Fuji~~ Drexel Heritage	~~Panasonic~~ Philips	~~Steve Madden~~	Thomasville
~~Hewlett-Packard~~ Dyson	~~Philips~~ Random House	Toshiba
Fuji		Wenger
Hewlett-Packard
Hoover
Hunter Fan

To date, we have not entered into contracts with manufacturers or liquidation wholesalers that guarantee the availability of merchandise for a set duration. Our manufacturer and supplier relationships are based on historical experience with manufacturers and liquidation wholesalers and do not obligate or entitle us to receive merchandise on a long-term or short-term basis. In our direct business, we purchase the products from manufacturers or liquidation wholesalers using standard

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purchase orders. Generally, suppliers do not control ~~any of~~ the terms under which products are sold through our Website.

Products

Online Products

Our website is organized into ~~four~~five main sections, namely: Shopping, Auctions, Cars, Real Estate, and Community. The Shopping section is organized into eleven main departments:

~~Furniture~~		~~Home~~
~~Bedding~~ Furniture		~~Clothing~~ At Home
~~Jewelery~~ Bedding		~~Watches~~ Clothing & Shoes
~~Electronics~~ Jewelry		~~Sports~~ Watches
~~Books, etc.~~ Electronics		~~Worldstock~~ Sports
~~Other~~ Books, etc.		Worldstock
Other

Each of these departments has multiple categories that more specifically define the products offered within that department. For example, the ~~“Bedding”~~"Bedding" department currently has the following product categories:

~~Memory foam~~		~~Mattresses~~
~~Sheets~~ Memory foam		~~Comforters~~ Mattresses
~~Blankets~~ Sheets		~~Down bedding~~ Comforters
Blankets		Down bedding
Duvet covers		Pillows

Each category has several subcategories that further detail the product contained within. For example, under the ~~“Down bedding”~~"Down bedding" category, we have the following subcategories:

~~Down comforters~~		~~Down alternatives~~
~~Feather bed~~ Down comforters		Down ~~pillows~~ alternatives
Down ~~Comforter~~pillows		Featherbeds
Down comforter sets

Individual products can be accessed and viewed from the category or subcategory pages. These specific product pages include detailed product descriptions, color photographs, pricing information and customer reviews.

For 2006, 2007 and 2008, the percentages of gross sales contributed by similar classes of products were as follows:

Product class

Home and garden(1)	42	%	44	%	50	%
Jewelry, watches, clothing and accessories	27	%	25	%	24	%
BMMG(2), electronics and computers	23	%	23	%	18	%
Other	8	%	8	%	8	%

Total	100	%	100	%	100	%

(1): Home and garden includes home décor, bedding, bath, furniture, house wares, garden, patio and other related products.
(2): BMMG stands for "Books, Music, Movies and Games."

The number of total products we offer has grown from less than 100 in 1999, to more than ~~63,000~~201,000 non-BMMG products and ~~almost 724,000~~approximately 450,000 BMMG products (books, magazines, CDs, DVDs ~~video cassettes~~ and

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video games) as of December 31, ~~2007.~~2008. As the number of products and product categories change throughout the year, we periodically reorganize our departments and/or categories to better reflect our current product offerings.

Worldstock is our socially-responsible, online marketplace through which artisans in the United States and around the world can sell their products and gain access to a broader market.

Fulfillment Operations

General

~~General.~~ When customers place orders on our Website, orders are fulfilled either by a third-party fulfillment partner or directly from our warehouses in Salt Lake City, Utah. We monitor all of these sources for accurate order fulfillment and timely shipment. We currently charge $2.95 per order for basic ground shipping, but customers can choose from various expedited shipping services at their expense.

Payment Terms

~~Payment Terms.~~ Generally, we require verification of receipt of payment, or authorization from credit card or other payment vendors whose services we offer to our customers (such as Paypal and BillMeLater), before we ship products to consumers or business purchasers. From time to time we grant credit to our business purchasers with normal credit terms (typically 30 days).

Fulfillment for Direct ~~Business.~~Business

During ~~2007,~~2008, we fulfilled approximately ~~25%~~21% of all orders through our leased warehouses in Salt Lake City, ~~Utah.~~Utah (see Item 2 of Part I, "Properties".) Our warehouse staff generally shipped between 5,000 and 8,000 orders per day, and up to ~~34,000~~32,000 orders per day during peak periods, using overlapping daily shifts. We also process returns of direct and fulfillment partner merchandise in the Salt Lake City warehouses. Our warehouses store approximately ~~6,000~~5,000 non-BMMG products offered on our Website. We operate the Salt Lake City warehouses with an automated warehouse management system that tracks the receipt of inventory, distributes order-fulfillment assignments to warehouse workers and obtains rates for various shipping options to ensure low-cost outbound shipping. Our Website relays orders to the warehouse management system throughout each day, and the warehouse management system in turn confirms to our Website shipment of each order. Customers can track the shipping status of their packages through links we provide on our Website.

Fulfillment Partner Business

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~~Fulfillment Partner Business.~~During ~~2007,~~2008, approximately ~~75%~~79% of our orders were for inventory owned and shipped by third-party fulfillment partners. We currently ~~manage~~coordinate approximately ~~730~~1,200 entities that collect orders through our Website. These third parties perform essentially the same operations as our warehouse: order picking and shipping; however, we handle the majority of the returns for these sales. These third parties relay shipment confirmations to our Website where customers can review shipping and tracking information. ~~From a customer’s point of view, all~~All orders through our Website ~~are being shipped by Overstock,~~bear Overstock's name on the packing material and shipping documents, including those shipped by our fulfillment partners. We also handle customer service related to all orders placed through our Website.

Sales and Marketing

We use a variety of methods to target our consumer audience, including online campaigns, such as advertising through portals, keywords, search engines, affiliate marketing programs, banners, e-mail and direct mail campaigns, and we are able to monitor and evaluate their results. We seek to identify and eliminate campaigns that do not meet our expectations. We also do brand advertising through television, radio, and print ads. We generally develop these campaigns internally and believe that doing so is cost-effective.

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Customer Service

We are committed to providing superior customer service. We staff our customer service department with dedicated in-house and outsourced professionals who respond to phone, instant online chat and e-mail inquiries on products, ordering, shipping status, and returns. As a result of this commitment, we now rank #2 in customer service rankings among all US retailers, according to rankings published in the 2008 NRF Foundation/American Express Customer Service Survey. Our customer service staff processes approximately ~~15,000~~14,000 calls per week and up to approximately ~~42,000~~30,000 calls per week during peak periods.

The same staff processes approximately ~~15,000~~17,000 e-mail messages each week and up to approximately ~~30,000~~21,000 e-mail messages per week during peak periods, with a turnaround goal of one business day. We use automated e-mail and phone systems to route traffic to appropriate customer service representatives. The demands on our customer service staff increase significantly during peak periods, including the several weeks before and after the Christmas holiday.

Technology

We use our internally developed Website and a combination of proprietary technologies and commercially available licensed technologies and solutions to support our operations. We use the services of XO Communications, Inc., Qwest Communications International, Inc. and Verizon, Inc. to obtain connectivity to the Internet over multiple Gig-E and OC48 links. We currently store our data on several Oracle ~~10g database clusters~~databases using Dell and IBM computer hardware connected to multiple large scale ~~EMCs for data storage.~~Hitachi and EMC storage devices. Currently, we use Dell and IBM servers for our Website, which are connected to the Oracle ~~database~~databases and operate in a multi-processing Linux environment designed to accommodate large volumes of Internet traffic. ~~During 2004 we moved our primary computer infrastructure to a co-location facility in Salt Lake City.~~

In July 2005, we entered into a Colocation Center Agreement (the “Colocation Agreement”) to build out and lease 11,289 square feet of space at Old Mill Corporate Center II in Salt Lake City for a data center and co-location facility. In November 2006, we made a determination to consolidate our facilities and began negotiations to terminate the lease of the new co-location facility (see Item 15 of Part IV—“Financial Statements (Restated)”—Note 4 “Restructuring Expense”), and on February 1, 2007, we terminated the lease agreement effective as of December 29, 2006. Currently, our primary computer infrastructure remains at our ~~original~~ co-location facility in Salt Lake City. ~~In December 2006, we entered into~~We also have a ~~Data Center Agreement (the “OM I Agreement”) for an IT~~second data center which we use primarily for backups, redundancy, development, testing, and our corporate systems infrastructure.

Competition

The online liquidation services market is new, rapidly evolving, intensely competitive and has relatively low barriers to entry, as new competitors can launch new websites at relatively low cost. We believe that competition in the online liquidation market is based predominantly on:

•

price;

•

product quality and selection;

•

shopping convenience;

•

order processing and fulfillment;

•

customer service; and

•

company brand recognition.

Our liquidation services compete with other online retailers and traditional liquidation ~~“brokers”~~"brokers", some of which may specifically adopt our methods and target our customers. We currently or potentially compete with a variety of companies that can be divided into several broad categories:

•

liquidation e-tailers such as SmartBargains;

•

online general retailers with discount departments such as Amazon.com, Inc., eBay, Inc. and Buy.com, Inc.;

•

online specialty retailers such as BlueNile and BackCountry; and

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•

traditional retailers and liquidators such as Ross Stores, Inc., Walmart Stores, Inc., TJX Companies, Inc., Costco Wholesale Corporation, Target Corporation, Best Buy Co., Inc. and Barnes and Noble, Inc., most of which ~~may or may not~~ also have an online presence.

As the market for online liquidation grows, we believe that companies involved in online retail, as well as traditional retailers and liquidation brokers, will increase their efforts to develop services that compete with our online services. We also face potential competition from Internet companies not yet focused on the liquidation market, and from retail companies who are currently operating or not yet operating online. ~~We are unable to anticipate which other companies are likely to offer services in the future that will compete with the services we provide.~~

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~~In addition, many~~Many of our current and potential competitors have greater brand recognition, longer operating histories, larger customer bases and significantly greater financial, marketing and other resources than we do, and may enter into strategic or commercial relationships with larger, more established and well-financed companies. Some of our competitors could enter into exclusive distribution arrangements with our vendors and deny us access to their products, devote greater resources to marketing and promotional campaigns and devote substantially more resources to their website and systems development than our company. New technologies and the continued enhancement of existing technologies also may increase competitive pressures on our company. We cannot ensure that we will be able to compete successfully against current and future competitors or address increased competitive pressures (see Item 1A—“"Risk ~~Factors”~~Factors").

Intellectual Property

We regard our domain names and similar intellectual property as critical to our success. We rely on a combination of laws and contractual restrictions with our employees, customers, suppliers, affiliates and others to establish and protect our proprietary rights. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our intellectual property without authorization. In addition, we cannot ensure that others will not independently develop similar intellectual property. Although we have registered and are pursuing the registration of our key trademarks in the United States and some internationally, some of our trade names ~~are~~may not be eligible to receive registered trademark protection. In addition, effective trademark protection may not be available or we may not ~~be sought by us~~seek protection in every country in which we market or sell our products and services, ~~are made available online,~~ including in the United States.

Third parties have in the past, and may in the future, recruit our employees who have had access to our proprietary technologies, processes and operations. These recruiting efforts expose us to the risk that such employees and those hiring them will misappropriate and exploit our intellectual property.

Legal and Regulatory Matters

From time to time, we receive claims of and become subject to regulatory investigations or actions, consumer protection, employment, intellectual property and other commercial litigation related to the conduct of our business. ~~Also, we receive regulatory inquiries from state and federal agencies which might relate to our business practices, our sales of securities, or the activity of our customers or suppliers.~~ Such ~~regulatory matters and commercial~~ litigation could be costly and time consuming and could divert our management and key personnel from ~~our~~its business operations. The uncertainty of litigation increases these risks. In connection with such litigation, ~~or regulatory inquiries,~~ we may be subject to significant damages or equitable remedies ~~or fines~~ relating to the operation of our business and the sale of products on our website. Any such litigation may materially harm our business, prospects, results of operations, financial condition or cash flows. However, we do not currently believe that any of our outstanding litigation will have a material adverse effect on our financial ~~condition or results of operation.~~

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 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 each filed a motion to appeal the court’s decision, we responded and the California Attorney General submitted an amicus brief supporting our view; the court has ruled that this appeal stays discovery in the case. On May 30, 2007 the California Court of Appeals upheld the lower court’s ruling in our favor. Defendants filed motions for rehearing, which the Court of Appeals summarily denied on June 27, 2007. Defendants filed Petitions for Review before the California Supreme Court which the California Supreme court denied on September 19, 2007. On October 1, 2007, the Court of Appeals remitted the case back to the Superior Court. On December 4, 2007, Matthew Kliber, a former principal of Gradient Analytics, filed a motion for judgment on the pleading which the court denied on February 8, 2008. Discovery in this case is currently stayed. We intend to continue to pursue this action vigorously. The court has set a trial date of September 9, 2008.

On November 9, 2007, Copper River Partners, L.P. (formerly known as Rocker Partners, LP) filed a cross-complaint against us and certain of our current and former directors. The Copper River cross-complaint alleges cross-defendants have engaged in violations of California’s state securities laws, violations of California’s unfair business practices act, tortuous interference with contract and prospective business advantage, and deceit. In January 2008, each of the cross-defendants filed various motions in opposition of this cross-complaint. On January 30, 2008, Gradient Analytics, Inc. filed a motion for leave to file a cross-complaint against us and Patrick Byrne. The court has not ruled on this motion. The proposed Gradient Analytics cross-complaint alleges that we and Dr. Byrne engaged in violations of California’s unfair business practices act, interference with prospective business advantage, and libel. These cases are in the initial stages. We intend to defend these cross-complaints vigorously.

On May 9, 2006 we received a notice of an investigation and subpoena from the Securities and Exchange Commission, Salt Lake City District Office. On May 17, 2006, Patrick Byrne also received a subpoena from the Securities and Exchange Commission, Salt Lake City District Office. These subpoenas requested a broad range of documents, including, among other documents, all documents relating to our accounting policies, our targets, projections or estimates related to financial performance, our recent restatement of our financial statements, the filing of our complaint against Gradient Analytics, Inc., the development and implementation of certain new technology systems and disclosures of progress and problems with those systems, communications with and regarding investment analysts, communications regarding shareholders who did not receive our proxy statement in April 2006, communications with certain shareholders, and communications regarding short selling, naked short selling, purchases and sales of our stock, obtaining paper certificates, and stock loan or borrow of our shares. We and Dr. Byrne have responded to these subpoenas and each continues to cooperate with the Securities and Exchange Commission on this matter.

On February 2, 2007, along with five shareholder plaintiffs, we filed a lawsuit in the Superior Court of California, County of San Francisco against Morgan Stanley & Co. Incorporated, Goldman Sachs & Co., Bear Stearns Companies, Inc., Bank of America Securities LLC, Bank of New York, Citigroup Inc., Credit Suisse (USA) Inc., Deutsche Bank Securities, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., and UBS Financial Services, Inc. In September 2007, we filed an amended complaint adding two plaintiff shareholders, naming Lehman Brothers Holdings Inc. as a defendant, eliminating the previous claim of intentional interference with prospective economic advantage and clarifying various points of other claims in the original complaint. The suit alleges that the defendants, who control over 80% of the prime brokerage market, participated in an illegal stock market manipulation scheme and that the defendants had no intention of covering short sell orders with borrowed stock, as they are required to do, causing what are referred to as “fails to deliver” and that the defendants’ actions caused and continue to cause dramatic distortions within the nature and amount of trading in our stock as well as dramatic declines in the share price of our stock. The suit asserts that a persistent large number of “fails to deliver” creates significant downward pressure on the price of a company’s stock and that the amount of “fails to deliver” have exceeded our entire supply of outstanding shares. The suit accuses the defendants of violations of California securities laws and common law, specifically, conversion, trespass to chattels, intentional interference with prospective economic advantage, and violations of California’s Unfair Business Practices Act. We are seeking damages of $3.48 billion. In April 2007 defendants filed a demurrer and motion to strike our complaint. We opposed the demurrer and motion to strike. In July 2007 the court substantially denied defendants’ demurrer and motion to strike. In November 2007, the defendants filed additional motions to strike. In February 2008, court denied defendants’ motion to strike our claims under California’s Securities Anti-Fraud statute and defendants’ motion to strike our common law punitive damages claims, but granted in part the defendants’ motion to strike Overstock’s claims under California’s Unfair Business Practices Act, while allowing our claims for injunctive relief under California’s Unfair Business Practices Act. The parties have begun discovery in this case. We intend to vigorously prosecute this action.

On March 29, 2007, we, along with other defendants, were sued in United States District Court for the Eastern District of Texas, Tyler Division, by Orion IP, LLC. The suit alleges that we and the other defendants infringe two patents owned by Orion that relate to the making and using supply chain methods, sales methods, sales systems, marketing methods, marketing systems, and inventory systems. On April 30, 2007, we filed an answer denying Orion’s allegations and a counterclaim asserting that Orion’s patent is invalid. The case is in its discovery stages. The court has set a trial date of May 2009. As we have consistently done with similar suits filed by patent trolls, we intend to vigorously defend this action.

On October 5, 2007, we were served as defendant in a case alleging violations of the Fair and Accurate Credit Transactions Act (the “Act”). The plaintiff alleged that, because we followed an industry practice of displaying to the customer on a confirmation page the expiration date of the customer’s credit card while the customer was online and logged into the customer’s own account, we have violated certain provisions of the Act which prohibit a merchant from printing the credit card expiration date on a receipt. Filed in the U.S. District Court, Southern District of Illinois, the case was styled as a class action lawsuit on behalf of the nominative plaintiff and all others similarly situated. On November 13, 2007, we moved to dismiss or stay the case or transfer venue. On December 27, 2007, the court dismissed

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the complaint without prejudice on the basis that the complaint should have been brought under the arbitration agreement between the plaintiff and us. Plaintiff has not appealed the dismissal, and the time for appeal has expired.

condition.

These and other types of claims could result in increased costs of doing business through legal expenses, adverse judgments or settlements or require us to change our business practices in expensive ways. In addition, litigation could result in interpretations of the law that require us to change our business practices or otherwise increase our costs.

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Additional litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Any litigation, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could materially harm our business (see Item 1A—“"Risk ~~Factors”~~Factors").

See the information set forth under Item 15 of Part IV, "Financial Statements"—Note 14—"Commitments and Contingencies," subheading "Legal Proceedings," contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K/A.

Government Regulation

~~All of our~~Our services are subject to federal and state consumer protection laws including laws protecting the privacy of consumer non-public information and regulations prohibiting unfair and deceptive trade practices. In particular, under federal and state financial privacy laws and regulations, we must provide notice to consumers of our policies on sharing non-public information with third parties, must provide advance notice of any changes to our policies and, with limited exceptions, must give consumers the right to prevent sharing of their non-public personal information with unaffiliated third parties. Furthermore, the growth and demand for online commerce could result in more stringent consumer protection laws that impose additional compliance burdens on online companies. These consumer protection laws could result in substantial compliance costs and could interfere with the conduct of our business.

In many states, there is currently great uncertainty whether or how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the Internet and commercial online services. These issues may take years to resolve. In addition, new state tax regulations may subject us to the obligation to collect and remit state and local taxes other than for sales within the state of Utah (where our operations are located), or subject us to additional state and local sales and income taxes. New legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business or the application of existing laws and regulations to the Internet and commercial online services could result in significant additional taxes on our business. These taxes could have an adverse effect on our cash flows and results of operations. Furthermore, there is a possibility that we may be subject to significant fines or other payments for any past failures to comply with these requirements.

Employees

As of December 31, ~~2007,~~2008, we had ~~844~~1,036 full-time employees, including ~~347~~379 in customer service and fraud prevention, ~~130~~119 in order fulfillment, ~~121~~226 in information technology and Website production, 6356 in marketing, ~~116~~150 in merchandising (including auctions, cars, and ~~cars)~~real estate), 3951 in accounting and finance, and 2855 in our executive and administrative department. We seasonally augment our workforce with temporary employees during our fourth quarter to handle increased workload atin both our warehouse ~~facility~~ and ~~in our~~ customer service operations. We have never had a work stoppage, and none of our employees are represented by a labor union. We consider our employee relationships to be positive. Competition for qualified personnel in our industry has historically been intense, particularly for software engineers, computer scientists, and other technical staff.

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Executive Officers

The following persons were executive officers of Overstock.com as of February 23, 2009:

Executive Officers		Position

Patrick M. Byrne	46	Chief Executive Officer and Chairman of the Board of Directors
Jonathan E. Johnson III	42	President and Corporate Secretary
Geoffrey R. Atkinson	24	Senior Vice President, Marketing
Stephen J. Chesnut	49	Senior Vice President, Finance
David K. Chidester	37	Senior Vice President, Internal Reporting and Information
Jacob K. Hawkins	33	Senior Vice President, Change Management
Samuel J. Peterson	33	Senior Vice President, Technology
Stormy D. Simon	40	Senior Vice President, Marketing and Customer Care
Stephen P. Tryon	47	Senior Vice President, Logistics and Human Capital Management

Dr. Patrick M. Byrne has served as our Chief Executive Officer (principal executive officer) and as a Director since October 1999, as Chairman of the Board from February 2001 through October 2005, and since July 2006. From September 1997 to May 1999, Dr. Byrne served as President and Chief Executive Officer of Fechheimer Brothers, Inc., a manufacturer and distributor of uniforms. From 1995 until its sale in September 1999, Dr. Byrne was Chairman, President and Chief Executive Officer of Centricut, LLC, a manufacturer and distributor of industrial torch parts. From 1994 to the present, Dr. Byrne has served as a Manager of the Haverford Group, an investment company and an affiliate of Overstock. Dr. Byrne has a Bachelor of Arts degree in Chinese studies from Dartmouth College, a Master's Degree from Cambridge University as a Marshall Scholar, and a Ph.D. in philosophy from Stanford University.

Mr. Jonathan E. Johnson III joined Overstock.com in September 2002 and currently serves as our President. He has served as our General Counsel and as our Vice President, Strategic Projects, and Senior Vice President, Corporate Affairs and Legal. From May 1999 to September 2002, Mr. Johnson held various positions with TenFold Corporation, a software company, including positions as General Counsel, Executive Vice President and Chief Financial Officer. From October 1997 to April 1999, Mr. Johnson practiced law in the Los Angeles offices of Milbank, Tweed, Hadley & McCloy and from September 1994 to September 1997, he practiced law in the Los Angeles offices of Graham & James. From February 1994 to August 1994, Mr. Johnson served as a judicial clerk at the Utah Supreme Court for Justice Leonard H. Russon, and prior to that, from August 1993 to January 1994, Mr. Johnson served as a judicial clerk at the Utah Court of Appeals for Justice Russon. Mr. Johnson holds a Bachelor's Degree in Japanese from Brigham Young University, studied for a year at Osaka University of Foreign Studies in Japan, and received his law degree from the J. Reuben Clark, Jr. Law School at Brigham Young University.

Mr. Geoffrey R. Atkinson currently serves as our Senior Vice President of Marketing. Mr. Atkinson is responsible for the search and email marketing channels as well as the Customer Relationship Management group (the "CRM"). Since joining the Company in 2005, Mr. Atkinson has worked primarily on improving the customer facing search and navigation experience as well as growing the email and search marketing channels. Mr. Atkinson has previously served as Vice President of tactical marketing and Director of web site and email marketing. Before joining Overstock.com, Mr. Atkinson worked in marketing and branding at Smith Sport Optics, a manufacturer of sunglasses and goggles for sports and leisure, in Sun Valley, Idaho. Mr. Atkinson holds a Bachelor of Arts Degree in Sociology from Dartmouth College.

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Mr. Stephen J. Chesnut was appointed Senior Vice President, Finance of the Company, effective January 5, 2009. From August 2007 until he joined the Company, Mr. Chesnut served as Vice President, Strategy/Market Development/Sales for HD Supply, Inc., a privately-held wholesale distribution company based in Atlanta, Georgia. From December 1998 to August 2007, Mr. Chesnut served in a variety of capacities for The Home Depot or its subsidiaries, including Director, Business Development for HD Supply (prior to its sale by Home Depot), Director, Finance and Chief Financial Officer for Home Depot Supply; Director, New Concept Development; and Director, Strategic Planning. Prior to joining The Home Depot, Mr. Chesnut served in a variety of operational, planning and financial positions for Target Stores Inc. from 1986 to 1998. Mr. Chesnut holds a Bachelor's of Science Degree in Accounting and Business Management, from Southern Utah University and a Master of Business Administration Degree, Finance and Strategic Planning, from Brigham Young University.

Mr. David K. Chidester currently serves as our Senior Vice President, Internal Reporting and Information and Assistant Secretary. Mr. Chidester previously served as Senior Vice President, Finance from January 2004 to January 2009, as our Acting Chief Financial Officer from August 2003 to January 2004, and as our Controller from August 1999 to August 2003. Prior to joining Overstock.com, Mr. Chidester was with PricewaterhouseCoopers LLP from December 1995 to August 1999. Mr. Chidester holds a Bachelor of Science Degree in Accounting and a Master's Degree in Business Administration, both from the University of Utah.

Mr. Jacob K. Hawkins currently serves as Senior Vice President, Change Management. Mr. Hawkins has performed various roles across the organization, including business development, marketing, merchandising, technology, and project management. Prior to joining Overstock.com, Mr. Hawkins worked for Professional Marketing International, a business consulting group. Mr. Hawkins holds a Bachelor's Degree in Business Management from Brigham Young University and a Master's Degree of Business Administration with an emphasis in information systems from the University of Utah.

Mr. Samuel J. Peterson currently serves as our Senior Vice President, Technology. Mr. Peterson previously served as the Vice President, Software Development from early 2005, and was appointed as Director, Network and Systems Engineering in 2003.

Ms. Stormy D. Simon currently serves as our Senior Vice President, Marketing and Customer Care. Ms. Simon previously served as our Vice President, BMMG; Travel and Off-Line Advertising; Chief of Staff and as our Director of B2B. Prior to joining Overstock.com in 2001, Ms. Simon worked in the media and travel industries.

Mr. Stephen P. Tryon joined Overstock.com in August 2004, and serves as Senior Vice President, Logistics and Human Capital Management, with primary responsibility for logistics and supervision of the Company's warehouse operations, and most recently, managing the Company's human resources. Prior to joining Overstock.com, Mr. Tryon was the Legislative Assistant to the Chief of Staff of the United States Army. During his 21 years with the Army, his assignments included director of plans for the 10th Mountain Division, Congressional Fellow for United States Senator Max Cleland, Assistant Professor of Philosophy at the United States Military Academy, and commander of a company of paratroopers. Mr.Tryon received a Bachelor's of Science Degree in Applied Sciences from the U.S. Military Academy and a Master's Degree of Arts in Philosophy from Stanford University.

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Board of Directors

Name		Position with the Company	Director Since

Allison H. Abraham	45	None	March 2002
Joseph J. Tabacco, Jr.	59	None	June 2007
Patrick M. Byrne	46	Chief Executive Officer	October 1999
Barclay F. Corbus	41	None	March 2007
James V. Joyce	50	Consultant	February 2008

Ms. Allison H. Abraham has served as a Director of Overstock since March 2002 and is currently the President of the Newton School, a non-profit, private school located in Sterling, Virginia. She is Chairwoman of the Audit Committee and a member of the Compensation Committee. Ms. Abraham served as President and as a director of LifeMinders, Inc., an online direct marketing company, from May 2000 until the acquisition of LifeMinders by Cross Media Marketing Corp. in October 2001. Prior to joining LifeMinders, Ms. Abraham served as Chief Operating Officer of iVillage Inc., an online media company, from May 1998 to May 2000. From February 1997 to April 1998, Ms. Abraham was President, Chief Operating Officer and a director of Shoppers Express, an online grocery service, and also served as Vice President of Sales and Marketing for several months prior to her promotion. From 1992 to 1996, Ms. Abraham held several marketing and management positions at Ameritech Corporation. She was employed at American Express Travel Related Services in New York City from 1988 to 1992, focusing on the launch of new products and loyalty programs. Ms. Abraham holds a Bachelor of Arts Degree in Economics from Tufts University and a Master's Degree of Business Administration from the Darden School at the University of Virginia.

Mr. Joseph J. Tabacco, Jr. has served as a Director of Overstock since June 2007. Mr. Tabacco is a member of the Audit Committee and the Compensation Committee. For more than the last five years Mr. Tabacco has served as the managing partner of the San Francisco office of Berman DeValerio (formerly Berman DeValerio Pease Tabacco Burt & Pucillo). A 1974 honors graduate of George Washington University School of Law, Mr. Tabacco litigates antitrust, securities fraud, commercial high tech, and intellectual property matters. Since entering private practice in the early 1980s, Mr. Tabacco has served as trial or lead counsel in numerous antitrust and securities cases and has been involved in all aspects of state and federal litigation. Prior to 1981, Mr. Tabacco served as senior trial attorney for the U.S. Department of Justice, Antitrust Division, and in both the Central District of California and the Southern District of New York. Mr. Tabacco frequently lectures and authors articles on securities and antitrust law issues and is a member of the Advisory Board of the Institute for Consumer Antitrust Studies at Loyola University Chicago School of Law. Mr. Tabacco is also a former teaching fellow of the Attorney General's Advocacy Institute in Washington, D.C., and has served on the faculty of ALI-ABA on programs about U.S.-Canadian business litigation and trial of complex securities cases.

Mr. Barclay F. Corbus has served as a Director of Overstock since March 2007. He is a member of the Audit Committee and Chairman of the Compensation Committee. Mr. Corbus has served as Senior Vice President of Clean Energy Fuels Corp., a provider of vehicular natural gas, with responsibility for

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strategic development, since September 2007. He served as Co-CEO of WR Hambrecht + Co., an investment banking firm, from July 2004 to September 2007, and prior to that date served in other executive positions with WR Hambrecht + Co. Prior to joining WR Hambrecht + Co in March 1999, Mr. Corbus was in the investment banking group at Donaldson, Lufkin and Jenrette. Mr. Corbus graduated from Dartmouth College with a Bachelor of Arts Degree in Government and has a Master's Degree of Business Administration in Finance from Columbia Business School.

Mr. James V. Joyce has served as a Director of Overstock since February 2008. He is also the chief executive officer of Icent LLC, which is a management consulting company through which Mr. Joyce has provided consulting services to clients, including the Company, for the last five years. Mr. Joyce holds a Bachelor of Arts Degree as well as a Master's Degree in Jurisprudence from the University of Oxford and a Master's Degree of Business Administration from Dartmouth College.

There are no family relationships among any of the current officers and directors of the Company.

Available Information

Our Internet website address ishttp://www.overstock.com. Our Annual Report on Form 10-K/A, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings made pursuant to the Securities Exchange Act of 1934 are available free of charge through our Internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our Internet website and the information contained therein or connected thereto are not a part of or incorporated into this Annual Report on Form 10-K/A.

ITEM 1A. RISK FACTORS

Please consider the following risk factors carefully. If any one of the following risks were to occur, our business, financial condition, operating results and cash flows could be materially adversely ~~affected. In addition, these~~affected, and the market price of our securities could decrease. These are not the only risks we face. In addition, the global economic climate amplifies many of these risks.

Risks Relating to Overstock

General economic factors may adversely affect our financial performance.

General economic conditions may adversely affect our financial performance. In the United States, higher interest rates, higher fuel and other energy costs, weakness in the housing market, inflation, higher levels of unemployment, unavailability of consumer credit, higher consumer debt levels, higher tax rates and other changes in tax laws, overall economic slowdown and other economic factors could adversely affect consumer demand for the products and services we sell, change the mix of products we sell to one with a lower average gross margin and result in slower inventory turnover and greater markdowns on inventory. Higher interest rates, transportation costs, inflation, higher costs of labor, insurance and healthcare, foreign exchange rates fluctuations, higher tax rates and other changes in tax laws, changes in other laws and regulations and other economic factors in the United States can increase our cost of sales and operating, selling, general and administrative expenses, and otherwise adversely affect our operations and operating results. These factors affect not only our operations, but also the operations of suppliers from whom we purchase goods, a factor that can result in an increase in the cost to us of the goods we sell to our customers.

We have a history of significant losses. If we do not achieve and maintain profitability, our financial condition and our stock price could suffer.

We have a history of losses and we may continue to incur operating and net losses for the foreseeable future. We incurred net losses of ~~$106.8~~$48.0 million and ~~$48.0~~$12.7 million for the years ended

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December 31, ~~2006~~2007 and ~~2007.~~2008. As of December 31, ~~2007,~~2008, our accumulated deficit was ~~$252.3~~$265.0 million. We will need to generate significant revenues to achieve profitability, and we may not be able to do so. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis in the future. If our revenues grow more slowly than we anticipate, or if our operating expenses exceed our expectations, our financial results would be harmed.

We will continue to incur significant operating expenses and ~~some~~ capital expenditures to:

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enhance our distribution and order fulfillment capabilities;

•

further improve our order processing systems and capabilities;

•

develop enhanced technologies and features;

•

expand our customer service capabilities to better serve our ~~customers’~~customers' needs;

•

expand or modify our product offerings;

•

~~rent or terminate~~occupy warehouse and office space;

•

increase our general and administrative functions to support our operations; and

•

maintain or increase our sales, branding and marketing activities, including maintaining existing or entering into new online marketing or marketing analytics arrangements, and continuing or increasing our national television and radio advertising and direct mail campaigns.

Because we will incur many of these expenses before we receive any revenues from our efforts, our losses may be greater than the losses we would incur if we developed our business more slowly. Further, we base our expenses in large part on our operating plans and future revenue projections. Many of our expenses are fixed

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in the short term, and we may not be able to quickly reduce spending if our revenues are lower than we project. Therefore, any significant shortfall in revenues would likely harm our business, prospects, operating results and financial condition. In addition, we may find that these efforts are more expensive than we currently anticipate which would further increase our losses. Also, the timing of these expenses may contribute to fluctuations in our quarterly operating results.

~~The seasonality of our business places increased strain on our operations.~~

We expect a disproportionate amount of our net sales to occur during our fourth quarter. If we do not stock or restock popular products in sufficient amounts such that we fail to meet customer demand, it could significantly affect our revenue and our future growth. If we overstock products, we may be required to take significant inventory markdowns or write-offs, which could reduce gross profits. We may experience an increase in our net shipping cost due to complimentary upgrades, split-shipments, and additional long-zone shipments necessary to ensure timely delivery for the holiday season. If too many customers access our Website within a short period of time due to increased holiday demand, we may experience system interruptions that make our Website unavailable or prevent us from efficiently fulfilling orders, which may reduce the volume of goods we sell and the attractiveness of our products and services. In addition, we may be unable to adequately staff our fulfillment and customer service centers during these peak periods and delivery and other fulfillment companies and customer service co-sourcers may be unable to meet the seasonal demand.

If we fail to accurately forecast our expenses and revenues, our business, operating results and financial condition may suffer and the price of our securities may decline.

Our limited operating history and the rapidly evolving nature of our industry make forecasting operating results difficult. WeSince 2005, we have ~~recently~~ completed several large, complex and expensive infrastructure upgrades in order to increase our ability to handle larger volumes of sales and to develop or increase our ability to perform a variety of analytical procedures relating to our business, and we are continuing the work to upgrade and further expand these and other components of our infrastructure. We have experienced difficulties with the implementation of various aspects to the upgrades of our infrastructure, and have incurred increased expenses as a result of these difficulties. As a result of these expenditures, our ability to quickly reduce spending if our revenues are lower than we project is limited. Therefore, any significant shortfall in the revenues for which we have built and are continuing to build our infrastructure would likely harm our business, prospects, operating results and financial condition and cause our results of operation to fall below the expectations of public market analysts and investors. ~~If this occurs, the price~~

The seasonality of our ~~securities~~business places increased strain on our operations.

We expect a disproportionate amount of our sales to occur during our fourth quarter. If we do not stock or restock popular products in sufficient amounts such that we fail to meet customer demand, it could significantly affect our revenue and our future growth. If we liquidate products, we may ~~decline.~~be required to take significant inventory markdowns or write-offs, which could reduce gross profits. We

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may experience an increase in our net shipping cost due to complimentary upgrades, split-shipments, and additional long-zone shipments necessary to ensure timely delivery for the holiday season. If too many customers access our Website within a short period of time due to increased holiday demand, we may experience system interruptions that make our Website unavailable or prevent us from efficiently fulfilling orders, which may reduce the volume of goods we sell and the attractiveness of our products and services. In addition, we may be unable to adequately staff our fulfillment and customer service centers during these peak periods and delivery and other fulfillment companies and customer service co-sourcers may be unable to meet the seasonal demand.

We depend on our relationships with third party fulfillment partners for a large portion of the products that we offer for sale on our Website. If we fail to maintain these relationships, our business will suffer.

At December 31, ~~2007,~~2008, we had fulfillment partner relationships with approximately ~~730~~1,200 third parties whose products we offer for sale on our Website. We depend on our fulfillment partners to provide a large portion of the product selection we offer, as these products accounted for approximately ~~90%~~97% of the non-BMMG products available on our Website. We plan to continue to expand the number of fulfillment partner relationships and the number of products offered for sale by our fulfillment partners on our Website. We do not have any long-term agreements with any of these third parties. Our agreements with third parties are terminable at will by either party immediately upon notice. In general, we agree to offer the third ~~parties’~~parties' products on our Website and these third parties agree to provide us with information about their products, honor our customer service policies and ship the products directly to the customer. If we do not maintain our existing relationships or build new relationships with third parties on acceptable commercial terms, we may not be able to offer a broad selection of merchandise, and customers may refuse to shop at our Website. In addition, manufacturers may decide not to offer particular products for sale on the Internet. If we are unable to maintain our existing or build new fulfillment partner relationships or if other product manufacturers refuse to allow their products to be sold via the Internet, our business and prospects would suffer severely.

We are ~~partially~~ dependent on third parties to fulfill a number of our fulfillment, distribution and other retail functions. If such parties are unwilling or unable to continue providing these services, our business could be seriously harmed.

In our fulfillment partner business, although we handle returned merchandise, we ~~continue to~~ rely on third parties to conduct a number of other traditional retail operations with respect to their respective products that we offer for sale on our Website, including maintaining inventory, preparing merchandise for shipment to individual customers and timely distribution of purchased merchandise. We have no effective means to ensure that these third parties will continue to perform these services to our satisfaction or on commercially reasonable terms. In addition, because we do not take possession of these third ~~parties’~~parties' products, we are unable to fulfill these traditional retail operations ourselves. Our customers could become dissatisfied and cancel their orders or decline to make future purchases if these third parties are unable to deliver products on a timely basis. If our customers become dissatisfied with the services provided by these third parties, our reputation and the Overstock.com brand could suffer.

We rely on our relationships with manufacturers, retailers and other suppliers to obtain sufficient quantities of quality merchandise on acceptable terms. If we fail to maintain our supplier relationships on acceptable terms, our sales and profitability could suffer.

To date, we have not entered into contracts with manufacturers or liquidation wholesalers that guarantee the availability of merchandise for a set duration. Our contracts or arrangements with suppliers do not provide for the continuation of particular pricing practices and may be terminated by

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either party at any time. Our current suppliers may not continue to sell their excess inventory to us on current terms or at all and we may not be able to establish new supply relationships. For example, it is difficult for us to maintain high levels of product quality and selection because none of the manufacturers, suppliers and liquidation wholesalers from whom we purchase products on a purchase order by purchase order basis have a continuing obligation to provide us with merchandise at historical levels or at all. In most cases, our relationships with our suppliers do not restrict the suppliers from selling their respective excess inventory to other traditional or online merchandise liquidators, which could in turn limit the selection of products available on our Website. If we are unable to develop and maintain relationships with suppliers that will allow us to obtain sufficient quantities of merchandise on acceptable commercial terms, such inability could harm our business, prospects, results of operation and financial condition.

We depend upon third-party delivery services to deliver our products to our customers on a timely and consistent basis. Deterioration in our relationship with any one of these third parties could decrease our ability to track shipments, cause shipment delays, and increase our shipping costs and the number of damaged products.

We rely upon multiple third parties for the shipment of our products. We cannot be sure that these relationships will continue on terms favorable to us, if at all. Unexpected increases in shipping costs or delivery times, particularly during the holiday season, could harm our business, prospects, financial condition and results of operations. If our relationships with these third parties are terminated or impaired or if these third parties are unable to deliver products for us, whether through labor shortage, slow down or stoppage, deteriorating financial or business condition, responses to terrorist attacks or for any other reason, we would be required to use alternative carriers for the shipment of products to our customers. In addition, conditions such as adverse weather can prevent any carriers from performing their delivery services, which can have an adverse effect on our ~~customers’~~customers' satisfaction with us. In any of these circumstances, we may be unable to engage alternative carriers on a timely basis, upon terms favorable to us, or at all. Changing carriers would likely have a negative effect on our business, prospects, operating results and financial condition. Potential adverse consequences include:

•

reduced visibility of order status and package tracking;

•

delays in order processing and product delivery;

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•

increased cost of delivery, resulting in reduced gross ~~margins;~~profit percentages; and

•

reduced shipment quality, which may result in damaged products and customer dissatisfaction.

A significant number of merchandise returns could harm our business, financial condition and results of operations.

We allow our customers to return products. If merchandise returns are significant, our business, prospects, financial condition and results of operations could be harmed. We modify our policies relating to returns from time to time and any policies intended to reduce the number of product returns may result in customer dissatisfaction and fewer repeat customers.

If the products that we offer on our Website do not reflect our ~~customers’~~customers' tastes and preferences, our sales and profit margins would decrease.

Our success depends in part on our ability to offer products that reflect ~~consumers’~~consumers' tastes and preferences. ~~Consumers’~~Consumers' tastes are subject to frequent, significant and sometimes unpredictable changes. Because some of the products that we sell consist of ~~manufacturers’~~manufacturers' and ~~retailers’~~retailers' excess inventory, we have limited control over some of the specific products that we are able to offer for sale. If our merchandise fails to satisfy ~~customers’~~customers' tastes or respond to changes in customer preferences, our sales could suffer and we could be required to mark down unsold inventory which would depress our profit margins. In addition, any failure to offer products in line with ~~customers’~~customers' preferences could allow our competitors to gain market share. This could have an adverse effect on our business, prospects, results of operations and financial condition.

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We face risks relating to our inventory.

We directly purchase some of the merchandise that we sell on our Website. We assume the inventory damage, theft and obsolescence risks, as well as price erosion risks for products that we purchase directly. These risks are especially significant because some of the merchandise we sell on our Website is characterized by rapid technological change, obsolescence and price erosion (for example, computer hardware, software and consumer electronics) and because we sometimes make large purchases of particular types of inventory. In addition, we often do not receive warranties on the merchandise we purchase. We accept returns of products sold through our fulfillment partners and we have the risk of reselling the returned products.

In the recent past we have recorded charges for obsolete inventory and have had to sell certain merchandise at a discount or loss. It is impossible to determine with certainty whether an item will sell for more than the price we pay for it. To the extent that we rely on purchased inventory, our success will depend on our ability to liquidate our inventory rapidly, the ability of our buying staff to purchase inventory at attractive prices relative to its resale value and our ability to manage customer returns and the shrinkage resulting from theft, loss and misrecording of inventory. If we are unsuccessful in any of these areas, we may be forced to sell our inventory at a discount or loss.

We purchase inventory from foreign markets and pay for inventory with U.S. dollars. If the dollar weakens with respect to foreign currencies, foreign vendors may require us to pay higher prices for products, which could negatively affect our gross ~~margins.~~profit percentage.

If we do not successfully optimize and operate our warehouse and customer service operations, our business could be harmed.

If we do not successfully optimize and operate our warehouse and customer service operations, it could significantly limit our ability to meet customer demand. Because it is difficult to predict demand, we may not manage our facilities in an optimal way, which may result in excess or insufficient inventory or warehousing capacity. We may be unable to adequately staff our fulfillment and customer service centers. In addition, we rely on a limited number of companies to deliver inventory to us and to ship orders to our customers. If we are not able to negotiate acceptable terms with these companies, or they experience performance problems or other difficulties, it could negatively impact our operating results and customer experience.

The loss of key personnel or any inability to attract and retain additional personnel could affect our ability to successfully grow our business.

Our performance is substantially dependent on the continued services and on the performance of our senior management and other key personnel, including Patrick M. Byrne, our Chief Executive Officer. Our performance also depends on our ability to retain and motivate other officers and key employees. The loss of the services of any of our executive officers or other key employees for any unforeseen reason, including without limitation, illness or call to military service, could harm our business, prospects, financial condition and results of operations. We do not have employment agreements with any of our key personnel and we do not maintain ~~“key person”~~"key person" life insurance policies. Our future success also depends on our ability to identify, attract, hire, train, retain and motivate other highly-skilled technical, managerial, editorial, merchandising, marketing and customer service personnel. Competition for such personnel is intense, and we cannot assure you that we will be able to successfully attract, assimilate or retain sufficiently qualified personnel. Our failure to retain and attract the necessary technical, managerial, editorial, merchandising, marketing and customer service personnel could harm our revenues, business, prospects, financial condition and results of operations.

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We have ~~a rapidly~~an evolving business model.

Our business model has evolved and continues to do so. In the past we have added additional types of services and product offerings and in some cases, we have modified or discontinued those offerings. We may continue to try to offer additional types of products or services and we cannot offer any assurance that any of them will be successful. From time to time we have also modified aspects of our business model relating to our product mix and the mix of direct/fulfillment partner sourcing of the products we offer. We may continue to modify this aspect of our business as well as other significant aspects of our business. We cannot offer any assurance that these or any other modifications will be successful.

We may be unable to manage expansion into new business areas which could harm our business operations and reputation.

Our long-term strategic plan involves expansion of our operations to offer additional types of products and services. We cannot assure you that our efforts to expand our business in this manner will succeed. Our failure to succeed in these markets or businesses or in other product or service offerings may harm our business, prospects, financial condition and results of operation. We cannot assure you that we will be able to expand our operations in a cost-effective or timely manner or that our efforts to expand will be successful. Furthermore, any new business or website we launch that is not favorably received by consumers could damage our reputation or the Overstock.com brand. We may expand the number of categories of products we carry on our Website and these and any other expansions of our operations would also require significant additional expenses and development and would strain our management, financial and operational resources. The lack of market acceptance of such efforts or our inability to generate satisfactory revenues from such expanded services or products to offset their cost could harm our business, prospects, financial condition and results of operations.

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

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We ~~plan to begin~~have begun selling products in international markets, and in the future we may expand into these markets more aggressively. International sales and transactions are subject to inherent risks and challenges that could adversely affect our profitability, including:

•

the need to develop new supplier and manufacturer relationships;

•

the need to comply with additional U.S. and foreign laws and regulations to the extent ~~applicable;~~applicable, including but not limited to, restrictions on advertising practices, regulations governing online services, restrictions on importation of specified or proscribed items, importation quotas, consumer protection laws, enforcement of intellectual property rights, laws dealing with consumer and data protection, privacy, encryption, and restrictions on pricing or discounts; and

•

unexpected changes in international regulatory requirements, taxes and ~~tariffs;~~

·~~difficulties in staffing~~tariffs, and ~~managing foreign operations;~~

·~~longer payment cycles from credit card companies;~~

·~~greater difficulty in accounts receivable collection;~~

·~~potential adverse tax consequences;~~

·~~price controls or other restrictions on foreign currency;~~geopolitical events such as war and

·~~difficulties in obtaining export and import licenses.~~

terrorist attacks.

To the extent we generate international sales and transactions in the future, any negative impact on our international operations could negatively impact our business. In particular, gains and losses on the conversion of foreign payments into United States dollars may contribute to fluctuations in our results of operations and fluctuating exchange rates could cause reduced gross revenues and/or gross ~~margins~~profit percentages from non-dollar-denominated international sales.

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In order to obtain future revenue growth and achieve and sustain profitability, we will have to attract and retain customers on cost-effective terms.

Our success depends on our ability to attract and retain customers on cost-effective terms. We have relationships with online services, search engines, affiliate marketing websites, directories and other Website and e-commerce businesses to provide content, advertising banners and other links that direct customers to our Website. We rely on these relationships as significant sources of traffic to our Website and to generate new customers. If we are unable to develop or maintain these relationships on acceptable terms, our ability to attract new customers and our financial condition could be harmed. If the underlying technology's development evolves in a manner that is no longer beneficial to us our financial condition could be harmed. In addition, certain of our online marketing agreements may require us to pay upfront fees and make other payments prior to the realization of the sales, if any, associated with those payments. Accordingly, if these ~~agreements~~relationships or ~~similar~~ agreements that we may enter into in the future fail to produce the sales that we anticipate, our results of operations will be adversely affected. We cannot assure you that we will be able to increase our revenues, if at all, in a cost-effective manner. We periodically conduct national television and radio branding and advertising campaigns. Such campaigns are expensive and may not result in the cost effective acquisition of customers.

Further, many of the parties with which we may have online-advertising arrangements could provide advertising services for other online or traditional retailers and merchandise liquidators. As a result, these parties may be reluctant to enter into or maintain relationships with us. Failure to achieve sufficient traffic or generate sufficient revenue from purchases originating from third parties may result in termination of these relationships by these third parties. Without these relationships, our revenues, business, prospects, financial condition and results of operations could suffer.

We may not be able to compete successfully against existing or future competitors.

The online liquidation services market is rapidly evolving and intensely competitive. Barriers to entry are minimal, and current and new competitors can launch new Websites at a relatively low cost. Our consumer Website currently competes with:

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liquidation e-tailers such as SmartBargains;

•

online retailers with discount departments such as Amazon.com, Inc., eBay, Inc. and Buy.com, Inc.; and

•

online specialty retailers such as BlueNile and BackCountry; and

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traditional retailers and liquidators such as Ross Stores, Inc., Walmart Stores, Inc., TJX Companies, Inc., Costco Wholesale Corporation, Target Corporation, Best Buy Co., Inc., and Barnes and Noble, Inc., most of which ~~may or may not~~ also have an online presence.

Our Website competes with liquidation ~~“brokers”~~"brokers" and retailers and online marketplaces such as eBay, Inc.

We expect the online liquidation services market to become even more competitive as traditional liquidators and online retailers continue to develop services that compete with our services. In addition, manufacturers and retailers may decide to create their own Website to sell their own excess inventory and the excess inventory of third parties. Competitive pressures created by any one of our competitors, or by our competitors collectively, could harm our business, prospects, financial condition and results of operations.

Further, as a strategic response to changes in the competitive environment, we may from time to time make certain pricing, service or marketing decisions or acquisitions that could harm our business,

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prospects, financial condition and results of operations. For example, to the extent that we enter new lines of businesses such as third-party logistics, or discount brick and mortar retail, we would be competing with large established businesses such as APL Logistics, and Ltd., Ross Stores, Inc., respectively. We have recently entered the online auctions and car listing businesses in which we compete with large established businesses including eBay, Inc. and AutoTrader.com, Inc.

Many of our current and potential competitors described above have longer operating histories, larger customer bases, greater brand recognition and significantly

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greater financial, marketing and other resources than we do. In addition, online retailers and liquidation e-tailers may be acquired by, receive investments from or enter into other commercial relationships with larger, well-established and well-financed companies. Some of our competitors may be able to secure merchandise from manufacturers on more favorable terms, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing or inventory availability policies and devote substantially more resources to Website and systems development than we do. Increased competition may result in reduced operating margins, loss of market share and a diminished brand franchise. We cannot ~~assure you~~provide assurance that we will be able to compete successfully against current and future competitors.

Our operating results depend on our Website, network infrastructure and transaction-processing systems. Capacity constraints or system failures would harm our business, prospects, results of operations and financial condition.

Any system interruptions that result in the unavailability of our Website or reduced performance of our transaction systems would reduce our transaction volume and the attractiveness of the services that we provide to suppliers and third parties and would harm our business, prospects, operating results and financial condition.

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

Our transaction processing systems and network infrastructure may be unable to accommodate increases in traffic in the future. We may be unable to project accurately the rate or timing of traffic increases or successfully upgrade our systems and infrastructure to accommodate future traffic levels on our Website. In addition, we may be unable to upgrade and expand our transaction processing systems in an effective and timely manner or to integrate any newly developed or purchased functionality with our existing systems. For example, in the third quarter 2005 we experienced difficulties with our implementation of infrastructure upgrades, which resulted in our inability to upload new products to our Website for a period of approximately five weeks. Any such difficulties with our transaction processing systems or other difficulties upgrading, expanding or integrating various aspects of our systems may cause unanticipated system disruptions, slower response times, and degradation in levels of customer service, additional expense, impaired quality and speed of order fulfillment or delays in reporting accurate financial information.

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If the facility where substantially all of our computer and communications hardware is located fails, our business, results of operations and financial condition will be harmed.

Our success, and in particular, our ability to successfully receive and fulfill orders and provide high-quality customer service, largely depends on the efficient and uninterrupted operation of our computer and communications systems. Substantially all of our computer and communications hardware is located at a single co-location facility in Salt Lake City, Utah, with a partially redundant back-up system located near our corporate headquarters in Salt Lake City. Although we have designed our back-up system in an effort to avoid or minimize service interruptions in the event of a failure of our main facility, our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks, acts of war, break-ins, earthquake and similar events. Our disaster recovery plan may be inadequate, and our business interruption insurance may be insufficient to compensate us for losses that may occur. Despite the implementation of network security measures, our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays, loss of critical data or the inability to accept and fulfill customer orders. The occurrence of any of the foregoing risks could harm our business, prospects, financial condition and results of operations.

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

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

Our failure to protect our software and other proprietary intellectual property rights or to develop technologies that are as good as our ~~competitors’~~competitors' could put us at a disadvantage to our competitors. In addition, the failure of the third parties whose products we offer for sale on our Website to protect their intellectual property rights, including their domain names, could impair our operations. These failures could harm our business, results of operations and financial condition.

We may be accused of infringing intellectual property rights of third parties.

Other parties also may claim that we infringe their intellectual property rights. We have been and are subject to, and expect to continue to be subject to, legal claims of alleged infringement of the intellectual property rights of third parties. The ready availability of damages, royalties and the potential for injunctive relief has increased the defense litigation costs of patent infringement claims, especially those asserted by third parties whose sole or primary business is to assert such claims. Such claims, whether or not meritorious, may result in significant expenditure of financial and managerial resources, and the payment of damages or settlement amounts. Additionally, we may become subject to injunctions prohibiting us from using software or business processes we currently use or may need to use in the future, or requiring us to obtain licenses from third parties when such licenses may not be available on financially feasible terms or terms acceptable to us or at all. In addition, we may not be able to obtain on favorable terms, or at all, licenses or other rights with respect to intellectual property we do not own in providing e-commerce services to other businesses and individuals under commercial agreements.

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

To remain competitive, we must continue to enhance and improve the functionality and features of our e-commerce businesses. We may face material delays in introducing new services, products and

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enhancements. If this happens, our customers may forgo the use of our Website and use those of our competitors. The Internet and the online commerce industry are rapidly changing. If competitors introduce new products and services using new technologies or if new industry standards and practices emerge, our existing Website and our proprietary technology and systems may become obsolete. Our failure to respond to technological change or to adequately maintain, upgrade and develop our computer network and the systems used to process ~~customers’~~customers' orders and payments could harm our business, prospects, financial condition and results of operations.

We may not be able to obtain trademark protection for our marks, which could impede our efforts to build brand identity.

We have filed trademark applications with the Patent and Trademark Office seeking registration of certain service marks and trademarks. There can be no assurance that our applications will be successful or that we will be able to secure significant protection for our service marks or trademarks in the United States or elsewhere as we expand internationally. Our competitors or others could adopt product or service marks similar to our marks, or try to prevent us from using our marks, thereby impeding our ability to build brand identity and possibly leading to customer confusion. Any claim by another party against us or customer confusion related to our trademarks, or our failure to obtain trademark registration, could negatively affect our business.

We may not be able to enforce protection of our intellectual property rights under the laws of other countries.

As we begin to sell products internationally, we are subject to risks of doing business internationally as related to our intellectual property, including:

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legal uncertainty regarding liability for the listings and other content provided by our users, including uncertainty as a result of less Internet-friendly legal systems, unique local laws, and lack of clear precedent or applicable law; and

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differing intellectual property laws, which may provide insufficient protection for our intellectual property.

Our business and reputation may be harmed by the listing or sale of pirated, counterfeit or illegal items by third parties, and by intellectual property litigation.

We have received in the past, and we anticipate we will receive in the future, communications alleging that certain items listed or sold through our Website infringe third-party copyrights, trademarks and trade names or other intellectual property rights or that we have otherwise infringed third ~~parties’~~parties' past, current or future intellectual property rights.

We may be unable to prevent third parties from listing unlawful goods, and we may be subject to allegations of civil or criminal liability for unlawful activities carried out by third parties through our Website. In the future, we may implement measures to protect against these potential liabilities that could require us to spend substantial resources and/or to reduce revenues by discontinuing certain service offerings. Any costs incurred as a result of liability or asserted liability relating to the sale of unlawful goods or the unlawful sale of goods could harm our revenues, business, prospects, financial condition and results of operations.

Resolving litigation or claims regarding patents or other intellectual property, whether meritorious or not, could be costly, time-consuming, cause service delays, divert our management and key personnel from our business operations, require expensive or unwanted changes in our methods of doing business or require us to enter into costly royalty or licensing agreements, if available. As a result, these claims could harm our business.

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Negative publicity generated as a result of the foregoing could damage our reputation, harm our business and diminish the value of our brand name.

Our ~~Gradient Analytics and~~ Rocker Partners, L.P. litigation may have an adverse effect on our business and financial condition.

In August 2005, we filed an unfair business practice lawsuit against Gradient Analytics, Rocker Partners, LP and others, alleging that the defendants have conspired to denigrate ~~Overstock’s~~Overstock's business for personal profit. In October 2005, we filed an amended complaint alleging additional causes of action and articulating in greater detail the allegations against the defendants. In November 2007, Copper River Partners, L.P. (formerly known as Rocker Partners, LP) filed a cross-complaint against us and some of our current and former directors. ~~In January 2008, Gradient Analytics requested~~Though the ~~court that it be allowed to file~~cross-claims against other current and former directors were dismissed, the cross claims against us and ~~our Chief Executive Officer,~~Dr. Byrne remain. Dr. Patrick ~~Byrne. Dr.~~ Byrne has appeared on nationally syndicated television programs and elsewhere to discuss the litigation. The use of ~~management’s~~management's time and attention and the Company's resources in connection with the litigation and related matters may reduce the time and attention management is able to spend on or give to other aspects of our business, which may have adverse effects on other aspects of our business. In addition, the use of the Company's resources in connection with the litigation and related matters may reduce the resources we are able to spend on or give to other aspects of our business, which may have adverse effects on other aspects of our business. To the extent that any such adverse effects exceed any benefits we may realize from pursuing the litigation, our business, prospects, financial condition and results of operation may suffer. We have settled, and dismissed, our claims against and by Gradient. If we are unsuccessful in defeating the remaining cross-claims, we may incur damages which may not be covered by existing insurance or may not be within policy limits which could adversely impact our financial condition.

Our Prime Broker litigation may have an adverse effect on our business and financial condition.

In February 2007, along with five shareholder plaintiffs, we filed a lawsuit in the Superior Court of California, County of San Francisco against Morgan Stanley & Co. Incorporated, Goldman Sachs & Co., Bear Stearns Companies, Inc., Bank of America Securities LLC, Bank of New York, Citigroup Inc., Credit Suisse (USA) Inc., Deutsche Bank Securities, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., and UBS Financial Services, Inc. In September 2007, we filed an amended complaint adding Lehman Brothers, Inc. as an additional defendant and articulating in greater detail the allegations against the defendants. The use of ~~management’s~~management's time and attention in connection with the litigation and related matters may reduce the time management is able to spend on other aspects of our business, which may have adverse effects on other aspects of our business. To the extent that any such adverse effects exceed any benefits we may realize from pursuing the litigation, our business, prospects, financial condition and results of operation may suffer. Further, the bankruptcy filing by Lehman Brothers may adversely affect our ability to collect any judgment we may obtain against Lehman.

We may be liable if third parties misappropriate our ~~customers’~~customers' personal information.

If third parties are able to penetrate our network security or otherwise misappropriate our ~~customers’~~customers' personal information or credit card information, or if we give third parties improper access to our ~~customers’~~customers' personal information or credit card information, we could be subject to liability. This liability could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims or damages for alleged violations of state or federal laws governing security protocols for the safekeeping of ~~customers’~~customers' personal or credit card information. This liability could also include claims for other misuses of personal information, including unauthorized marketing purposes. These claims could result in litigation. Liability for misappropriation of this information could adversely

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affect our business. In addition, the Federal Trade Commission and state agencies have been investigating various Internet companies regarding their use of personal information. We could incur additional expenses if new regulations regarding the use of personal information are introduced or if government agencies investigate our privacy practices.

We rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to effect secure transmission of confidential information such as customer credit card numbers. We cannot ~~assure you~~provide assurance that advances in computer capabilities, new discoveries in the field of cryptography or other events or developments will not result in a compromise or breach of the algorithms that we use to protect customer transaction data. If any such compromise of our security were to occur, it could harm our reputation, business, prospects, financial condition and results of operations. A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against such security breaches or to alleviate problems caused by such breaches. We cannot assure you that our security measures will prevent security breaches or that failure to prevent such security breaches will not harm our business, prospects, financial condition and results of operations.

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

We sell products manufactured for us by third parties, some of which may be defective. If any product that we sell were to cause physical injury or injury to property, the injured party or parties could bring claims against us as the manufacturer and/or retailer of the product. Our insurance coverage may not be adequate to cover every claim that could be asserted. If a successful claim were brought against us in excess of our insurance coverage, it could adversely affect our business. Even unsuccessful claims could result in the expenditure of funds and management time and could have a negative impact on our business.

~~The promissory notes we hold in connection with the sale of our travel business are risky.~~

As part of the sale of our travel business, we now hold senior and junior promissory notes issued by the purchaser. Both of these notes are in the principal amount of $3,000,000. The security on the senior note is the stock of the travel company we sold. There is no security on the junior note, which note also may be subordinated to all other debt of the travel company, and, according to the junior note terms, is not in default so long as the senior debt is outstanding. In the event of default on one or both of these notes, it is possible that stock held as security on the note will have lost some or all of its value. If the purchaser defaults on one or both of these notes, and we are unable to collect or realize comparable value by foreclosing on the stock held as security, the notes could have little or no value.

We have significant indebtedness.

~~In connection with our~~As a result of the sale of our 3.75% Convertible Senior Notes (the ~~“Senior Notes”~~"Senior Notes") in November 2004, we incurred $120.0 million of indebtedness, due

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December 1, 2011. Under the repurchase program approved by our Board of Directors in 2005, we retired $33.0 million and $10.0 million of the Senior Notes in June and November ~~2005.~~2005, and $9.5 million during the quarter ended September 30, 2008. As of December 31, ~~2007, $77.0~~2008, $67.5 million of the Senior Notes remained outstanding. On February 17, 2009, our Board of Directors approved a debt repurchase program that authorizes us to utilize up to $20.0 million to repurchase a portion of its 3.75% Senior Notes. Under this repurchase program, we retired $4.9 million of the Senior Notes for $3.0 million in cash. As a result of ~~this indebtedness, our principal~~the Senior Notes retirements, we expect to recognize a gain of $1.9 million, net of the associated unamortized discount of $63,000 (see Item 15 of Part IV, "Financial Statements"—Note 17—"Stock and ~~interest payment obligations increased substantially.~~Debt Repurchase Program"). The degree to which we are leveraged could materially and adversely affect our ability to obtain additional financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service obligations is dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. If we fail to comply with our debt covenants, we will be in default.

We may be unable to generate sufficient cash flow to satisfy our debt service obligations.

Our ability to generate cash flow from operations to make interest payments on our debt obligations will depend on our future performance, which will be affected by a range of economic, competitive and business factors. We cannot control many of these factors, including general economic conditions and the health of the internet retail industry. If our operations do not generate sufficient

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cash flow from operations to satisfy our debt service obligations, we may need to borrow additional funds to make these payments or undertake alternative financing plans, such as refinancing or restructuring our debt, or reducing or delaying capital investments and acquisitions. Additional funds or alternative financing may not be available to us on ~~favorable~~acceptable terms, or at all. Our inability to generate sufficient cash flow from operations or obtain additional funds or alternative financing on acceptable terms could have a material adverse effect on our business, prospects, financial condition and results of operations.

We may have difficulty during the current economic turmoil.

In the current volatile credit market, there is risk that any lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit commitments, including but not limited to: extending credit up to the maximum permitted by a credit facility, allowing access to additional credit features and otherwise accessing capital and/or honoring loan commitments. Our lender on our credit facility is Wells Fargo. If our lender fails to honor its legal commitments under our credit facility, it could be difficult in this environment to replace our credit facility on similar terms.

We believe that continued turmoil in the financial markets may lead to general economic weakness, which could have a negative impact on our business. Due to the recent economic developments seen nationally that have adversely impacted the retail industry, liquidation wholesalers and discount retailers have also been under competitive pressure from large national retailers seeking either to liquidate inventory as they go out of business or steeply discounting inventory to mitigate losses as of the end of the year. This resulting margin pressure is anticipated to not be sustainable as brick-and-mortar stores clear out excess inventory in their supplies chains and adjust their business model for the changes in the economy.

Our suppliers, fulfillment partners or key third party vendors of necessary services and technical systems may encounter difficulty with credit or liquidity in their own businesses, which may adversely affect ours.

Risks Relating to our Auctions Site Business

Our auctions business is a new business.

Our auctions business began operation in September 2004. The online auctions business is a relatively new business for us, and we cannot ensure that our expansion into the online auctions business will succeed. Our entry into the online auctions business will require us to devote substantial financial, technical, managerial and other resources to the business. It will also expose us to additional risks, including legal and regulatory risks, and it will require us to compete with established businesses having substantially greater experience in the online auctions business and substantially greater resources than we have.

Our auctions business may be subject to a variety of regulatory requirements.

Many states and other jurisdictions, including Utah, where our company is located, have regulations governing the conduct of traditional ~~“auctions”~~"auctions" and the liability of traditional ~~“auctioneers”~~"auctioneers" in conducting auctions. Although the vast majority of these regulations clearly contemplated only traditional auctions, not online auctions, the potential application of these types of regulations to online auction sites is not clear. We are aware that several states and some foreign jurisdictions have attempted to impose such regulations on other companies operating online auction sites or on the users of those sites. In addition, certain states have laws or regulations that do expressly apply to online auction site services. Although we do not expect these laws to have a significant effect on our auction site business, we will incur costs in complying with these laws, and we may from time to time be

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required to make changes in our business that may increase our costs, reduce our revenues, cause us to prohibit the listing of certain items in certain locations, or make other changes that may adversely affect our auctions business.

Current and future laws could affect our auctions business.

Like our shopping site business, our auction site business is subject to the same laws and regulations that apply to other companies conducting business on and off the Internet. In addition, our auction site business may be affected by other laws and regulations, such as those that expressly apply to online auction site services. Further, because of the wide range of items that users of our auctions service may choose to list on the site, a variety of additional laws and regulations may apply to transactions between users of our site, such as those requiring a license to sell or purchase certain items or mandating particular disclosures in connection with an offer or sale of an item. At least one state recently proposed legislation that sought to prohibit the sale of certain items through internet auction without similar application of the law to traditional retail establishments, online or printed classified advertising publications, or other types of sales list services. To the extent that such current or future laws or regulations prevent or inhibit users from selling items on our auction site, or to the extent these laws discriminate against internet auctions or apply in a discriminatory fashion, they could harm our business.

Our business may be harmed if our auctions business is used for unlawful transactions.

The law regarding the potential liability of an online auction service for the activities of its users is not clear. We prohibit the listing of numerous categories of items in an effort to reduce the possibility that users of our auction site will engage in an unlawful transaction. However, we cannot assure that users of the site will comply with all laws and regulations applicable to them and their transactions, and we may be subject to allegations of civil or criminal liability for any unlawful activities conducted by them. Any costs we incur as a result of any such allegations, as a result of actual or alleged unlawful transactions utilizing our site, or in our efforts to prevent any such transactions, may harm our business. In addition, any negative publicity we receive regarding any such transactions or allegations may damage our reputation, our ability to attract new customers to our main shopping site, and the Overstock.com brand name generally.

Fraudulent activities using our auctions business and disputes between users of our auctions business may harm our business.

We are aware that other companies operating online auction services have periodically received complaints from users alleging that they have not received the purchase price or the goods they expected to receive and that, in some cases, users have been arrested and convicted for engaging in fraudulent activities using those ~~companies’~~companies' auction sites. We may receive similar complaints. We do not have the ability to require users of our services to fulfill their obligations to make payments or to deliver items. We are aware that other companies periodically receive complaints from buyers about the quality of the items they purchase, requests for reimbursement of amounts paid, and communications threatening or commencing legal actions against them. We may receive similar complaints, requests and communications in connection with our auctions business.

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We are subject to risks associated with information transmitted through our auctions service.

The law relating to the liability of online services companies for information carried on or disseminated through their services is currently unsettled. Claims could be made against online services companies under both U.S. and foreign law for defamation, libel, invasion of privacy, negligence, copyright or trademark infringement, or other theories based on the nature and content of the materials disseminated through their services. We are aware that private lawsuits seeking to impose liability under a number of these theories have been brought against other companies operating auction sites. In addition, domestic and foreign legislation has been proposed that would prohibit or impose liability for the transmission over the Internet of certain types of information. Our auctions service permits users to make comments regarding other users. Although all such comments are generated by users and not by us, we are aware that claims of defamation or other injury have been made against other companies operating auction services in the past and could be made in the future against us for comments made by users. Recent court decisions have narrowed the scope of the immunity provided to Internet service providers like us under the Communications Decency Act. This trend, if continued, may increase our potential liability to third parties for the user-provided content on our site.

Difficulties or negative publicity associated with our auctions business could affect our main shopping site business.

Any significant operational or other difficulties we encounter with our auctions business could damage our reputation, our ability to attract new customers to our main shopping site, and the Overstock.com brand name generally. Negative publicity resulting from actual or alleged fraudulent or deceptive conduct by users of our auctions business could also damage our reputation, our ability to attract new customers to our main shopping site, and the Overstock.com brand name generally.

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Risks Relating to our Cars Site ~~Business~~and Real Estate Businesses

Our cars site ~~is a~~and real estate businesses are new ~~business.~~businesses.

Our car listing site and real estate listing businesses began operation in December ~~2006.~~2006 and August 2008, respectively. The ~~car~~ listing ~~site is a~~sites are listing ~~service~~services for automobile and real estate sellers. The online car listing service ~~is a~~and real estate listing service are relatively new ~~business~~businesses for us. We cannot ensure that our expansion into ~~the car listing business~~these businesses will succeed. Our entry into ~~this business~~these businesses will require us to devote substantial financial, technical, managerial and other resources to this car listing ~~site.~~and real estate listing sites. It will also expose us to additional risks, including legal and regulatory risks, and it will require us to compete with established businesses having substantially greater experience in the online car listing and real estate listing service ~~business~~businesses and substantially greater resources than we have.

Our car listing ~~business~~and real estate listing businesses may be subject to a variety of regulatory requirements.

Many states and other jurisdictions, including Utah, where we are located, have regulations governing the conduct of car sellers and real estate agents and public advertisement for car and real estate sales. Generally, these regulations govern the conduct of those sellers advertising their automobiles for sale and real estate listing for sale and are not directly applicable to those providing the medium through which the advertisement is made available to the public. Sellers are often subject to regulations in the nature of ~~“truth~~"truth in advertising laws.”" The application of these regulations to online car listing service and real estate listing providers is not clear. Although we do not expect these laws to have a significant effect on our ~~car~~ listing ~~business,~~businesses, we will incur costs in researching and complying with these laws, and we may from time to time be required to make changes in our ~~business~~businesses that may increase our costs, reduce our revenues, cause us to prohibit certain listing or

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advertising practices, or make other changes that may adversely affect our car and real estate listing ~~business.~~businesses.

Current and future laws could affect our car and real estate listing ~~business.~~businesses.

Like our shopping business, our car and real estate listing ~~business is~~services are subject to the same laws and regulations that apply to other companies conducting business on and off the Internet. In addition, our car and real estate listing ~~business~~services may be affected by other laws and regulations, such as those that expressly apply to advertising automobiles and real estate for sale. To the extent that such current or future laws or regulations prevent users from selling items on our car and real estate listing ~~site,~~sites, they could harm our business.

Our business may be harmed if our car and real estate listing ~~site is~~sites are used for unlawful transactions.

The law regarding the potential liability of an online listing service for automobile sales and real estate is not clear. The platform of the listing service will be accessible to those subscribers who will have the ability to feature their cars and real estate listings for sale and will supply the text descriptions of the vehicles, including the general condition of the vehicle and property and other important information. We will have no ability beforehand to know if the information sellers provide is correct. While our site terms and conditions of usage will prohibit unlawful acts, we cannot rule out the possibility that users of our car and real estate listing ~~site~~sites will engage in unlawful transactions, or fail to comply with all laws and regulations applicable to them and their transactions. We may be subject to allegations of civil or criminal liability for any unlawful activities conducted by such users. Any costs we incur as a result of any such allegations, as a result of actual or alleged unlawful transactions utilizing our site, or in our efforts to prevent any such transactions, may harm our business. In addition, any negative publicity we receive regarding any such transactions or allegations may damage our reputation, our ability to attract new customers to our main shopping site, and the Overstock.com brand name generally.

Fraudulent activities using our car and real estate listing ~~site~~sites and disputes between users of our car and real estate listing ~~site~~sites may harm our business.

We are aware that other companies operating online car and real estate listing services have periodically received complaints from users alleging improprieties in connection with listings and occasionally these complaints may result in regulatory action. ~~Particularly, with~~With any online listing service there is the possibility that sellers may attempt to employ ~~“bait~~"bait and ~~switch”~~switch" techniques, attracting consumers with advertisements of low cost, good condition vehicles in hopes of switching buyer interest to another less favorable vehicle or different property once a potential purchaser responds. Additionally, sellers may attempt to sell vehicles and real estate without accurate descriptions of the condition of the ~~vehicles.~~vehicles or real estate. We do not have the ability to require users of our services to fulfill their obligations to make accurate disclosures or comply with consumer laws prohibiting ~~“bait~~"bait and ~~switch”~~switch" or other prohibited seller tactics. We are aware that other companies providing similar services periodically receive complaints ~~from vehicle purchasers~~ about the quality of the vehicles or real estate they purchase, requesting reimbursement of amounts they have paid, threatening or commencing legal actions against the listing service for damages. We may receive similar complaints, requests and communications, and encounter similar legal actions in connection with our cars and real estate listing ~~business,~~businesses, which may harm our business or reputation among consumers.

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Risks Relating to our Community Site Business

Our community site business is a new business

Our Community site began operation in February 2006 with the introduction of Omuse, an Overstock supported, collaborative writing platform. Omuse allows Community site users to read about and or write ~~“guides”~~"guides" about a universe of subjects in which they may have a particular expertise or interest. The Community site when fully deployed will also have services intended to establish user forum participation, provide customers access to recent news about Overstock and allow users the opportunity to participate in forum reading and writing, to create weblogs or post comments to the weblogs or ~~“blogs”~~"blogs" of other site users, or in our Omuse collaborative writing platform. Presently Omuse is the only operating platform on the Community site. ~~The Community site is a new business for us.~~ We cannot ensure that our expansion into this business will succeed. It is a business which allows persons to contribute content within certain guidelines and subject to terms and conditions. We cannot always be in a position to assure that our community users are abiding by these terms and conditions, or be in a position to interdict or remove inappropriate or infringing material. Our entry into this business will require us to devote substantial financial, technical, managerial and other resources to this site. It is uncertain whether ~~the business~~we will benefit financially from the Community site. The Community site will also expose us to additional risks, including legal and regulatory risks, including, but not limited to, legal actions for possible intellectual property infringement, and claims for libel.

Additionally, our entry into the Community site service will require us to compete with established businesses having substantially greater experience in the Community site service business and which have substantially greater resources than we have.

Risks Relating to the Internet Industry

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

Our future revenues and profits, if any, substantially depend upon the continued widespread use of the Internet as an effective medium of business and communication. Factors which could reduce the widespread use of the Internet include:

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actual or perceived lack of security of information or privacy protection;

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possible disruptions, computer viruses or other damage to the Internet servers or to ~~users’~~users' computers;

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significant increases in the costs of transportation of goods; and

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governmental regulation.

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

Our long-term future depends heavily upon the general ~~public’s~~public's willingness to use the Internet as a means to purchase goods. E-commerce remains a relatively new concept and large numbers of customers may not begin or continue to use the Internet to purchase goods. The demand for and acceptance of products sold over the Internet are highly uncertain and most e-commerce businesses have a short track record. If consumers are unwilling to use the Internet to conduct business, our business may not develop profitably.

The security risks or perception of risks of e-commerce may discourage customers from purchasing goods from us.

In order for the e-commerce market to develop successfully, we and other market participants must be able to transmit confidential information securely over public networks. Third parties may have the technology or know-how to breach the security of customer transaction data. Any breach could

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cause customers to lose confidence in the security of our Website and choose not to purchase from our Website. If someone is able to circumvent our security measures, he or she could destroy or steal valuable information or disrupt our operations. Concerns about the security and privacy of transactions over the Internet could inhibit the growth of the Internet and e-commerce. Our security measures may not effectively prohibit others from obtaining improper access to our information. Third parties may target our customers directly with fraudulent identity theft schemes designed to appear as legitimate communications from us. Any security breach or fraud perpetrated on our customers could expose us to increased costs and to risks of loss, litigation and liability and could seriously disrupt our operations.

Credit card fraud could adversely affect our business.

We routinely receive orders placed with fraudulent credit card data. We do not carry insurance against the risk of credit card fraud, so the failure to adequately control fraudulent credit card transactions could reduce our net revenues and our gross ~~margin.~~profit percentage. We have implemented technology to help us detect the fraudulent use of credit card information. However, we may in the future suffer losses as a result of orders placed with fraudulent credit card data even though the associated financial institution approved payment of the orders. Under current credit card practices, we may be liable for fraudulent credit card transactions because we do not obtain a ~~cardholder’s~~cardholder's signature. If we are unable to detect or control credit card fraud, our liability for these transactions could harm our business, results of operation or financial condition.

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

We do not currently collect sales or other similar taxes for physical shipments of goods into states other than Utah. One or more local, state or foreign jurisdictions may seek to impose sales tax collection obligations on us ~~even though~~because we are engaged in online commerce, ~~and~~even though we have no physical presence in those jurisdictions. The future location of our fulfillment centers and customer service center networks, or any other operation of the company, establishing a physical presence in states where we are not now present, may result in additional sales and other tax obligations. ~~Our~~We challenged the constitutionality of a New York state law which requires internet retailers to collect and remit New York sales taxes on their New York sales, even if the seller has no New York tax "nexus" other than with New York based independent contractors who are internet advertising affiliates. The trial court dismissed our challenge and we are appealing the dismissal. As a result of the enactment of the New York law, we terminated our relationship with New York based advertizing affiliates. Several other states currently have legislative proposals similar to New York's tax law, and if such laws are evaluated and constitutionally upheld, we may have to elect to discontinue in those states valuable marketing through the use of affiliates based in those states, or begin in those states the collection of the taxes. In either event, our business could be harmed and our business could be adversely affected if one or more states or any foreign country successfully asserts that we should collect sales or other taxes on the sale of our ~~merchandise.~~merchandise in compliance with these or any other state law.

Existing or future government regulation could harm our business.

We are subject to the same federal, state and local laws as other companies conducting business on the Internet. Today there are relatively few laws specifically directed towards conducting business on the Internet. However, due to the increasing popularity and use of the Internet, many laws and regulations relating to the Internet are being debated at the state and federal levels. These laws and regulations could cover issues such as user privacy, freedom of expression, pricing, fraud, quality of products and services, taxation, advertising, intellectual property rights and information security. Applicability to the Internet of existing laws governing issues such as property ownership, copyrights

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and other intellectual property issues, taxation, libel, obscenity and personal privacy could also harm our business. For example, United States and foreign laws regulate our ability to use customer information and to develop, buy and sell mailing lists. The vast majority of these laws ~~was~~were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised thereby. Those laws that do reference the Internet are only beginning to be interpreted by the courts and their applicability and reach are therefore uncertain. Additionally, laws governing the permissible contents of products may adversely affect us. Recently the United States Congress passed the Consumer Product Safety Improvement Act ("CPSIA"), which created more stringent safety requirements for children's products and any products containing lead paint sold within the United States. The CPSIA, not only regulates the future manufacture of items such as cribs, pacifiers, toys and children's jewelry, but applies to existing inventories and may cause us to incur losses for any non-compliant items in our inventory, or which we may have sold subsequent to the effective dates of the legislation, through regulatory or civil actions against us. These current and future laws and regulations could harm our business, results of operation and financial condition.

Laws or regulations relating to privacy and data protection may adversely affect the growth of our Internet business or our marketing efforts.

We are subject to increasing regulation at the federal, state and international levels relating to privacy and the use of personal user information. For example, we are subject to various telemarketing laws that regulate the manner in which we may solicit future suppliers and customers. Such regulations, along with increased governmental or private enforcement, may increase the cost of growing our business. In addition, many jurisdictions have laws that limit the uses of personal user information gathered online or offline or require companies to establish privacy policies. The Federal Trade Commission has adopted regulations regarding the collection and use of personal identifying information obtained from children under 13. Proposed legislation in this country and existing laws in foreign countries require companies to establish procedures to notify users of privacy and security policies, obtain consent from users for collection and use of personal information, and/or provide users with the ability to access, correct and delete personal information stored by us. Additional legislation regarding data security and privacy has been proposed in Congress. These data protection regulations may restrict our ability to collect demographic and personal information from users, which could be costly or harm our marketing efforts, and could require us to implement new and potentially costly processes, procedures and/or protective measures.

Risks Relating to the Securities Markets and Ownership of Our Securities

The price of our securities may be volatile and you may lose all or a part of your investment.

Our common stock has been publicly traded only since May 30, 2002. The market price of our common stock has been subject to significant fluctuations since the date of our initial public offering. These fluctuations could continue. It is possible that in some future periods our results of operations may be below the expectations of public market analysts and investors. If this occurs, the market price of our securities may decline. Some of the factors that could affect the market price of our securities are as follows:

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changes in securities ~~analysts’~~analysts' recommendations or estimates of our financial performance or publication of research reports by analysts;

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changes in market valuations of similar companies;

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announcements by us or our competitors of significant contracts, acquisitions, commercial relationships, joint ventures or capital commitments;

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general market conditions;

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actual or anticipated fluctuations in our operating results;

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intellectual property or litigation developments;

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changes in our management team;

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economic factors unrelated to our performance; and

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our issuance of additional shares of stock or other securities.

In addition, the securities markets have experienced significant price and trading volume fluctuations. These broad market fluctuations may adversely affect the trading price of our securities. In the past, following periods of volatility in the market price of a public ~~company’s~~company's securities, securities class action litigation has often been instituted against that company. Such litigation could result in substantial cost and a diversion of ~~management’s~~management's attention and resources.

Our quarterly operating results are volatile and may adversely affect the market price of our securities.

Our future revenues and operating results are likely to vary significantly from quarter to quarter due to a number of factors, many of which are outside our control, and any of which could harm our business. As a result, we believe that quarterly comparisons of our operating results are not necessarily meaningful and that you should not rely on the results of one quarter as an indication of our future performance. In addition to the other risk factors described in this report, additional factors that have caused and/or could cause our quarterly operating results to fluctuate and in turn affect the market price of our securities include:

•

increases in the cost of advertising;

•

our inability to retain existing customers or encourage repeat purchases;

•

the extent to which our existing and future marketing agreements are successful;

•

price competition that results in lower profit margins or losses;

•

the amount and timing of operating costs and capital expenditures relating to the expansion of our business operations and infrastructure;

•

the amount and timing of our purchases of inventory;

•

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

•

our ability to successfully integrate operations and technologies from acquisitions or other business combinations;

•

~~entering into~~offering new lines of products;

•

our ability to attract users to our ~~new~~ auctions, ~~and~~ car listing and real estate sites; and

•

our inability to replace the loss of significant customers.

Our operating results may fluctuate depending on the season, and such fluctuations may affect the market price of our securities.

We have experienced and expect to continue to experience fluctuations in our operating results because of seasonal fluctuations in traditional retail patterns. Sales in the retail and wholesale industry tend to be significantly higher in the fourth calendar quarter of each year than in the preceding three quarters due primarily to increased shopping activity during the holiday season. However, there can be no assurance that our sales in the fourth quarter will exceed those of the preceding quarters or, if the fourth quarter sales do exceed those of the preceding quarters, that we will be able to manage the

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increased sales effectively. Further, we generally increase our inventories substantially in anticipation of holiday season shopping activity, which has a negative effect on our cash flow. Securities analysts and investors may inaccurately estimate the effects of seasonality on our results of operations in one or more future quarters and, consequently, our operating results may fall below expectations, causing the market price of our securities to decline.

We do not intend to pay dividends on our common stock and you may lose the entire amount of your investment in our common stock.

We have never declared or paid any cash dividends on our common stock and do not intend to pay dividends on our common stock for the foreseeable future. We intend to invest our future earnings, if any, to fund our growth. Therefore, you will not receive any funds without selling your shares. We cannot assure that you will receive a positive return on your investment when you sell your shares or that you will not lose the entire amount of your investment.

Our Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws and the Delaware General Corporation Law contain anti-takeover provisions which could discourage or prevent a takeover, even if an acquisition would be beneficial to our stockholders.

Several provisions of our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws could discourage potential acquisition proposals and could delay or prevent a change in control of our company even if that change in control would be beneficial to our stockholders. For example, only one-third of our board of directors will be elected at each of our annual meetings of stockholders, which will make it more difficult for a potential acquirer to change the management of our company, even after acquiring a majority of the shares of our common stock. These provisions, which cannot be amended without the approval of two-thirds of our stockholders, could diminish the opportunities for a stockholder to participate in tender offers, including tender offers at a price above the then current market value of our common stock. In addition, our board of directors, without further stockholder approval, may issue preferred stock, with such terms as the board of directors may determine, that could have the effect of delaying or preventing a change in control of our company. The issuance of preferred stock could also adversely affect the voting powers of the holders of common stock, including the loss of voting control to others. We are also afforded the protections of Section 203 of the

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Delaware General Corporation Law, which could delay or prevent a change in control of our company or could impede a merger, consolidation, takeover or other business combination involving our company or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.

The price of our stock may be vulnerable to manipulation.

We have filed an unfair business practice lawsuit against, ~~Gradient Analytics,~~ Rocker Partners, L.P. and others, alleging that the defendants have conspired to denigrate ~~Overstock’s~~Overstock's business for personal profit, as well as an amended complaint alleging additional causes of action and articulating in greater detail the allegations against the defendants. We have also filed an unfair business practice lawsuit against Morgan Stanley & Co. Incorporated, Goldman Sachs & Co., Bear Stearns Companies, Inc., Bank of America Securities LLC, Bank of New York, Citigroup Inc., Credit Suisse (USA) Inc., Deutsche Bank Securities, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., and UBS Financial Services, Inc. In September 2007, we filed an amended complaint adding Lehman Brothers Holdings Inc. as an additional defendant and articulating in greater detail the allegations against the defendants. We believe that the defendants in both of these lawsuits have engaged in unlawful actions and have caused substantial harm to Overstock, and that certain of the defendants have made efforts to drive the market price of ~~Overstock’s~~Overstock's common stock down. To the extent that the defendants or other persons engage in any such actions or take any other actions to interfere with or destroy or harm ~~Overstock’s~~ Overstock's

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existing and/or prospective business relationships with its suppliers, bankers, customers, lenders, investors, prospective investors or others, our business, prospects, financial condition and results of operation may suffer, and the price of our common stock may be more volatile than it might otherwise be and/or may trade at prices below those that might prevail in the absence of any such efforts.

Our stock has consistently been on the Regulation SHO threshold list.

Regulation SHO requires the stock exchanges to publish daily a list of companies whose stock has failures-to-deliver above a certain threshold. It also requires mandatory close-outs for open fail-to-deliver positions in threshold securities persisting for over 13 days, with the aim that no security would appear on the threshold for any extended period. Despite that aim, we have consistently appeared on the Regulation SHO threshold list and, while we do not currently appear on the Regulation SHO threshold list, we have been on the list for more trading days than any other company.

Any investment in our securities involves a high degree of risk. Investors should consider carefully the risks and uncertainties described above, and all other information in this Form 10-K/A and in any reports we file with the SEC after we file this Form 10-K/A, before deciding whether to purchase or hold our securities. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also become important factors that may harm our business. The occurrence of any of the risks described in this Form 10-K/A could harm our business. The trading price of our securities could decline due to any of these risks and uncertainties, and investors may lose part or all of their investment.

~~Available Information~~

~~Our Internet website address is~~ ~~http://www.overstock.com~~. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our Internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our Internet website and the information contained therein or connected thereto are not a part of or incorporated into this Annual Report on Form 10-K/A.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Corporate office space

~~Through~~In July 2005, we leased 43,000 square feet of office space at Old Mill Corporate Center I for our principal executive offices under an operating lease which was originally scheduled to expire in January 2007. Beginning July 2005, this lease was terminated and replaced with a lease for approximately 154,000 rentable square feet in the Old Mill Corporate Center III in Salt Lake City, Utah for a term of ten years.

We entered into a Tenant Improvement Agreement (the “OMIII Agreement”) with Old Mill Corporate Center III, LLC (the “Lessor”) relating to the office building in February 2005. The OMIII Agreement sets forth the terms on which we paid the costs of certain improvements to the leased office space. The amount of the costs was approximately $2.0 million. The OMIII Agreement also required us to provide a letter of credit in the amount of $500,000 to the Lessor to provide funds for the removal of certain improvements upon the termination of the lease.

In 2006, we commenced implementation of a facilities consolidation and restructuring program. Under the program, we recorded $638,000 of accelerated depreciation of leasehold improvements related to our current office facilities that we are attempting to sublease, and $450,000 of costs incurred to return our office facilities to their original condition as required by the lease agreement.

During fiscal year 2007, we recorded an additional $6.2 million of restructuring costs related to our marketing for sub-lease office and data center space in our current corporate office facilities. We also recorded an additional $2.2 million of restructuring charges related to accelerated depreciation of leasehold improvements located in the abandoned office and co-location data center space and $200,000 of other miscellaneous restructuring charges (see Item 15 of Part IV, “Financial Statements (Restated)”—Note 4—“Restructuring Expense”).

Logistics and warehouse space

In July 2004, we entered into a logistics service agreement (the “Logistics Agreement”) wherein the handling, storage and distribution of some of our prepackaged products were performed by a third party. The Logistics Agreement and subsequent amendment set forth terms on which we paid various fixed fees based onWe currently lease 795,000 square feet of ~~storage and various variable costs based on product handling costs for a term of five years.~~

In December 2005, we entered into a warehouse facilities lease agreement (the “License Agreement”) to license approximately 400,000 square feet of warehouse space in Indiana. The License Agreement was subsequently amended, reducing the amount of lease space to approximately 300,000 and extending the term to 2011.

In the first quarter of 2007, we terminated the Logistics Agreement and gave notice of intent to sublease the Indiana warehouse facilities under the License Agreement. During the second quarter of 2007, we reached an agreement to terminate the Indiana warehouse facilities lease effective August 15, 2007. As a result of the termination of the License agreement and warehouse lease, we incurred $3.7 million of related restructuring charges in 2007 (see Item 15 of Part IV, “Financial Statements (Restated)”—Note 4—“Restructuring Expense”).

~~We lease 561,000 square feet for our~~ warehouse facilities in Utah under operating leases which expire in August ~~2012. We also temporarily~~2012 and August 2015.

On April, 8, 2008, we entered into a lease agreement with Natomas Meadows, LLC (the "Natomas Lease"). The Natomas Lease is for a 686,865 square foot warehouse facility in Salt Lake City, Utah (the "New Warehouse"). The Natomas Lease provides that we will lease the New Warehouse in stages: on October 15, 2008, we leased ~~an additional 251,000~~the initial 232,900 square feet of ~~warehouse space in Utah under operating leases~~the New Warehouse; on February 1, 2009, we leased a total of 435,400 square feet; and, on September 1, 2009, we will lease the remainder, for a total of 686,865 square feet. The Natomas Lease term is seven years, and specifies rent, exclusive of common area maintenance fees, at a variable rate over the course of the staged lease term, ranging from $0.3300 per square foot for the ~~seasonal increase~~first stage, to $0.3950 per square foot for the last year of the Natomas Lease term. Including the space now leased in ~~inventory during~~ the ~~fourth quarter~~New Warehouse, we currently have warehouse operations in two facilities in Salt Lake City. The Natomas Lease anticipates that we may construct a corporate office facility within the New Warehouse. We constructed a 40,000 square foot customer service facility in the New Warehouse and commenced use of ~~2007.~~

22the facility on November 3, 2008.

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Co-location data center

In July 2005, we entered into a Co-location Center Agreement (the “Co-location Agreement”) to build out and lease 11,289 square feet of space at Old Mill Corporate Center II for an IT co-location data center. The Co-location Agreement set forth the terms on which the Lessor would incur the costs to build out the IT co-location data center and we would commence to lease the space upon its completion for a term of ten years. In November 2006 however, we made the determination to consolidate our facilities and to not occupy the IT co-location data center, and the Co-location Agreement was terminated effective December 29, 2006, for which we incurred a $4.6 million restructuring charge (see Item 15 of Part IV, “Financial Statements (Restated)”—Note 4—“Restructuring Expense”).

In December 2006, we entered into a Data Center Agreement (the ~~“OM~~"OM I ~~Agreement”~~Agreement") to lease 3,999 square feet of space at Old Mill Corporate Center I for an IT data center to allow us to consolidate other IT data center ~~facilities at the Old Mill Corporate Center II and at our current corporate offices~~ facilities.

We believe that ~~these~~all the above listed facilities will be sufficient for our needs for at least the next twelve months, subject to seasonal requirements for additional warehouse space during the fourth quarter. ~~Also, we are still considering further consolidation of office space, possibly through a complete relocation of our corporate office facilities.~~

ITEM 3. LEGAL PROCEEDINGS

The information set forth under Item 15 of Part IV, ~~“Financial Statements (Restated)”~~"Financial Statements"—Note ~~13—“~~14—"Commitments and ~~Contingencies”,~~Contingencies," subheading ~~“Legal Proceedings”,~~"Legal Proceedings," contained in the ~~“Notes~~"Notes to Consolidated Financial ~~Statements”~~Statements" of this Annual Report on Form 10-K/A is incorporated by reference in answer to this Item.

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

No matters were submitted to a vote of security holders during the fourth quarter of ~~2007.~~2008.

~~EXECUTIVE OFFICERS OF THE REGISTRANT~~

~~The following persons were executive officers of Overstock.com as of March 1, 2008:~~

~~Executive Officers~~	~~Age~~	~~Position~~
~~Patrick M. Byrne~~	45	~~Chairman, Chief Executive Officer~~
~~Stephen P. Tryon~~	46	~~Senior Vice President, Logistics~~
~~Jonathan E. Johnson III~~	42	~~Senior Vice President, Corporate Affairs and Legal~~
~~David K. Chidester~~	36	~~Senior Vice President, Finance~~
~~Stormy Simon~~	39	~~Senior Vice President, Customer Care, PR and Branding~~
~~Sam Peterson~~	32	~~Senior Vice President, Technology~~
~~Jacob Hawkins~~	32	~~Senior Vice President, Change Management~~

~~Dr. Patrick M. Byrne~~ has served as our Chief Executive Officer (principal executive officer) and as a Director since October 1999, as Chairman of the Board from February 2001 through October 2005, and since July 2006. From September 1997 to May 1999, Dr. Byrne served as President and Chief Executive Officer of Fechheimer Brothers, Inc., a manufacturer and distributor of uniforms. From 1995 until its sale in September 1999, Dr. Byrne was Chairman, President and Chief Executive Officer of Centricut, LLC, a manufacturer and distributor of industrial torch parts. From 1994 to the present, Dr. Byrne has served as a Manager of the Haverford Group, an investment company and an affiliate of Overstock. Dr. Byrne has a Bachelor of Arts degree in Chinese studies from Dartmouth College, a Master’s degree from Cambridge University as a Marshall Scholar, and a Ph.D. in philosophy from Stanford University.

~~Mr. Stephen P. Tryon~~ joined Overstock.com in August 2004, and serves as Senior Vice President, Logistics, with primary responsibility for logistics and supervision of the Company’s warehouse operations, and most recently, managing the Company’s human resources. Prior to joining Overstock.com, Mr. Tryon was the Legislative Assistant to the Chief of Staff of the United States Army. During his 21 years with the Army, his assignments included director of plans for the 10th Mountain Division, Congressional Fellow for United States Senator Max Cleland, Assistant Professor of Philosophy at the United States Military Academy, and commander of a company of paratroopers. Mr.Tryon received a B.S. in Applied Sciences from the U.S. Military Academy in 1983 and a M.A. in Philosophy from Stanford University in 1992.

~~Mr. Jonathan E. Johnson III~~ joined Overstock.com in September 2002. He has served as our General Counsel and as our Vice President, Strategic Projects, and currently serves as our Senior Vice President, Corporate Affairs and Legal and as our Secretary. From May 1999 to September 2002, Mr. Johnson held various positions with TenFold Corporation, including positions as General Counsel, Executive Vice President and Chief Financial Officer. From October 1997 to April 1999, Mr. Johnson practiced law in the Los Angeles offices of Milbank, Tweed, Hadley & McCloy and from September 1994 to September 1997, he practiced law in the Los Angeles offices of Graham & James. From February 1994 to August 1994, Mr. Johnson served as a judicial clerk at the Utah Supreme Court for Justice Leonard H. Russon, and prior to that, from August 1993 to January 1994, Mr. Johnson served as a judicial clerk at the Utah Court of Appeals for Justice Russon. Mr. Johnson holds a Bachelor’s Degree in Japanese from Brigham Young University, studied for a year at Osaka University of Foreign Studies in Japan, and received his law degree from the J. Reuben Clark, Jr. Law School at Brigham Young University.

~~Mr. David K. Chidester~~ currently serves as our Senior Vice President, Finance (our principal financial and accounting officer). Mr. Chidester served as our Controller from August 1999 to August 2003 and as our Acting Chief Financial Officer from August 2003 to January 2004. Prior to joining Overstock.com, Mr. Chidester was with PricewaterhouseCoopers LLP from December 1995 to August 1999. Mr. Chidester holds a Bachelor of Science Degree in Accounting and a Master’s Degree in Business Administration, both from the University of Utah.

~~Ms. Stormy Simon~~ currently serves as our Senior Vice President, Customer Care and Strategic Marketing. Ms. Simon previously served as our Vice President, BMMG, Travel and Off-Line Advertising, Chief of Staff and as our Director of B2B. Prior to joining Overstock.com in 2001, Ms. Simon worked in the media and travel industries.

~~Mr. Sam Peterson~~ currently serves as our Senior Vice President, Technology. Mr. Peterson previously served as the Vice President, Software Development from early 2005, and was appointed as Director, Network and Systems Engineering in 2003. Prior to joining Overstock in 1999, Mr. Peterson was involved in creating several start-up internet ventures, including Fitnesoft, Inc.

~~Mr. Jacob Hawkins~~ currently serves as Senior Vice President, Change Management. Mr. Hawkins has performed various roles across the organization, including business development, marketing, merchandising, technology, and project management. Prior to joining Overstock.com, Mr. Hawkins worked for Professional Marketing International. Mr. Hawkins holds a Bachelor’s degree in Business Management from Brigham Young University and a Masters of Business Administration with an emphasis in information systems from the University of Utah.

~~There are no family relationships among any of the current officers and directors of the Company.~~

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PART II

ITEM 5. MARKET FOR THE ~~REGISTRANT’S~~REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is traded on the NASDAQ Global Market under the symbol ~~“OSTK”.~~"OSTK." Prior to May 30, 2002, there was no public market for our common stock. The following table sets forth, for the periods indicated, the high and low sales prices per share for our common stock as reported by NASDAQ.

		Common Stock Price

		High		Low
Year Ended December 31, 2007
	First Quarter		19.72		14.05
	Second Quarter		19.98		15.80
	Third Quarter		28.99		17.22
	Fourth Quarter		39.39		14.75
Year Ended December 31, 2008
	First Quarter		15.68		8.61
	Second Quarter		28.50		11.50
	Third Quarter		29.59		13.64
	Fourth Quarter		20.13		6.34

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STOCK PERFORMANCE GRAPH

The following graph shows a comparison of cumulative total stockholder return, calculated on a dividend reinvested basis, from the market closing price on December 31, 2003 through December 31, 2008 for Overstock.com, Inc., Hemscott's (formerly Media General's) Nasdaq U.S. Index and Hemscott's Internet Software and Services Index. The graph assumes that $100 was invested in Overstock's common stock and the above indices at the closing prices on December 31. Historic stock price performance is not necessarily indicative of future stock price performance.

Common
Stock Price

High

Low

Year Ended December 31, 2006

First Quarter

35.02

21.60

Second Quarter

30.63

19.00

Third Quarter

22.93

16.03

Fourth Quarter

19.09

13.40

Year Ended December 31, 2007

First Quarter

19.72

14.05

Second Quarter

15.80

19.98

Third Quarter

28.99

17.22

Fourth Quarter

39.39

14.75

COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG OVERSTOCK.COM, INC.,
NASDAQ MARKET INDEX-U.S. AND HEMSCOTT GROUP INDEX

ASSUMES $100 INVESTED ON DEC. 31, 2003
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2008

Holders

As of ~~March 14, 2008,~~February 23, 2009, there were ~~194~~183 holders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of shareholders represented by these record holders.

Dividends

We have never declared or paid any cash dividends on our common stock. We currently intend to retain any earnings for future growth and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our results of operations, financial conditions, contractual and legal restrictions and other factors the board deems relevant. Our Loan and Security Agreement with Wells Fargo Retail Finance, LLC ~~dated December 12, 2005~~as amended and restated on January 6, 2009, prohibits us from paying dividends without the consent of the lender.

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Recent Sales of Unregistered Securities

~~During January 2005, the Board~~None.

Issuer Purchases of Directors authorized a stock repurchase program under which we were authorized to repurchase up to $50.0 million of our 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 the stock repurchase program to include the repurchase of its Convertible Senior Notes.

During 2005, we entered into several purchased call options, pursuant to which we could have been required to purchase up to 1.3 million shares of our common stock at certain settlement dates during the quarter ended June 30, 2005. In connection with these repurchase transactions; we paid approximately $47.5 million, which was recorded in shareholders’ equity in the consolidated balance sheet.

At our option, the purchased call options were settled in cash or stock, based on the market price of our common stock on the date of the settlement. Upon settlement, we either had our capital investment returned with a premium or received shares of our common stock, depending, respectively, on whether the market price of our common stock was above or below a pre-determined price agreed in connection with each such transaction.

Under the share repurchase program, we repurchased approximately 665,000 shares of our 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 settlement of $41.1 million of structured stock repurchase transactions during the twelve months ended December 31, 2005. The purchased call options that did not settle in stock settled in cash totaling $7.9 million, which we received in July 2005.

Equity Securities

In January 2008, the Board of Directors ~~an additional~~approved a repurchase program under which we ~~are~~were authorized to repurchase up to $20.0 million of our common stock and/or Convertible Senior Notes due 2011 through December 31, 2009. Under this repurchase program, we repurchased approximately ~~1.1~~1.2 million shares of our common stock in open market transactions for ~~$12.0~~$13.4 million ~~through March 14, 2008. None of the purchases were made~~ during the ~~fourth quarter~~year ended December 31, 2008. The Company had fully utilized the authorized this $20.0 million repurchase program as of ~~2007.~~

December 31, 2008.

We have 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. We match 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. Our matching contribution totaled ~~$261,000,~~ $389,000, $494,000 and ~~$494,000~~$570,000 during ~~2005,~~the years ended December 31, 2006, 2007 and ~~2007,~~2008, respectively. Beginning in 2006 and through January of 2008, our matching contribution was paid using common stock issued from treasury. In addition, for ~~the 2005,~~ 2006 and 2007, ~~years,~~ the board of directors approved a discretionary ~~contribution~~contributions of 2% of salary to all employees eligible to participate in the plan totaling ~~$342,000,~~ $409,000 and $408,000, respectively. The contributions in 2006 and 2007 were settled with shares of our common stock in the following year. No discretionary contributions were approved or paid for 2008.

Stock based Compensation

Stock Options

Our board of directors adopted the Amended and Restated 1999 Stock Option Plan, the 2002 Stock Option Plan and the 2005 Equity Incentive Plan (collectively, the ~~“Plans”~~"Plans"), in May 1999, April 2002 and April 2005, respectively. Under these Plans, the Board of Directors may issue incentive stock options to our employees and directors and non-qualified stock options to our consultants, as well as other types of awards under the 2005 Equity Incentive Plan. Options granted under these Plans generally expire at the end of either five or ten years and vest in accordance with a vesting schedule determined by our 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~~Subsequent awards will be made under the 2005 Equity Incentive Plan. As of December 31, ~~2007, 608,000~~2008, 1.2 million shares of stock based awards were available for future grants under ~~these Plans.~~

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the 2005 Equity Incentive Plan.

The following is a summary of stock option activity (amounts in thousands, except per share data):

		2006					2007					2008

		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding—beginning of year			1,299		$	18.09		1,011		$	18.97		1,161		$	20.48
	Granted at fair value		183			22.47		762			18.14		11			14.14
	Exercised		(276	)		9.19		(354	)		8.81		(112	)		12.96
	Canceled/forfeited		(195	)		30.17		(258	)		23.65		(86	)		20.45

Outstanding—end of year			1,011			18.97		1,161			20.48		974			21.27

Options exercisable at year-end			679		$	15.74		408		$	22.36		609		$	23.18

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2005

2006

2007

Shares

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Exercise
Price

Outstanding—beginning of year

1,512

$
12.90

1,299

$
18.09

1,011

$
18.97

Granted at fair value

220

44.44

183

22.47

762

18.14

Exercised

(298
)
8.56

(276
)
9.19

(354
)
8.81

Canceled/forfeited

(135
)
24.08

(195
)
30.17

(258
)
23.65

Outstanding—end of year

1,299

18.09

1,011

18.97

1,161

20.48

Options exercisable at year-end

739

$
11.33

679

$
15.74

408

$
22.36

Restricted Stock Units Activity

InDuring the ~~first quarter of~~year ended December 31, 2008, ~~the Compensation Committee of the Board of Directors approved grants of approximately 460,000~~491,000 restricted stock units towere granted. The cost of restricted stock units is determined using the fair value of our ~~officers~~common stock on the date of the grant and ~~employees which~~compensation expense is recognized in accordance with the vesting schedule. The weighted average grant date fair value of restricted stock units granted during the year ended December 31, 2008 was $12.64.

The following is a summary of restricted stock unit activity (amounts in thousands, except per share data):

		2008

		Units			Grant Date Fair Value
Outstanding—beginning of year			—		$	—
	Granted at fair value		491			12.64
	Vested		—			—
	Canceled/forfeited		(42	)		12.13

Outstanding—end of year			449			12.69

Restricted stock units vested at year-end			—			—

Restricted stock units vest over three years at 25% at the end of the first year, ~~an additional~~ 25% at the end of the second year and 50% at the end of the third year. During ~~2007, except as previously reported in a Quarterly Report on Form 10-Q/A, or current Report on Form 8-K, we did not sell any equity securities that were not registered under~~ the ~~Securities Act.~~

~~STOCK PERFORMANCE GRAPH~~

~~The following graph shows a comparison of cumulative total stockholder return, calculated on a dividend reinvested basis, from the market closing price on~~years ended December 31, ~~2002 through~~2006, 2007 and 2008, the Company recorded stock based compensation related to restricted stock units of $0, $0 and $896,000.

At December 31, 2007 for Overstock.com, Inc., Hemscott’s (formerly Media General’s) Nasdaq U.S. Index and Hemscott’s Internet Software and Services Index. The graph assumes that $100 was invested in Overstock’s common2008, 449,000 restricted stock ~~and the above indices at the closing prices on~~units were outstanding. No restricted stock units had been vested as of December 31, ~~2002. Historic~~2008. On January 13, 2009, 337,000 restricted stock ~~price performance is not necessarily indicative~~units were granted.

Table of ~~future stock price performance.~~Contents

~~COMPARISON OF CUMULATIVE TOTAL RETURN~~ ITEM 6. SELECTED FINANCIAL DATA

~~AMONG OVERSTOCK.COM, INC.,~~

~~NASDAQ MARKET INDEX-U.S. AND HEMSCOTT GROUP INDEX~~

~~ASSUMES $100 INVESTED ON DEC. 31, 2002~~

~~ASSUMES DIVIDEND REINVESTED~~

~~FISCAL YEAR ENDING DEC. 31, 2007~~

			Year ended December 31,

			2004			2005			2006(1)			2007			2008
			(in thousands, except per share data)
Consolidated Statement of Operations Data:
Revenue
	Direct revenue		$	212,264		$	323,136		$	301,509		$	197,088		$	174,203
	Fulfillment partner revenue			278,357			471,839			478,628			568,814			660,164

		Total revenue		490,621			794,975			780,137			765,902			834,367

Cost of goods sold
	Direct			183,653			280,647			284,774			168,008			154,501
	Fulfillment partner			240,530			397,855			405,559			473,344			536,957

		Total cost of goods sold		424,183			678,502			690,333			641,352			691,458

Gross profit				66,438			116,473			89,804			124,550			142,909

Operating expenses:
	Sales and marketing			40,559			77,155			70,897			55,458			57,634
	Technology			8,509			27,901			65,158			59,453			57,815
	General and administrative			22,024			33,043			46,837			41,976			38,373
	Restructuring(2)			—			—			5,674			12,283			—

		Total operating expenses		71,092			138,099			188,566			169,170			153,822

Operating loss				(4,654	)		(21,626	)		(98,762	)		(44,620	)		(10,913	)
Interest income, net				1,064			(161	)		3,566			4,788			3,163
Interest expense				(775	)		(5,582	)		(4,765	)		(4,188	)		(3,462	)
Other income (expense), net				(49	)		4,728			81			(92	)		(1,446	)

Loss from continuing operations				(4,414	)		(22,641	)		(99,880	)		(44,112	)		(12,658	)
Loss from discontinued operations				—			(2,571	)		(6,882	)		(3,924	)		—

Net loss				(4,414	)		(25,212	)		(106,762	)		(48,036	)		(12,658	)
Deemed dividend related to redeemable common stock				(188	)		(185	)		(99	)		—			—

Net loss attributable to common shares			$	(4,602	)	$	(25,397	)	$	(106,861	)	$	(48,036	)	$	(12,658	)

Net loss per common share—basic and diluted
	Loss from continuing operations		$	(0.26	)	$	(1.17	)	$	(4.91	)	$	(1.86	)	$	(0.55	)
	Loss from discontinued operations		$	—		$	(0.13	)	$	(0.34	)	$	(0.17	)	$	—
Net loss per common share—basic and diluted			$	(0.26	)	$	(1.30	)	$	(5.25	)	$	(2.03	)	$	(0.55	)
Weighted average common shares outstanding—basic and diluted				17,846			19,429			20,332			23,704			22,901

Table of Contents

~~ITEM 6. SELECTED FINANCIAL DATA (RESTATED)~~

~~Restatement~~

As discussed in Item 15 of Part IV “Financial Statements (Restated)” – Note 3 – “Restatement of Financial Statements”, the Company is restating (1) its consolidated financial statements as of December 31, 2007 and 2006 and for the years ended December 31, 2007, 2006, 2005; (2) its selected financial data as of and for the years ended December 31, 2007, 2006, 2005, 2004 and 2003; and (3) its quarterly results of operations for all quarters in the years ended December 31, 2007 and 2006 in this Amendment to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 to correct errors related to the accounting for customer refunds and credits and the accounting for gift cards issued to customers. All amounts in Selected Financial Data (Restated) have been adjusted, as appropriate, for the effects of the restatement.

The following selected consolidated financial data as of December 31, 2006 and 2007 and for each of the three years in the period ended December 31, 2007, are derived from our audited consolidated financial statements included elsewhere in this Form 10-K/A. The consolidated financial data as of December 31, 2003, 2004 and 2005 and for the years ended December 31, 2003 and 2004 are derived from our restated unaudited consolidated financial statements not contained herein. The historical results do not necessarily indicate results expected for any future period. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations (Restated)” and the Consolidated Financial Statements and the related notes thereto included elsewhere in this Form 10-K/A.

Year ended December 31,

2003(4)
(Restated)

2004(4)
(Restated)

2005(4)
(Restated)

2006(1)(4)
(Restated)

2007(4)
(Restated)

(in thousands, except per share data)

Consolidated Statement of Operations Data:

Revenue

Direct revenue

$
136,317

$
212,264

$
323,136

$
301,509

$
197,088

Fulfillment partner revenue

98,286

278,357

471,839

478,628

568,814

Total revenue

234,603

490,621

794,975

780,137

765,902

Cost of goods sold

Direct

122,418

183,653

280,647

284,774

168,008

Fulfillment partner

86,902

240,530

397,855

405,559

473,344

Total cost of goods sold

209,320

424,183

678,502

690,333

641,352

Gross profit

25,283

66,438

116,473

89,804

124,550

Operating expenses:

Sales and marketing

20,228

40,559

77,155

70,897

55,458

Technology

2,549

8,509

27,901

65,158

59,453

General and administrative

14,987

22,024

33,043

46,837

41,976

Restructuring(2)

—

—

—

5,674

12,283

Total operating expenses

37,764

71,092

138,099

188,566

169,170

Operating loss

(12,481
)
(4,654
)
(21,626
)
(98,762
)
(44,620
)
Interest income, net

461

1,064

(161
)
3,566

4,788

Interest expense

(76
)
(775
)
(5,582
)
(4,765
)
(4,188
)
Other (expense) income, net

115

(49
)
4,728

81

(92
)

Loss from continuing operations

(11,981
)
(4,414
)
(22,641
)
(99,880
)
(44,112
)
Discontinued operations(3):

—

—

—

—

—

Loss from discontinued operations

—

—

(2,571
)
(6,882
)
(3,924
)

Net loss

(11,981
)
(4,414
)
(25,212
)
(106,762
)
(48,036
)
Deemed dividend related to redeemable common stock

(262
)
(188
)
(185
)
(99
)
—

Net loss attributable to common shares

$
(12,243
)
$
(4,602
)
$
(25,397
)
$
(106,861
)
$
(48,036
)

Net loss per common share—basic and diluted

Loss from continuing operations

$
(0.76
)
$
(0.26
)
$
(1.17
)
$
(4.91
)
$
(1.86
)
Loss from discontinued operations

$
—

$
—

$
(0.13
)
$
(0.34
)
$
(0.17
)
Net loss per common share—basic and diluted

$
(0.76
)
$
(0.26
)
$
(1.30
)
$
(5.25
)
$
(2.03
)
Weighted average common shares outstanding—basic and diluted

16,198

17,846

19,429

20,332

23,704

	As of December 31,

	2004		2005		2006(3)		2007(3)		2008
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	198,678	$	55,875	$	126,965	$	101,394	$	100,577
Marketable securities		88,802		55,799		—		46,000		8,989
Working capital		267,640		79,561		59,475		62,621		39,679
Total assets		381,600		335,953		264,453		231,143		172,445
Total indebtedness		117,589		84,676		84,336		82,453		69,130
Redeemable common stock		3,166		3,205		—		—		—
Stockholders' equity (deficit)		169,504		89,148		56,367		18,212		(2,985	)

~~Table of Contents~~

As of December 31,

2003 (4)
(Restated)

2004 (4)
(Restated)

2005 (4)
(Restated)

2006 (4)
(Restated)

2007 (4)
(Restated)

(in thousands)

Balance Sheet Data:

Cash and cash equivalents

$
28,846

$
198,678

$
55,875

$
126,965

$
101,394

Marketable securities

11,500

88,802

55,799

—

46,000

Working capital

45,668

267,640

79,561

59,475

62,621

Total assets

100,170

381,600

335,953

264,453

231,143

Total indebtedness

161

117,589

84,676

84,336

82,453

Redeemable common stock

2,978

3,166

3,205

—

—

Stockholders’ equity

55,298

169,504

89,148

56,367

18,212

(1)

Effective January 1, 2006, we adopted SFAS 123(R) and recognized stock-based compensation of $4.1 million, ~~and~~ $4.5 million, inand $3.3 million during the years ended December 31, 2006, 2007 and ~~2007,~~2008, respectively.

(2)

During the fourth quarter of 2006, we commenced implementation of a facilities consolidation and restructuring program designed to reduce the overall expense structure in an effort to improve future operating performance (see Item 15 of Part IV, ~~“Financial Statements (Restated)”~~"Financial Statements"—Note ~~4—“~~3—"Restructuring ~~Expense”~~Expense").

(3)

As part of the program to reduce our expense structure and sell non-core businesses, we decided during the fourth quarter of 2006 to sell our travel subsidiary ~~(“OTravel”~~("OTravel"). As a result, ~~OTravel’s~~OTravel's operations have been classified as a discontinued operation and therefore are not included in the results of continuing operations. The loss from discontinued operations for OTravel was $6.9 million for the year ended December 31, 2006 (including a goodwill impairment charge of $4.5 million) and $3.9 million for the year ended December 31, 2007 (including a goodwill impairment charge of $3.8 million—see Item 15 of Part IV, ~~“Financial Statements (Restated)”~~"Financial Statements"—Note ~~5—“~~4—"Acquisition and Subsequent Discontinued ~~Operations”~~Operations").

~~(4)~~As discussed in Item 15 of Part IV “Financial Statements (Restated)” — Note 3 — “Restatement of Financial Statements”, the Company is restating (1) its consolidated financial statements as of December 31, 2007 and 2006 and for the years ended December 31, 2007, 2006, 2005; (2) its selected financial data as of and for the years ended December 31, 2007, 2006, 2005, 2004 and 2003; and (3) its quarterly results of operations for all quarters in the years ended December 31, 2007 and 2006 in this Amendment No. 1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 to correct errors related to the accounting for customer refunds and credits and the accounting for gift cards issued to customers. The effect of the error adjustments on the Consolidated Results of Operations for the years ended December 31, 2003, 2005, 2006 and 2007 is to increase net loss by $433,000, $294,000, $5.0 million and $3.0 million, respectively and decrease net loss for the year ended December 31, 2004 by $126,000. The effect of the error adjustments on loss per common share from continuing operations for the years ended December 31, 2003, 2005, 2006 and 2007 is to increase loss per common share from continuing operations by $0.03, $0.01, $0.24 and $0.13, respectively. The error adjustments did not have an effect on loss per common share from continuing operations for the year ended December 31, 2004. All amounts in Management’s Discussion and Analysis of Financial Condition and Results of Operations (Restated) have been adjusted, as appropriate, for the effects of the restatement.

~~The consolidated financial data as of December 31, 2003, 2004 and 2005 and for the years ended December 31, 2003 and 2004 have been restated as follows:~~

Year ended December 31, 2003

As Reported

Adjustments

As Restated

(in thousands, except per share data)

Consolidated Statement of Operations Data:

Revenue

Direct revenue

$
138,134

(1,817
)
$
136,317

Fulfillment partner revenue

100,811

(2,525
)
98,286

Total revenue

238,945

(4,342
)
234,603

Cost of goods sold

Direct

124,039

(1,621
)
122,418

Fulfillment partner

89,190

(2,288
)
86,902

Total cost of goods sold

213,229

(3,909
)
209,320

Gross profit

25,716

(433
)
25,283

Operating expenses:

Sales and marketing

20,228

—

20,228

Technology

2,549

—

2,549

General and administrative

14,987

—

14,987

Restructuring

—

—

—

Total operating expenses

37,764

—

37,764

Operating loss

(12,048
)
(433
)
(12,481
)
Interest income, net

461

—

491

Interest expense

(76
)
—

(76
)
Other (expense) income, net

115

—

115

Loss from continuing operations

(11,548
)
(433
)
(11,981
)
Discontinued operations:

—

—

—

Loss from discontinued operations

—

—

Net loss

(11,548
)
(433
)
(11,981
)
Deemed dividend related to redeemable common stock

(262
)
—

(262
)

Net loss attributable to common shares

$
(11,810
)
(433
)
$
(12,243
)

Net loss per common share—basic and diluted

Loss from continuing operations

$
(0.73
)
(0.03
)
$
(0.76
)
Loss from discontinued operations

$
—

—

$
—

Net loss per common share—basic and diluted

$
(0.73
)
(0.03
)
$
(0.76
)

Weighted average common shares outstanding—basic and diluted

16,198

16,198

Table of Contents

Year ended December 31, 2004

As Reported

Adjustments

As Restated

(in thousands, except per share data)

Consolidated Statement of Operations Data:

Revenue

Direct revenue

$
213,210

(946
)
$
212,264

Fulfillment partner revenue

281,425

(3,068
)
278,357

Total revenue

494,635

(4,014
)
490,621

Cost of goods sold

Direct

184,964

(1,311
)
183,653

Fulfillment partner

243,468

(2,938
)
240,530

Total cost of goods sold

428,432

(4,249
)
424,183

Gross profit

66,203

235

66,438

Sales and marketing

40,559

—

40,559

Technology

8,509

—

8,509

General and administrative

22,024

—

22,024

Restructuring

—

––

Total operating expenses

71,092

—

71,092

Operating loss

(4,889
)
235

(4,654
)
Interest income, net

1,173

(109
)
1,064

Interest expense

(775
)
—

(775
)
Other (expense) income, net

(49
)
—

(49
)

Loss from continuing operations

(4,540
)
126

(4,414
)
Discontinued operations(3):

—

—

—

Loss from discontinued operations

—

—

—

Net loss

(4,540
)
126

(4,414
)
Deemed dividend related to redeemable common stock

(188
)
—

(188
)

Net loss attributable to common shares

$
(4,728
)
126

$
(4,602
)

Net loss per common share—basic and diluted

Loss from continuing operations

$
(0.26
)
—

$
(0.26
)
Loss from discontinued operations

$
—

—

$
—

Net loss per common share—basic and diluted

$
(0.26
)
—

$
(0.26
)

Weighted average common shares outstanding—basic and diluted

17,846

17,846

~~Table of Contents~~

As of December 31, 2003

As Reported

Adjustments

As Restated

(in thousands)

Balance Sheet Data:

Cash and cash equivalents

$
28,846

—

$
28,846

Marketable securities

11,500

—

11,500

Working capital

46,101

(433
)
45,668

Total assets

98,549

1,621

100,170

Total indebtedness

161

—

161

Redeemable common stock

2,978

—

2,978

Stockholders’ equity

55,731

(433
)
55,298

As of December 31, 2004

As Reported

Adjustments

As Restated

(in thousands)

Balance Sheet Data:

Cash and cash equivalents

$
198,678

—

$
198,678

Marketable securities

88,802

—

88,802

Working capital

267,947

(307
)
267,640

Total assets

377,543

4,057

381,600

Total indebtedness

117,589

—

117,589

Redeemable common stock

3,166

—

3,166

Stockholders’ equity

169,811

(307
)
169,504

As of December 31, 2005

As Reported

Adjustments

As Restated

(in thousands)

Balance Sheet Data:

Cash and cash equivalents

$
55,875

—

$
55,875

Marketable securities

55,799

—

55,799

Working capital

80,162

(601
)
79,561

Total assets

325,913

10,040

335,953

Total indebtedness

84,676

—

84,676

Redeemable common stock

3,205

—

3,205

Stockholders’ equity

89,749

(601
)
89,148

~~Table of Contents~~

ITEM 7. ~~MANAGEMENT’S~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF ~~OPERATION (RESTATED)~~OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operation should be read in conjunction with our Consolidated Financial Statements and the related Notes thereto. This ~~discussion contains~~Annual Report on Form 10-K/A includes forward-looking statements ~~based upon~~within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding guidance, industry prospects or future results of operations or financial position, made in this Annual Report on Form 10-K/A are forward-looking. We use words such as anticipates, believes, expects, future, intends, and similar expressions to identify forward-looking statements. Forward-looking statements reflect management's current expectations and are inherently uncertain. Actual results could differ materially for a variety of reasons, including, among others, changes in global economic conditions and consumer spending, world events, the rate of growth of the Internet and online commerce, the amount that ~~involve risks and uncertainties, such as our plans, objectives, expectations and intentions, as set forth under “Special Note Regarding Forward-Looking Statements.” Our actual results~~Overstock.com invests in new business opportunities and the timing of ~~events~~those investments, the mix of products sold to customers, the mix of net sales derived from products as compared with services, the extent to which we owe income taxes, competition, management of growth, potential fluctuations in operating results, international growth and expansion, fluctuations in foreign exchange rates, the outcomes of legal proceedings and claims, fulfillment center optimization, risks of inventory management, seasonality, the degree to which the Company enters into, maintains, and develops commercial agreements, acquisitions, and strategic transactions, payments risks, and risks of fulfillment throughput and productivity. In addition, the current global economic climate amplifies many of these risks. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ ~~materially~~significantly from ~~those anticipated~~management's expectations, are described in ~~these forward-looking statements as a result~~greater detail in Item 1A of ~~several factors, including those set forth in the following discussion and under “Risk Factors” and elsewhere in this Form 10-K/A.~~Part I, "Risk Factors."

~~Restatement~~

The Company is restating (1) its consolidated financial statements as of December 31, 2007 and 2006 and for the years ended December 31, 2007, 2006, 2005; (2) its selected financial data as of and for the years ended December 31, 2007, 2006, 2005, 2004 and 2003; and (3) its quarterly results of operations for all quarters in the years ended December 31, 2007 and 2006 in this Amendment to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 to correct errors related to the accounting for customer refunds and credits and the accounting for gift cards issued to customers.

There was no effect of the of the error corrections prior to 2003. The effect of the error adjustments on the Consolidated Results of Operation for the years ended December 31, 2003, 2005, 2006 and 2007 is to increase net loss by $433,000, $294,000, $5.0 million and $3.0 million, respectively and decrease net loss for the year ended December 31, 2004 by $126,000. All amounts in Management’s Discussion and Analysis of Financial Condition and Results of Operations (Restated) have been adjusted, as appropriate, for the effects of the restatement.

A more complete discussion of the restatement can be found in “Selected Financial Data (Restated)” contained in Part I Item 6 and Note 3 to the consolidated financial statements contained in Part IV, Item 15 of this Amendment and Item 4.02(a) of the Company’s Current Report on Form 8-K filed with the Commission on October 24, 2008.

Overview

We are an online ~~“closeout”~~"closeout" retailer offering discount brand name merchandise, including bed-and-bath goods, home décor, kitchenware, watches, jewelry, electronics and computers, sporting goods, apparel, and designer accessories, among other products. We also sell books, magazines, CDs, DVDs ~~videocassettes~~ and video games ~~(“BMMG”~~("BMMG"). We also operate as part of our Website an online auctions business—a marketplace for the buying and selling of goods and services—as well as an online ~~site~~sites for listing cars and real estate for sale.

~~Our Company,~~We are based in Salt Lake City, Utah, ~~was~~and were founded in ~~1997, and we~~1997. We launched our first Website through which customers could purchase products in March 1999. Our Website offers our customers an opportunity to shop for bargains conveniently, while offering our suppliers an alternative inventory liquidation distribution channel. We continually add new, limited inventory products to our Website in order to create an atmosphere that encourages customers to visit frequently and purchase products before our inventory sells out. We offer approximately ~~63,000~~201,000 products under multiple departments under the shopping tab on our Website, and offer ~~almost 724,000~~approximately 450,000 media products in the Books etc. department on our Website.

Closeout merchandise is typically available in inconsistent quantities and often is only available to consumers after it has been purchased and resold by disparate liquidation wholesalers. We believe that the traditional liquidation market is therefore characterized by fragmented supply and fragmented demand. We utilize the Internet to aggregate both supply and demand and create a more efficient market for liquidation merchandise. Our objective is to provide a one-stop destination for discount shopping for products and services sold through the Internet.

Table of Contents

Our Business

We ~~utilize~~use the Internet to create a more efficient market for liquidation, closeout and other discount merchandise. We provide consumers and businesses with quick and convenient access to high-quality, brand-name merchandise at discount prices. Our shopping business (sales of product offered through the Shopping section of our Website) includes both a ~~“direct”~~"direct" business and a ~~“fulfillment partner” business. Some products~~"fulfillment partner" business (see Item 15 of Part IV, "Financial Statements"—Note 23—"Business Segments"). Products from our direct segment and fulfillment partner segments (including products from various industry verticals, such as florist supplies, restaurant supplies, and office supplies) are also available in bulk to both consumers and businesses through the Wholesale ~~department~~product category on our Website. During the years ended December 31, ~~2005,~~ 2006, 2007, and ~~2007,~~2008, no single customer accounted for more than 1% of our total revenue.

Direct business

Our direct business includes sales made to individual consumers and businesses, which are fulfilled from our warehouses in Salt Lake City, ~~Utah.~~Utah (see Item 2 of Part I, "Properties"). During the years ended December 31, ~~2006~~2007 and ~~2007,~~2008, we fulfilled approximately ~~39%~~25% and ~~25%~~21%, respectively, of all orders through our warehouses. Our warehouses generally ship between 5,000 and 8,000 orders per day and up to approximately ~~34,000~~32,000 orders per day during peak periods, using overlapping daily shifts.

Fulfillment partner business

For our fulfillment partner business, we sell merchandise of other retailers, cataloguers or manufacturers (“("fulfillment ~~partners”~~partners") through our Website. We are considered to be the primary obligor for the majority of these sales transactions and we record revenue from the majority of these sales transactions on a gross basis. Our use of the term ~~“partner”~~"partner" or ~~“fulfillment partner”~~"fulfillment partner" does not mean that we have formed any legal partnerships with any of our fulfillment partners. We currently have fulfillment partner relationships with approximately ~~730~~1,200 third parties which post approximately ~~57,000~~196,000 non-BMMG products, as well as most of the BMMG products, on our Website.

Our revenue from sales on our shopping site from both the direct and fulfillment partner businesses is recorded net of returns, coupons and other discounts. During the third quarter of 2007, we updated our returns policy. For products other than computers, electronics and mattresses the returns policy provides for a full refund of the cost of the merchandise and all shipping charges if the item shipped is returned unopened within 30 days of delivery. If the item is returned after 30 days of delivery, opened or shows signs of wear, the transaction may only be subject to partial refund. For items shipped from our Computers and Electronics department, returns must be initiated within 20 days of the purchase date and must be received in the original condition within 30 days of purchase. Computer and Electronics items returned opened or received at our warehouse after 30 days may only qualify for up to a 70 percent refund. Damaged or defective mattresses qualify for a full refund only if the items are refused at the time of delivery.

Unless otherwise indicated or required by the context, the discussion herein of our financial statements, accounting policies and related matters, pertains to our shopping site and not necessarily to our auctions or cars tabs sites.

Both direct and fulfillment partner revenues are seasonal, with revenues historically being the highest in the fourth quarter, reflecting higher consumer holiday spending. We anticipate this will continue in the foreseeable future.

Auctions business

We operate an online auction service as part of our Website. Our auction tab allows sellers to list items for sale, buyers to bid on items of interest, and users to

~~Table of Contents~~

browse through listed items online. We record only our listing fees and commissions for items sold as revenue. From time to time, we also sell items returned from our shopping site on our auction site, and for these sales, we record the revenue on a gross basis. Revenue from our auction business is included in the fulfillment partner segment, as it is not significant enough to segregate as its own segment.

Car listing business

Table of Contents

purchase, and provides the means for purchasers to contact sellers for further information and negotiations on the purchase of an advertised vehicle. Revenue from our car listing business is included in the fulfillment partner segment, as it is not significant enough to ~~separate out~~segregate as its own segment.

~~Cost of goods sold~~Real Estate listing business

~~Cost of goods sold consists of the cost of the product,~~We operate an online site for listing real estate for sale as ~~well as inbound and outbound freight, warehousing and fulfillment costs (including payroll and related expenses and stock-based compensation), credit card fees and customer service costs.~~

~~Operating expenses~~

Sales and marketing expenses consist primarily of advertising, public relations and promotional expenditures, as well as payroll and related expenses, including stock-based compensation, for personnel engaged in marketing and selling activities.

~~Advertising expense is the largest component~~a part of our ~~sales~~Website. The real estate listing service allows customers to search active listings across the country. Listing categories include foreclosures, live and ~~marketing expenses~~on-line auctions, for sale by owner listings, broker/agent listings and numerous aggregated classified ad listings. Advertising revenue from the real estate business is ~~primarily attributable~~included in the fulfillment partner segment, as it is not significant enough to expenditures related to online marketing activities and offline national radio and television advertising. Our advertising expenses totaled approximately $75.3 million, $68.1 million and $51.0 million for the years ended December 31, 2005, 2006 and 2007, respectively, representing 98%, 96% and 92% of sales and marketing expenses for those respective periods.segregate as its own segment.

International business

~~Executive Commentary~~

~~This executive commentary is intended to provide investors with a view of our business~~began selling products through the eyes of our management. As an executive commentary, it necessarily focuses on selected aspects of our business. This executive commentary is intended as a supplement to, but not a substitute for, the more detailed discussion of our business included elsewhere herein. Investors are cautioned to read our entire “Management’s Discussion and Analysis of Financial Condition and Results of Operations (Restated)”, as well as our interim and audited financial statements, and the discussion of our business and risk factors and other information included elsewhere in this report. This executive commentary includes forward-looking statements, and investors are cautioned to read the “Special Note Regarding Forward-Looking Statements” included elsewhere in this report.

~~Commentary—Revenue.~~ Total revenue decreased 2% for the fiscal year 2007 to $765.9 million and increased 4% for Q4 2007 to $294.5 million. The fulfillment partner business, which accounted for 74% of total revenue, during 2007 and 77% during Q4, grew 19% for the full year, and 21% in Q4 2007, an improvement from the -2% and 5% growth during the same periods in 2006, respectively. Our direct business, on the other hand, shrunk 35% for the year and 29% in Q4, compared to shrinking 7% and 24% during the same periods in 2006.

Total revenues decreased at the same rate we experienced in 2006;-2%. However, we did show progress toward returning to positive revenue growth throughout the year (Q1: -10%, Q2: -7%, Q3:1%, and Q4: 4%). This was driven primarily through our efforts to become more efficient in our marketing activities, and by nearly doubling our product selection through adding new fulfillment partners, as well as increasing the number of items offered by existing fulfillment partners. This initiative increased the number of products listed on our website to ~~63,000 non-BMMG products at December 31, 2007 compared to 36,000 at~~customers outside the ~~end of 2006.~~

~~We also announced during the fourth quarter that we are planning to begin selling products~~United States in ~~international markets in 2008, first in~~late August 2008. The initial launch included Canada and ~~then potentially into other markets. Our initial approach will be to leverage existing partners in each country or region rather than opening our own distribution facilities~~33 European countries, including the U.K. and Germany. We do not have operations outside of the United ~~States.~~

~~Commentary—Gross Profit~~States, and ~~Gross Margin.~~ ~~Gross profit dollars increased 39%~~are utilizing a U.S. based third party to ~~$124.6 million in 2007. Gross margin expanded to 16.3%~~provide logistics and fulfillment for all international orders. Revenue generated from 11.5%, a 480 basis point improvement, and a historical best for the company. Gross profit improved 95% in the fourth quarter, while total revenue increased by 4%. Gross margins for each of the quarters and fiscal years during 2006 and 2007 were:

Q1 2006
(Restated)

Q2 2006
(Restated)

Q3 2006
(Restated)

Q4 2006
(Restated)

FY 2006
(Restated)

Q1 2007
(Restated)

Q2 2007
(Restated)

Q3 2007
(Restated)

Q4 2007
(Restated)

FY 2007
(Restated)

12.8
%
13.5
%
13.6
%
8.4
%
11.5
%
15.2
%
17.6
%
17.1
%
15.7
%
16.3
%

~~The improvement in gross margin is primarily due to significant expansion in~~ our direct margins, which were up 920 basis points to 14.8% in fiscal 2007 from 5.6% in 2006. We significantly reduced our inventory in 2006, and in 2007, we maintained lower levels of inventory by refining the selection of products that we purchase directly to those that turn faster and have higher profitability. We believe that we can continue to do so, while filling in product selection using fulfillment partners, rather than acquiring the inventory directly. As a result of these efforts, we have seen a substantial improvement in direct and overall gross margin in 2007. With reduced inventory levels, we have also successfully reduced our warehouse space and the related costs, which we expect will assist in our efforts to further improve our direct gross margin.

While direct gross margin showed sequential improvement in the fourth quarter, overall gross margins decreased from Q3 2007 levels. This was primarily due to heavy shipping promotions and discounts offered during the holiday shopping season. In addition, demand for lower margin products like BMMG was up 200 basis points sequentially to 8.6% of gross sales and computers and consumer electronics (C&E) increased during the fourth quarter relative to other categories. Although C&E products typically have lower gross margin, we have aggressively expanded our product offering in this area throughout the year to better meet consumer demand.

~~Commentary—Marketing.~~ While revenues declined by 2% this year, we were able to substantially reduce the dollars spent on marketing (down 22% to $55.5 million during fiscal 2007 from $70.9 million in 2006), and those dollars were spent more efficiently (7% of total revenue during fiscal 2007 versus 9% in 2006). However, with fewer dollars spent on advertising, the amount of traffic that came to our website was lower compared to 2006, and we believe our revenue growth was impacted throughout the year as a result. During the fourth quarter we decided to invest more heavily in television, radio and print advertising to both strengthen our

~~Table of Contents~~

~~brand and enhance revenue growth. Marketing expenses in the period were $27.4 million, or 9% of total revenue compared to $29.0 million, or 10% in Q4 2006.~~

~~Commentary—Contribution and Contribution Margin.~~ Contribution (gross profit dollars less sales and marketing expense) increased 265%, from $18.9 million in 2006 to $69.1 million during fiscal 2007. For the three months ended December 31, 2007, contribution was $19.0 million, a $24.3 million improvement from $(5.3) million during Q4 2006. This was due to the improvements we made in gross margin combined with a slight reduction in total sales and marketing dollars spent. The following table represents our calculation of contribution (in thousands):

Three months ended
December 31,

Twelve months ended
December 31,

2006
(Restated)

2007
(Restated)

2006
(Restated)

2007
(Restated)

Total revenue

$
282,407

$
294,516

$
780,137

$
765,902

Cost of goods sold

258,636

248,134

690,333

641,352

Gross profit

23,771

46,382

89,804

124,550

Less: Sales and marketing expense

29,045

27,377

70,897

55,458

Contribution

$
(5,274
)
$
19,005

$
18,907

$
69,092

Contribution margin

(1.9
)%
6.5
%
2.4
%
9.0
%

~~Commentary—Technology and G&A costs.~~ We terminated a long-term computer co-location facility lease in December 2006 and we have reduced corporate headcount during 2007. We have also reduced facilities costs and other expenses by reducing corporate office space. As a result, our combined technology and G&A costs were down 9% for fiscal 2007 and down 23% for Q4 2007 versus 2006.

~~Overall, our operating expenses, including sales and marketing and restructuring were down 10% for fiscal 2007 and down 22% for Q4 2007 compared to the previous year.~~

~~Commentary—Operating loss.~~ Our operating loss for fiscal 2007 was $44.6 million, down 55% from $98.8 million in 2006. For the three months ended December 31, 2007, our operating loss was $6.8 million, an 85% improvement from $44.5 million during the same period last year.

The 2007 operating loss includes $12.3 million of restructuring costs ($6.1 million in Q1 and $6.2 million in Q2). During 2006, we incurred restructuring costs of $5.7 million during the fourth quarter.

~~Commentary—Adjusted EBITDA (non-GAAP).~~ Adjusted EBITDA for fiscal 2007 was $(10.6) million, $50.8 million better than the $(61.4) million in 2006. For the fourth quarter of 2007, adjusted EBITDA was $(415,000), a $31.3 million improvement from $(31.7) million in Q4 2006. We believe that because our current capital expenditures are significantly lower than our depreciation levels, discussing adjusted EBITDA at this stage of ourinternational business is ~~useful to us and investors. During 2005 and 2006, we made significant investments~~included in either direct or fulfillment partner revenue, depending on whether the product is shipped from our ~~systems and overall infrastructure. In 2007, capital expenditures were $2.6 million while depreciation expense was $29.5 million, and therefore we believe that adjusted EBITDA was~~warehouses or from a ~~reasonable measure of actual cash used or cash generated by the continuing operations of the business in 2007.~~fulfillment partner.

~~Regulation G,~~ ~~Conditions for Use of Non-GAAP Financial Measures,~~ and other SEC regulations regulate the disclosure of certain non-GAAP financial information. Our measure of adjusted EBITDA (non-GAAP) which we reconcile to “Net loss” in our statement of operations, is earnings before interest, taxes, depreciation, amortization, stock-based compensation and discontinued operations. Adjusted EBITDA is used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. Adjusted EBITDA reflects an additional way of viewing our results that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our results. You should review our financial statements and publicly-filed reports in their entirety and not rely on any single financial measure. Our discussion above and below (i) explains why management believes that presentation of adjusted EBITDA provides useful information to investors regarding our financial condition and results of continuing operations, (ii) to the extent material, discloses the additional purposes, if any, for which management uses this non-GAAP measure, and (iii) provides a reconciliation of this measure to our net loss. For further details on adjusted EBITDA, see the reconciliation of this non-GAAP measure to our GAAP net loss below (in thousands):

Three months ended
December 31,

Twelve months ended
December 31,

2006
(Restated)

2007
(Restated)

2006
(Restated)

2007
(Restated)

Net loss

$
(49,216
)
$
(6,470
)
$
(106,762
)
$
(48,036
)
Add back amounts for computation of adjusted EBITDA:

Depreciation and amortization

11,525

6,670

32,327

29,495

Interest (income) expense, net

550

(326
)
1,199

(600
)
Stock-based compensation expense

1,032

1,136

4,120

4,522

Stock-based compensation to consultants for service

(8
)
(91
)
23

189

Stock-based compensation for performance share plan

—

(900
)
—

(550
)
Treasury stock issued to employees as compensation

108

(434
)
787

494

Loss from discontinued operations

4,267

—

6,882

3,924

Adjusted EBITDA

$
(31,742
)
$
(415
)
$
(61,424
)
$
(10,562
)

~~Commentary—Balance Sheet Items.~~ We ended the year with $147.4 million in cash, cash equivalents and marketable securities, compared to $127.0 million at the end of 2006. Working capital increased to $62.6 million from $59.5 million.

We ended the year with $25.6 million of inventory (including inventory in-transit of $3.1 million), an increase from the $23.9 million of inventory (including inventory in-transit of $3.6 million) we had at the end of 2006, but we have been able to turn our inventory more efficiently (inventory turns on the direct business

~~Table of Contents~~

~~increased from 4.3 times to 6.1 times) due to better inventory management and maintaining a more attractive product selection.~~

~~Commentary—Cash Flows.~~ For the year ended December 31, 2007, we generated $10.0 million in cash flows from operations compared to cash outflows of $26.3 million during 2006. “Free Cash Flow” (a non-GAAP measure) for the three months ended December 31, 2006 and 2007 totaled $48.2 million and $55.3 million, respectively. For the years ended December 31, 2006 and 2007, free cash flow was $(49.7) million and $7.3 million.

~~Regulation G,~~~~Conditions for Use of Non-GAAP Financial Measures,~~ and other SEC regulations regulate the disclosure of certain non-GAAP financial information. Free cash flow reflects an additional way of viewing our cash flows and liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows. Free cash flow, which we reconcile to “Net cash provided by (used in) operating activities”, is cash flow from operations reduced by “Expenditures for property and equipment”. Although we believe that cash flow from operating activities is an important measure, we believe free cash flow is a useful measure to evaluate our business since purchases of fixed assets are a necessary component of ongoing operations. Therefore, we believe it is important to view free cash flow as a complement to our entire consolidated statements of cash flows.

Three months ended
December 31,

Twelve months ended
December 31,

2006

2007

2006

2007

Net cash provided by (used in) operating activities

$
51,949

$
55,734

$
(26,293
)
$
9,977

Expenditures for property and equipment

(3,766
)
(411
)
(23,441
)
(2,643
)

Free cash flow

$
48,183

$
55,323

$
(49,734
)
$
7,334

The balance of our Management’s Discussion and Analysis of Financial Condition and Results of Operations (Restated) provides further information about the matters discussed above and other important matters affecting our business.

Critical Accounting Policies and Estimates

~~Our consolidated~~The preparation of financial statements ~~have been prepared~~ in ~~accordance~~conformity with generally accepted accounting principles ~~generally accepted in~~of the United States ~~of America. The preparation of these financial statements~~("GAAP") requires ~~us to make~~ estimates and ~~judgments~~assumptions that affect the reported amounts of assets and liabilities, revenues and ~~expenses. We base our estimates on historical experience~~expenses, and ~~on various other assumptions that we believe to be reasonable under the circumstances, the results~~related disclosures of ~~which form the basis for making judgments about the carrying values of~~contingent assets and liabilities in the consolidated financial statements and accompanying notes. The Securities and Exchange Commission ("SEC") has defined a company's critical accounting policies as the ones that are ~~not readily apparent from~~most important to the portrayal of the company's financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other ~~sources.~~key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see Item 15 of Part IV, "Financial Statements"—Note 2—"Summary of Significant Accounting Policies." Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions. Our critical accounting policies are as follows:

•

·revenue recognition;

•

estimating valuation allowances and accrued liabilities (specifically, the reserve for returns, the allowance for doubtful accounts and the reserve for obsolete and damaged inventory);

•

internal use ~~software;~~

software and website development (acquired and developed internally);·

•

accounting for income taxes;

•

valuation of long-lived and intangible assets and goodwill; and

·

~~stock based~~

•

stock-based compensation and performance share plan.

Revenue recognition

~~Revenue recognition.~~ We derive our 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

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Auctions tab of our Website as well as advertisement revenue derived from our cars listing business. The Company has organized its operations into two principal segments based on the primary source of revenue: Direct revenue and Fulfillment partner revenue (see Item 15 of Part IV, ~~“Financial Statements (Restated) “—~~"Financial Statements"—Note ~~24—“~~23—"Business ~~Segments”~~Segments").

Revenue related to merchandise sales is recognized upon delivery to our customers. As we ship high volumes of packages through multiple carriers, it is not practical for us to track the actual delivery date of each shipment. Therefore, we use estimates to determine which shipments are delivered and therefore recognized as revenue at the end of the period. Our delivery date estimates are based on average shipping transit times, which are calculated using the following factors: (i) the shipping carrier (as carriers differ in transit times); (ii) the fulfillment source (either our warehouses or those of our fulfillment partners); (iii) the delivery destination; and (iv) actual transit time experience, which shows that delivery date is typically one to eight business days from the date of shipment.

We review and update our estimates on a quarterly basis based on our actual transit time experience. However, actual shipping times may differ from our estimates. The following table shows the effect that hypothetical changes in the estimate of average shipping transit times would have had on the reported amount of revenue and net loss for the year ended December 31, ~~2007 ($ in~~2008 (in thousands):

	Year ended December 31, 2008

Change in the Estimate of Average Transit Times (Days)	Effect on Revenue			Effect on Net Income
-2		$ 7,633			$ 1,264
-1		$ 3,949			$ 652
As reported		As reported			As reported
1		$ (959	)		$ (142	)
2		$(1,634	)		$ (259	)

~~Table of Contents~~

Change in the

Year ended December 31, 2007

Estimate of Average

(Restated)

Transit Times (Days)

Effect on Revenue

Effect on Net Income

-2

$
5,892

$
913

-1

$
2,710

$
420

As reported

As reported

As reported

1

$
(1,879
)
$
(291
)
2

$
(4,019
)
$
(623
)

We evaluate the criteria outlined in EITF Issue No. 99-19,Reporting Revenue Gross as a Principal Versus Net as an Agent, in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. When we are the primary obligor in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators, revenue is recorded gross. If we are not the primary obligor in the transaction and amounts earned are determined using a fixed percentage, revenue is recorded on a net basis. Currently, the majority of both direct revenue and fulfillment partner revenue is recorded on a gross basis, as we are the primary obligor.

We periodically provide incentive offers to our customers to encourage purchases. Such offers include discount offers, such as percentage discounts off current purchases and other similar ~~offers. Discount~~ offers, which, when ~~accepted~~used by our customers, are treated as a reduction to the purchase price of the related transaction.

Direct revenue

Direct revenue consists of sales of merchandise ~~sold through our Website~~ to both individual consumers and businesses that are fulfilled directly from our leased ~~warehouses.~~warehouses (see Item 2 of Part I, "Properties"). Direct sales occur primarily through our Website, but may also occur through other offline channels.

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Fulfillment partner revenue

Fulfillment partner revenue consists of merchandise sold through our Website and shipped by third parties directly to consumers and other businesses from warehouses maintained by our fulfillment partners.

During September 2004, we added an online auction service to our Website. The Auctions business allows sellers to list items for sale, buyers to bid on items of interest, and users to browse through listed items online. With limited exceptions, we are not considered the seller of the items sold on the auction site and ~~has~~have 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 2005, 2006 and 2007.~~ Revenue from the auctions business has been included in the fulfillment partner segment, as it is not large enough to separate out as its own segment at this early stage of the business.

~~During December 2006, we added~~We operate an online site for listing cars for sale as a part of our Website. The cars listing service allows dealers to list vehicles for sale and allows buyers to review vehicle descriptions, post offers to purchase, and provides the means for purchasers to contact sellers for further information and negotiations on the purchase of an advertised vehicle. Revenue from the cars listing business is not large enough to separate as a segment, and therefore has been included inwithin the fulfillment partner ~~segment,~~segment.

We operate an online site for listing real estate for sale as ita part of our Website. The real estate listing service allows customers to search active listings across the country. Listing categories include foreclosures, live and on-line auctions, for sale by owner listings, broker/agent listings and numerous aggregated classified ad listings. Revenue from the real estate listing business is not ~~significant~~large enough to separate ~~out~~ as ~~its own~~a segment, and therefore has been included within the fulfillment partner segment.

International business

We began selling products through our website to customers outside the United States in August 2008. The initial launch included Canada and 33 European countries, including the U.K. and Germany. We do not have operations outside the United States, and are utilizing a U.S. based third party to provide logistics and fulfillment for all international orders. Revenue generated from our international business is included in either direct or fulfillment partner revenue, depending on whether the product is shipped from our warehouses or from a fulfillment partner.

Cost of goods sold

Cost of goods sold consists of the cost of the product, as well as inbound and outbound freight, warehousing and fulfillment costs (including payroll and related expenses and stock-based compensation), credit card fees and customer service costs.

Operating expenses

Advertising expense is the largest component of our sales and marketing expenses and is primarily attributable to expenditures related to online marketing activities and offline radio and television advertising. Our advertising expenses totaled approximately $68.1 million, $51.0 million and $52.8 million for the years ended December 31, 2006, 2007 and 2008, respectively, representing 96%, 92% and 92% of sales and marketing expenses for those respective periods.

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Business Restructuring

During 2006, we began a facilities consolidation and restructuring program which continued through 2007 designed to reduce our overall expense structure in an effort to improve future operating performance. If we determine to move our corporate headquarters we expect to incur future restructuring expenses. (see Item 15 of Part IV, "Financial Statements"—Note 3—"Restructuring Expense").

Deferred ~~revenue.~~revenue We

Payment is generally ~~require payment~~required by credit card at the point of sale. Amounts owed or received prior to delivery of products or services provided are recorded as deferred revenue. ~~In addition, amounts~~Amounts received in advance for Club O membership fees are recorded as deferred revenue and recognized ratably over the membership period. WeIn addition, we sell gift cards and record related deferred revenue at the time of the sale. Revenue from a gift card is recognized when a customer redeems it. If a gift card is not redeemed, we recognize revenue when the likelihood of its redemption becomes remote.

Reserve for ~~returns.~~returns

Total revenue is recorded net of estimated returns. For products other than computers, electronics and mattresses the returns policy provides for a full refund of the cost of the merchandise and all shipping charges if the item shipped is returned unopened within 30 days of delivery. If the item is returned after 30 days of delivery, opened or shows signs of wear, the transaction may only be eligible for a partial refund. For items shipped from our Computers and Electronics department, returns must be initiated within 20 days of the purchase date and must be received in the original condition within 30 days of purchase. Computer and Electronics items returned opened or received at our warehouse after 30 days may only qualify for up to a 70 percent refund. Damaged or defective mattresses qualify for a full refund only if the items are refused at the time of delivery.

We maintain a reserve for returns based on ~~estimates of future product returns related to~~ current period revenues and ~~are estimated using~~ historical returns experience. Management analyzes historical returns, current economic trends and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns reserve and other allowances in any accounting period. The reserve for returns was ~~$4.6~~$6.9 million and ~~$6.9~~$5.1 million at December 31, ~~2006~~2007 and ~~2007,~~2008, respectively.

Allowance for doubtful ~~accounts.~~accounts

From time to time, we grant credit to certain of our business customers on normal credit terms (typically 30 days). We perform ongoing credit evaluations of our ~~customers’~~customers' financial condition and maintain an allowance for doubtful accounts receivable based upon our historical collection experience and expected ~~collectibility~~collectability of all accounts receivable. We maintained an allowance for doubtful accounts receivable of ~~$2.1~~$2.5 million and ~~$2.5~~$1.6 million as of December 31, ~~2006~~2007 and ~~2007,~~2008, respectively.

Reserve for obsolete and damaged ~~inventory.~~inventory

We write down our inventory 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. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Once established, the original cost of the inventory less the related inventory 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. At December 31, 2006, our inventory balance was $23.9 million (including $3.6 million of inventory in-transit related to sales shipped but not yet delivered), net of allowance for obsolescence or damaged inventory of $6.6 million. At December 31, 2007, our inventory balance was $25.6 million (including $3.1 million of inventory in-transit related to sales shipped but not yet delivered), net of allowance for obsolescence or damaged inventory of $1.8 million. At December 31, 2008, our inventory balance was $17.7 million (including

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$2.8 million of inventory in-transit related to sales shipped but not yet delivered), net of allowance for obsolescence or damaged inventory of $2.1 million.

Internal-Use Software and Website ~~Development.~~Development

Included in fixed assets is the capitalized cost of internal-use software and website development, including software used to upgrade and enhance our Website and processes supporting our business. As required by Statement of Position 98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, we capitalize costs incurred during the application development stage of internal-use software and amortize these costs over the estimated useful life of two to three years. Costs incurred related to design or maintenance of internal-use software are expensed as incurred.

During the years ended December 31, ~~2006~~2007 and ~~2007,~~2008, we capitalized ~~$21.7~~$2.0 million and ~~$2.0~~$9.0 million, respectively, of costs associated with internal-use software and website ~~development.~~development, both internally developed and acquired externally. Amortization of previously capitalized amounts totaled ~~$14.4~~$13.5 million and ~~$13.5~~$11.6 million for those respective periods.

~~Table of Contents~~

Accounting for income ~~taxes.~~taxes

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. As of December 31, ~~2006~~2007 and ~~2007,~~2008, we have recorded a full valuation allowance of ~~$76.5~~$86.0 million and ~~$86.0~~$86.9 million, respectively, against our net deferred tax asset balance due to uncertainties related to our deferred tax assets as a result of our history of operating losses. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to change the valuation allowance, which could materially impact our financial position and results of operations.

In July 2006, the Financial Accounting Standards Board ~~(“FASB”~~("FASB") issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109 (“ ("FIN ~~48”~~48"). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that it has taken or expects to take on a tax return.

We adopted the provisions of FIN 48 on January 1, 2007. As a result of a full valuation allowance ~~we do not have any unrecognized tax benefits and~~ there iswas no effect on our financial condition or results of operations as a result of implementing FIN 48. We are subject to audit by the IRS and various states ~~for periods since inception. We do not believe there will be any material changes in our unrecognized tax positions~~ for periods since inception. Our policy is that we recognize interest and penalties accrued on any unrecognized tax positions as a component of income tax expense. As of the date of adoption of FIN 48, we did not have any accrued interest or penalties associated with ~~any~~ unrecognized tax positions, nor was any interest expense recognized during the year ended December 31, ~~2007.~~2008.

Valuation of long-lived and intangible assets and ~~goodwill.~~goodwill

Under Statement of Financial Accounting Standard ~~(“SFAS”~~("SFAS") No. 142,Goodwill and Other Intangible Assets, (“("SFAS ~~142”~~142"), goodwill is not amortized, but must be tested for impairment at least annually. Other long-lived assets must also be evaluated for impairment when management believes that an asset has experienced a decline in value that is other than temporary. Future adverse changes in

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market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the asset that may not be reflected in an ~~asset’s~~asset's current carrying value, thereby possibly requiring an impairment charge in the future. Goodwill totaled $2.8 million as of December 31, ~~2006~~2007 and ~~2007.~~

2008.

In conjunction with the decision to sell OTravel, our travel subsidiary, we performed an evaluation of its goodwill, pursuant to SFAS 144,Accounting for the Impairment Long-Lived Assets, (“("SFAS ~~144”~~144") and SFAS 142 and determined that goodwill was subject to an impairment loss of approximately $4.5 million and $3.8 million during the years ended December 31, 2006 and 2007 (see Item 15 of Part IV, ~~“Financial Statements (Restated) —Note 5—“~~"Financial Statements"—Note 4—"Acquisition and Subsequent Discontinued ~~Operations”~~Operations"). These have been recorded as a component of the loss from discontinued operations. There were no impairments to goodwill recorded during the year ended December 31, 2008.

Stock-based compensation

~~Stock-based compensation.~~ As of January 1, 2006, we adopted SFAS 123(R)Share Based Payment (“ ("SFAS 123(R)”"), which requires us to measure compensation cost for all outstanding unvested share-based awards at fair value and recognize compensation over the service period for awards expected to vest. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as an adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results may differ substantially from these estimates. We ~~have utilized a~~use the Black-Scholes-Merton ~~(“BSM”~~("BSM") valuation model to estimate the value of stock options granted to employees. Several of the primary estimates used in measuring stock-based compensation are as follows:

Expected Volatility: The fair value of stock options were valued using a volatility factor based on our historical stock prices.

Expected Term: For 2005 and 2006 option grants, the expected term represents the period that our stock options are expected to be outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms and vesting provisions of the stock-based awards. For 2007 and 2008 option grants, we elected to use the ~~“simplified method”~~"simplified method" as discussed in Staff Accounting Bulletin ~~(“SAB”~~("SAB") No. 107,Share Based Payment (“ ("SAB ~~107”~~No. 107") to develop an estimate of expected term. In December 2007, the SEC issued SAB No. 110,Certain Assumptions Used in Valuation Methods—Expected Term ("SAB No. 110"). According to SAB No. 110, under certain circumstances the SEC staff will continue to accept the use of the simplified method as discussed in SAB No. 107, in developing an estimate of expected term of "plain vanilla" share options in accordance with SFAS No. 123(R), beyond December 31, 2007. We adopted SAB No. 110 effective January 1, 2008 and will continue to use the simplified method in developing the expected term used for our valuation of stock-based compensation.

Expected Dividend: We have not paid any dividends and do not anticipate paying dividends in the foreseeable future.

Risk-Free Interest Rate: We base the risk-free interest rate used on the implied yield currently available on U.S. Treasury zero-coupon issues with remaining term equivalent to the expected term of the options.

Estimated Pre-vesting Forfeitures: When estimating forfeitures, we consider voluntary and involuntary termination behavior.

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Performance Share ~~Plan.~~Plan

In January 2006, the Board of Directors and Compensation Committee adopted the Overstock.com Performance Share Plan (the "Plan") and approved grants to executive officers and certain ~~employees.~~employees of the Company. The ~~Performance Share~~ Plan ~~provides~~provided for a three-year period for the measurement of ~~our~~the Company's attainment of ~~certain~~the performance ~~goals.~~

goal described in the form of grant.

The performance goal iswas measured by growth in economic value, as defined in the ~~plan.~~Plan. The amount of payments due to participants under the ~~plan will be~~Plan was a function of the then current market price of a share of ~~our~~the Company's common stock, multiplied by a percentage dependent on the extent to which the performance goal ~~has been~~was attained, which ~~will be~~was between 0% and 200%. If the growth in economic value iswas 10% compounded annually or less, the percentage ~~will~~would be 0%. If the growth in economic value iswas 25% compounded annually, the percentage ~~will~~would be 100%. If the growth in economic value iswas 40% compounded annually or more, the percentage ~~will~~would be 200%. If the percentage growth iswas between these percentages, the payment percentage ~~will~~would be determined on the basis of straight line interpolation. Amounts payable under the ~~plan~~Plan were subject to Board discretion. Amounts payable under the Plan were originally payable in cash. During interim and annual periods prior to the third quarter of 2007, we recorded compensation expense based upon the period-end stock price and estimates regarding the ultimate growth in economic value that iswas expected to occur. These estimates included assumed future growth rates in revenues, gross ~~margins~~profit percentages and other factors. If we were to use different assumptions, the estimated compensation charges could be significantly different.

An amendment to the ~~Performance Share~~ Plan to allow usthe Company to make payments in the form of common stock was approved by the shareholders on May 15, 2007. In the third quarter of 2007, we determined the fair value of the awards on the amendment date and determined ~~on August 7, 2007~~ to make the payments in the form of common stock, rather than cash. Therefore, we reclassified awards under the ~~performance share plan~~Plan from their current status as liability awards to equity awards in accordance with SFAS No. 123(R).

As of December 31, 2006, we had accrued $900,000 in total compensation expense under the plan. During the first six months of 2007, we accrued an additional $650,000 related to performance shares granted prior to the determination to make the payments in the form of common stock. We reclassified the total liability of approximately $1.6 million related to performance share awards granted prior to the determination to additional-paid-in-capital in the third quarter of 2007. Over the remaining six months of 2007, we reduced the estimated compensation expense under the plan by approximately $550,000, based on changes in ~~our~~its estimate of growth in economic value over the remaining twelve months of the plan. As of December 31, 2007, ~~we have recorded $1.0 million of~~the cumulative expense related to the ~~Performance Share Plan.~~performance share awards was $1.0 million.

During the year ended December 31, 2008, we reversed the cumulative $1.0 million in total compensation expense under the Plan as the Board determined no payments would be made under the plan. The plan expired on December 31, 2008.

Restricted Stock ~~Units.~~Units In

During the ~~first quarter of~~year ended December 31, 2008, ~~the Compensation Committee of the Board of Directors approved grants of approximately 460,000~~491,000 restricted stock units ~~to our officers and employees which~~were granted. The restricted stock units vest over three years at 25% at the end of the first year, ~~an additional~~ 25% at the end of the second year and 50% at the end of the third ~~year.~~year and are subject to the employee's continuing service to the Company. At December 31, 2008, there were 449,000 restricted stock units that remained outstanding.

~~Recent Accounting Pronouncements.~~

~~In September 2006,~~The cost of restricted stock units is determined using the ~~FASB issued SFAS No. 157,~~ ~~Fair Value Measurements~~ ~~(“SFAS 157”). SFAS 157 defines~~ fair value ~~establishes a framework for measuring~~of the Company's shares of common stock on the date of the grant and compensation expense is recognized in accordance with the vesting schedule. The weighted average grant date fair value ~~and expands disclosures about fair value measurements. The FASB recently decided to postpone~~of restricted stock units granted during the ~~effective date of SFAS 157 for other non-financial assets and liabilities for one year. SFAS 157 is effective for us as of January 1,~~year ended December 31, 2008 ~~for financial items and January 1, 2009 for other non-financial items. We~~

35was $12.64.

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~~anticipate that the adoption of SFAS 157 will not have a material impact on our consolidated financial statements.~~

Recent Accounting Pronouncements.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial ~~Liabilities—including an amendment of FASB Statement~~Liabilities ("SFAS No. ~~115~~ ~~(“SFAS 159”~~159"). Under SFAS No. 159, ~~permits entities to choose~~companies may elect to measure ~~many~~certain financial instruments and certain other items at fair value. ~~Unrealized~~The standard requires that unrealized gains and losses on items for which the fair value option has been elected ~~will~~ be ~~recognized~~reported in ~~earnings at each subsequent reporting date.~~earnings. SFAS No. 159 is effective for ~~our~~ fiscal ~~year~~years beginning after November 15, 2007. We adopted SFAS No. 159 on January 1, 2008; however, we did not elect to apply the fair value option to any financial instruments or other items upon adoption of SFAS No. 159 during the year ended December 31, 2008. ~~We anticipate that~~Therefore, the adoption of SFAS No. 159 ~~will~~did not ~~have a material~~ impact on our consolidated financial ~~statements.~~position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141 (R),Business Combinations (“ ("SFAS ~~141(R)”~~No. 141 (R)"), and SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements (“ ("SFAS ~~160”~~No. 160"). SFAS No. 141 (R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the ~~acquiree~~acquired entity at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No. 141 (R) and SFAS No. 160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. We do not expect the adoption of SFAS No. 141 (R) or SFAS No. 160 will have a material impact our financial position and results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 ("SFAS No. 161"). SFAS No. 161 requires enhanced disclosures about a company's derivative and hedging activities, in particular: 1) how and why derivative instruments are utilized; 2) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and 3) how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. We have no derivative instruments. Therefore, we do not ~~yet determined~~expect the ~~effect~~adoption of SFAS No. 161 to impact our financial position and results of operations or cash flows.

In April 2008, the FASB issued FSP No. 142-3,Determination of the Useful Life of Intangible Assets ("FSP No. 142-3"). FSP No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142,Goodwill and Other Intangible Assets. FSP No. 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. We do not expect the adoption of FSP No. 142-3 will have a material impact on our consolidated financial ~~statements, if any, upon~~statements.

In May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles ("SFAS No. 162"). The current GAAP hierarchy was established by the American Institute of Certified Public Accountants, and faced criticism because it was directed to auditors rather than entities. The issuance of this statement corrects this and makes some other hierarchy changes. This statement is effective 60 days following the Securities and Exchange Commission's approval of the Public Company Accounting Oversight Board amendments to AU Section 411,The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The adoption of SFAS ~~141 (R) or SFAS 160.~~No. 162 did not result in a change to our consolidated financial statements.

In May 2008, the FASB issued FASB Staff Position ("FSP") APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) ("FSP

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APB 14-1"), which clarifies the accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement. FSP APB 14-1 specifies that an issuer of such instruments should separately account for the liability and equity components of the instruments in a manner that reflect the issuer's non-convertible debt borrowing rate when interest costs are recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. We anticipate that the adoption of FSP APB 14-1 will not have a material impact on our consolidated financial statements.

We periodically review new accounting standards that are issued from time to time. Although some of these accounting standards may be applicable to us, we have not identified any other new standards that we believe merit further discussion and we expect that none would have a significant impact on our consolidated financial statements.

Executive Commentary

This executive commentary is intended to provide investors with a view of our business through the eyes of our management. As an executive commentary, it necessarily focuses on selected aspects of our business. This executive commentary is intended as a supplement to, but not a substitute for, the more detailed discussion of our business included elsewhere herein. Investors are cautioned to read our entire "Management's Discussion and Analysis of Financial Condition and Results of Operations", as well as our interim and audited financial statements, and the discussion of our business and risk factors and other information included elsewhere in this report. This executive commentary includes forward-looking statements, and investors are cautioned to read the "Special Note Regarding Forward-Looking Statements" included elsewhere in this report.

Commentary—Revenue. We experienced strong revenue growth in the first three quarters of 2008. As of September 30, 2008, year-to-date revenue growth was 23% compared to a decrease of 2% for the same prior year period. However, our business experienced a significant slowdown in Q4 as consumers pulled back on discretionary spending over worries of a weakening economy. As a result, total revenue increased 9% for the fiscal year 2008 to $834.4 million from $765.9 million for the fiscal year 2007 notwithstanding a decrease of 13% in Q4 2008 revenue to $255.9 million from $294.5 million in Q4 2007.

The fulfillment partner business continued to be the ~~SEC issued SAB No. 110,~~ ~~Certain Assumptions Used~~primary driver of growth throughout 2008. We believe this is due to our initiative to considerably increase the number of non-media products we offer on our website. At the end of 2008, we had approximately 201,000 non-media SKUs on site compared to 63,000 at the end of last year, a 219% increase. The fulfillment partner business accounted for 79% of total revenue during 2008 and 81% during Q4, and it grew 16% for the full year, despite decreasing 9% in ~~Valuation Methods—Expected Term~~ ~~(“SAB 110”). According~~Q4 2008. Going forward, our plan is to ~~SAB 110, under certain circumstances the SEC staff will~~ continue to ~~accept~~add products to existing and new categories from new and existing partners. We ended 2008 with 1,200 fulfillment partners, up from 730 a year ago.

Our direct business, unlike the ~~use~~fulfillment partner business, continued to contract in 2008 and revenues were down 12% from last year. As part of our initiative to add partner products to our website, some suppliers have transitioned into fulfillment partners, eliminating the need for us to purchase their inventory, and as a result, we have experienced a shift from direct to fulfillment partner business.

Commentary—Gross Profit and Gross Profit Percentage. Higher revenues and better purchasing contributed to 15% growth in gross profit dollars in 2008. Gross profit rose to $142.9 million, while gross profit percentage expanded 80 basis points to 17.1%, a historical best for the Company. Gross profit contracted in the fourth quarter by 6% due to lower revenues, but gross profit percentage expanded to 17.0% from 15.7%. This was partly due to a decision we made to be less promotional around the holiday season.

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In addition, during Q4 2008, we reduced Cost of Goods Sold by $1.8 million for billing recoveries from partners who were underbilled earlier in the year for certain fees and charges that they were contractually obligated to pay. When the underbilling was originally discovered, we determined that the recovery of such amounts was not assured, and that consequently the potential recoveries constituted a gain contingency. Accordingly, we determined that the appropriate accounting treatment for the potential recoveries was to record their benefit only when such amounts became realizable (i.e., an agreement had been reached with the partner and the partner had the wherewithal to pay). We are currently reviewing our policies and procedures surrounding partner supplier cost updates and partner billing processes to ensure that the amounts contractually negotiated are billed in a complete and timely manner. We may have further billing recoveries from our partners in the future that we will seek to recover. We will recognize such recoveries in the manner described above. This accounted for 60 basis points of the ~~simplified method~~130 basis point improvement from Q4 2007. Gross profit percentages for each of the quarters and fiscal years during 2007 and 2008 were:



Direct	11.7	%	16.5	%	15.3	%	15.4	%	14.8	%	13.4	%	12.5	%	10.4	%	8.7	%	11.3	%
Fulfillment Partner	16.6	%	18.0	%	17.7	%	15.8	%	16.8	%	17.9	%	19.0	%	18.7	%	19.0	%	18.7	%
Combined	15.2	%	17.6	%	17.1	%	15.7	%	16.3	%	16.7	%	17.6	%	17.2	%	17.0	%	17.1	%

Fulfillment partner gross profit benefited throughout the year from a mix shift of higher-margin sales away from the direct business and into the fulfillment partner business, and a continued shift away from our low margin BMMG business, which accounted for 5% of gross sales for 2008, down from 8% a year ago. Fulfillment partner gross profit expanded by 29% to $123.2 million or 18.7% of revenue, a 190 basis point improvement.

In addition to the sales mix shift away from the direct business and lower revenues, higher product and freight costs negatively impacted direct gross profit, which declined 32% compared to 2007. Direct gross profit percentage fell by approximately 350 basis points to 11.3% despite a 40 basis point reduction in fulfillment costs.

Commentary—Marketing. While revenues increased by 9% this year our sales and marketing expense increased only 4% to $57.6 million during fiscal 2008, and marketing efficiency (marketing as ~~discussed~~a percentage of revenue) improved to 6.9% from 7.2% in ~~SAB 107,~~2007. In Q4 2007, we invested heavily in ~~developing~~television, radio and print advertising to both strengthen our brand and enhance future revenue growth. We continued to invest in our brand throughout 2008, but with a more consistent, disciplined approach. Because our branding spend was minimal in the first three quarters of 2007, sales and marketing expenses rose sharply through the first three quarters of 2008 compared to 2007. In Q4 2008, we reduced the level of marketing to $16.4 million or 6.4% of total revenue compared to $27.4 million or 9.3% of total revenue in Q4 2007.

Commentary—Contribution and Contribution Percentage. With higher gross profit and more efficient marketing, contribution (gross profit dollars less sales and marketing expense) increased 23% to $85.3 million in 2008. Contribution as of a percentage of revenue was 9.0% and 10.2% in 2007 and 2008, respectively. Contribution increased by 43% in Q4 to $27.2 million, an ~~estimate~~$8.2 million improvement

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due primarily to lower marketing costs. The following table represents our calculation of ~~“plain vanilla” share options~~contribution (in thousands):

	Three months ended December 31,						Twelve months ended December 31,

	2007			2008			2007			2008
Total revenue	$	294,516		$	255,862		$	765,902		$	834,367
Cost of goods sold		248,134			212,252			641,352			691,458

Gross profit		46,382			43,610			124,550			142,909
Less: Sales and marketing expense		27,377			16,437			55,458			57,634

Contribution	$	19,005		$	27,173		$	69,092		$	85,275

Contribution percentage		6.5	%		10.6	%		9.0	%		10.2	%

Commentary—Technology and G&A costs. Our combined technology and G&A costs were down 5% to $96.2 million for fiscal 2008. Technology costs fell 3% to $57.8 million from $59.5 million in ~~accordance~~2007 as we offset falling depreciation expense with ~~SFAS 123(R), beyond~~IT development and related staff in 2008.

G&A costs decreased 9.0% to $38.4 million for the year 2008 from $42.0 million or $3.6 million. The primary reduction in G&A expenses year over year is primarily due to a $4.1 million decrease in bonuses accrued in 2008 (including our decision to not pay senior executives and company-wide profit sharing bonuses). In addition, the performance goal described in the Performance Share Plan (the "Plan") was not attained as of the end of the year ended 2008 and $1.0 million in total compensation expense accrued under the Plan was reversed. This year over year decrease was offset in part by an increase of approximately $1.5 million related to consulting costs and professional fees. Technology/G&A costs have been falling over the last few years; we expect that trend will reverse in 2009 as we invest in development and corporate staff and projects.

Commentary—Operating loss. Overall, our operating expenses, including sales and marketing, technology/G&A and restructuring were down 9% for 2008 and down 29% for Q4 2008 compared to the previous year. Our resulting operating loss for 2008 was $10.9 million, a 76% improvement from $44.6 million in 2007. For the three months ended December 31, 2008, our operating profit was $5.7 million, $12.5 million better than the $6.8 million operating loss during the same period last year. The 2007 operating loss includes $12.3 million of restructuring costs ($6.1 million in Q1 2007 and $6.2 million in Q2 2007). We did not incur any restructuring costs in 2008.

Commentary—Other income (expense), net. For the year ended 2008, other expense was $1.4 million and included a $2.8 million gain on the retirement of $9.5 million of 3.75% Senior Notes, a $3.9 million loss on settlement of notes receivable and a $300,000 other-than-temporary impairment of marketable securities.

Commentary—Adjusted EBITDA (non-GAAP). Adjusted EBITDA (a non-GAAP financial measure) for fiscal 2008 was $15.1 million, $25.5 million better than the $(10.5) million in 2007. For the fourth quarter of 2008, Adjusted EBITDA was $9.9 million, a $10.4 million improvement from ($415,000) in Q4 2007. In 2008, capital expenditures were $18.7 million, while depreciation expense was $22.7 million. We believe that a discussion of Adjusted EBITDA at this stage of our business is useful to investors, as Adjusted EBITDA is a reasonable measure of actual cash used or cash generated by the continuing operations of our business. See "Non-GAAP Financial Measures" below for a reconciliation of Adjusted EBITDA to net income (loss).

Commentary—Balance Sheet Items. We ended the year with $109.6 million in cash, cash equivalents and marketable securities, compared to $147.4 million at the end of 2007. Working capital

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decreased to $39.7 million from $62.6 million. The difference is largely the result of $20 million of stock repurchases and debt retirement and $18.7 million of capital expenditures.

We ended the year with $17.7 million of inventory (including inventory in-transit of $2.8 million), a decrease from the $25.6 million of inventory (including inventory in-transit of $3.1 million) we had at the end of 2007. We ~~will adopt SAB 110 effective January 1,~~were able to turn our inventory more frequently due to more efficient inventory management and maintaining a more attractive product selection.

Commentary—Cash Flows (non-GAAP). For the year ended December 31, 2008, we generated $2.0 million in cash inflows from operations compared to cash inflows of $10.0 million during 2007. "Free Cash Flow" (a non-GAAP financial measure) for the three months ended December 31, 2007 and ~~will continue~~2008 totaled $55.3 million and $39.4 million, respectively. For the years ended December 31, 2007 and 2008, free cash flow was $7.3 million and $(16.7) million. See "Non-GAAP Financial Measures" below for a reconciliation of Free Cash Flow to ~~use~~net cash provided by operating activities.

Commentary—Debt Repurchase Program. At December 31, 2008, $67.5 million of our 3.75% Senior Convertible Notes due 2011 were outstanding. On February 17, 2009 our Board authorized us to spend up to $20.0 million to repurchase Senior Notes. To date we have spent $3.0 million under the ~~simplified method in developing the expected term used for our valuation of stock-based compensation.~~new debt repurchase program.

The balance of our Management's Discussion and Analysis of Financial Condition and Results of Operations provides further information about the matters discussed above and other important matters affecting our business.

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Results of Operations

The following table sets forth our results of operations expressed as a percentage of total revenue for ~~2005,~~2006, 2007 and 2008:

			Years ended December 31,

			2006			2007			2008
			(as a percentage of total revenue)
Revenue
	Direct revenue			38.6	%		25.7	%		20.9	%
	Fulfillment partner revenue			61.4			74.3			79.1

		Total revenue		100.0			100.0			100.0

Cost of goods sold
	Direct			36.5			21.9			18.5
	Fulfillment partner			52.0			61.8			64.4

		Total cost of goods sold		88.5			83.7			82.9

Gross profit				11.5			16.3			17.1

Operating expenses:
	Sales and marketing			9.1			7.2			6.9
	Technology			8.4			7.8			6.9
	General and administrative			6.0			5.5			4.6
	Restructuring			0.7			1.6			0.0

		Total operating expenses		24.2			22.1			18.4

Operating loss				(12.7	)		(5.8	)		(1.3	)
Interest income, net				0.5			0.6			0.4
Interest expense				(0.6	)		(0.6	)		(0.4	)
Other (expense) income, net				0.0			(0.0	)		(0.2	)

Loss from continuing operations				(12.8	)%		(5.8	)%		(1.5	)%

Comparison of Years Ended December 31, 2007 and 2008

Revenue

Total revenue increased 9% to $834.4 million for the year ended December 31, 2008, from $765.9 million in 2007. During the three months ended December 31, 2007 and 2008, total revenue was $294.5 million and $255.9 million, respectively, a 13% decrease. Direct revenue decreased 12% from $197.1 million in 2007 to $174.2 million in 2008. In the fourth quarters, direct revenue decreased 28%, from $67.2 million in 2007 to $48.4 million in 2008. Fulfillment partner revenue increased 16% during fiscal 2008, but decreased 9% during the fourth quarter. For the year ended December 31, 2008, fulfillment partner revenue was $660.2 million compared to $568.8 million in 2007. For the three months ended December 31, 2008, fulfillment partner revenue was $207.4 million compared to $227.3 million in 2007.

Gross profit and gross profit percentage

Generally, our overall gross profit percentages fluctuate based on several factors, including our product mix of sales; sales volumes mix within our direct business and fulfillment partners business; changes in vendor and / or customer pricing, including competitive pricing and inventory management decisions within the direct business; warehouse management costs; customer service costs; and our

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discounted shipping offers. Discounted shipping offers reduce shipping revenue, and therefore reduce our gross profit percentage on retail sales.

Gross profit percentage for the twelve months ended December 31, 2008 increased 80 basis points, from 16.3% in 2007 to 17.1% in 2008. Gross profit for the years ended December 31, 2007 and 2008 amounted to $124.6 million and $142.9 million, respectively, a 15% increase. For the three months ended December 31, 2008, gross profit percentage increased 130 basis points, from 15.7% in 2007 to 17.0% in 2008, and gross profit decreased 6% from $46.4 million in Q4 2007 to $43.6 million in Q4 2008. Gross profit percentages for the quarters and fiscal years during 2007 and 2008 were:

Q1 2007			Q2 2007			Q3 2007			Q4 2007			FY 2007			Q1 2008			Q2 2008			Q3 2008			Q4 2008			FY 2008

	15.2	%		17.6	%		17.1	%		15.7	%		16.3	%		16.7	%		17.6	%		17.2	%		17.0	%		17.1	%

Cost of goods sold includes stock-based compensation related to the adoption of SFAS 123(R) of $460,000 and $181,000 for the years ended December 31, 2007 and 2008, respectively.

Direct Gross Profit and Gross Profit Percentage—Gross profit for our direct business declined 32% from $29.1 million during the year ended December 31, 2007 to $19.7 million for the same period in 2008. Gross profit for our direct business as a percentage of direct revenue decreased from 14.8% in 2007 to 11.3% in 2008. For the three-month periods ended December 31, 2007 and 2008, gross profit for our direct business totaled $10.4 million and $4.2 million, respectively, a 59% decrease. Gross profit percentage for our direct business for those three-month periods decreased from 15.4% in 2007 to 8.7% in 2008.

Gross profit percentage for our direct business decreased along with a decrease in direct revenue of 12% for fiscal 2008, decreasing 28% for the fourth quarter of 2008 compared to the respective periods in 2007. While fulfillment costs continue to improve, these benefits are more than offset by our fixed warehouse cost being amortized over a smaller direct revenue base.

Fulfillment Partner Gross Profit and Gross Profit Percentage—Our fulfillment partner business generated gross profit of $95.5 million and $123.2 million for the years ended December 31, 2007 and 2008, respectively, a 29% improvement. Gross profit percentage for the fulfillment partner business also increased from 16.8% in 2007 to 18.7% in 2008 for those respective periods. The increase in gross profit dollars for our fulfillment partner business is the result of the 16% increase in fulfillment partner revenue combined with increased gross profit percentage.

Fulfillment costs

Fulfillment costs include all warehousing costs, including fixed overhead and variable handling costs (excluding packaging costs), as well as credit card fees and customer service costs, all of which we include as costs in calculating gross profit percentage. We believe that some companies in our industry, including some of our competitors, account for fulfillment costs within operating expenses, and therefore exclude fulfillment costs from gross profit percentage. As a result, our gross profit percentage may not be directly comparable to others in our industry.

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The following table has been included to provide investors additional information regarding our classification of fulfillment costs and gross profit percentage, thus enabling investors to better compare our gross profit percentage with others in our industry (in thousands):

		Years ended December 31,

		2007				2008
Total revenue		$	765,902	100	%	$	834,367	100	%

Cost of goods sold
	Product costs and other cost of goods sold		594,276	78	%		644,212	77	%
	Fulfillment costs		47,076	6	%		47,246	6	%

	Total cost of goods sold		641,352	84	%		691,458	83	%

Gross profit		$	124,550	16	%	$	142,909	17	%

As displayed in the above table, fulfillment costs during the years ended December 31, 2007 and 2008 were $47.1 million and $47.2 million, representing 6% of total revenue for those respective periods. Fulfillment costs as a percentage of sales may vary due to several factors, such as our ability to manage costs at our warehouses, significant changes in the number of units received and fulfilled, the extent to which we utilize third party fulfillment services and warehouses, and our ability to effectively manage customer service costs and credit card fees.

Operating expenses

Sales and marketing. Sales and marketing expenses totaled $55.5 million and $57.6 million for the years ended December 31, 2007 and 2008, representing 7% of total revenue for those respective periods. Comparing 2007 and 2008, sales and marketing expenses increased 4% from 2007 to 2008. We direct customers to our Website primarily through a number of targeted online marketing channels, such as sponsored search, affiliate marketing, portal advertising, e-mail campaigns, and other initiatives. We also use nation-wide television, print and radio advertising campaigns to promote sales. Sales and marketing expenses also include stock-based compensation related to the adoption of SFAS 123(R) in 2006 of $336,000 and $313,000 for the years ended December 31, 2007 and 2008, respectively.

Costs associated with our discounted shipping promotions are not included in marketing expense. Rather they are accounted for as a reduction of revenue and therefore affect sales growth and gross profit percentage. We consider discounted shipping promotions as an effective marketing tool, and intend to continue to offer them as we deem appropriate as part of our overall marketing plan.

Technology expenses. We seek to efficiently invest in our technology, including web services, customer support, search, and expansion of new and existing product categories, as well as technology infrastructure to continue to enhance the customer experience, improve our process efficiency and support our web services infrastructure.

Technology expenses totaled $59.5 million and $57.8 million for the years ended December 31, 2007 and 2008, respectively (7.8% and 6.9% of revenue for 2007 and 2008). From 2007 to 2008, technology expenses decreased 3% primarily due to decreased depreciation expense. Technology expenses also included stock-based compensation related to the adoption of SFAS 123(R) in 2006 of $764,000 and $792,000 for the years ended December 31, 2007 and 2008, respectively.

General and administrative expenses. General and administrative ("G&A") expenses totaled $42.0 million and $38.4 million for the years ended December 31, 2007 and 2008, respectively, representing approximately 5.5% and 4.6% of total revenue, respectfully. G&A costs decreased 9.0% to $38.4 million for the year 2008 from $42.0 million or $3.6 million. The primary reduction in G&A expenses year over year is primarily due to a $4.1 million decrease in bonuses accrued in 2008

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(including our decision to not pay senior executives and company-wide profit sharing bonuses). In addition, the performance goal described in the Performance Share Plan (the "Plan") was not attained as of the end of the year ended 2008 and $1.0 million in total compensation expense accrued under the Plan was reversed. This year over year decrease was offset in part by an increase of approximately $1.5 million related to consulting costs and professional fees.

We incurred stock-based compensation related to the adoption of SFAS 123(R) in 2006 within general and administrative expenses of approximately $3.0 million and $2.0 million for the years ended December 31, 2007 and 2008, respectively.

A large portion of our technology and general and administrative expenses are non-cash expenses. These non-cash expenses (which include depreciation and amortization and stock-based compensation) for the year ended December 31, 2008 were $26.0 million, compared to similar non-cash expense of $34.2 million during 2007. We estimate that that these non-cash expenses for 2009 will be approximately $18-$20 million.

Overall, our total operating expenses decreased 9% during fiscal 2008 compared to the previous year, while total revenues increased 9% and gross profit increased 15%.

Restructuring expenses. During the fourth quarter of 2006, we commenced a facilities consolidation and restructuring program designed to reduce our overall expense structure in an effort to improve future operating performance. The facilities consolidation and restructuring program was substantially completed by the end of the second quarter of 2007. There were no restructuring expenses recorded during the third and fourth quarters of 2007 or for any period in 2008. If we determine to move our corporate headquarters we expect to incurr future restructuring expenses. (see Item 15 of Part IV, "Financial Statements"—Note 3—"Restructuring Expense").

During fiscal year 2006, we recorded $5.7 million of restructuring charges, of which $4.6 million related to costs to terminate a co-location data center lease. Other costs included in the restructuring charge related to $638,000 of accelerated amortization of leasehold improvements in our current office facilities that we are attempting to sublease, and $450,000 of costs to return these office facilities to their original condition as required by the lease agreement.

During fiscal year 2007, we recorded $12.3 million of restructuring charges, of which $9.9 million related to the termination of a logistics services agreement, termination and settlement of a lease related to vacated warehouse facilities in Indiana, and abandonment and marketing for sub-lease office and data center space in our current corporate office facilities. We also recorded an additional $2.2 million of restructuring charges related to accelerated depreciation of leasehold improvements located in the abandoned office and co-location data center space and $200,000 of other miscellaneous restructuring charges. We had no restructuring charges in 2008.

Non-operating income (expense)

Interest income and interest expense. Interest income is primarily derived from the investment of our cash in short-term investments. Comparing 2007 and 2008, the decrease in interest income is due to a decrease in total cash and interest rates in 2008.

Interest expense is largely related to interest incurred on our convertible notes and our credit lines. Interest expense for the years ended December 31, 2007 and 2008 totaled $4.2 million and $3.5 million, respectively.

Other income (expense). Other income (expense) for the year ended December 31, 2007 was net expense of $(92,000). For the year ended December 31, 2008, other income (expense) was net expense of $(1.4) million. This included a $2.8 million gain, net of amortization of debt discount of $142,000 on the retirement of $9.5 million of the 3.75% Senior Notes (see Item 15 of Part IV, "Financial

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Statements"—Note 17—"Stock and Debt Repurchase Program"), a $3.9 million loss on the settlement of notes receivable (see Item 15 of Part IV, "Financial Statements"—Note 4—"Acquisition and Subsequent Discontinued Operations") and a $300,000 other-than-temporary impairment of marketable securities.

On January 14, 2008, the Company's Board of Directors authorized a repurchase program that allowed the Company to purchase up to $20.0 million of its common stock and / or its 3.75% Senior Convertible Notes due 2011 ("Senior Notes") through December 31, 2009. During the year ended 2008, we retired $9.5 million of the Senior Notes for $6.6 million in cash and recognized a gain of $2.8 million, net of amortization of debt discount of $142,000.

Sale of discontinued operations

We determined during the fourth quarter of 2006 to sell our travel subsidiary ("OTravel"). As a result, OTravel's operations were classified as a discontinued operation and therefore are not included in the results of continuing operations. The loss from discontinued operations for OTravel was $6.9 million and $3.9 million for the years ended December 31, 2006 and ~~2007:~~2007, respectively.

In conjunction with the discontinuance of OTravel, we performed an evaluation of the goodwill associated with the reporting unit pursuant to SFAS 142 and SFAS 144 and determined that goodwill of approximately $4.5 million was impaired as of December 31, 2006 based on a non-binding letter of intent from a third party to purchase this business. On April 25, 2007, we completed the sale of OTravel for cash proceeds of $9.9 million, net of cash transferred, and $6.0 million of notes. Based on the estimated fair value of the discounted cash flows of the net proceeds from the sale, we recorded an additional goodwill impairment of $3.8 million in 2007. (see Item 15 of Part IV, "Financial Statements"—Note 4—"Acquisition and Subsequent Discontinued Operations").

Years ended December 31,

2005
(Restated)

2006
(Restated)

2007
(Restated)

(as a percentage of total revenue)

Revenue

Direct revenue

40.6
%
38.6
%
25.7
%
Fulfillment partner revenue

59.4

61.4

74.3

Total revenue

100.0

100.0

100.0

Cost of goods sold

Direct

35.3

36.5

21.9

Fulfillment partner

50.0

52.0

61.8

Total cost of goods sold

85.3

88.5

83.7

Gross profit

14.7

11.5

16.3

Operating expenses:

Sales and marketing

9.7

9.1

7.2

Technology

3.5

8.4

7.8

General and administrative

4.2

6.0

5.5

Restructuring

—

0.7

1.6

Total operating expenses

17.4

24.2

22.1

Operating loss

(2.7
)
(12.7
)
(5.8
)
Interest income, net

0.0

0.5

0.6

Interest expense

(0.7
)
(0.6
)
(0.6
)
Other (expense) income, net

0.6

0.0

(0.0
)

Loss from continuing operations

(2.8
)%
(12.8
)%
(5.8
)%

On January 21, 2009, we entered into a Note Purchase Agreement to sell both the senior and junior promissory notes to Castles Travel, Inc for $1.3 million in cash and recognized a loss on the settlement of these notes and interest receivable of approximately $3.9 million which was recorded as of December 31, 2008 (see Item 15 of Part IV, "Financial Statements"—Note 4—"Acquisition and Subsequent Discontinued Operations").

Income taxes

For the year ended December 31, 2007 and 2008, we incurred net operating losses, and consequently paid insignificant amounts of federal, state and foreign income taxes. As of December 31, 2007 and 2008, we had net operating loss carry-forwards of approximately $164.2 million and $171.8 million, respectively, which may be used to offset future taxable income. An additional $21.9 million of net operating losses are limited under Internal Revenue Code Section 382 to $799,000 a year. These net operating loss carry-forwards will begin to expire in 2018.

Seasonality

Based upon our historical experience, revenue typically increases during the fourth quarter because of the holiday retail season. The actual quarterly results for each quarter could differ materially depending upon consumer preferences, availability of product and competition, among other risks and uncertainties. Accordingly, there can be no assurances that seasonal variations will not materially affect

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our results of operations in the future. The following table reflects our total revenues for each of the quarters since 2005 (in thousands):

First Quarter Second Quarter Third Quarter Fourth Quarter
2008
$ 202,814 $ 188,836 $ 186,855 $ 255,862
2007
162,156 149,171 160,059 294,516
2006
179,783 159,717 158,230 282,407
2005
165,028 153,519 166,396 310,033

Comparison of Years Ended December 31, 2006 and 2007

Revenue

�� Total revenue decreased 2% to $765.9 million for the year ended December 31, 2007, from $780.1 million in 2006. During the three months ended December 31, 2006 and 2007, total revenue was $282.4 million and $294.5 million, respectively, a 4% increase. Direct revenue decreased 35% from $301.5 million in 2006 to $197.1 million in 2007, and comparing the fourth quarters, direct revenue decreased 29%, from $94.4 million in 2006 to $67.2 million in 2007. On the other hand, fulfillment partner revenue experienced 19% growth during fiscal 2007 and 21% growth during the fourth quarter. For the year ended December 31, 2007, fulfillment partner revenue was $568.8 million compared to $478.6 million in 2006. For the three months ended December 31, 2007, fulfillment partner revenue was $227.3 million versus $188.0 million in 2006.

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Gross ~~profit and gross margin~~Profit Percentage

Generally, our overall gross ~~margins~~profit percentages fluctuate based on several factors, including our product mix of sales; sales volumes mix by our direct business and fulfillment partners businesses; changes in vendor and / or customer pricing, including competitive pricing and inventory management decisions within the direct business; warehouse management costs; customer service costs; and our discounted shipping offers. Discounted shipping offers reduce shipping revenue, and therefore reduce our gross ~~margin~~profit percentage on retail sales.

Gross ~~margin~~profit percentage for the twelve months ended December 31, 2007 increased 480 basis points, from 11.5% in 2006 to 16.3% in 2007. Gross profit for the years ended December 31, 2006 and 2007 amounted to $89.8 million and $124.6 million, respectively, a 39% increase. For the three-month period ended December 31, 2007, gross ~~margin~~profit percentage increased 730 basis points, from 8.4% in 2006 to 15.7% in 2007, and gross profit increased 95% from $23.8 million in 2006 to $46.4 million in 2007. Gross ~~margins~~profit percentages for the quarters and fiscal years during 2006 and 2007 were:

Q1 2006			Q2 2006			Q3 2006			Q4 2006			FY 2006			Q1 2007			Q2 2007			Q3 2007			Q4 2007			FY 2007

	12.8	%		13.5	%		13.6	%		8.4	%		11.5	%		15.2	%		17.6	%		17.1	%		15.7	%		16.3	%

Cost of goods sold includes stock-based compensation related to the adoption of SFAS 123(R) of $412,000 and $460,000 for the years ended December 31, 2006 and 2007, respectively.

Direct Gross Profit and Gross ~~Margin—~~Profit Percentage—Gross profit for our direct business grew 74% from $16.7 million during the year ended December 31, 2006 to $29.1 million for the same period in 2007. Gross profit for our direct business as a percentage of direct revenue increased from 5.6% in 2006 to 14.8% in 2007. For the three-month periods ended December 31, 2006 and 2007, gross profit for our direct business totaled $(4.3) million and $10.4 million, respectively, a 342% increase. Gross ~~margin~~profit percentage for our direct business for those three-month periods increased from -4.5% in 2006 to 15.4% in 2007. Gross ~~margin~~profit percentage for our direct business expanded despite direct revenue decreasing 35% for fiscal 2007 and decreasing 29% for the fourth quarter of 2007 compared to the respective periods in 2006. This was primarily due to a significant reduction in direct inventory.

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However, gross ~~margins~~profit percentages have increased at the same time, since the remaining inventory in general turns faster and has higher profitability. Gross ~~margins~~profit percentages have also improved from the reduction of fulfillment costs (defined as warehousing costs, credit card fees and customer service costs—see further discussion in the following section entitled ~~“Fulfillment Costs”~~"Fulfillment Costs") to 6.1% of sales in 2007 compared to 7.8% in 2006, a 170 basis point improvement.

Fulfillment Partner Gross Profit and Gross ~~Margin—~~Profit Percentage—Our fulfillment partner business generated gross profit of $73.1 million and $95.5 million for the years ended December 31, 2006 and 2007, respectively, a 31% improvement. Gross ~~margin~~profit percentage for the fulfillment partner business also increased from 15.3% in 2006 to 16.8% in 2007 for those respective periods. The increase in gross profit dollars for our fulfillment partner business is the result of the 19% increase in fulfillment partner revenue combined with increased gross ~~margin.~~profit percentage. The increase in partner gross ~~margin~~profit percentage is the result of better product pricing and improvements in partner fulfillment costs, particularly the cost of customer service.

Fulfillment costs

Fulfillment costs include all warehousing costs, including fixed overhead and variable handling costs (excluding packaging costs), as well as credit card fees and customer service costs, all of which we include as costs in calculating gross ~~margin.~~profit percentage. We believe that some companies in our industry, including some of our competitors, account for fulfillment costs within operating expenses, and therefore exclude fulfillment costs from gross ~~margin.~~profit percentage. As a result, our gross ~~margin~~profit percentage may not be directly comparable to others in our industry.

The following table has been included to provide investors additional information regarding our classification of fulfillment costs and gross ~~margin,~~profit percentage, thus enabling investors to better compare our gross ~~margin~~profit percentage with others in our industry (in thousands):

Years ended December 31,

2006
(Restated)

2007
(Restated)

Total revenue

$
780,137

100
%
$
765,902

100
%

Cost of goods sold

Product costs and other cost of goods sold

629,477

81
%
594,276

78
%
Fulfillment costs

60,856

7
%
46,728

6
%

Total cost of goods sold

690,333

88
%
641,352

84
%

Gross profit

$
89,804

12
%
$
124,550

16
%

		Years ended December 31,

		2006				2007
Total revenue		$	780,137	100	%	$	765,902	100	%

Cost of goods sold
	Product costs and other cost of goods sold		629,477	81	%		594,276	78	%
	Fulfillment costs		60,856	7	%		47,076	6	%

	Total cost of goods sold		690,333	88	%		641,352	84	%

Gross profit		$	89,804	12	%	$	124,550	16	%

As displayed in the above table, fulfillment costs during the years ended December 31, 2006 and 2007 were $60.9 million and ~~$46.7~~$47.1 million, representing 7% and 6% of total revenue for those respective periods. Fulfillment costs as a percentage of sales may vary due to several factors, such as our ability to manage costs at our warehouses, significant changes in the number of units received and fulfilled, the extent to which we utilize third party fulfillment services and warehouses, and our ability to effectively manage customer service costs and credit card fees.

The decrease in fulfillment costs in 2007 has been the result of improved efficiencies in both our warehousing costs (including the reduction of warehouse space), and in our customer service operations.

Operating expenses

Sales and marketing. Sales and marketing expenses totaled $70.9 million and $55.5 million for the years ended December 31, 2006 and 2007, representing 9% and 7% of total revenue for those respective periods. Comparing 2006 and 2007, sales and marketing expenses decreased 22% from 2006 to 2007. We direct customers to our Website primarily through a number of targeted online marketing channels, such as sponsored search, affiliate marketing, portal advertising, e-mail campaigns, and other initiatives. We also utilize channels such as nation-wide television, print and radio advertising campaigns. Sales and marketing expenses also include stock-based compensation related to the adoption of SFAS 123(R) in 2006 of $301,000 and $336,000 for the years ended December 31, 2006 and 2007, respectively.

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Costs associated with our discounted shipping promotions are not included in marketing expense. Rather they are accounted for as a reduction of revenue and therefore affect sales growth and gross profit. We consider discounted shipping promotions as an effective marketing tool, and intend to continue to offer them as we deem appropriate as part of our overall marketing plan.

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Technology expenses. Technology expenses totaled $65.2 million and $59.5 million for the years ended December 31, 2006 and 2007, respectively (8% of revenue in both years). From 2006 to 2007, technology expenses decreased 9% primarily due to decreased depreciation expense. Technology expenses also included stock-based compensation related to the adoption of SFAS 123(R) in 2006 of $684,000 and $764,000 for the years ended December 31, 2006 and 2007, respectively.

General and administrative expenses. General and administrative ~~expenses.~~ ~~General and administrative (“~~("G~~&A”~~&A") expenses totaled $46.8 million and $42.0 million for the years ended December 31, 2006 and 2007, respectively, representing approximately 6% of total revenue for both years. Comparing fiscal years 2006 and 2007, general and administrative expenses decreased 10%. The decrease in G&A expenses relates to decreases in corporate facilities costs, payroll-related expenses, professional fees, merchandising, legal and finance costs as we have made reductions to our corporate office space and headcount.

We incurred stock-based compensation related to the adoption of SFAS 123(R) in 2006 within general and administrative expenses of approximately $2.7 million and $3.0 million for the years ended December 31, 2006 and 2007, respectively.

A large portion of our technology and general and administrative expenses are non-cash expenses. These non-cash expenses (which include depreciation and amortization and stock-based compensation and excludes non-cash restructuring costs) for the year ended December 31, 2007 were $34.2 million, compared to similar non-cash expense of $37.3 million during 2006. We estimate that that these non-cash expenses for 2008 will be approximately $28-$30 million.

Overall, our total operating expenses decreased 10% during fiscal 2007 compared to the previous year, while total revenues decreased 2% and gross profit increased 39%.

Restructuring expenses. During the fourth quarter of 2006, we commenced a facilities consolidation and restructuring program designed to reduce our overall expense structure in an effort to improve future operating performance. The facilities consolidation and restructuring program was substantially completed by the end of the second quarter of 2007. There were no restructuring expenses recorded during the third and fourth quarters of 2007 (see Item 15 of Part IV, ~~“Financial Statements (Restated)”~~"Financial Statements"—Note ~~4—“~~3—"Restructuring ~~Expense”~~Expense").

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Non-operating income (expense)

Interest income, interest expense and other income (expense). Interest income is derived from the investment of our cash in short-term investments. Over the last two years, interest income totaled $3.6 million and $4.8 million for the years ended December 31, 2006 and 2007, respectively. Comparing 2006 and 2007, the increase in interest income is due to an increase in total cash and interest rates in 2007, and from interest income earned from our notes receivable related to the sale of our OTravel business which ~~occured~~occurred in the second quarter of 2007 (see Item 15 of Part IV, ~~“Financial Statements (Restated)”~~"Financial Statements"—Note ~~5—“~~4—"Acquisition and Subsequent Discontinued ~~Operations”~~Operations"). During Q2 of 2006, we recorded $1.9 million of interest income related to the sale of Foreign Notes (see Item 15 of Part IV, ~~“Financial Statements (Restated)”~~"Financial Statements"—Note ~~6—“~~5—"Marketable ~~Securities”~~Securities").

Interest expense is largely related to interest incurred on our convertible notes, capital leases and our credit lines. Interest expense for the years ended December 31, 2006 and 2007 totaled $4.8 million and $4.2 million, respectively. The decrease from 2006 to 2007 is due primarily to the fact that we had $20 million of borrowings outstanding on our inventory line of credit in the first quarter of 2006, and no borrowings outstanding during the same period in 2007.

Other income (expense) for the year ended December 31, 2006 was income of $81,000 and net expense of $92,000 in 2007.

~~Sale of discontinued~~Discontinued operations

We determined during the fourth quarter of 2006 to sell our travel subsidiary ~~(“OTravel”~~("OTravel"). As a result, ~~OTravel’s~~OTravel's operations were classified as a discontinued operation and therefore are not included in the results of continuing operations. The loss from discontinued operations for OTravel was $6.9 million and $3.9 million for the years ended December 31, 2006 and 2007, respectively.

In conjunction with the discontinuance of OTravel, we performed an evaluation of the goodwill associated with the reporting unit pursuant to SFAS 142 and SFAS 144 and determined that goodwill of approximately $4.5 million was impaired as of December 31, 2006 based on a non-binding letter of intent from a third party to purchase this business. On April 25, 2007, we completed the sale of OTravel for cash proceeds of $9.9 million, net of cash transferred, and $6.0 million of notes. Based on the estimated fair value of the discounted cash flows of the net proceeds from the sale, we recorded an additional goodwill impairment of $3.8 million. There was no additional impairment of goodwill during the year ended December 31, 2007 (see Item 15 of Part IV, ~~“Financial Statements (Restated)”~~"Financial Statements"—Note ~~5—“~~4—"Acquisition and Subsequent Discontinued ~~Operations”~~Operations").

On January 21, 2009, we entered into a Note Purchase Agreement to sale both the senior and junior promissory notes to Castles Travel, Inc for $1.3 million in cash and recognized a loss on the settlement of these notes and interest receivable of approximately $3.9 million (see Item 15 of Part IV, "Financial Statements"—Note 4—"Acquisition and Subsequent Discontinued Operations").

Income taxes

~~Income taxes.~~ For the year ended December 31, 2006 and 2007, we incurred net operating losses, and consequently paid insignificant amounts of federal, state and foreign income taxes. As of December 31, 2006 and 2007, we had net operating loss carry-forwards of approximately ~~$150.5~~$145.2 million and ~~$172.5~~$164.2 million, respectively, which may be used to offset future taxable income. An additional $21.9 million of net operating losses are limited under Internal Revenue Code Section 382 to $799,000 a year. These net operating loss carry-forwards will begin to expire in 2018.

~~Seasonality~~

First Quarter
(Restated)

Second Quarter
(Restated)

Third Quarter
(Restated)

Fourth Quarter
(Restated)

2007

$
162,156

$
149,171

$
160,059

$
294,516

2006

179,783

159,717

158,230

282,407

2005

165,028

153,519

166,396

310,033

2004

82,660

86,140

102,659

219,162

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~~Comparison of Years Ended December 31, 2005 and 2006~~

~~Revenue~~

During the year ended December 31, 2005 and 2006, total revenue decreased 2%, from $795.0 million in 2005 to $780.1 million in 2006. During the same period, direct revenue decreased 7%, from $323.1 million in 2005 to $301.5 million in 2006, while fulfillment partner revenue experienced 1% growth, from $471.8 million in 2005 to $478.6 million in 2006.

Our fourth quarter revenue declined 9%, and total revenue was down 2% for the year. We believe that these decreases were primarily the result of our infrastructure upgrades in the last half of 2005, which resulted in an unsatisfactory shopping experience for many of our customers and affected both repeat and new customer sales in 2006. We believe that a key to future revenue growth is to increase our Website conversion rate—defined as the percentage of visitors to the website who make a purchase. The areas of our business that most directly affect conversion rate, including personalization of the website, customer retention, e-mail marketing, and site design and layout, are the responsibility of our internal marketing department. Within each of these areas, we have identified and made progress on initiatives that we believe can improve conversion, including outsourcing to third-party providers certain aspects of the functionality on the website, such as the engine that provides product recommendations to customers visiting product pages and the gift center that went live during the fourth quarter.

~~Gross Margin~~

Total Gross Margin—For the years ended December 31, 2005 and 2006, total cost of goods sold increased $11.8 million or 2%, from $678.5 million in 2005 to $690.3 in 2006, resulting in a decrease in gross profit of 23% (from $116.5 million in 2005 to $89.8 million in 2006) during the same periods. As a percent of total revenue, cost of goods sold increased from 85% to 89% for those respective periods, resulting in decreased gross margin of 14.7% and 11.5% for the years ended December 31, 2005 and 2006, respectively. Cost of goods sold also included stock-based compensation related to the adoption of SFAS 123(R) in 2006 of $412,000 during the year ended December 31, 2006 compared to $6,000 of stock-based compensation in 2005.

Generally, our overall gross margins fluctuate based on several factors, including our product mix of sales; sales volumes mix by our direct business and fulfillment partners; changes in vendor pricing; lowering prices for customers, including competitive pricing and inventory management decisions within the direct business; warehouse management costs; customer service costs; and our discounted shipping offers. Discounted shipping offers reduce shipping revenue, and therefore reduce our gross margins on retail sales.

Direct Gross Margin—For the years ended December 31, 2005 and 2006, gross profit for our direct business decreased 61% from $42.5 million in 2005 to $16.7 million in 2006. Gross margin for our direct business decreased from 13.1% to 5.6% for those respective periods. The lower gross margin experienced by the direct business were primarily the result of lowering prices to our customers in an effort to significantly reduce inventory levels, which decreased from $97.7 million at the end of 2005 to $23.9 million at the end of 2006.

Fulfillment Partner Gross Margin—For the years ended December 31, 2005 and 2006, our fulfillment partner business generated gross profit of $74.0 million and $73.1 million, respectively, an decrease of 1%, also resulting in decrease gross margin of 15.7% and 15.3% for those respective periods.

~~Fulfillment costs~~

Fulfillment costs include all warehousing costs, including fixed overhead and variable handling costs (excluding packaging costs), as well as credit card fees and customer service costs, all of which we include as costs in calculating gross margins. We believe that some companies in our industry, including some of our competitors, account for fulfillment costs within operating expenses, and therefore exclude fulfillment costs from gross margins. As a result, our gross margins may not be directly comparable to others in our industry.

The following table has been included to provide investors additional information regarding our classification of fulfillment costs and gross margins, thus enabling investors to better compare our gross margins with others in our industry (in thousands):

Years ended December 31,

2005
(Restated)

2006
(Restated)

Total revenue

$
794,975

100
%
$
780,137

100
%

Cost of goods sold

Product costs and other cost of goods sold

618,571

78
%
629,477

81
%
Fulfillment costs

59,931

7
%
60,856

8
%

Total cost of goods sold

678,502

85
%
690,333

89
%

Gross profit

$
116,473

15
%
$
89,804

11
%

As displayed in the above table, fulfillment costs during the years ended December 31, 2005 and 2006 were $59.9 million and $60.9 million, respectively, or 7.5% and 7.8% of total revenue for those respective periods. Fulfillment costs as a percentage of sales may vary due to several factors, such as our ability to manage costs at our warehouses, significant changes in the number of units received and fulfilled, the extent we utilize third party fulfillment services and warehouses, and our ability to effectively manage customer service costs and credit card fees.

~~Operating expenses~~

~~Sales and marketing.~~ For the years ended December 31, 2005 and 2006, sales and marketing expenses totaled $77.2 million and $70.9 million (8% decrease), respectively. As a percentage of total revenue, sales and marketing expenses decreased slightly from 10% in 2005 to 9% in 2006. We direct customers to our Website primarily through a number of targeted online marketing channels, such as sponsored search, affiliate marketing, portal advertising, e-mail campaigns, and other initiatives. We also utilize channels such as nation-wide television, print and radio advertising campaigns. Our marketing expense is variable and is measured as a percentage of overall sales.

~~Our intent in 2006 was to keep marketing expense as a percent of sales at approximately 7%, and we had accomplished this over the first six months of the year.~~

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However, we entered the third quarter with our systems and processes running smoothly, and our customer satisfaction ratings back to where they had been prior to the system issues we experienced at the end of 2005. As a result, we increased both online and offline marketing expenditures in the last half of 2006 in an effort to create sales momentum in Q4 2006 and into 2007. However, we did not see a corresponding increase in sales, primarily as a result of visitor conversion rates, and marketing expense was 10% of sales in the fourth quarter, bringing it to 9% of sales for the year.

We believe that our marketing expenditures were less efficient due to overall increases in online marketing rates, as well as the expiration of marketing agreements that we had with several large portals, including MSN, Yahoo and AOL, which are either no longer available or were too expensive for us to justify. In an effort to offset this, we internally developed a search engine optimization tool that we believed would help us manage keyword purchases more efficiently and is intended to help improve conversion rates and our overall marketing efficiency.

While costs associated with our discounted shipping promotions are not included in marketing expense (they are accounted for as a reduction of revenue), we consider discounted shipping promotions as an effective marketing tool, and intend to continue to offer them as we deem appropriate.

Sales and marketing expenses also included stock-based compensation related to the adoption of SFAS 123(R) in 2006 of $301,000 during the year ended December 31, 2006 compared to $4,000 of stock-based compensation in 2005.

~~Technology expenses.~~ Technology expenses increased 134%, from $27.9 million for the year ended December 31, 2005 to $65.2 million for the same period in 2006, representing 3% and 8% of total revenue for those respective periods. Technology expenses also included stock-based compensation related to the adoption of SFAS 123(R) in 2006 of $684,000 during the year ended December 31, 2006, compared to $11,000 of stock-based compensation in 2005.

We incurred a “stair-step” increase in technology costs over these two years, as we had made significant investments in all of our major systems, with approximately $60 million of capital expenditures in 2005 and an additional $26 million in 2006 (including increases to capital leases). The increases in expense are related primarily to increased depreciation expense, as well as increases in maintenance and support costs, and increased IT personnel, including consultants. These increased expenses resulted in a significant increase in technology expenses as a percent of sales for the full-year 2006.

~~General and administrative expenses.~~ General and administrative (“G&A”) expenses increased 42%, from $33.0 million during the year ended December 31, 2005 to $46.8 million during the same period in 2006, representing 4% and 6% of total revenue for each of the respective periods. We incurred stock-based compensation within general and administrative expenses of approximately $2.7 million for the year ended December 31, 2006 compared to $51,000 in stock-based compensation in 2005.

The increase in G&A expenses in 2006 compared to 2005 related to increases in payroll-related expenses, professional fees, merchandising, legal and finance costs, and also due to increased costs related to our relocation of our corporate offices to larger facilities in the third quarter of 2005.

A large portion of our technology and general and administrative expenses are now non-cash expenses. Total depreciation and amortization (including amortization of stock- based compensation) in 2006 was $36 million. This compared to only $14 million of similar non-cash expenses in 2005.

~~Restructuring expenses.~~ During the fourth quarter of 2006, in an effort to improve future operating performance, we commenced implementation of a facilities consolidation and restructuring program designed to reduce our overall expense structure (see Item 15 of Part IV, “Financial Statements (Restated)”—Note 4—“Restructuring Expense”). The planned actions included the termination of a co-location data center lease, marketing of the current office facilities for sub-lease, and marketing non-core businesses for sale. We recorded $5.7 million of restructuring charges in 2006, of which $4.6 million related to costs to terminate a co-location data center lease. Other costs included in the restructuring charge related to $638,000 of accelerated amortization of leasehold improvements in our current office facilities that we are attempting to sublease, and $450,000 of costs to return these office facilities to their original condition as required by the lease agreement.

~~Non-operating income (expense)~~

~~Interest income, interest expense and other income (expense).~~ Interest income is derived from the investment of our excess cash in short-term investments and marketable securities. In 2005, we incurred a large expense related to the valuation of the conditional coupon of our foreign bonds. Consequentially, interest income increased from $161,000 negative interest income related to a decrease in the valuation of the conditional coupon of our foreign bonds in 2005, to a positive $3.6 million of interest income for the year ended December 31, 2006, including a $1.9 million gain recognized in 2006 as a result of selling the foreign bonds.

Interest expense is largely related to our convertible notes, capital leases and our credit lines. Interest expense decreased slightly from $5.6 million during the year ended December 31, 2005 to $4.8 million during the same period in 2006. The decrease in interest expense was related to the reduction of convertible notes outstanding related to the retirement of $43.0 million of Senior Notes in June and November of 2005 (see Item 15 of Part IV, “Financial Statements (Restated)”—Note 12—“3.75% Convertible Senior Notes”).

~~Under SFAS No. 133,~~ ~~Accounting for Derivative Instruments and Hedging Activities~~, the Foreign Notes were considered to be derivative financial instruments and were marked to market quarterly. Any unrealized gain or loss related to the changes in value of the conditional coupon was 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 was recorded as a component of other comprehensive income (loss). On April 26, 2006, we sold the Foreign Notes for $49.5 million, resulting in the gain on the bond instrument of $1.9 million (see Item 15 of Part IV, “Financial Statements (Restated)”—Note 6—“Marketable Securities”).

~~Other income for the year ended December 31, 2005 related primarily to the retirement of $43.0 million of Senior Notes for $35.7 million, which resulted in a recognized gain of $6.2 million.~~

~~Discontinued operations~~

As part of the program to reduce our expense structure and sell non-core businesses, we decided during the fourth quarter of 2006 to sell our travel subsidiary (“OTravel”). As a result, OTravel’s operations have been classified as a discontinued operation and therefore were not included in the results of continuing operations. The loss from discontinued operations for OTravel was $6.9 million for the year ended December 31, 2006, including a goodwill impairment charge of $4.5 million.

~~Income taxes~~

~~Income taxes.~~ For the year ended December 31, 2005 and 2006, we incurred net operating losses, and consequently paid insignificant amounts of federal, state and foreign income taxes. As of December 31, 2005 and 2006, we had net operating loss carry-forwards of approximately $58.2 million and $150.5 million, respectively, which may be used to offset future taxable income. An additional $21.9 million of net operating losses are limited under Internal Revenue Code Section 382 to $799,000 a year. These net operating loss carry-forwards will begin to expire in 2018.

~~Supplemental Information about Stock-Based Compensation~~

~~Periods prior to the adoption of SFAS 123(R)~~

~~Prior to January 1, 2006, the Company accounted for stock-based awards under the intrinsic value method, which followed the recognition and measurement~~

~~Table of Contents~~

~~principles of APB Opinion No. 25,~~ ~~Accounting for Stock Issued to Employee~~, and related interpretations. The intrinsic value method of accounting resulted in compensation expense for stock options to the extent option exercise prices were set below market prices on the date of grant. Also, to the extent stock awards were forfeited prior to vesting, any previously recognized expense was reversed as an offset to operating expenses in the period of forfeiture.

~~The following table (in thousands, except per share data) illustrates the effects on net loss and net loss per share as if the Company had applied the fair value recognition provisions of SFAS 123,~~ ~~Accounting for Stock Based Compensation~~~~, as amended by SFAS No. 148,~~ ~~Accounting for Stock-Based Compensation—Transition and Disclosure~~ to options granted under the Company’s stock-based compensation plans prior to the adoption. For purposes of this pro forma disclosure, the value of the options was estimated using the Black-Scholes-Merton (“BSM”) option-pricing formula and amortized on a straight-line basis over the respective vesting periods of the awards. Disclosure for the years ended December 31, 2006 and 2007 are not presented because stock-based payments were accounted for under SFAS 123 (R)’s fair value method during these periods.

Year ended December 31,
2005
(Restated)

Net loss, as reported

$
(25,212
)
Add: Stock-based employee compensation, as reported

72

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards

(3,996
)

Pro forma net loss

$
(29,136
)

Net loss per common share

Basic and diluted—as reported

$
(1.30
)
Basic and diluted—pro forma

$
(1.50
)

~~Adoption of SFAS 123(R)~~

As of January 1, 2006, the Company adopted SFAS No. 123(R) using the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options is determined using the BSM valuation model, which is consistent with our valuation techniques previously utilized for options in footnote disclosures required under SFAS No. 123. Such value is recognized as expense over the service period, net of estimated forfeitures, using the straight-line method under SFAS 123(R).

The adoption of SFAS 123(R) did not result in a cumulative benefit from accounting change, which reflects the net cumulative impact of estimating future forfeitures in the determination of period expense, rather than recording forfeitures when they occur as previously permitted, as we did not have unvested employee stock awards for which compensation expense was recognized prior to adoption of SFAS No. 123(R).

Prior to the adoption of SFAS 123(R), cash retained as a result of tax deductions relating to stock-based compensation was presented in operating cash flows, along with other tax cash flows, in accordance with the provisions of the Emerging Issues Task Force (“EITF”) Issue No. 00-15, ~~Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option~~ ~~(“EITF 00-15”). SFAS 123(R) supersedes EITF 00-15, amends SFAS 95,~~ ~~Statement of Cash Flows,~~ and requires tax benefits relating to excess stock-based compensation deductions to be prospectively presented in the statement of cash flows as financing cash inflows. As of the adoption of SFAS 123(R), we had fully reserved against any tax benefits resulting from stock-based compensation deductions in excess of amounts reported for financial reporting purposes.

On March 29, 2005, the SEC published SAB 107, which provides the Staff’s views on a variety of matters relating to stock-based payments. SAB 107 requires stock-based compensation be classified in the same expense line items as cash compensation. The Company has reclassified stock-based compensation from prior periods to correspond to current period presentation within the same operating expense line items as cash compensation paid to employees.

The application of SFAS 123(R) had the following effect on the year ended December 31, 2006 reported amounts relative to amounts that would have been reported using the intrinsic value method under previous accounting (in thousands, except per share amounts):

SFAS 123(R) Adjustments

Year ended
December 31, 2006
(Restated)

Operating loss

$
(4,120
)
Net loss

$
(4,120
)
Net loss per common share—basic and diluted

$
(0.20
)

~~Quarterly Results of Operations~~

The following tables set forth our restated unaudited quarterly results of operations for the eight most recent quarters for the period ended December 31, 2007, as well as such data expressed as a percentage of our total revenue for the periods presented. These amounts have been restated for errors described in Note 3 of the financial statements (see Item 15 of Part IV, “Financial Statements (Restated)” – Note 3 – “Restatement of Financial Statements”). See Item 15 of Part IV, “Financial Statements (Restated)” - Note 27 - “Quarterly Results of Operations” for a reconciliation from the previously report amounts. The information in the table below should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this Form 10-K/A. We have prepared this information on the same basis as the Consolidated Financial Statements 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. Our quarterly operating results have varied substantially in the past and may vary substantially in the future. You should not draw any conclusions about our future results from the results of operations for any particular quarter.

~~Table of Contents~~

Three Months Ended

Mar. 31,
2006 (6)
(Restated)

June 30,
2006 (6)
(Restated)

Sept. 30,
2006 (6)
(Restated)

Dec. 31,
2006 (6)
(Restated)

Mar. 31,
2007 (6)
(Restated)

June 30,
2007 (6)
(Restated)

Sept. 30,
2007 (6)
(Restated)

Dec. 31,
2007 (6)
(Restated)

(in thousands, except per share data)

Consolidated Statement of Operations Data:

Revenue

Direct revenue

$
80,143

$
69,363

$
57,563

$
94,440

$
46,990

$
43,658

$
39,270

$
67,170

Fulfillment partner revenue

99,640

90,354

100,667

187,967

115,166

105,513

120,789

227,346

Total revenue

179,783

159,717

158,230

282,407

162,156

149,171

160,059

294,516

Cost of goods sold

Direct

71,831

62,178

52,073

98,692

41,469

36,456

33,268

56,815

Fulfillment partner

85,013

76,037

84,565

159,944

96,077

86,523

99,425

191,319

Total cost of goods sold

156,844

138,215

136,638

258,636

137,546

122,979

132,693

248,134

Gross profit

22,939

21,502

21,592

23,771

24,610

26,192

27,366

46,382

Operating expenses:

Sales and marketing

12,659

11,911

17,282

29,045

11,284

7,962

8,835

27,377

Technology

13,424

14,897

16,157

20,680

14,973

15,237

14,576

14,667

General and administrative

11,850

11,050

11,078

12,859

10,689

10,429

9,724

11,134

Restructuring

—

—

—

5,674

6,089

6,194

—

—

Total operating expenses

37,933

37,858

44,517

68,258

43,035

39,822

33,135

53,178

Operating loss

(14,994
)
(16,356
)
(22,925
)
(44,487
)
(18,425
)
(13,630
)
(5,769
)
(6,796
)
Interest income, net

315

2,215

459

577

990

1,078

1,291

1,429

Interest expense

(1,267
)
(1,275
)
(1,096
)
(1,127
)
(1,029
)
(1,027
)
(1,029
)
(1,103
)
Other income (expense), net

—

(1
)
(6
)
88

—

—

(92
)
—

Loss from continuing operations

(15,946
)
(15,417
)
(23,568
)
(44,949
)
(18,464
)
(13,579
)
(5,599
)
(6,470
)
Discontinued operations:

Loss from discontinued operations

(779
)
(1,128
)
(708
)
(4,267
)
(3,624
)
(300
)
—

—

Net loss

(16,725
)
(16,545
)
(24,276
)
(49,216
)
(22,088
)
(13,879
)
(5,599
)
(6,470
)
Deemed dividend related to redeemable common stock

(33
)
(33
)
(33
)
—

—

—

—

—

Net loss attributable to common shares

$
(16,758
)
$
(16,578
)
$
(24,309
)
$
(49,216
)
$
(22,088
)
$
(13,879
)
$
(5,599
)
$
(6.470
)

Net loss per common share—basic and diluted

Loss from continuing operations

$
(0.82
)
$
(0.76
)
$
(1.15
)
$
(2.12
)
$
(0.78
)
$
(0.57
)
$
(0.23
)
$
(0.27
)

Loss from discontinued operations

$
(0.04
)
$
(0.06
)
$
(0.03
)
$
(0.20
)
$
(0.15
)
$
(0.01
)
$
—

$
—

Net loss per share—basic and diluted

$
(0.86
)
$
(0.82
)
$
(1.18
)
$
(2.32
)
$
(0.93
)
$
(0.58
)
$
(0.23
)
$
(0.27
)
Weighted average common shares outstanding—basic and diluted

19,385

20,159

20,600

21,163

23,594

23,689

23,726

23,807

~~Table of Contents~~

Three Months Ended

Mar. 31, 2006

June 30, 2006

Sept. 30, 2006

Dec. 31, 2006

Mar. 31, 2007

June 30, 2007

Sept. 30, 2007

Dec. 31, 2007

(Restated)

(Restated)

(Restated)

(Restated)

(Restated)

(Restated)

(Restated)

(Restated)

Additional Operating Data(1):

Gross bookings (in thousands)(2)

$
200,900

$
172,091

$
170,590

$
319,621

$
170,362

$
165,683

$
177,226

$
336,942

Number of orders(3)

1,856,000

1,568,000

1,529,000

3,061,000

1,481,000

1,288,000

1,457,000

2,973,000

Number of new B2C customers(4)

638,000

520,000

540,000

1,157,000

473,000

394,000

486,000

1,104,000

Average customer acquisition cost(5)

$
19.49

$
22.98

$
31.22

$
25.56

$
24.58

$
20.20

$
18.17

$
24.98

~~(1)~~	The additional operating data sets forth certain operating data relating to our business for the eight most recent quarters for the period ended December 31, 2007. While we believe that the information in the table above facilitates an understanding of our business and results of operations for the periods presented, such information is not in accordance with generally accepted accounting principles and should be read in conjunction with the quarterly results of operations data set forth above.

~~(2)~~	Gross bookings exclude bookings related to the auctions and cars businesses (shopping business only). We believe that gross bookings is a metric widely used in our industry and by making this metric available to investors, we believe investors are able to compare our performance against others in our industry.

~~(3)~~	~~Number of orders represents the number of individual orders for merchandise through our Website excluding B2B orders.~~

~~(4)~~	Number of new B2C customers represents the number of valid new customer accounts. To establish a valid customer account, a person must provide us with the following information and purchase merchandise on our B2C Website: a unique e-mail address; a unique password; and a verified credit card account number.

~~(5)~~	Average customer acquisition cost represents total shopping sales and marketing expense divided by the number of new shopping customers for the period presented (excluding both new customers and marketing costs for the auctions business). We believe that investors may use the average customer acquisition cost metric to determine how efficiently we are able to acquire new customers.

~~(6)~~	A more complete discussion of the restatement can be found in Note 3 to the consolidated financial statements contained in Part IV, Item 15 of this Amendment and Item 4.02(a) of the Company’s Current Report on Form 8-K filed with the Commission on October 24, 2008.

~~Table of Contents~~

Three Months Ended

Mar. 31,
2006
(Restated)

June 30,
2006
(Restated)

Sept. 30,
2006
(Restated)

Dec. 31,
2006
(Restated)

Mar. 31,
2007
(Restated)

June 30,
2007
(Restated)

Sept. 30,
2007
(Restated)

Dec. 31,
2007
(Restated)

(as a percentage of total revenue)

Revenue

Direct revenue

44.6
%
43.4
%
36.4
%
33.4
%
29.0
%
29.3
%
24.5
%
22.8
%
Fulfillment partner revenue

55.4

56.6

63.6

66.6

71.0

70.7

75.5

77.2

Total revenue

100.0

100.0

100.0

100.00

100.00

100.0

100.0

100.0

Cost of goods sold

Direct

40.0

38.9

32.9

34.9

25.6

24.4

20.8

19.3

Fulfillment partner

47.3

47.6

53.4

56.6

59.2

58.0

62.1

65.0

Total cost of goods sold

87.2

86.5

86.4

91.6

84.8

82.4

82.9

84.3

Gross profit

12.8

13.5

13.6

8.4

15.2

17.6

17.1

15.7

Operating expenses:

Sales and marketing

7.0

7.5

10.9

10.3

7.0

5.3

5.5

9.3

Technology

7.5

9.3

10.2

7.3

9.2

10.2

9.1

5.0

General and administrative

6.6

6.9

7.0

4.6

6.6

7.0

6.1

3.8

Restructuring

—

—

—

2.0

3.7

4.2

—

—

Total operating expenses

21.1

23.7

28.1

24.2

26.5

26.7

20.7

18.1

Operating loss

(8.3
)
(10.2
)
(14.5
)
(15.8
)
(11.4
)
(9.1
)
(3.6
)
(2.3
)
Interest income

0.2

1.4

0.3

0.2

0.6

0.7

0.8

0.5

Interest expense

(0.7
)
(0.8
)
(0.7
)
(0.4
)
(0.6
)
(0.7
)
(0.6
)
(0.4
)
Other income (expense), net

—

—

—

—

—

—

(0.1
)
—

Loss from continuing operations

(8.9
)%
(9.7
)%
(14.9
)%
(15.9
)%
(11.4
)%
(9.1
)%
(3.5
)%
(2.2
)%

Total operating expenses gradually increased as a percentage of total revenue each quarter during 2006 primarily as a result of increases in marketing costs and our investment in an improved technology infrastructure. During 2007, total operating expenses as a percentage of total revenue decreased each quarter primarily due to restructuring charges during the first two quarters of 2007, decreases in marketing costs during the first three quarters and the significant drop in technology costs in the fourth quarter.

Due to the foregoing factors, in one or more future quarters our operating results may fall below the expectations of securities analysts and investors. In such an event, the trading price of our common stock would likely be materially adversely affected.

~~Off-Balance Sheet Arrangements~~

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that would be material to investors.

Liquidity and Capital Resources

Historical sources of liquidity

Prior to the second quarter of 2002, we financed our activities primarily through a series of private sales of equity securities, warrants to purchase our common stock and promissory notes. During the second quarter of 2002, we completed our initial public offering pursuant to which we received approximately $26.1 million in cash, net of underwriting discounts, commissions, and other related expenses. Additionally, we completed follow-on offerings in February 2003, May 2004 and November 2004, pursuant to which we received approximately $24.0 million, $37.9 million and $75.2 million, respectively, in cash, net of underwriting discounts, commissions, and other related expenses. In November 2004, we also received $116.2 million in proceeds from the issuance of our convertible senior notes in a transaction event exempt from registration under the Securities Act. During 2006, we received $64.4 million from two stock offerings in May and December. ~~At December 31, 2007, our cash and cash equivalents balance was $101.4 million and we had $46.0 million in marketable securities, for a total~~

Current sources of ~~$147.4 million of cash, cash equivalents and marketable securities.~~

For the years ended December 31, 2006 and 2007, our operating activities resulted in net cash outflows of $26.3 million and net cash inflows of $10.0 million, respectively. We have payment terms with our fulfillment partners that extend beyond the amount of time necessary to collect proceeds from our customers. As a result, following our seasonally strong fourth quarter sales, at December 31 of each year, our cash, cash equivalents, marketable securities and accounts payable balances typically reach their highest level (other than as a result of cash flows provided by or used in investing and financing activities). However, our accounts payable balance normally declines during the first three months following year-end, which normally results in a decline in our cash, cash equivalents, and marketable securities balances from the year-end balance. The seasonality of our business causes payables and accruals to grow significantly in the fourth quarter, and then decrease in the first quarter when they are paid.

The primary operating use of cash and cash equivalents during the year ended December 31, 2007 was to fund our net losses of $48.0 million (which includes $50.4 million of loss from discontinued operations and other net non-cash activity), as well as changes in inventories, prepaid inventory, prepaid expenses, accrued liabilities, deferred revenue and other long-term liabilities of $1.8 million, $1.3 million, $99,000, $5.9 million, $255,000 and $193,000, respectively. This was offset by the cash provided from changes in accounts receivable, other long-term assets and accounts payable of $4.8 million, $471,000 and $11.8 million, respectively. For the year ended December 31, 2006, the primary use of cash and cash equivalents was to fund our operations, including net losses of $106.8 million (which includes $43.3 million of loss from discontinued operations and other net non-cash activity), as well as changes in accounts receivables, accounts payables and accrued liabilities

~~Table of Contents~~liquidity

of $1.5 million, $35.4 million and $11.6 million, respectively. This was offset by the cash provided from changes in inventory, prepaid inventory, prepaid expenses, other long-term assets and deferred revenue of $67.9 million, $7.4 million, $1.0 million, $496,000 and $3.4 million, respectively.

Investing activities resulted in cash inflows of $33.4 million and cash outflows of $33.5 million for the years ended December 31, 2006 and 2007, respectively. The $33.5 million used in investing activities during fiscal 2007 resulted from the net cash outflows from purchases and sales of marketable securities of $46.0 million and expenditures of property and equipment of $2.6 million, offset by payments received from a note receivable of $5.2 million and the net proceeds from the sale of OTravel of $9.9 million. The cash inflows of $33.4 million from investing activities in 2006 resulted from the sale of marketable securities of $56.8 million, including the sale of our foreign notes of $49.5 million in April 2006, offset by expenditures for property and equipment of $23.4 million. During 2006 we planned to reduce capital expenditures to $10.0 million or less in 2007. We actually spent $2.6 million in capital expenditures. During 2008, we plan capital expenditures of $15.0 million.

Financing activities resulted in cash inflows of $64.0 million and cash outflows of $2.0 million for the years ended December 31, 2006 and 2007, respectively. The net cash used in financing activities in 2007 was primarily due to payments for capital leases of $5.3 million offset by $3.2 million received from the exercise of stock options. The cash inflows of $64.0 million in 2006 primarily are the result of $64.4 million received from the sale of our common stock and $2.5 million received from the exercise of employee stock options, offset by payments on capital lease obligations of $3.0 million.

While we believe that the cash and marketable securities currently on hand, amounts available under our credit facility and expected cash flows from future operations will be sufficient to continue operations for at least the next twelve months, we may require additional financing. However, there can be no assurance that if additional financing is necessary it will be available, or, if available, that such financing can be obtained on satisfactory terms. Failure to generate sufficient revenues, profits or to raise additional capital could have a material adverse effect on our ability to continue as a going concern and to achieve our intended business objectives. Any projections of future cash needs and cash flows are subject to substantial uncertainty.

Our principal sources of liquidity are cash flows generated from operations and our existing cash, cash equivalents, and sale or maturity of marketable securities. At December 31, 2008, our cash and cash equivalents balance was $100.6 million and we had $9.0 million in marketable securities, for a total of $109.6 million of cash, cash equivalents and marketable securities.

Cash flow information is as follows:

		Year Ended December 31,

		2006			2007			2008
		(in thousands)
Cash provided by (used in):
	Operating activities	$	(26,293	)	$	9,977		$	1,960
	Investing activities		33,367			(33,514	)		19,550
	Financing activities		63,983			(2,031	)		(22,327	)

Free Cash Flow. "Free Cash Flow" (a non-GAAP measure) for the years ended December 31, 2007 and 2008, was $7.3 million and $(16.7) million. See "Non-GAAP Financial Measures" below for a reconciliation of Free Cash Flow to net cash provided by operating activities.

Cash provided by (used in) operating activities. For the years ended December 31, 2007 and 2008, our operating activities resulted in net cash inflows of $10.0 million and net cash inflows of $2.0 million, respectively.

Cash received from customers generally corresponds to our net sales as our customers primarily use credit cards to buy from us causing our receivables from these sales transactions to settle quickly. We have payment terms with our fulfillment partners that generally extend beyond the amount of time necessary to collect proceeds from our customers. As a result, following our seasonally strong fourth quarter sales, at December 31 of each year, our cash, cash equivalents, marketable securities and accounts payable balances typically reach their highest level (other than as a result of cash flows

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provided by or used in investing and financing activities). However, our accounts payable balance normally declines during the first three months following year-end, which normally results in a decline in our cash, cash equivalents, and marketable securities balances from the year-end balance. The seasonality of our business causes payables and accruals to grow significantly in the fourth quarter, and then decrease in the first quarter when they are paid.

The primary operating use of cash and cash equivalents during the year ended December 31, 2008 was to fund our net losses of $12.7 million (which includes $27.3 million of net non-cash activity, including $3.9 million related to the loss on settlement of notes receivable (see Item 15 of Part IV, "Financial Statements"—Note 4—"Acquisition and Subsequent Discontinued Operations") and $2.8 million related to the gain from early extinguishment of debt (see Item 15 of Part IV, "Financial Statements"—Note 17—"Stock and Debt Repurchase Program"), as well as changes in prepaid expenses, other long term assets, accounts payable, accrued liabilities, deferred revenue and other long-term liabilities of $2.1 million, $516,000, $8.2 million, $12.3 million, $3.9 million and $462,000, respectively. This was offset by the cash provided from changes in accounts receivable, inventories, net, and prepaid inventory of $4.8 million, $7.9 million and $2.2 million, respectively.

In late December 2008, our credit card processor began withholding approximately 1% of our daily credit card remittances as a reserve. They have indicated that they expect to continue such withholding until the reserve reaches a total of $3.5 million. The reserve was $125,000 at December 31, 2008 and is included in Accounts Receivable in the Consolidated Balance Sheets.

Cash provided by (used in) investing activities. Cash provided by (used in) investing activities corresponds with purchases, sales, and maturities of marketable securities, cash purchases of fixed assets, including internal-use software and website development costs. Investing activities resulted in cash outflows of $33.5 million and cash inflows of $19.6 million for the years ended December 31, 2007 and 2008, respectively. The $19.6 million provided by investing activities during fiscal 2008 resulted from the net cash outflows for expenditures of fixed assets of $18.7 million, offset by payments received from purchases, sales and maturities of marketable securities of $36.7 million and a note receivable of $1.5 million related to the sale of the Company's interest in a variable interest entity (see Item 15 of Part IV, "Financial Statements"—Note 25—"Deconsolidation of Variable Interest Entity.")

The $33.5 million used in investing activities during fiscal 2007 resulted from the net cash outflows from purchases, sales and maturities of marketable securities of $46.0 million and expenditures of fixed assets of $2.6 million, offset by payments received from a note receivable of $5.2 million and the net proceeds from the sale of OTravel of $9.9 million.

Cash provided by (used in) financing activities. Financing activities resulted in cash outflows of $2.0 million and cash outflows of $22.3 million for the years ended December 31, 2007 and 2008, respectively. The net cash used in financing activities in 2008 was primarily due to payments for capital leases, paydown of long term debt, and treasury stock purchases of $3.8 million, $6.6 million, and $13.4 million, respectively (see Item 15 of Part IV, "Financial Statements"—Note 17—"Stock and Debt Repurchase Program."), offset by $1.5 million received from the exercise of stock options. The net cash used in financing activities in 2007 was primarily due to payments for capital leases of $5.3 million offset by $3.2 million received from the exercise of stock options.

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Stock and Debt Repurchase Program

On January 14, 2008, our Board of Directors authorized a repurchase program that allowed us to purchase up to $20.0 million of our common stock and / or our 3.75% Senior Convertible Notes due 2011 ("Senior Notes") through December 31, 2009. Under this repurchase program, we repurchased approximately 1.2 million shares of our common stock in open market purchases for $13.4 million during the year ended December 31, 2008.

In addition, during the third quarter of 2008, we retired $9.5 million of the Senior Notes for $6.6 million in cash. As a result of the Senior Notes retirements, we recognized a gain of $2.8 million, net of the associated unamortized discount of $142,000. As of December 31, 2008, $67.5 million of Senior Notes remain outstanding. We had fully utilized the authorized $20.0 million repurchase program as of December 31, 2008.

On February 17, 2009, our Board of Directors approved a debt repurchase program that authorizes us to utilize up to $20.0 million to repurchase a portion of our 3.75% Senior Notes. Under this repurchase program, we have retired $4.9 million of the Senior Notes for $3.0 million in cash. As a result of the Senior Notes retirements, we expect to recognize a gain of $1.9 million, net of the associated unamortized discount of $63,000 (see Item 15 of Part IV, "Financial Statements"—Note 17—"Stock and Debt Repurchase Program").

Shelf Registration

In April 2005, we filed a registration statement with the Securities and Exchange Commission using a "shelf" registration or continuous offering process. On May 1, 2006, we issued approximately 1,042,000 shares of common stock for net proceeds of approximately $25.0 million. Additionally, on December 12, 2006, we issued approximately 2,734,000 shares for net proceeds of approximately $39.4 million. We did not issue any shares of common stock under the shelf registration statement during fiscal years 2007 and 2008. During 2008 we filed a new shelf registration statement with the Securities and Exchange Commission, which was declared effective on December 5, 2008. The new shelf registration statement registers offerings of our securities in an aggregate amount of up to $500.0 million.

Contractual Obligations and ~~Commitments.~~Commitments

The following table summarizes our contractual obligations as of December 31, ~~2007~~2008 and the effect such obligations and commitments are expected to have on our liquidity and cash flow in future periods (in thousands):

	Payments Due by Period

Contractual Obligations	2009		2010		2011		2012		2013		Thereafter		Total
Long-term debt arrangements	$	—	$	—	$	67,500	$	—	$	—	$	—	$	67,500
Interest on convertible senior notes		2,530		2,530		2,319		—		—		—		7,379
Operating leases		8,060		8,652		8,989		8,868		8,325		15,036		57,930
Purchase obligations		6,506		700		508		—		—		—		7,714
Total contractual cash obligations	$	17,096	$	11,882	$	79,316	$	8,868	$	8,325	$	15,036	$	140,523

Payments Due by Period

Contractual Obligations

2008

2009

2010

2011

2012

Thereafter

Total

Long-term debt arrangements

$
—

$
—

$
—

$
77,000

$
—

$
—

$
77,000

Interest on convertible senior notes

2,888

2,888

2,888

2,647

—

—

11,311

Capital lease obligations

4,086

—

—

—

—

—

4,086

Operating leases

7,647

6,238

5,987

5,803

5,526

11,196

42,397

Purchase obligations

12,699

—

—

—

—

—

12,699

Line of credit

—

—

—

—

—

—

—

Total contractual cash obligations

$
27,320

$
9,126

$
8,875

$
85,450

$
5,526

$
11,196

$
147,493

	Amounts of Commitment Expiration Per Period

Other Commercial Commitments	2008		2009		2010		2011		2012		Thereafter		Total
Letters of credit	$	2,200	$	—	$	—	$	—	$	—	$	—	$	2,200

Total commercial commitments	$	2,200	$	—	$	—	$	—	$	—	$	—	$	2,200

Amounts of Commitment Expiration Per Period

Other Commercial Commitments

2008

2009

2010

2011

2012

Thereafter

Total

Letters of credit

$
2,805

$
—

$
—

$
—

$
—

$
—

$
2,805

Total commercial commitments

$
2,805

$
—

$
—

$
—

$
—

$
—

$
2,805

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Purchase Obligations.~~3.75% Convertible Senior Notes~~ The amount of purchase obligations shown above is based on assumptions regarding the legal enforceability against us of purchase orders we had outstanding at December 31, 2008. Under different assumptions regarding our rights to cancel our purchase orders or different assumptions regarding the enforceability of the purchase orders under applicable law, the amount of purchase obligations shown in the table above would be less.

Long-Term Debt Arrangements and Interest. In November 2004, we completed an offering of $120.0 million of 3.75% Convertible Senior Notes (the ~~“Senior Notes”~~"Senior Notes"). Proceeds to us were $116.2 million, net of $3.8 million of initial 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. We recorded amortization of discount and debt issuance costs related to this offering totaling $620,000, $417,000 and $344,000 during the years ended December 31, 2006, 2007 and 2008, respectively. Interest on the Senior Notes is payable semi-annually on June 1 and December 1 of each year. 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 our common stock at the option of the note holders at a conversion price of $76.23 per share or, approximately 885,000 shares in aggregate (subject to adjustment in certain events, including stock splits, dividends and other distributions and certain repurchases of our stock, as well as certain fundamental changes in ~~our ownership)~~the ownership of us).

Beginning December 1, 2009, we have 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 us, certain changes in our board of directors or the termination of trading of our stock) meeting certain conditions, holders of the Senior Notes may require us 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 us 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. ~~We were in compliance with these covenants at December 31, 2007.~~

~~In 2005,~~Wilmington Trust Company currently serves as Trustee under the ~~Share Repurchase Program~~indenture.

Under the repurchase program discussed ~~below,~~above, we retired ~~$43.0~~$9.5 million of the Senior Notes during the quarter ended September 30, 2008 for ~~$35.7~~$6.6 million in ~~cash. As a result of the note retirements, we recognized~~cash, resulting in a gain of ~~$6.2~~$2.8 million on early extinguishment of debt, net of ~~the~~$142,000 of associated unamortized ~~discount of $1.2 million for the year ended December 31, 2005.~~discount. As of December 31, ~~2007, $77.0~~2008, $67.5 million of the Senior Notes ~~and unamortized debt discount of $1.4 million remain~~remained outstanding.

~~Capital and~~ Operating Leases

Computer equipment operating leases.

~~In June 2005 and 2006, we entered into non-cancelable~~ We have two operating leases for certain computer equipment ~~expiring~~that expire in ~~April 2008~~the first and ~~June 2008, respectively.~~fourth quarters of 2010. It is expected that such leases will be renewed by exercising purchase options or replaced by leases of other computer equipment. ~~The lease obligations also include our obligations for corporate office space, logistics and warehouse space, co-location data center agreement and other operating leases.~~

Corporate office ~~space~~space.

~~Through~~ In July 2005, we leased ~~43,000 square feet of office space at Old Mill Corporate Center I for our principal executive offices under an operating lease which~~

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~~was originally scheduled to expire in January 2007. Beginning July 2005, this lease was terminated and replaced with a lease for~~ approximately 154,000 rentable square feet in the Old Mill Corporate Center III in Salt Lake City, Utah for a term of ten years. The total lease obligation over the ~~ten-year~~remaining term of ~~the new~~this lease is ~~$42.4~~$30.4 million, of which approximately ~~$7.6~~$4.0 million is payable in the next twelve months.

We entered into a Tenant Improvement Agreement (the “OMIII Agreement”) with Old Mill Corporate Center III, LLC (the “Lessor”) relating to the office building in February 2005. The OMIII Agreement sets forth the terms on which we paid the costs of certain improvements to the leased office space. The amount $8.0 million of the ~~costs was approximately $2.0 million. The OMIII Agreement also required us~~total lease obligation is offset by estimated sublease payments related to ~~provide a letter~~restructuring, of ~~credit~~which $1.0 million is anticipated to be received in the ~~amount of $500,000 to the Lessor to provide funds for the removal of certain improvements upon the termination of the lease.~~

In 2006, we commenced implementation of a facilities consolidation and restructuring program. Under the program, we recorded $638,000 of accelerated amortization of leasehold improvements related to our current office facilities that we are attempting to sublease, and $450,000 of costs incurred to return our office facilities to their original condition as required by the lease agreement.

During fiscal year 2007, we recorded an additional $6.2 million of restructuring costs related to our marketing for sub-lease office and data center space in our current corporate office facilities. We also recorded an additional $2.2 million of restructuring charges related to accelerated amortization of leasehold improvements located in the abandoned office and co-location data center space and $200,000 of other miscellaneous restructuring charges.next twelve months (see Item 15 of Part IV, ~~“Financial Statements (Restated)”~~"Financial Statements"—Note ~~4—“~~3—"Restructuring ~~Expense”~~Expense").

Logistics and warehouse ~~space~~space.

In July 2004, we entered into a logistics service agreement (the “Logistics Agreement”) wherein the handling, storage and distribution of some of our prepackaged products were performed by a third party. The Logistics Agreement and subsequent amendment set forth terms on which we paid various fixed fees based on We currently lease 795,000 square feet ~~of storage and various variable costs based on product handling costs~~ for ~~a term of five years.~~

In the first quarter of 2007, we terminated the Logistics Agreement and gave notice of intent to sublease the Indiana warehouse facilities under the License Agreement. During the second quarter of 2007, we reached an agreement to terminate the Indiana warehouse facilities lease effective August 15, 2007. As a result of the termination of the License agreement and warehouse lease, we incurred $3.7 million of related restructuring charges in 2007. (see Item 15 of Part IV, “Financial Statements (Restated)”—Note 4—“Restructuring Expense”).

~~We lease 561,000 square feet for our~~ warehouse facilities in Utah under operating leases which expire in August ~~2012. We have also temporarily leased an additional 251,000 square feet~~2012 and August 2015.

Table of ~~warehouse space in Utah under operating leases for the seasonal increase in inventory during the fourth quarter of 2007.~~Contents

~~Co-location data center~~

~~In July 2005,~~On April, 8, 2008, we entered into a ~~Co-location Center Agreement~~lease agreement with Natomas Meadows, LLC (the ~~“Co-location Agreement”~~"Natomas Lease") ~~to build out and~~. The Natomas Lease is for a 686,865 square foot warehouse facility in Salt Lake City, Utah (the "New Warehouse"). The Natomas Lease provides that we will lease ~~11,289~~the New Warehouse in stages: on October 15, 2008, we leased the initial 232,900 square feet of the New Warehouse; on February 1, 2009, we leased a total of 435,400 square feet; and, on September 1, 2009, we will lease the remainder, for a total of 686,865 square feet. The Natomas Lease term is seven years, and specifies rent, exclusive of common area maintenance fees, at a variable rate over the course of the staged lease term, ranging from $0.3300 per square foot for the first stage, to $0.3950 per square foot for the last year of the Natomas Lease term. Including the space ~~at Old Mill Corporate Center II for an IT co-location~~now leased in the New Warehouse, we currently have warehouse operations in two facilities in Salt Lake City. The Natomas Lease anticipates that we may construct a corporate office facility within the New Warehouse. We constructed a 40,000 square foot customer service facility in the New Warehouse and commenced use of the facility on November 3, 2008.

Co-location data center. ~~The Co-location Agreement set forth the terms on which the Lessor would incur the costs to build out the IT co-location data center and we would commence to~~ We lease the space upon its completion for a term of ten years. In November 2006 however, we made the determination to consolidate our facilities and to not occupy the IT co-location data center, and the Co-location Agreement was terminated effective December 29, 2006, for which we incurred a $4.6 million restructuring charge (see Item 15 of Part IV, “Financial Statements (Restated)”—Note 4—“Restructuring Expense”).

~~In December 2006, we entered into a Data Center Agreement (the “OM I Agreement”) to lease 3,999~~approximately 4,000 square feet of space at Old Mill Corporate Center I for an IT data ~~center to allow us to consolidate other IT data center facilities at the Old Mill Corporate Center II and at our current corporate offices facilities.~~

We believe that these facilities will be sufficient for our needs for the next twelve months, subject to seasonal requirements for additional warehouse space during the fourth quarter. Also, we are still considering further consolidation of office space, possibly through a complete relocation of our corporate office facilities.

~~Purchase Obligations~~

center. The amount of purchase obligations shown is based on assumptions regarding the legal enforceability against us of purchase orders we had outstanding at December 31, 2007. Under different assumptions regarding our rights to cancel our purchase orders or different assumptions regarding the enforceability of the purchase orders under applicable law, the amount of purchase obligations shownlease expires in ~~the table above would be less.~~May 1, 2017.

Borrowings

~~$30.0 million~~ Wells Fargo Credit ~~Agreement~~Agreement.

We have a credit agreement (as amended to date, the ~~“Credit Agreement”~~"Credit Agreement") with Wells Fargo Bank, National Association (“("Wells ~~Fargo”~~Fargo"). The Credit Agreement provides a revolving line of credit to us of up to $30.0 million which we use primarily to obtain letters of credit to support inventory purchases. Interest on borrowings is payable monthly and accrued at either (i) 1.0% 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. The Credit Agreement expires on January 1, 2010, and requires us to comply with certain covenants, including restrictions on mergers, business combinations or transfer orof assets. ~~We were in compliance with these covenants at December 31, 2007.~~

Borrowings and outstanding letters of credit under the Credit Agreement are required to be completely collateralized by cash balances held at Wells Fargo Bank, N.A, and therefore the facility does not provide additional liquidity to us.

At December 31, ~~2007,~~2008, no amounts were outstanding under the Credit Agreement, and letters of credit totaling ~~$2.8~~$2.2 million were issued on our behalf.

Wells Fargo Retail Finance Agreement.~~$40.0 million WFRF Agreement~~

~~We are a party to a~~ On January 6, 2009 we entered into an Amended and Restated Loan and Security Agreement ~~(as amended to date, the “WFRF Agreement”~~dated January 6, 2009 (the "WFRF Agreement") with Wells Fargo Retail Finance, LLC ("WFRF"). The WFRF Agreement replaces our Loan and ~~related security agreements and other agreements described in the WFRF Agreement.~~

Security Agreement dated December 12, 2005 with WFRF.

The WFRF Agreement provides for advances to us and for the issuance of letters of credit for our account of up to an aggregate maximum of ~~$40.0~~$35.0 million. The amount actually available to us may be less and may vary from time to time, depending on, among other factors, the amount of ~~our~~its eligible inventory and receivables. Our obligations under the WFRF Agreement and all related agreements are collateralized by all or substantially all of our and our ~~subsidiaries’~~subsidiaries' assets. Our obligations under the WFRF Agreement are cross-collateralized with our ~~assets pledged~~obligation under our $30.0 million credit facility with Wells Fargo Bank, N.A. The WFRF Agreement contains standard default provisions and expires on ~~December 12, 2008.~~January 5, 2011. The conditions to our use of the facility include a 45-day advance notice requirement.

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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~~lender's approval, including covenants that limit our 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 our name or the name of any of our subsidiaries, (f) make certain changes to our business, (g) optionally prepay, acquire or refinance indebtedness, (h) consign inventory, (i) pay dividends on, or purchase, acquire or redeem shares of, our capital stock, (j) change ~~our~~ method of accounting, (k) make investments, (l) enter into transactions with affiliates, or (m) store any of our inventory or equipment with third parties. ~~We were in compliance with these covenants as of December 31, 2007.~~

At December 31, ~~2007,~~2008, no amounts were outstanding under the WFRF Agreement or under our prior loan agreement with WFRF.

Wells Fargo Commercial Purchasing Card Agreement. ~~As of~~ We have a commercial purchasing card agreement (the "Purchasing Card") with Wells Fargo Bank, National Association ("Wells Fargo"). We use the Purchasing Card for business purpose purchasing and must pay it in full each month. Outstanding amounts under the Purchasing Card are collateralized by cash balances held at Wells Fargo Bank, N.A, and therefore the facility does not provide additional liquidity to us. At December 31, ~~2007, availability~~2008, $436,000 was outstanding and $564,000 was available under the ~~WFRF Agreement was $9.0 million.~~Purchasing Card.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that would be material to investors.

~~Share Repurchase Programs~~Non-GAAP Financial Measures

Regulation G,Conditions for Use of Non-GAAP Financial Measures, and other SEC regulations regulate the disclosure of certain non-GAAP financial information.

~~During January 2005,~~ Adjusted EBITDA. Our measure of Adjusted EBITDA (a non-GAAP financial measure) (which we reconcile to "Net income (loss)" in our ~~Board~~statement of ~~Directors authorized~~operations) consists of earnings before interest, taxes, depreciation, amortization, stock-based compensation, other income (expense) and discontinued operations. Adjusted EBITDA is used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. Adjusted EBITDA reflects an additional way of viewing our results that, when viewed with our GAAP results, provides a ~~share repurchase program under~~more complete understanding of factors and trends affecting our results. You should review our financial statements and publicly-filed reports in their entirety and not rely on any single financial measure. Our discussion above and below (i) explains why management believes that presentation of Adjusted EBITDA provides useful information to investors regarding our financial condition and results of continuing operations, (ii) to the extent material, discloses the additional purposes, if any, for which management uses this non-GAAP measure, and (iii) provides a

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reconciliation of this measure to our net income (loss). For further details on Adjusted EBITDA, see the reconciliation of this non-GAAP measure to our GAAP net income (loss) below (in thousands):

		Three months ended December 31,						Twelve months ended December 31,

		2007			2008			2007			2008
Net income (loss)		$	(6,470	)	$	1,014		$	(48,036	)	$	(12,658	)
Add back amounts for computation of Adjusted EBITDA:
	Depreciation and amortization, including internal-use software and website development, and other amortization		6,670			4,703			29,495			22,667
	Stock-based compensation expense to employees and directors		1,136			780			4,522			4,022
	Stock-based compensation to consultants for services		(91	)		78			189			259
	Stock-based compensation related to performance share plan		(900	)		(1,300	)		(550	)		(1,000	)
	Treasury stock issued from treasury for 401(k) matching contribution		(434	)		—			494			19
	Interest (income) expense, net		(326	)		371			(600	)		299
	Other income (expense), net		—			4,297			92			1,446
	Loss from discontinued operations		—			—			3,924			—

Adjusted EBITDA		$	(415	)	$	9,943		$	(10,470	)	$	15,054

We believe that discussing Adjusted EBITDA at this stage of our business is useful to us and investors, as Adjusted EBITDA is a reasonable measure of actual cash used or cash generated by the continuing operations of our business.

Free Cash Flow. Free cash flow (a non-GAAP financial measure) reflects an additional way of viewing our cash flows and liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows. Free cash flow, which we ~~were authorized~~reconcile to ~~repurchase up~~"Net cash provided by (used in) operating activities", is cash flow from operations reduced by "Expenditures for fixed assets, including internal-use software and website development." Although we believe that cash flow from operating activities is an important measure, we believe free cash flow is a useful measure to ~~$50.0 million~~evaluate our business since purchases of fixed assets are a necessary component of ongoing operations. Therefore, we believe it is important to view free cash flow as a complement to our ~~common stock through December 31, 2007. On April 26, 2005,~~entire consolidated statements of cash flows.

	Three months ended December 31,						Twelve months ended December 31,

(in thousands)	2007			2008			2007			2008
Net cash provided by operating activities	$	55,734		$	42,830		$	9,977		$	1,960
Expenditures for fixed assets, including internal-use software and website development		(411	)		(3,432	)		(2,643	)		(18,690	)

Free cash flow	$	55,323		$	39,398		$	7,334		$	(16,730	)

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Quarterly Results of Operations (unaudited)

The following tables set forth our unaudited quarterly results of operations for the ~~Board of Directors increased~~eight most recent quarters for the amount of the share repurchase program to $100.0 million. Additionally, on June 14, 2005, the Board of Directors authorized an amendment of our three-year share repurchase program to include the repurchase of our Convertible Senior Notes. Under the repurchase program, we repurchased approximately 665,000 shares of our common stock in open market transactions for $24.1 million during the yearperiod ended December 31, ~~2005. In addition, approximately 1.0 million shares of common stock were acquired~~2008, as well as such data expressed as a ~~result~~percentage of our total revenue for the ~~settlement~~periods presented. The information in the table below should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this Form 10-K/A. We have prepared this information on the same basis as the Consolidated Financial Statements and the information includes all adjustments, consisting only of ~~$41.1 million~~normal recurring adjustments, that we consider necessary for a fair statement of ~~structured stock repurchase transactions during~~our financial position and operating results for the ~~year~~quarters presented. Our quarterly operating results have varied substantially in the past and may vary substantially in the future. You should not draw any conclusions about our future results from the results of operations for any particular quarter.

				Three Months Ended

				Mar. 31, 2007			June 30, 2007			Sept. 30, 2007			Dec. 31, 2007			Mar. 31, 2008			June 30, 2008			Sept. 30, 2008			Dec. 31, 2008
				(in thousands, except per share data)
Consolidated Statement of Operations Data:
Revenue
	Direct revenue			$	46,990		$	43,658		$	39,270		$	67,170		$	51,764		$	39,832		$	34,176		$	48,431
	Fulfillment partner revenue				115,166			105,513			120,789			227,346			151,050			149,004			152,679			207,431

			Total revenue		162,156			149,171			160,059			294,516			202,814			188,836			186,855			255,862

Cost of goods sold
	Direct				41,469			36,456			33,268			56,815			44,803			34,871			30,633			44,194
	Fulfillment partner				96,077			86,523			99,425			191,319			124,040			120,756			124,103			168,058

		Total cost of goods sold			137,546			122,979			132,693			248,134			168,843			155,627			154,736			212,252

Gross profit					24,610			26,192			27,366			46,382			33,971			33,209			32,119			43,610

Operating expenses:
	Sales and marketing				11,284			7,962			8,835			27,377			15,019			14,244			11,934			16,437
	Technology				14,973			15,237			14,576			14,667			14,516			15,311			14,119			13,869
	General and administrative				10,689			10,429			9,724			11,134			9,563			10,867			10,321			7,622
	Restructuring				6,089			6,194			—			—			—			—			—			—

			Total operating expenses		43,035			39,822			33,135			53,178			39,098			40,422			36,374			37,928

Operating income/(loss)					(18,425	)		(13,630	)		(5,769	)		(6,796	)		(5,127	)		(7,213	)		(4,255	)		5,682
Interest income, net					990			1,078			1,291			1,429			1,304			740			664			455
Interest expense					(1,029	)		(1,027	)		(1,029	)		(1,103	)		(901	)		(888	)		(847	)		(826	)
Other income (expense), net					—			—			(92	)		—			—			2			2,849			(4,297	)

Income /(loss) from continuing operations					(18,464	)		(13,579	)		(5,599	)		(6,470	)		(4,724	)		(7,359	)		(1,589	)		1,014
Discontinued operations:
Loss from discontinued operations					(3,624	)		(300	)		—			—			—			—			—			—

Net income/(loss) attributable to common shares				$	(22,088	)	$	(13,879	)	$	(5,599	)	$	(6,470	)	$	(4,724	)	$	(7,359	)	$	(1,589	)	$	1,014

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		Three Months Ended

		Mar. 31, 2007			June 30, 2007			Sept. 30, 2007			Dec. 31, 2007			Mar. 31, 2008			June 30, 2008			Sept. 30, 2008			Dec. 31, 2008
		(in thousands, except per share data)
Net income/(loss) per common share—basic
	Income /(loss) from continuing operations	$	(0.78	)	$	(0.57	)	$	(0.23	)	$	(0.27	)	$	(0.20	)	$	(0.32	)	$	(0.07	)	$	0.04
	Loss from discontinued operations	$	(0.16	)	$	(0.01	)	$	—		$	—		$	—		$	—		$	—		$	—
Net income /(loss) per share—basic		$	(0.94	)	$	(0.58	)	$	(0.23	)	$	(0.27	)	$	(0.20	)	$	(0.32	)	$	(0. 07	)	$	0.04
Weighted average common shares outstanding—basic			23,594			23,689			23,726			23,807			23,345			22,750			22,768			22,745
Net income /(loss) per common share—diluted
	Income /(loss) from continuing operations	$	(0.78	)	$	(0.57	)	$	(0.23	)	$	(0.27	)	$	(0.20	)	$	(0.32	)	$	(0.07	)	$	0.04
	Loss from discontinued operations	$	(0.16	)	$	(0.01	)	$	—		$	—		$	—		$	—		$	—		$	—
Net income /(loss) per share—diluted		$	(0.94	)	$	(0.58	)	$	(0.23	)	$	(0.27	)	$	(0.20	)	$	(0.32	)	$	(0. 07	)	$	0.04
Weighted average common shares outstanding—diluted			23,594			23,689			23,726			23,807			23,345			22,750			22,768			22,827

	Three Months Ended

	Mar. 31, 2007		June 30, 2007		Sept. 30, 2007		Dec. 31, 2007		Mar. 31, 2008		June 30, 2008		Sept. 30, 2008		Dec. 31, 2008
Additional Operating Data(1):
Gross bookings (in thousands)(2)	$	174,740	$	164,646	$	176,410	$	336,340	$	219,754	$	206,151	$	204,656	$	285,648
Number of orders(3)		1,481,000		1,288,000		1,457,000		2,973,000		1,773,000		1,574,000		1,570,000		2,509,000
Number of new B2C customers(4)		473,000		394,000		486,000		1,104,000		596,000		516,000		547,000		930,000
Average customer acquisition cost(5)	$	24.58	$	20.20	$	18.17	$	24.98	$	25.21	$	27.61	$	21.82	$	17.67

(1): The additional operating data sets forth certain operating data relating to our business for the eight most recent quarters for the period ended December 31, ~~2005. The purchased call options~~2008. While we believe that ~~did~~the information in the table above facilitates an understanding of our business and results of operations for the periods presented, such information is not ~~settle~~ in ~~stock settled~~accordance with generally accepted accounting principles and should be read in ~~cash totaling $7.9 million, which~~conjunction with the quarterly results of operations data set forth above.
(2): Gross bookings exclude bookings related to the auctions, cars and real estate businesses (shopping business only). We believe that gross bookings is a metric widely used in our industry and by making this metric available to investors, we ~~received~~believe investors are able to compare our performance against others in ~~July 2005. We also repurchased convertible senior notes having an aggregate principal amount~~our industry.
(3): Number of ~~$43.0 million during 2005. As~~orders represents the number of ~~December 31, 2007, we had utilized all~~individual orders for merchandise through our Website excluding Business to Business ("B2B") orders.
(4): Number of new Business to Consumers ("B2C") customers represents the ~~$100.0 million authorized~~number of valid new customer accounts. To establish a valid customer account, a person must provide us with the following information and purchase merchandise on our B2C Website: a unique e-mail address; a unique password; and a verified credit card account number.
(5): Average customer acquisition cost represents total shopping sales and marketing expense divided by the ~~board~~number of ~~directors under~~new shopping customers for the ~~share repurchase program.~~period presented (excluding both new customers and marketing costs for the

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auctions, real estate, and cars business). We believe that investors may use the average customer acquisition cost metric to determine how efficiently we are able to acquire new customers.

			Three Months Ended

			Mar. 31, 2007			June 30, 2007			Sept. 30, 2007			Dec. 31, 2007			Mar. 31, 2008			June 30, 2008			Sept. 30, 2008			Dec. 31, 2008
			(as a percentage of total revenue)
Revenue
	Direct revenue			29.0	%		29.3	%		24.5	%		22.8	%		25.5	%		21.1	%		18.3	%		18.9	%
	Fulfillment partner revenue			71.0			70.7			75.5			77.2			74.5			78.9			81.7			81.1

		Total revenue		100.0			100.0			100.0			100.0			100.0			100.0			100.0			100.0

Cost of goods sold
	Direct			25.6			24.4			20.8			19.3			22.1			18.5			16.4			17.3
	Fulfillment partner			59.2			58.0			62.1			65.0			61.2			63.9			66.4			65.7

		Total cost of goods sold		84.8			82.4			82.9			84.3			83.3			82.4			82.8			83.0

Gross profit				15.2			17.6			17.1			15.7			16.7			17.6			17.2			17.0

Operating expenses:
	Sales and marketing			7.0			5.3			5.5			9.3			7.4			7.5			6.4			6.4
	Technology			9.2			10.2			9.1			5.0			7.2			8.1			7.6			5.4
	General and administrative			6.6			7.0			6.1			3.8			4.7			5.8			5.5			3.0
	Restructuring			3.7			4.2			—			—			—			—			—			—

	Total operating expenses			26.5			26.7			20.7			18.1			19.3			21.4			19.5			14.8

Operating income (loss)				(11.4	)		(9.1	)		(3.6	)		(2.3	)		(2.5	)		(3.8	)		(2.3	)		2.2
Interest income, net				0.6			0.7			0.8			0.5			0.6			0.4			0.4			0.2
Interest expense				(0.6	)		(0.7	)		(0.6	)		(0.4	)		(0.4	)		(0.5	)		(0.5	)		(0.3	)
Other income (expense), net				—			—			(0.1	)		—			—			0.0			1.5			(1.7	)

Income (loss) from continuing operations				(11.4	)%		(9.1	)%		(3.5	)%		(2.2	)%		(2.3	)%		(3.9	)%		(0.9	)%		0.4	%

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On January 14, 2008, our Board of Directors authorized an additional repurchase program that authorizes us to purchase up to $20.0 million of our common stock and/or our 3.75% Senior Convertible Notes due 2011 through December 31, 2009. Under this repurchase program, we have repurchased approximately 1.1 million shares of our common stock in open market transactions for $12.0 million through March 14, 2008. None of the purchases were made during the fourth quarter of 2007.

~~Shelf Registration~~

In April 2005, we filed a registration statement with the Securities and Exchange Commission using a “shelf” registration or continuous offering process. Under this shelf process, we may, from time to time, sell any or all of the securities described in the prospectus in one or more offerings up to a total dollar amount of $500.0 million. On May 1, 2006, we issued approximately 1,042,000 shares of common stock for net proceeds of approximately $25.0 million. Additionally, on December 12, 2006, we issued approximately 2,734,000 shares for net proceeds of approximately $39.4 million. We did not issue any shares of common stock under the shelf registration statement during fiscal 2007.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents, marketable securities, trade accounts and contracts receivable, accounts payable and long-term obligations. We consider investments in highly-liquid instruments with a remaining maturity of 90 days or less at the date of purchase to be cash equivalents.

Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-term obligations; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities. However, the fair values of our investments may be subject to fluctuations due to volatility of the stock market in general, investment-specific circumstances, and changes in general economic conditions.

At December 31, ~~2007,~~2008, we had ~~$101.4~~$100.6 million in cash and cash equivalents and ~~$46.0~~$9.0 million in marketable securities. Hypothetically, an increase or decrease in interest rates of one hundred basis points would have an estimated impact of ~~$1.5~~$1.1 million on our earnings or loss, or the fair market value or cash flows of these instruments. Our cash, cash equivalents and marketable securities consisted of U.S. agency securities, money market funds and top tier commercial ~~paper, and AAA-rated asset-backed securities collateralized by automobile loans/leases and credit card receivables.~~

paper.

At December 31, ~~2007,~~2008, we had approximately ~~$77.0~~$67.5 million of convertible senior notes outstanding which bear interest at a fixed rate of 3.75%. ~~In addition, at~~At December 31, ~~2007,~~2008, there were no borrowings outstanding under our lines of credit and letters of credit totaling ~~$2.8~~$2.2 million were outstanding under our credit facilities.

The fair value of the convertible senior notes is sensitive to interest rate changes. Interest rate changes would result in increases or decreases in the fair value of the convertible senior notes, due to differences between market interest rates and rates in effect at the inception of the obligation. Unless we elect to repurchase our convertible senior notes in the open market, changes in the fair value of convertible senior notes have no impact on our cash flows or consolidated financial statements. The estimated fair value of our 3.75% ~~Convertible Senior Notes~~convertible senior notes as of December 31, ~~2007~~2008 was ~~$60.0~~$38.1 million. The fair value of the convertible senior notes was derived using a convertible pricing model with observable market inputs, which include stock price, dividend payments, borrowing costs, equity volatility, interest rates and interest spread.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ~~(RESTATED)~~

The financial statements and supplementary data required by this item are included in Part IV, Item 15 of this Form 10-K/A and are presented beginning on page F-1.

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

None.

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ITEM 9A. CONTROLS AND PROCEDURES ~~(RESTATED)~~

~~Restatement~~

As discussed elsewhere in this Form 10-K/A and in Note 3 to the consolidated financial statements contained in Part IV, Item 15 of this Amendment, management of the Company has amended its Annual Report on Form 10-K for the year ended December 31, 2007 to restate (1) its consolidated financial statements as of December 31, 2007 and 2006 and for the years ended December 31, 2007, 2006 and 2005; (2) its selected financial data as of and for the years ended December 31,2007, 2006, 2005, 2004 and 2003; and (3) its quarterly results of operations for all quarters in the years ended December 31, 2007 and 2006. The determination to restate this previously issued financial information was made on October 20, 2008 as a result of management’s identification of errors related to the accounting for customer refunds and credits. Management subsequently determined that a portion of the error previously believed to be related to the accounting for customer refunds and credits was actually related to the accounting for gift cards issued to customers.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to management, including the CEO (principal executive officer) and Senior Vice

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President, Finance (principal financial officer), as appropriate, to allow timely decisions regarding required disclosure.

~~In our Annual Report on Form 10-K (“Original Filing”) for the year ended December 31, 2007, filed on March 17, 2008, management~~ Management of the Company, ~~including~~under the supervision and with the participation of our CEO (principal executive officer) and Senior Vice President, Finance (principal financial officer), has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in ~~Rule~~the Rules 13a-15(e) ~~promulgated~~and 15d-15(e) under the Exchange ~~Act of 1934, as amended (the “Exchange Act”))~~Act) as of ~~the end of the period covered by the Original Filing.~~December 31, 2008. Based ~~on that~~upon this evaluation, ~~management initially~~our CEO and Senior Vice President, Finance concluded that our disclosure controls and procedures were effective in reaching a reasonable level of assurance that information required to be included in our reports filed or submitted under the Exchange Act as of such time was recorded, processed, summarized, and reported within the time period specified in the U.S. Securities and Exchange Commission’s (the “Commission”) rules and forms and such information was accumulated and communicated as appropriate to allow timely decisions regarding required disclosures.

In connection with the restatement discussed above, management of the Company, including our CEO (principal executive officer) and Senior Vice President, Finance (principal financial officer), reevaluated the effectiveness of our disclosure controls and procedures as of December 31, 2007 pursuant to SEC Rule 13a-15(b) under the Exchange Act. As a result of such reevaluation, management has determined that the control deficiency discussed above constituted a material weakness in our system of internal control over financial reporting as of such date, which has caused us to amend our Original Filing for the year ended December 31, 2007 in order to restate our Consolidated Financial Statements as described above.2008.

As a result of the material weakness in our internal control over financial reporting described above, management, including our CEO (principal executive officer) and Senior Vice President, Finance (principal financial officer), has now concluded that our disclosure controls and procedures were not effective as of December 31, 2007.

Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are properly recorded, processed, summarized and reported within the time periods required by the Commission’s rules and forms. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures that, by their nature, can provide only reasonable assurance regarding management’s control objectives. Management does not expect that its disclosure controls and procedures will prevent all errors and fraud. A control system, irrespective of how well it is designed and operated, can only provide reasonable assurance, and cannot guarantee that it will succeed in its stated objectives.

The Company’s management nevertheless has concluded, after completion of procedures to reconcile customer refunds and credits to third party statements to determine the completeness and accuracy of such amounts as components of returns expense, accounts receivable and deferred revenue, and after completion of procedures to reconcile all gift cards issued to customers with underlying supporting data in order to determine the completeness and accuracy of such amounts as a component of revenue and deferred revenue, that the consolidated financial statements included in this Annual Report on Form 10-K/A are fairly stated, in accordance with accounting principles generally accepted in the United States of America.

~~Management’s~~Management's Report on Internal Control over Financial Reporting ~~(Restated)~~

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in ~~Rules~~Rule 13a-15(f) and 15d-15(f) under the Exchange Act. ~~The Company’s internal~~Internal control over financial reporting is a process designed by, or under our the supervision of, our CEO (principal executive officer) and Senior Vice President, Finance (principal financial officer), 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of internal control over financial reporting 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.

Under the supervision and with the participation of ~~the Company’s~~our CEO (principal executive officer) and Senior Vice President, Finance (principal financial officer), ~~management has~~we have assessed the effectiveness of the ~~Company’s~~Company's internal control over financial reporting as of December 31, ~~2007.~~2008. In making ~~its~~an assessment of the effectiveness of internal control over financial reporting, ~~management~~we used the criteria set forth inInternal ~~Control —~~ Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission ~~(“COSO”~~(the "COSO"). Our management concluded that based on its assessment, our internal control over financial reporting was effective as of December 31, 2008.

The effectiveness of our internal control over financial reporting as of December 31, 2008 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, included herein.

Remediation Steps to Address Material Weakness

As previously disclosure in our form 10-Q for the quarter ended September 30, 2008, the Company determined that there were errors in its accounting for customer refunds and credits and the accounting for gift cards issued to customers. As a result of these errors, the Company determined that previously issued financial information was no longer reliable and amended its Annual Report on Form 10-K for the year ended December 31, 2007 to restate (1) its consolidated financial statements as of December 31, 2007 and 2006 and for the years ended December 31, 2007, 2006 and 2005; (2) its selected financial data as of and for the years ended December 31, 2007, 2006, 2005, 2004 and 2003 and (3) its quarterly results of operations for all quarters in the years ended December 31, 2007 and 2006 on November 11, 2008. Management concluded that controls were not designed or operating effectively to ensure all refunds and credits issued to customers and gift cards issued to customers were completely and accurately recorded in the consolidated financial statements. These control failures impacted accounts receivable and deferred revenue in the consolidated balance sheet as well as revenue and returns expense (a component of revenue), in the consolidated statements operations. Management concluded that these deficiencies in the Company's internal control over financial reporting constituted a material weakness.

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A material weakness is a ~~control~~ deficiency, or a combination of ~~control~~ deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the ~~registrant’s~~ annual or interim financial statements will not be prevented or detected on a timely basis. As of December 31, 2007, the Company did not maintain effective controls over its accounting for customer refunds and credits and gift cards issued to customers. Specifically, the Company’s controls were not designed or operating effectively to ensure that customer refunds and credits and gift cards issued to customers were completely and accurately recorded as a component of revenue, returns expense, accounts receivable and deferred revenue in accordance with generally accepted accounting principles. This control deficiency resulted in the restatement of the Company’s annual consolidated financial statements as of December 31, 2007 and 2006 and for the years ended December 31, 2007, 2006 and 2005 and the quarterly consolidated financial statements therein, as well as the selected financial data as of December 31, 2007, 2006, 2005 and 2004 and for the years ended December 31, 2004, 2005, 2006 and 2007. This control deficiency could result in misstatements in the aforementioned accounts 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.

In the Company’s original filing of the 2007 Annual Report on Form 10-K, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2007. However in connection with the restatement discussed in Note 3 to the consolidated financial statements, management has subsequently determined that the material weakness described above existed as of December 31, 2007. As a result of this material weakness, management has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2007 based on the criteria set forth in ~~Internal Control — Integrated Framework~~ ~~issued by the COSO. Accordingly, management has restated its report on internal control over financial reporting.~~

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2007 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

~~Remediation Steps to Address Material Weakness~~

Management of the Company ~~is implementing~~implemented several processes to remediate the material weakness in the ~~Company’s~~Company's internal control over financial reporting

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and the ineffectiveness of its disclosure controls and procedures including:

•: ·Employee training on effectively reconciling customer refunds and credits and customer gift cards to a sufficient level of ~~precision.~~
precision;·
•: Regular reconciliation of credits and accounts receivable balance to third party ~~statements.~~
statements;·
•: Review and approval of these reconciliations by a person knowledgeable with the way transactions in these accounts are ~~processed.~~
processed;·
•: Controls to ensure changes to peripheral systems are evaluated for effects on ~~how they will impact~~ data transferred to the ERP ~~system.~~
system;·
•: Regular reconciliation of gift cards issued to customers as reported in the ERP system to amounts reported in peripheral systems.

· ~~Supplemental~~ We operated and tested the above controls ~~over changes made to our information systems.~~at each month end during the fourth quarter of 2008.

We have determined as of December 31, 2008 that the remediation controls discussed above were effectively designed and demonstrated effective operation for a sufficient period of time to enable us to conclude that the material weakness has been remediated.

The effectiveness of any controls and procedures is subject to certain limitations, and, as a result, there can be no assurance that our controls and procedures will detect all errors or fraud. A control, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be attained.

We will continue to develop new policies and procedures as well as educate and train our employees on our existing policies and procedures in a continual effort to improve our internal control over financial reporting.

Changes in Internal Control ~~Over~~over Financial Reporting

~~There~~As described above, there have been no changes in our internal control over financial reporting ~~that occurred~~ during the ~~fourth~~ quarter ~~of 2007~~ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, ~~materially, our~~the Company's internal control over financial reporting.

~~/s/Patrick M. Byrne~~		~~/s/ David K. Chidester~~
~~Patrick M. Byrne~~		~~David K. Chidester~~
~~CEO (principal executive officer)~~		~~Senior Vice President, Finance (principal financial officer)~~
~~November 7, 2008~~		~~November 7, 2008~~

ITEM 9B. OTHER INFORMATION

None.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Except as set forth herein, the information required by this Item is incorporated by reference to the ~~Company’s~~Company's definitive proxy statement for the ~~2008~~2009 annual meeting of stockholders.

The Company has adopted a Code of Business Conduct and Ethics, which is applicable to all employees of the Company, including the principal executive officer, principal financial officer, and principal accounting officer. The Code includes provisions that are specifically applicable to our senior financial officers. We intend to disclose any amendments to these provisions and any waivers from any of these provisions granted to our principal executive officer, principal financial officer or principal accounting officer on our Website,www.overstock.com. We will provide a copy of the relevant portion to any person without any charge upon request in writing addressed to Overstock.com Attn: Investor Relations, 6350 South 3000 East, Salt Lake City, UT 84121.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to the ~~Company’s~~Company's definitive proxy statement for the ~~2008~~2009 annual meeting of stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND RELATED STOCKHOLDER MATTERS

The information required by this Item is incorporated by reference to the ~~Company’s~~Company's definitive proxy statement for the ~~2008~~2009 annual meeting of stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item is incorporated by reference to the ~~Company’s~~Company's definitive proxy statement for the ~~2008~~2009 annual meeting of stockholders.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this Item is incorporated by reference to the ~~Company’s~~Company's definitive proxy statement for the ~~2008~~2009 annual meeting of stockholders.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) 1. Financial Statements

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page


Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets		F-3
Consolidated Statements of Operations		F-4
Consolidated Statement of ~~Stockholders’~~Stockholders' Equity (Deficit) and Comprehensive Loss		F-5
Consolidated Statements of Cash Flows		F-6
Notes to Consolidated Financial Statements		F-8
Schedule II Valuation and Qualifying Accounts	~~F-36~~	F-47

2. Financial Statement Schedules

Schedule II Valuation and Qualifying Accounts listed in (a)(1) above is included herein. Schedules other than those listed above have been omitted as they are either not required, not applicable, or the information has otherwise been shown in the consolidated financial statements or notes thereto.

3. Exhibits

The exhibits listed below are filed as part of, or incorporated by reference into, this Form 10-K/A.

~~Table of Contents~~

Exhibit Number
~~Exhibit Number~~
	3.1(a)
~~3.1(a)~~		Amended and Restated Certificate of Incorporation.
	3.2(a)
~~3.2(a)~~		Amended and Restated ~~Bylaws.~~ Bylaws (incorporated by reference to Exhibit 3.1 to our Report on Form 8-K filed on February 5, 2009).
	4.1(b)
~~4.1(b)~~		Form of specimen common stock certificate.
	4.2(b)
~~4.2(b)~~		Investor Rights Agreement, dated March 4, 2002.
	10.1(b)
~~10.1(b)~~		Form of Indemnification Agreement between Overstock.com, Inc. and each of its directors and officers.
	10.2(b)
~~10.2(b)~~		Amended and Restated 1999 Stock Option Plan and form of agreements thereunder.
	10.3(b)
~~10.3(b)~~		2001 Stock Purchase Plan and form of agreements thereunder.
	10.4(b)
~~10.4(b)~~		Gear.com, Inc. Restated 1998 Stock Option Plan and form of agreements thereunder.
	10.5
~~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), which became effective on May 29, 2002).
	10.6(b)
~~10.6(b)~~		Agreement and Plan of Merger dated November 3, 2000 by and between Overstock.com, Inc. and Gear.com, Inc.
	10.7
~~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), which became effective on May 29, 2002).


			Exhibit Number	Description of Document
~~10.8~~	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), which became effective on May 29, 2002).
	10.9
~~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), which became effective on May 29, 2002).
	10.10
~~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), which became effective on May 29, 2002).
	10.11
~~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), which became effective on May 29, 2002).
	10.12
~~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), which became effective on May 29, 2002).
	10.13
~~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), which became effective on May 29, 2002).
	10.14
~~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), which became effective on May 29, 2002).
	10.15
~~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), which became effective on February 12, 2003).
	10.16
~~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), which became effective on February 12, 2003).
	10.17
~~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), which became effective on February 12, 2003).
	10.18
~~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), which became effective on February 12, 2003).
	10.19
~~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), which became effective on February 12, 2003).

Table of Contents

Exhibit Number			Description of Document
~~10.20~~
	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), which became effective on February 12, 2003).
	10.21
~~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), which became effective on February 12, 2003).
	10.22
~~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
~~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
~~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
~~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).
	10.26
~~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).
	10.27
~~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).
	10.28
~~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).
	10.29
~~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).
	10.30
~~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).
	10.31
~~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).
	10.32
~~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).

Table of Contents


			Exhibit Number	Description of Document
~~10.34~~	10.33		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).
	10.34
~~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)
	10.35
~~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
	10.36
~~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)
	*10.37(c)		Summary of unwritten Compensation arrangements with Directors
~~10.38(c)~~	10.38(c)		Summary of unwritten Compensation ~~Payable to~~arrangements with Named Executive Officers
	10.39
~~10.39(c)~~		~~Summary of Compensation Payable to Directors (filed herewith in part and incorporated in part by reference to Item 5.02(d) of our Report on Form 8-K filed on January 15, 2008)~~

~~10.40~~		2005 Equity Incentive Plan (incorporated by reference to Appendix BA to Overstock.com, Inc.’s's definitive proxy statement filed with the SEC on March ~~29, 2005.~~ 28, 2008.
	10.40
~~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)~~

~~Table of Contents~~

~~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)
	10.41
~~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)
	10.43
~~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)
	10.44
~~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)
	10.45
~~10.48~~		Seventh Amendment dated December 31, 2005 to Credit Agreement with Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on January 6, 2006)
	10.46
~~10.49~~		Revolving Line of Credit Note dated January 1, 2006 payable to Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.2 to our Form 8-K filed on January 1, 2006)
	10.47
~~10.50~~		Amended and Restated Loan and Security Agreement dated as of ~~December 12, 2005~~January 6, 2009 with Wells Fargo Retail Finance, LLC (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on ~~December 12, 2005)~~ January 7, 2009)
	10.49
~~10.51~~		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)

~~10.52~~		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)

~~10.53~~		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)

~~10.54~~		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)

~~10.55~~		~~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)~~

~~10.56~~		~~Letter of Agreement dated June 30, 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 July 5, 2006)~~

~~10.57~~		~~Colocation Center Termination Agreement executed February 1, 2007 and effective December 29, 2006 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on February 5, 2007)~~

~~10.58~~		Stock Purchase Agreement by and among Overstock.com, Inc., OTravel.com, Inc. and Castles Travel, Inc. dated April 25, 2007 (incorporated by reference to Exhibit 10.1 to our Report on Form 8-K filed on April 25, 2007)
	10.50
~~10.59~~		License Termination Agreement between Overstock.com, Inc. and Ozburn-Hessey Logistics, LLC dated July 31, 2007 (incorporated by reference to Exhibit 10.1 to our Report on Form 8-K filed on August 1, 2007)

Table of Contents


			Exhibit Number	Description of Document
~~10.60~~	10.51		Amendment dated January 1, 2008 to Credit Agreement with Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.1 to our Report on Form 8-K filed on January 3, 2008)
	10.52
~~10.61~~		Revolving Line of Credit Note dated January 1, 2008 entered into in connection with Amendment to Credit Agreement with Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.2 to our Report on Form 8-K filed on January 3, 2008)
	10.53
~~10.62~~		Second Amendment dated January 14, 2008 to Loan and Security Agreement with Wells Fargo Retail Finance, LLC (incorporated by reference to Exhibit 10.1 to our Report on Form 8-K filed on January 15, 2008)

~~10.63~~		Form of Restricted Stock Unit Grant Notice and Restricted Stock Agreement under the 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to our Report on Form 8-K filed on January 15, 2008)
	10.54		Lease Agreement with Natomas Meadows, LLC dated April 8, 2008 (incorporated by reference to Exhibit 10.1 to our Report on Form 8-K filed on April 11, 2008).
21	10.55		First Amendment to Lease amending the terms of the Lease Agreement with Natomas Meadows, LLC dated December 16, 2008 (incorporated by reference to Exhibit 10.1 to our Report on Form 8-K filed on December 17, 2008).
	10.56		Note Purchase Agreement, First Amendment to Stock Purchase Agreement and First Amendment to Sub-Lease Agreement, by and among the Company, Mountain Reservations, Inc. and Castles Travel, Inc. dated January 21, 2009 (incorporated by reference to Exhibit 10.1 to our Report on Form 8-K filed on January 26, 2008).
	21		Subsidiaries of the Registrant
	*23.1
~~23.1~~		Consent of Independent Registered Public Accounting Firm
	24.1
~~24.1~~		~~Power~~ Powers of Attorney (see signature ~~page)~~ page to original filing)

~~Table of Contents~~

~~31.1~~	*31.1	~~Rule 13a-14(a)/15d-14(a)~~	Exhibit 31 Certification of Chief Executive Officer
	*31.2
~~31.2~~		~~Rule 13a-14(a)/15d-14(a)~~ Exhibit 31 Certification of Chief Financial Officer
	*32.1
~~32.1~~		Section 1350 Certification of Chief Executive Officer
	*32.2
~~32.2~~		Section 1350 Certification of Chief Financial Officer

(a): Incorporated by reference to exhibits of the same number filed with our Form 10-Q (File No. 000-49799), filed on August 13, 2002.
(b): Incorporated by reference to exhibits of the same number filed with our Registration Statement on Form S-1 (File No. 333-83728), which became effective on May 29, 2002.
(c): Management contract or compensatory plan or arrangement.
*: Filed herewith.

~~(a)~~	~~Incorporated by reference to exhibits of the same number filed with our Form 10-Q (File No. 000-49799), filed on August 13, 2002.~~

~~(b)~~	~~Incorporated by reference to exhibits of the same number filed with our Registration Statement on Form S-1 (File No. 333-83728), which became effective on May 29, 2002.~~

~~(c)~~	~~Management contract or compensatory plan or arrangement.~~

Table of Contents

~~SIGNATURES~~

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this ~~report~~Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized, on ~~November 7, 2008.~~March 5, 2009.

	~~OVERSTOCK.COM, INC.~~
	OVERSTOCK.COM, INC.

By:	~~By:~~	/s/ PATRICK M. BYRNE
		Patrick M. Byrne
		Chief Executive Officer

Table of Contents

~~POWER OF ATTORNEY~~

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Patrick M. Byrne, Jonathan E. Johnson III and David K. Chidester, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and conforming all that said attorney-in-fact, or his or their substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature		Title	Date


/s/ PATRICK M. BYRNE Patrick M. Byrne	Chief Executive Officer (Principal Executive Officer),	~~November 7, 2008~~
~~Patrick M. Byrne~~	Chairman of the Board	March 5, 2009

/s/ ~~David K. Chidester~~ STEPHEN J. CHESNUT Stephen J. Chesnut	Senior Vice President, Finance (Principal Financial Officer and
~~David K. Chidester~~	Principal Accounting Officer)	~~November 7, 2008~~ March 5, 2009

/s/ ALLISON H. ABRAHAM* Allison H. Abraham	Director	~~November 7, 2008~~ March 5, 2009
~~Allison H. Abraham~~

/s/ BARCLAY F. CORBUS* Barclay F. Corbus	Director	~~November 7, 2008~~ March 5, 2009
~~Barclay F. Corbus~~

/s/ JOSEPH J. TABACCO, JR.* Joseph J. Tabacco, Jr.	Director	~~November 7, 2008~~ March 5, 2009
~~Joseph J. Tabacco, Jr.~~

/s/ JAMES V. JOYCE James V. Joyce	Director	~~November 7, 2008~~ March 5, 2009


~~James V. Joyce~~ *By		/s/ STEPHEN J. CHESNUT Stephen J. Chesnut, pursuant to a power of attorney

Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Overstock.com, ~~Inc.:~~

Inc:

In our opinion, the ~~accompanying~~ consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Overstock.com, Inc. and its subsidiaries ~~(the “Company”)~~ at December 31, ~~2007~~2008 and ~~2006,~~2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, ~~2007~~2008 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 accompanying index appearing under Item 15(a)(1) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Management and we previously concluded that the Company maintained effective internal control over financial reporting as of December 31, 2007. However, management has subsequently determined that a material weaknessAlso in internal control over financial reporting related to accounting for customer refunds and credits and gift cards issued to customers existed as of that date. Accordingly, management’s report has been restated and our present opinion on internal control over financial reporting, as presented herein, is different from that expressed in our previous report. In our opinion, the Company ~~did not maintain,~~maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2007,~~2008, based on criteria established inInternal ~~Control -~~ Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because a material weakness in internal control over financial reporting related to accounting for customer refunds and credits and gift cards issued to customers existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.. The material weakness referred to above is described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2007 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. The Company’sCompany's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in ~~management’s report referred to above.~~Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the ~~Company’s~~Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 3 to the consolidated financial statements, the Company has restated its consolidated financial statements as of December 31, 2007 and 2006 and for the years ended December 31, 2007, 2006 and 2005. As discussed in Note 1 to its financial statement schedule, the Company has restated its schedule as of December 31, 2007, 2006 and 2005.

~~As discussed in Note 18 to the consolidated financial statements, the Company changed the manner in which it accounts for stock-based compensation in 2006.~~

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 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.

/s/PricewaterhouseCoopers LLP

Salt Lake City, Utah

March 17, 2008, except for the effect of the restatement discussed in Note 3 to the consolidated financial statements, Note 1 to the financial statement schedule and the matter described in the penultimate paragraph of Management’s Report on Internal Control Over Financial Reporting, for which the date is November 7, 2008

~~F-2~~
February 23, 2009

Table of Contents

Overstock.com, Inc.

Consolidated Balance Sheets

(in thousands)

December 31,

2006

2007

(Restated)

(Restated)

Assets

Current assets:

Cash and cash equivalents

$
126,965

$
101,394

Marketable securities

—

46,000

Cash, cash equivalents and marketable securities

126,965

147,394

Accounts receivable, net

16,330

11,208

Note receivable (Note 26)

6,702

1,506

Inventories, net

23,870

25,643

Prepaid inventory

2,241

3,572

Prepaid expense

7,473

7,572

Current assets of held for sale subsidiary

4,718

—

Total current assets

188,299

196,895

Property and equipment, net

56,198

27,197

Goodwill

2,784

2,784

Other long-term assets, net

578

86

Notes receivable

—

4,181

Long-term assets of held for sale subsidiary

16,594

—

Total assets

$
264,453

$
231,143

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

$
58,412

$
70,358

Accrued liabilities

38,434

37,155

Deferred revenue

23,220

22,965

Capital lease obligations, current

5,074

3,796

Current liabilities of held for sale subsidiary

3,684

—

Total current liabilities

128,824

134,274

Capital lease obligations, non-current

3,983

—

Other long-term liabilities

—

3,034

Convertible senior notes

75,279

75,623

Total liabilities

208,086

212,931

Commitments and contingencies (Notes 11, 12 and 13)

Stockholders’ equity:

Preferred stock, $0.0001 par value, 5,000 shares authorized, no shares issued and outstanding as of December 31, 2006 and 2007

—

—

Common stock, $0.0001 par value, 100,000 shares authorized, 25,069 and 25,423 shares issued as of December 31, 2006 and 2007, respectively

2

2

Additional paid-in capital

325,771

333,909

Accumulated deficit

(204,291
)
(252,327
)

Treasury stock, 1,654 and 1,605 shares at cost as of December 31, 2006 and 2007, respectively

(64,983
)
(63,278
)
Accumulated other loss

(132
)
(94
)

Total stockholders’ equity

56,367

18,212

Total liabilities and stockholders’ equity

$
264,453

$
231,143

			December 31,

			2007			2008
Assets
Current assets:
	Cash and cash equivalents		$	101,394		$	100,577
	Marketable securities			46,000			8,989

		Cash, cash equivalents and marketable securities		147,394			109,566
	Accounts receivable, net			11,208			6,985
	Notes receivable (Note 25 and Note 4)			1,506			1,250
	Inventories, net			25,643			17,723
	Prepaid inventory, net			3,572			761
	Prepaid expense			7,572			9,694

		Total current assets		196,895			145,979
Fixed assets, net				27,197			23,144
Goodwill				2,784			2,784
Other long-term assets, net				86			538
Notes receivable (Note 4)				4,181			—

		Total assets	$	231,143		$	172,445

Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
	Accounts payable		$	70,358		$	62,120
	Accrued liabilities			37,155			25,154
	Deferred revenue			22,965			19,026
	Capital lease obligations			3,796			—

		Total current liabilities		134,274			106,300
Other long-term liabilities				3,034			2,572
Convertible senior notes				75,623			66,558

		Total liabilities		212,931			175,430

Commitments and contingencies (Notes 13 and 14)
Stockholders' equity (deficit):
	Preferred stock, $0.0001 par value, 5,000 shares authorized, no shares issued and outstanding as of December 31, 2007 and 2008			—			—
	Common stock, $0.0001 par value, 100,000 shares authorized, 25,423 and 25,536 shares issued as of December 31, 2007 and 2008, respectively, and 23,818 and 22,743 shares outstanding as of December 31, 2007 and 2008, respectively			2			2
	Additional paid-in capital			333,909			338,620
	Accumulated deficit			(252,327	)		(264,985	)
	Treasury stock, 1,605 and 2,793 shares at cost as of December 31, 2007 and 2008, respectively			(63,278	)		(76,670	)
	Accumulated other comprehensive income (loss)			(94	)		48

		Total stockholders' equity (deficit)		18,212			(2,985	)

		Total liabilities and stockholders' equity (deficit)	$	231,143		$	172,445

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

~~F-3~~

Table of Contents

Overstock.com, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

Year ended December 31,

2005

2006

2007

(Restated)

(Restated)

(Restated)

Revenue

Direct revenue

$
323,136

$
301,509

$
197,088

Fulfillment partner revenue

471,839

478,628

568,814

Total revenue

794,975

780,137

765,902

Cost of goods sold

Direct(1)

280,647

284,774

168,008

Fulfillment partner

397,855

405,559

473,344

Total cost of goods sold

678,502

690,333

641,352

Gross profit

116,473

89,804

124,550

Operating expenses:

Sales and marketing(1)

77,155

70,897

55,458

Technology(1)

27,901

65,158

59,453

General and administrative(1)

33,043

46,837

41,976

Restructuring

—

5,674

12,283

Total operating expenses

138,099

188,566

169,170

Operating loss

(21,626
)
(98,762
)
(44,620
)
Interest income (expense), net

(161
)
3,566

4,788

Interest expense

(5,582
)
(4,765
)
(4,188
)
Other income (expense), net

4,728

81

(92
)

Loss from continuing operations

(22,641
)
(99,880
)
(44,112
)
Discontinued operations (Note 5):

Loss from discontinued operations

(2,571
)
(6,882
)
(3,924
)

Net loss

(25,212
)
(106,762
)
(48,036
)
Deemed dividend related to redeemable common stock

(185
)
(99
)
—

Net loss attributable to common shares

$
(25,397
)
$
(106,861
)
$
(48,036
)

Net loss per common share—basic and diluted:

Loss from continuing operations

$
(1.17
)
$
(4.91
)
$
(1.86
)

Loss from discontinued operations

$
(0.13
)
$
(0.34
)
$
(0.17
)

Net loss per common share—basic and diluted

$
(1.30
)
$
(5.25
)
$
(2.03
)

Weighted average common shares outstanding—basic and diluted

19,429

20,332

23,704

			Year ended December 31,

			2006			2007			2008
Revenue
	Direct revenue		$	301,509		$	197,088		$	174,203
	Fulfillment partner revenue			478,628			568,814			660,164

		Total revenue		780,137			765,902			834,367

Cost of goods sold
	Direct(1)			284,774			168,008			154,501
	Fulfillment partner			405,559			473,344			536,957

		Total cost of goods sold		690,333			641,352			691,458

	Gross profit			89,804			124,550			142,909

Operating expenses:
	Sales and marketing(1)			70,897			55,458			57,634
	Technology(1)			65,158			59,453			57,815
	General and administrative(1)			46,837			41,976			38,373
	Restructuring			5,674			12,283			—

		Total operating expenses		188,566			169,170			153,822

Operating loss				(98,762	)		(44,620	)		(10,913	)
Interest income, net				3,566			4,788			3,163
Interest expense				(4,765	)		(4,188	)		(3,462	)
Other income (expense), net				81			(92	)		(1,446	)

Loss from continuing operations				(99,880	)		(44,112	)		(12,658	)
Loss from discontinued operations (Note 4)				(6,882	)		(3,924	)		—

Net loss				(106,762	)		(48,036	)		(12,658	)
Deemed dividend related to redeemable common stock				(99	)		—			—

Net loss attributable to common shares			$	(106,861	)	$	(48,036	)	$	(12,658	)

Net loss per common share—basic and diluted:
	Loss from continuing operations		$	(4.91	)	$	(1.86	)	$	(0.55	)

	Loss from discontinued operations		$	(0.34	)	$	(0.17	)	$	—

Net loss per common share—basic and diluted			$	(5.25	)	$	(2.03	)	$	(0.55	)

Weighted average common shares outstanding—basic and diluted				20,332			23,704			22,901


Cost of goods sold—direct	$	412	$	460	$	181
Sales and marketing		301		336		313
Technology		684		764		792
General and administrative		2,746		2,601		1,995

Table of Contents

Overstock.com, Inc.

Consolidated Statements of ~~Stockholders’~~Stockholders' Equity (Deficit)

and Comprehensive Loss

~~(in~~(in thousands)

Common stock

Additional Paid-

Treasury stock

Accumulated Other
Comprehensive

Shares

Amount

in capital

Accumulated Deficit

Shares

Amount

Income (Loss)

Total

Balance at December 31, 2004 (as Reported)

19,390

$
2

$
241,830

$
(71,726
)
(35
)
$
(100
)
$
(195
)
$
169,811

Cumulative effect of restatement (1)

—

—

—

(307
)
—

—

—

(307
)
Balance at January 1, 2005 (Restated)

19,390

$
2

$
241,830

$
(72,033
)
(35
)
$
(100
)
$
(195
)
$
169,504

Exercise of stock options and warrants

1,167

—

7,315

—

—

—

—

7,315

Treasury stock issued to employees as compensation

—

—

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
)
—

—

Amortization of stock-based compensation

—

—

72

—

—

—

—

72

Stock-based compensation to consultants in exchange for services

—

—

(389
)
—

—

—

—

(389
)
Deemed dividend related to redeemable common stock

—

—

—

(185
)
—

—

—

(185
)
Lapse of rescission rights on redeemable common stock

14

—

146

—

—

—

—

146

Comprehensive loss (Restated):

Net loss (Restated)

—

—

—

(25,212
)
—

—

—

(25,212
)
Net unrealized loss on marketable securities

—

—

—

—

—

—

(54
)
(54
)
Unrealized gain on foreign notes

—

—

—

—

—

—

1,125

1,125

Cumulative translation adjustment

—

—

—

—

—

—

86

86

Total comprehensive loss (Restated)

(24,055
)

Balance at December 31, 2005 (Restated)

20,571

2

250,939

(97,430
)
(1,687
)
(65,325
)
962

89,148

Issuance of common stock in offerings

3,776

—

64,406

—

—

—

—

64,406

Exercise of stock options

276

—

2,534

—

—

—

—

2,534

Treasury stock issued to employees as compensation

—

—

445

—

33

342

—

787

Stock-based compensation from employee options

—

—

4,120

—

—

—

—

4,120

Stock-based compensation to consultants in exchange for services

—

—

23

—

—

—

—

23

Deemed dividend related to redeemable common stock

—

—

—

(99
)
—

—

—

(99
)
Lapse of rescission rights on redeemable common stock

446

—

3,304

—

—

—

—

3,304

Comprehensive loss (Restated):

Net loss (Restated)

—

—

—

(106,762
)
—

—

—

(106,762
)

Unrealized (loss) on marketable securities

—

—

—

—

—

—

(1,128
)
(1,128
)
Cumulative translation adjustment

—

—

—

—

—

—

34

34

Total comprehensive loss (Restated)

(107,856
)

Balance at December 31, 2006 (Restated)

25,069

2

325,771

(204,291
)
(1,654
)
(64,983
)
(132
)
56,367

Exercise of stock options

354

—

3,230

—

—

—

—

3,230

Treasury stock issued for 401(k) matching contribution

—

—

(391
)
—

26

885

—

494

Treasury stock issued for prior-year 401(k) discretionary contribution

—

—

(412
)
—

23

820

—

408

Stock-based compensation from employee options

—

—

4,522

—

—

—

—

4,522

Stock-based compensation to consultants in exchange for services

—

—

189

—

—

—

—

189

Stock-based compensation related to performance shares

—

—

1,000

—

—

—

—

1,000

Comprehensive loss (Restated):

Net loss (Restated)

—

—

—

(48,036
)
—

—

—

(48,036
)

Unrealized gain on marketable securities

—

—

—

—

—

—

41

41

Cumulative translation adjustment

—

—

—

—

—

—

(3
)
(3
)

Total comprehensive loss (Restated)

(47,998
)

Balance at December 31, 2007 (Restated)

25,423

$
2

$
333,909

$
(252,327
)
(1,605
)
$
(63,278
)
$
(94
)
$
18,212

		Common stock										Treasury stock

		Common stock				Additional Paid-in capital			Accumulated Deficit			Treasury stock						Accumulated Other Comprehensive Income (Loss)
		Shares		Amount		Additional Paid-in capital			Accumulated Deficit			Shares			Amount			Accumulated Other Comprehensive Income (Loss)			Total
Balance at December 31, 2005			20,571	$	2	$	250,939		$	(97,430	)		(1,687	)	$	(65,325	)	$	962		$	89,148
Issuance of common stock in offerings			3,776		—		64,406			—			—			—			—			64,406
Exercise of stock options			276		—		2,534			—			—			—			—			2,534
Treasury stock issued for 401(k) matching contribution			—		—		445			—			33			342			—			787
Stock-based compensation from employee options			—		—		4,120			—			—			—			—			4,120
Stock-based compensation to consultants in exchange for services			—		—		23			—			—			—			—			23
Deemed dividend related to redeemable common stock			—		—		—			(99	)		—			—			—			(99	)
Lapse of rescission rights on redeemable common stock			446		—		3,304			—			—			—			—			3,304
Comprehensive loss:
	Net loss		—		—		—			(106,762	)		—			—			—			(106,762	)
	Unrealized (loss) on marketable securities		—		—		—			—			—			—			(1,128	)		(1,128	)
	Cumulative translation adjustment		—		—		—			—			—			—			34			34

Total comprehensive loss																						(107,856	)

Balance at December 31, 2006			25,069		2		325,771			(204,291	)		(1,654	)		(64,983	)		(132	)		56,367
Exercise of stock options			354		—		3,230			—			—			—			—			3,230
Treasury stock issued for 401(k) matching contribution			—		—		(391	)		—			26			885			—			494
Treasury stock issued for prior-year 401(k) discretionary contribution			—		—		(412	)		—			23			820			—			408
Stock-based compensation from employee options			—		—		4,522			—			—			—			—			4,522
Stock-based compensation to consultants in exchange for services			—		—		189			—			—			—			—			189
Stock-based compensation related to performance shares			—		—		1,000			—			—			—			—			1,000
Comprehensive loss:
	Net loss		—		—		—			(48,036	)		—			—			—			(48,036	)
	Unrealized gain on marketable securities		—		—		—			—			—			—			41			41
	Cumulative translation adjustment		—		—		—			—			—			—			(3	)		(3	)

Total comprehensive loss																						(47,998	)

Balance at December 31, 2007			25,423	$	2	$	333,909		$	(252,327	)		(1,605	)	$	(63,278	)	$	(94	)	$	18,212
Exercise of stock options			113		—		1,471			—			—			—			—			1,471
Treasury stock issued for 401(k) matching contribution			—		—		(41	)		—			2			60			—			19
Purchase of treasury stock			—		—		—			—			(1,190	)		(13,452	)		—			(13,452	)
Stock-based compensation from employee options			—		—		4,022			—			—			—			—			4,022
Stock-based compensation to consultants in exchange for services			—		—		259			—			—			—			—			259
Stock-based compensation related to performance shares			—		—		(1,000	)		—			—			—			—			(1,000	)
Comprehensive loss:
	Net loss		—		—		—			(12,658	)		—			—			—			(12,658	)
	Unrealized gain on marketable securities		—		—		—			—			—			—			48			48
	Cumulative translation adjustment		—		—		—			—			—			—			94			94
Total comprehensive loss																						(12,516	)

Balance at December 31, 2008			25,536	$	2	$	338,620		$	(264,985	)		(2,793	)	$	(76,670	)	$	48		$	(2,985	)

~~(1) See “Note 3 – Restatement of Financial Statements.”~~

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

~~F-5~~

Table of Contents

Overstock.com, Inc.

Consolidated Statements of Cash Flows

(in thousands)

Year ended December 31,

2005
(Restated)

2006
(Restated)

2007
(Restated)

Cash flows from operating activities of continuing operations:

Net loss

$
(25,212
)
$
(106,762
)
$
(48,036
)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities of continuing operations:

Loss from discontinued operations

2,571

6,882

3,924

Depreciation and amortization

14,111

32,327

29,495

Realized loss (gain) on marketable securities

3,351

(2,085
)
—

Loss on disposition of property and equipment

1,457

599

1

Stock-based compensation

72

4,120

4,522

Stock-based compensation to consultants for services

(389
)
23

189

Stock-based compensation—performance shares

—

—

(550
)
Issuance of common stock from treasury for 401(k) matching contribution

443

787

494

Amortization of debt discount and deferred financing fees

620

417

344

Gain from retirement of convertible senior notes

(6,158
)
—

—

Asset impairment and depreciation (restructuring)

—

791

2,169

Restructuring charges

—

4,883

10,114

Notes receivable accretion

—

—

(272
)
Changes in operating assets and liabilities, net of effect of acquisition and discontinued operations:

Accounts receivable, net

(8,755
)
(1,470
)
4,822

Inventories, net

(48,245
)
67,879

(1,773
)
Prepaid inventory

2,689

7,388

(1,331
)
Prepaid expenses

(5,022
)
1,004

(99
)
Other long-term assets

(2,151
)
496

471

Accounts payable

33,009

(35,400
)
11,849

Accrued liabilities

22,364

(11,573
)
(5,908
)
Deferred revenue

9,182

3,401

(255
)
Other long-term liabilities

—

—

(193
)

Net cash provided by (used in) operating activities of continuing operations

(6,063
)
(26,293
)
9,977

Cash flows from investing activities of continuing operations:

Change in restricted cash

1,349

253

—

Purchases of marketable securities

(185,543
)
—

(75,217
)
Sales of marketable securities

216,265

56,756

29,258

Expenditures for property and equipment

(44,642
)
(23,441
)
(2,643
)
Acquisition of Ski West

(25,111
)
—

—

Proceeds from the sale of OTravel, net of cash transferred

—

—

9,892

Collection of note receivable

—

—

5,196

Proceeds from the sale of property and equipment

—

1

—

Other investments

—

(100
)
—

Decrease in cash resulting from de-consolidation of variable interest entity

—

(102
)
—

Net cash provided by (used in) investing activities of continuing operations

(37,682
)
33,367

(33,514
)

Cash flows from financing activities of continuing operatons:

Payments on capital lease obligations

(7,086
)
(2,957
)
(5,261
)
Drawdown on line of credit

11,868

86,681

2,423

Payments on line of credit

(11,868
)
(86,681
)
(2,423
)
Payments to retire convertible senior notes

(35,670
)
—

—

Issuance of common stock in offerings, net of issuance costs

—

64,406

—

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

7,315

2,534

3,230

Net cash provided by (used in) financing activities of continuing operations

(99,144
)
63,983

(2,031
)

Effect of exchange rate changes on cash

86

34

(3
)
Cash (used in) provided by operating activies of discontinued operations

(45
)
1,581

(204
)
Cash (used in) provided by investing activities of discontinued operations

(98
)
(566
)
(53
)

Net increase (decrease) in cash and cash equivalents

(142,946
)
72,106

(25,828
)
Less change in cash and cash equivalents from discontinued operations

143

(1,016
)
257

Cash and cash equivalents, beginning of year

198,678

55,875

126,965

Cash and cash equivalents from continuing operations, end of year

$
55,875

$
126,965

$
101,394

~~F-6~~

				Year ended December 31,

				2006			2007			2008
Cash flows from operating activities of continuing operations:
Net loss				$	(106,762	)	$	(48,036	)	$	(12,658	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities of continuing operations:
	Loss from discontinued operations				6,882			3,924			—
	Depreciation and amortization, including internal-use software and website development				32,327			29,495			22,667
	Realized loss (gain) on marketable securities				(2,085	)		—			334
	Loss on settlement of notes receivable (Note 4)				—			—			3,929
	Loss on disposition of fixed assets				599			1			140
	Stock-based compensation to employees and directors				4,120			4,522			4,022
	Stock-based compensation to consultants for services				23			189			259
	Stock-based compensation relating to performance share plan				—			(550	)		(1,000	)
	Issuance of common stock from treasury for 401(k) matching contribution				787			494			19
	Amortization of debt discount				417			344			334
	Gain from early extinguishment of debt				—			—			(2,849	)
	Asset impairment and depreciation (other non-cash restructuring charges)				791			2,169			—
	Restructuring charges				4,883			10,114			—
	Notes receivable accretion				—			(272	)		(545	)
	Changes in operating assets and liabilities, net of effect of acquisition and discontinued operations:
		Accounts receivable, net			(1,470	)		4,822			4,769
		Inventories, net			67,879			(1,773	)		7,920
		Prepaid inventory, net			7,388			(1,331	)		2,177
		Prepaid expenses			1,004			(99	)		(2,122	)
		Other long-term assets, net			496			471			(516	)
		Accounts payable			(35,400	)		11,849			(8,238	)
		Accrued liabilities			(11,573	)		(5,908	)		(12,281	)
		Deferred revenue			3,401			(255	)		(3,939	)
		Other long-term liabilities			—			(193	)		(462	)

			Net cash provided by (used in) operating activities of continuing operations		(26,293	)		9,977			1,960

Cash flows from investing activities of continuing operations:
	Change in restricted cash				253			—			—
	Purchases of marketable securities				—			(75,217	)		(35,548	)
	Maturities of marketable securities				56,756			29,258			64,542
	Sales of marketable securities prior to maturity				—			—			7,740
	Expenditures for fixed assets, including internal-use software and website development				(23,441	)		(2,643	)		(18,690	)

Table of Contents

Overstock.com, Inc.

Consolidated Statements of Cash Flows (Continued)

(in thousands)

Supplemental disclosures of cash flow information:

Interest paid

$
5,108

$
3,677

$
3,882

Equipment and software acquired under capital leases

15,438

2,273

—

Asset retirement obligation

—

450

—

Deemed dividend on redeemable common stock

185

99

—

Lapse of rescission rights on redeemable common stock

146

3,304

—

Settlement of purchased call options for treasury stock

41,121

—

—

Promissory note received in exchange for deconsolidation of variable interest entity

—

6,702

—

Prior year discretionary 401(k) contribution settled in treasury stock

—

—

408

Supplemental disclosure on non-cash investing activities:

Fair value of assets acquired

26,447

—

—

Fair value of liabilities assumed

(1,336
)
—

—

Cash paid to purchase business

$
25,111

$
—

$
—

			Year ended December 31,

			2006			2007			2008
	Proceeds from the sale of discontinued operations, net of cash transferred			—			9,892			—
	Collection of note receivable			—			5,196			1,506
	Proceeds from the sale of fixed assets			1			—			—
	Other investments			(100	)		—			—
	Decrease in cash resulting from de-consolidation of variable interest entity			(102	)		—			—

		Net cash provided by (used in) investing activities of continuing operations		33,367			(33,514	)		19,550

Cash flows from financing activities of continuing operations:
	Payments on capital lease obligations			(2,957	)		(5,261	)		(3,796	)
	Drawdowns on line of credit			86,681			2,423			12,963
	Paydowns on line of credit			(86,681	)		(2,423	)		(12,963	)
	Payments to retire convertible senior notes			—			—			(6,550	)
	Issuance of common stock in offerings, net of issuance costs			64,406			—			—
	Purchase of treasury stock			—			—			(13,452	)
	Exercise of stock options			2,534			3,230			1,471

		Net cash provided by (used in) financing activities of continuing operations		63,983			(2,031	)		(22,327	)

Effect of exchange rate changes on cash				34			(3	)		—
	Cash used in operating activities of discontinued operations			1,581			(204	)		—
	Cash used in investing activities of discontinued operations			(566	)		(53	)		—

Net increase (decrease) in cash and cash equivalents				72,106			(25,828	)		(817	)
Less change in cash and cash equivalents from discontinued operations				(1,016	)		257			—
Cash and cash equivalents, beginning of year				55,875			126,965			101,394

Cash and cash equivalents from continuing operations, end of year			$	126,965		$	101,394		$	100,577

Supplemental disclosures of cash flow information:
	Interest paid		$	3,677		$	3,882		$	3,390
	Equipment and software acquired under capital leases			2,273			—			—
	Asset retirement obligation			450			—			—
	Deemed dividend on redeemable common stock			99			—			—
	Lapse of rescission rights on redeemable common stock			3,304			—			—
	Promissory notes received for sale of discontinued operations			—			6,000			—
	Promissory note received in exchange for deconsolidation of variable interest entity			6,702			—			—
	Prior year discretionary 401(k) contribution settled in treasury stock			409			408			—

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

~~F-7~~

Table of Contents

Overstock.com, Inc.

Notes to Consolidated Financial Statements

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, home décor, kitchenware, watches, jewelry, electronics and computers, sporting goods, apparel, and designer accessories, among other products. The Company also sells books, magazines, CDs, DVDs ~~videocassettes~~ and video games ~~(“BMMG”~~("BMMG"). As part of its Website, the Company also offers ~~on its Website~~ an online auction service,—which acts as an online marketplace for the buying and selling of goods and services, as well as an online site for listing cars and homes for sale.

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 July 23, 2003, the Company formed Overstock Mexico, S. de R. L. de C.V., a wholly owned subsidiary, to distribute products in Mexico.

The Company ceased operations of its Mexico Operations on October 24, 2008.

The Company has organized its operations into two ~~principle~~principal segments based on the primary source of revenue: Direct revenue and Fulfillment partner revenue (see ~~“Note 24—~~"Note 23—Business ~~Segments”~~Segments").

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The consolidated financial statements include the accounts of the ~~Company’s~~Company's OTravel subsidiary through April 25, 2007 (see ~~“Note 5—~~"Note 4—Acquisition and Subsequent Discontinued ~~Operations”~~Operations"). The consolidated financial statements also include the accounts of a variable interest entity for which the Company was the primary beneficiary through November 30, 2006. 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 estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, valuation of investments, receivables valuation, revenue recognition, sales returns, incentive discount offers, inventory valuation, depreciable lives of fixed assets, internally-developed software, valuation of acquired intangibles, income taxes, stock-based compensation, and contingencies. Actual results could differ materially from those estimates.

Cash and Cash Equivalents

The Company classifies all highly liquid instruments, including money market funds with a remaining maturity of three months or less at the time of purchase, as cash equivalents.

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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Marketable Securities

Marketable securities consist of funds deposited into capital management accounts at ~~two~~one financial ~~institutions.~~institution. The Company generally invests excess cash in ~~“A”~~"A" rated or higher short- to intermediate-term fixed income securities and money market mutual funds, including municipal, government and corporate bonds ~~and money market securities~~ which are classified as cash or cash equivalents, or available-for-sale marketable securities on the 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~~its investments. At December 31, ~~2006~~2007 and ~~2007,~~2008, gross unrealized gains on marketable securities were ~~zero~~$41,000 and ~~$41,000,~~$48,000, respectively, and were determined to be temporary based on the ~~Company’s~~Company's assessment of the qualitative and quantitative factors discussed above. The Company recorded an "other than temporary" impairment of marketable securities of $300,000 and realized losses of $34,000 during the year ended December 31, 2008.

Fair value of financial instruments

The ~~Company’s~~Company's financial instruments, including cash, cash equivalents, notes receivable, 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.

In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157,Fair Value Measurements ("SFAS No. 157"), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position, ("FSP"), FAS No. 157-2,Effective Date of FASB Statement No. 157 ("FSP FAS No. 157-2"), which delayed the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted SFAS No. 157 on January 1, 2008, except as it applies to those non-financial assets and non-financial liabilities as described in FSP FAS No. 157-2, and it did not have a material impact on its consolidated financial position, results of operations or cash flows.

On a quarterly basis, the Company measures at fair value certain financial assets, including cash equivalents and available-for-sale securities. SFAS No. 157 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the

Table of Contents

Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Company's market assumptions. These two types of inputs have created the following fair-value hierarchy:

•: Level 1—Quoted prices for identical instruments in active markets;
•: Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
•: Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

This hierarchy requires the Company to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. The fair value of these financial assets was determined using the following levels of inputs as of December 31, 2008 (in thousands):

		Fair Value Measurements as of December 31, 2008:

		Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents—Money market mutual funds		$	100,577	$	100,577	$	—	$	—
Available-for-sale securities			8,989		8,989		—		—

	Total assets	$	109,566	$	109,566	$	—	$	—

The estimated fair value of the ~~Company’s~~Company's 3.75% Convertible Senior Notes at December 31, ~~2006~~2007 and ~~2007~~2008 was ~~$56.3~~$60.0 million and ~~$60.0~~$38.1 million, respectively. The fair value of the convertible senior notes was derived using a convertible pricing model with observable market inputs, which include stock price, dividend payments, borrow costs, equity volatility, interest rates and interest spread.

Accounts receivable

Accounts receivable consist of trade amounts due from customers and from uncleared credit card transactions at period end. Accounts receivable are recorded at invoiced amounts and do not bear interest.

Allowance for Doubtful Accounts

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. From time to time, the Company grants credit to certain of its business customers on normal credit terms (typically 30 days). The Company ~~recorded~~performs ongoing credit evaluations of its customers' financial condition and maintains an allowance for doubtful accounts receivable based upon its historical collection experience and expected collectability of ~~$2.1~~all accounts receivable. The Company maintained an allowance for doubtful accounts receivable of $2.5 million and ~~$2.5~~$1.6 million atas of December 31, ~~2006~~2007 and ~~2007,~~2008, respectively.

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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Concentration of credit risk

Cash equivalents include short-term, highly liquid instruments with original maturities of 90 days or less. At December 31, ~~2006~~2007 and ~~2007,~~2008, two 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.

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.

~~F-8~~

~~Table of Contents~~

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~~collectability of accounts receivable.

Inventories

Inventories, consisting of merchandise purchased for resale, are accounted for using a standard costing system which approximates the first-in-first-out ~~(“FIFO”~~("FIFO") method of accounting, and are valued at the lower of cost or 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.

Prepaid inventory

Prepaid inventory represents inventory paid for in advance of receipt. Prepaid inventory at December 31, ~~2006~~2007 and ~~2007~~2008 was ~~$2.2~~$3.6 million and ~~$3.6 million,~~$761,000, respectively.

Prepaid expenses

Prepaid expenses represent expenses paid prior to receipt of the related goods or services, including advertising, maintenance, packaging, insurance and other miscellaneous costs. Total prepaid expenses at December 31, ~~2006~~2007 and ~~2007~~2008 were ~~$7.5~~$7.6 million and ~~$7.6~~$9.7 million, respectively.

~~Property and equipment~~Fixed Assets

~~Property and equipment,~~Fixed assets, which includes ~~capitalized leases,~~assets such as furniture and fixtures, technology infrastructure, internal-use software and website development, 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 capital lease, whichever is shorter, as follows:

	Years

Computer software	~~Years~~	2-3
Computer ~~software~~hardware	3	3
~~Computer hardware~~	3
Furniture and equipment	~~3-5~~	3-5

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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Leasehold improvements are amortized over the shorter of the term of the related leases or estimated service lives. Depreciation expense is classified within the corresponding operating expense categories on our consolidated statements of operations, and certain assets are amortized as "Cost of goods sold." 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 and Website Development

The Company includes in fixed assets the capitalized cost of internal-use software and website development, including software used to upgrade and enhance its Website and processes supporting the ~~Company’s~~Company's business. As required by Statement of Position ("SOP") 98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, the Company capitalizes costs incurred during the application development stage of internal-use software and amortizes these costs over the estimated useful life of two to three years. The Company expenses costs incurred related to design or maintenance of internal-use software as incurred.

During the years ended December 31, ~~2006~~2007 and ~~2007,~~2008, the Company capitalized ~~$21.7~~$2.0 million and ~~$2.0~~$9.0 million, respectively, of costs associated with internal-use software and website ~~development.~~development, both developed internally and acquired externally. Amortization of costs associated with internal-use software and website development was ~~$14.4~~$13.5 million and ~~$13.5~~$11.6 million for those respective periods.

Leases

The Company accounts for its lease agreements pursuant to Statement of Financial Accounting Standards ~~(“SFAS”~~("SFAS") No. 13,Accounting for Leases, which categorizes leases at their inception as either operating or capital leases depending on certain defined criteria. On certain of its lease agreements, the Company may receive rent holidays and other incentives. The Company recognizes lease costs on a straight-line basis without regard to deferred payment terms, such as rent holidays that defer the commencement date of required payments. Additionally, incentives it receives are treated as a reduction of our costs over the term of the agreement. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the life of the lease, without assuming renewal features, if any, are exercised.

Treasury Stock

The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders' equity (deficit).

Asset Retirement Obligation

In accordance with ~~the Financial Accounting Standards Board (“FASB”)~~ 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.

Table of Contents

Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Other long-term assets

Other long-term assets include deposits, long-term prepaids, intangibles ~~deferred financing and issuance costs~~ and the fees associated with the acquisition of Overstock.com and other related domain names. The cost of the domain names is being amortized using the straight-line method over 5five years.

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 impairment of long-lived assets during ~~2005,~~ 2006, 2007 and ~~2007.~~2008.

Goodwill

Goodwill represents the excess of the purchase price paid over the fair value of the tangible net assets acquired in business combinations.

In accordance with SFAS No. 142,Goodwill and Other Intangible Assets (“ ("SFAS ~~142”~~No. 142"), goodwill is not amortized but tested for impairment at least annually. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to its carrying amount. If

~~F-9~~

~~Table of Contents~~

the carrying amount exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss is calculated by comparing the implied fair value of the goodwill to its carrying amount. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all the other assets and liabilities within the reporting unit based on fair value. The excess of the fair value of a reporting unit over the amount allocated to its other assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized when the carrying amount of goodwill exceeds its implied fair value. The Company evaluated its goodwill during ~~2007~~2008 and determined that no impairment charge should be recorded.

In conjunction with the discontinuance of the ~~Company’s~~Company's travel subsidiary ~~(“OTravel”~~("OTravel"), the Company performed an evaluation of the goodwill associated with the reporting unit pursuant to SFAS No. 142 and SFAS No. 144,Accounting for the Impairment of Long-Lived Assets (“ ("SFAS ~~144”~~No. 144"), and determined that goodwill of approximately $4.5 million and $3.8 million was impaired in 2006 and 2007, respectively (see ~~“Note 5—~~"Note 4—Acquisition and Subsequent Discontinued ~~Operations”~~Operations").

Revenue recognition

The Company derives 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 as well as advertisement revenue derived from its cars and real estate listing ~~business.~~businesses. The Company has organized its operations into two principal segments based on the

Table of Contents

Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

primary source of revenue: Direct revenue and Fulfillment partner revenue (see ~~“Note 24—~~"Note 23—Business Segments).

Revenue is recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred 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. Revenue related to merchandise sales is recognized upon delivery to the ~~Company’s~~Company's customers. As the Company ships high volumes of packages through multiple carriers, it is not practical for the Company to track the actual delivery date of each shipment. Therefore, the Company uses estimates to determine which shipments are delivered and therefore recognized as revenue at the end of the period. The delivery date estimates are based on average shipping transit times, which are calculated using the following factors: (i) the shipping carrier (as carriers differ in transit times); (ii) the fulfillment source (either the ~~Company’s~~Company's warehouses or those of its fulfillment partners); (iii) the delivery destination; and (iv) actual transit time experience, which shows that delivery date is typically one to eight business days from the date of shipment.

The Company evaluates the criteria outlined in EITF Issue No. 99-19,Reporting Revenue Gross as a Principal Versus Net as an Agent, in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. When the Company is the primary obligor in a transaction, is subject to inventory risk, has latitude in establishing prices and selecting suppliers, or has several but not all of these indicators, revenue is recorded gross. If the Company is not the primary obligor in the transaction and amounts earned are determined using a fixed percentage, revenue is recorded on a net basis. Currently, the majority of both direct revenue and fulfillment partner revenue is recorded on a gross basis, as the Company is the primary obligor.

The Company periodically provides incentive offers to its customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off current purchases, and other similar offers. Current discount offers, when ~~accepted~~used by its customers, are treated as a reduction to the purchase price of the related transaction.

Direct revenue

Direct revenue consists of merchandise sold through the ~~Company’s~~Company's Website to individual consumers and businesses that ~~are~~is fulfilled from its leased warehouses.

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 from warehouses maintained by the fulfillment partners.

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 majority of the items sold on the auction site and has no control over the pricing of the majority 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. ~~The~~From time to time, the Company also sells items returned from our shopping business through our auction ~~business revenues were insignificant in 2005, 2006~~service, and ~~2007.~~for these sales, the revenue is

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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

recorded on a gross basis. Revenue from the auctions business has been included in the fulfillment partner segment, as it is not large enough to separate out as its own ~~segment at this early stage of the business.~~

segment.

During December 2006, the Company added an online site for listing cars for sale as a part of its Website. The cars listing service allows dealers to list vehicles for sale and allows buyers to review vehicle descriptions, post offers to purchase, and provides the means for purchasers to contact sellers for further information and negotiations on the purchase of an advertised vehicle. Revenue from its cars listing business is included in the fulfillment partner segment, as it is not significant enough to separate out as its own segment.

During August 2008, the Company added an online site for listing real estate for sale as a part of its Website. The real estate listing service allows customers to search active listings across the country. Listing categories include foreclosures, live and on-line auctions, for sale by owner listings, broker/agent listings and numerous aggregated classified ad listings. Revenue from the real estate business is included in the fulfillment partner segment, as it is not significant enough to separate out as a segment.

Deferred ~~revenue.~~revenue

Payment is generally required by credit card at the point of sale. Amounts received prior to delivery of products or services provided are recorded as deferred revenue. In addition, amounts received in advance for Club O membership fees are recorded as deferred revenue and recognized ratably over the membership period. The Company sells gift cards and records related deferred revenue at the time of the sale. Revenue from a gift card is recognized when a customer redeems it. If a gift card is not redeemed, the Company recognizes revenue when the likelihood of its redemption becomes remote.

Reserve for ~~returns.~~returns

Total revenue is recorded net of estimated returns. For products other than computers, electronics and mattresses the returns policy provides for a full refund of the cost of the merchandise and all shipping charges if the item shipped is returned unopened within 30 days of delivery. If the item is returned after 30 days of delivery, is opened or shows signs of wear, the transaction may only be eligible for a partial refund. For items shipped from the Computers and Electronics department, returns must be initiated within 20 days of the purchase date and must be received in the original condition within 30 days of purchase. Computer and Electronics items returned opened or received at the Company’s warehouse after 30 days may only qualify for up to a 70 percent refund. Damaged or defective mattresses qualify for a full refund only if the items are refused at the time of delivery.

The Company maintains a reserve for returns based on estimates of future product returns related to current period revenues and ~~are estimated using~~ historical returns experience. The Company analyzes historical returns, current economic trends and changes in customer demand and acceptance of ~~our~~its products when evaluating the adequacy of the sales returns reserve and other allowances in any accounting period. The reserve for returns was ~~$4.6~~$6.9 million and ~~$6.9~~$5.1 million at December 31, ~~2006~~2007 and ~~2007,~~2008, respectively.

~~�� Allowance for doubtful accounts.~~ From time to time, the Company grants credit to certain of our business customers on normal credit terms (typically 30 days). The Company performs ongoing credit evaluations of its customers’ financial condition and maintains an allowance for doubtful accounts receivable based upon its historical collection experience and expected collectibility of all accounts receivable.

Reserve for obsolete and damaged ~~inventory.~~inventory

The Company writes down its inventory 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. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Once established, the original cost of the inventory less the related inventory 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.

~~F-10~~ At December 31, 2007, the Company's inventory balance was $25.6 million (including $3.1 million of inventory in-transit related to sales shipped but not yet delivered), net of allowance for obsolescence or damaged inventory of $1.8 million. At December 31, 2008, the Company's inventory balance was $17.7 million (including $2.8 million of inventory in-transit related to sales shipped but not yet delivered), net of allowance for obsolescence or damaged inventory of $2.1 million.

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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Cost of goods sold

Cost of goods sold includes product costs, warehousing costs, inbound and outbound shipping costs, handling and fulfillment costs, customer service costs and credit card fees, and ~~are~~is 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, ~~2005,~~ 2006, 2007 and ~~2007,~~2008, fulfillment costs totaled ~~$59.9 million,~~ $60.9 million, ~~and~~ $47.1 million and $47.2 million, respectively.

		Years ended December 31,

		2006				2007				2008
		(in thousands)
Total revenue		$	780,137	100	%	$	765,902	100	%	$	834,367	100	%

Cost of goods sold
	Product costs and other cost of goods sold		629,477	81	%		594,276	78	%		644,212	77	%
	Fulfillment costs		60,856	7	%		47,076	6	%		47,246	6	%

	Total cost of goods sold		690,333	88	%		641,352	84	%		691,458	83	%

Gross profit		$	89,804	12	%	$	124,550	16	%	$	142,909	17	%

Years ended December 31,

(in thousands)

2005

2006

2007

(Restated)

(Restated)

(Restated)

Total revenue

$
794,975

100
%
$
780,137

100
%
$
765,902

100
%

Cost of goods sold

Product costs and other cost of goods sold

618,571

78
%
629,477

81
%
594,276

78
%
Fulfillment costs

59,931

7
%
60,856

7
%
47,076

6
%

Total cost of goods sold

678,502

85
%
690,333

88
%
641,352

84
%

Gross profit

$
116,473

15
%
$
89,804

12
%
$
124,550

16
%

Advertising expense

The Company recognizes advertising expenses in accordance with SOP 93-7,Reporting on Advertising Costs. As such, the Company expenses the costs of producing advertisements at the time production occurs or the first time the advertising takes place and expenses the cost of communicating advertising in the period during which the advertising space or airtime is used. Internet advertising expenses are recognized as incurred based on the terms of the individual agreements, which are generally: 1) a commission for traffic driven to the Website that generates a sale or 2) a referral fee based on the number of clicks on keywords or links to our Website generated during a given period. Advertising expense included in sales and marketing expenses totaled ~~$75.3 million, $68.1~~$68.1million, $51.0 million and ~~$51.0~~$52.8 million during the years ended December 31, ~~2005,~~ 2006, 2007 and ~~2007,~~2008, respectively.

Stock-based Compensation

As of January 1, 2006, the Company adopted SFAS No. 123(R)Share-based Payment (“ ("SFAS No. 123(R)”"), which requires the Company to measure compensation expense for all outstanding unvested share-based awards at fair value and recognize compensation expense over the service period for awards expected to vest. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from estimates, such amounts will be recorded as an adjustment in the period estimates are revised. Management considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results may differ substantially from these estimates (see ~~“Note~~"Note 18—Stock Based ~~Awards” and “Note 19—Performance Share Plan”~~Awards").

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~~Restructuring~~
Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Restructuring

Restructuring expenses ~~are~~comprise primarily ~~comprised of~~ lease termination costs and the costs incurred for returning leased facilities back to their original condition in anticipation of subleasing current office space. SFAS 146,Accounting for Costs Associated with Exit or Disposal Activities, requires that when an entity ceases using a property that is leased under an operating lease before the end of its term contract, the termination costs should be recognized and measured at fair value when the entity ceases using the facility. Key assumptions in determining the restructuring expenses include the terms that may be negotiated to exit certain contractual obligations (see ~~“Note 4—~~"Note 3—Restructuring ~~Expense”~~Expense").

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. 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 No. 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~~its deferred assets including expectations of future taxable income, the carry-forward periods available for tax reporting purposes, and other relevant factors. At December 31, ~~2006~~2007 and ~~2007,~~2008, the Company has established a full valuation allowance against its deferred tax assets. Significant judgment is required in making this assessment, and it is very difficult to predict when, if ever, ~~our~~the Company's assessment may conclude that the remaining portion of the deferred tax assets are realizable.

Foreign currency translation

For the ~~Company’s~~Company's subsidiary located in Mexico, the ~~subsidiary’s~~subsidiary's local currency iswas considered its functional currency. As a result, all of the ~~subsidiary’s~~subsidiary's assets and liabilities ~~are~~were translated into U.S. dollars at exchange rates existing at the balance sheet dates, revenue and expenses ~~are~~were translated at weighted average exchange rates, and ~~stockholders’~~stockholders' equity iswas recorded at historical exchange rates. The resulting foreign currency translation adjustments ~~are~~were recorded as a separate component of ~~stockholders’~~stockholders' equity (deficit) in the consolidated balance sheets as part of accumulated other comprehensive income (loss). Transaction gains and losses ~~are~~were included in other income (expense) in the consolidated financial statements and ~~have~~were not ~~been~~ significant for any ~~periods~~period presented. The Company's subsidiary was located in Mexico and ceased operations on October 24, 2008.

Derivative instruments

SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities (“ ("SFAS ~~133”~~133") 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

Table of Contents

Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 value of derivatives not designated as cash flow hedges are recorded in the statement of operations. As of December 31, ~~2006~~2007 and ~~2007,~~2008, 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

~~F-11~~

~~Table of Contents~~

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~~comprising incremental common shares issuable upon the exercise of stock options, warrants, convertible senior notes, restricted stock units and shares under the Performance Share Plan, are included in the calculation of diluted ~~net loss~~earnings (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):

			Years ended December 31,

			2006			2007			2008
Loss from continuing operations			$	(99,880	)	$	(44,112	)	$	(12,658	)
Deemed dividend related to redeemable common stock				(99	)		—			—
Loss from continuing operations attributable to common shares				(99,979	)		(44,112	)		(12,658	)
Loss from discontinued operations				(6,882	)		(3,924	)		—
Net loss attributable to common shares			$	(106,861	)	$	(48,036	)	$	(12,658	)
Weighted average common shares outstanding—basic				20,332			23,704			22,901
Effect of dilutive securities:
		Stock options and restricted units		—			—			—
		Convertible senior notes		—			—			—
		Shares under the Performance Share Plan		—			—			—
	Restricted stock units			—			—			—
Weighted average common shares outstanding—diluted				20,332			23,704			22,901
Net loss per common share—basic and diluted:
		Loss from continuing operations	$	(4.91	)	$	(1.86	)	$	(0.55	)
		Loss from discontinued operations	$	(0.34	)	$	(0.17	)	$	—

Net loss per common share—basic and diluted			$	(5.25	)	$	(2.03	)	$	(0.55	)

Table of Contents

Years ended December 31,

2005

2006

2007

(Restated)

(Restated)

(Restated)

Loss from continuing operations

$
(22,641
)
$
(99,880
)
$
(44,112
)
Deemed dividend related to redeemable common stock

(185
)
(99
)
—

Loss from continuing operations attributable to common shares

(22,826
)
(99,979
)
(44,112
)
Loss from discontinued operations

(2,571
)
(6,882
)
(3,924
)

Net loss attributable to common shares

$
(25,397
)
$
(106,861
)
$
(48,036
)

Weighted average common shares outstanding—basic

19,429

20,332

23,704

Effective of dilutive securities:

Stock options and warrants

—

—

—

Convertible senior notes

—

—

—

Shares under the Performance Share Plan

—

—

—

Weighted average common shares outstanding—diluted

19,429

20,332

23,704

Net loss per common share—basic and diluted:

Loss from continuing operations

$
(1.17
)
$
(4.91
)
$
(1.86
)

Loss from discontinued operations

$
(0.13
)
$
(0.34
)
$
(0.17
)

Net loss per common share—basic and diluted

$
(1.30
)
$
(5.25
)
$
(2.03
)

Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The shares issuable related to stock options, ~~warrants,~~restricted stock units, convertible senior notes outstanding and ~~shares under~~ the Performance Share Plan were not included in the computation of diluted earnings per share because to do so would have been antidilutive. The number of shares ofissuable related to stock options outstanding ~~at each year-end~~ was ~~1.3 million shares,~~ 1.0 million shares, ~~and~~ 1.2 million shares and 974,000 shares for ~~2005,~~ 2006, 2007 and ~~2007,~~2008, respectively. As of December 31, ~~2007,~~2008, the Company had ~~$77.0~~$67.5 million of convertible senior notes outstanding (see ~~“Note 12 -~~ "Note 13—"Borrowings"—"3.75% Convertible Senior ~~Notes”~~Notes"), which could potentially convert into ~~1.0 million~~885,000 shares of common stock in the aggregate. As of December 31, 2007, up to 376,000 shares could potentially be issued in relation to the Performance Share Plan based on growth in economic value as defined in the plan (see “Note 19—Performance Share Plan”).

Recent accounting pronouncements

~~In September 2006, the FASB issued SFAS No. 157,~~ ~~Fair Value Measurements~~ (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The FASB recently decided to postpone the effective date of SFAS 157 for other non-financial assets and liabilities for one year. SFAS 157 is effective for the Company as of January 1, 2008 for financial items and January 1, 2009 for other non-financial items. The Company anticipates that the adoption of SFAS 157 will not have a material impact on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial ~~Liabilities—including an amendment of FASB Statement~~Liabilities ("SFAS No. ~~115~~ ~~(“SFAS 159”~~159"). Under SFAS No. 159, ~~permits entities to choose~~companies may elect to measure ~~many~~certain financial instruments and certain other items at fair value. ~~Unrealized~~The standard requires that unrealized gains and losses on items for which the fair value option has been elected ~~will~~ be ~~recognized~~reported in ~~earnings at each subsequent reporting date.~~earnings. SFAS No. 159 is effective for ~~the Company’s~~ fiscal ~~year~~years beginning after November 15, 2007. The Company adopted SFAS No. 159 on January 1, 2008; however, it did not elect to apply the fair value option to any financial instruments or other items upon adoption of SFAS No. 159 during the year ended December 31, 2008. ~~The Company anticipates that~~Therefore, the adoption of SFAS No. 159 ~~will~~did not ~~have a material~~ impact ~~on its~~the Company's consolidated financial ~~statements.~~position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141 (R),Business Combinations (“ ("SFAS ~~141(R)”~~No. 141 (R)"), and SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements (“ ("SFAS ~~160”~~No. 160"). SFAS ~~141(R)~~No. 141 (R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the ~~acquiree~~acquired entity at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS ~~141(R)~~No. 141 (R) and SFAS No. 160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. The Company ~~has~~does not ~~yet determined~~expect the ~~effect on its consolidated financial statements, if any, upon~~ adoption of SFAS ~~141(R)~~No. 141 (R) or SFAS ~~160.~~No. 160 to impact its financial position and results of operations or cash flows.

In ~~December 2007,~~March 2008, the ~~SEC~~FASB issued ~~Staff Accounting Bulletin (“SAB”)~~SFAS No. ~~110,~~ 161,~~Certain Assumptions Used~~Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 ("SFAS No. 161"). SFAS No. 161 requires enhanced disclosures about a company's derivative and hedging activities, in ~~Valuation Methods—Expected Term~~ ~~(“SAB 110”). According~~particular: 1) how and why derivative instruments are utilized; 2) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and 3) how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. The Company has no derivative instruments. Therefore, the Company does not expect the adoption of SFAS No. 161 to ~~SAB 110, under certain circumstances~~have a material impact its financial position and results of operations or cash flows.

In April 2008, the ~~SEC staff will continue to accept the use~~FASB issued FSP No. 142-3,Determination of the ~~simplified method as discussed in SAB~~Useful Life of Intangible Assets ("FSP No. ~~107,~~ ~~Share Based Payment,~~142-3"). FSP No. 142-3 amends the factors that should be considered in developing ~~an estimate~~renewal or extension assumptions used to determine the useful life of ~~expected term of “plain vanilla” share options in accordance with~~a recognized intangible asset under SFAS ~~123(R), beyond December 31, 2007. The Company will adopt SAB 110~~No. 142. FSP No. 142-3 is effective ~~January 1, 2008 and will continue to use the simplified method in developing the expected term used~~ for ~~our valuation of stock-based compensation.~~financial statements issued for fiscal years beginning after

~~Reclassifications~~

Certain prior period amounts have been reclassified to conform to the current period’s presentation. The effect of these reclassifications had no impact on net income, total assets, total liabilities, or stockholders’ equity.

~~F-12~~

Table of Contents

~~3. RESTATEMENT OF FINANCIAL STATEMENTS~~

Overstock.com, Inc. ~~(the “Company”)~~

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

December 15, 2008. Early adoption is ~~restating~~prohibited. The Company does not expect the adoption of FSP No. 142-3 will have a material impact on its consolidated financial ~~statements as~~statements.

In May 2008, the FASB issued SFAS No. 162,The Hierarchy of ~~December 31, 2007~~Generally Accepted Accounting Principles ("SFAS No. 162"). The current GAAP hierarchy was established by the American Institute of Certified Public Accountants, and ~~2006~~faced criticism because it was directed to auditors rather than entities. The issuance of this statement corrects this and makes some other hierarchy changes. This statement is effective 60 days following the Securities and Exchange Commission's approval of the Public Company Accounting Oversight Board amendments to AU Section 411,The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The adoption of SFAS No. 162 did not result in a change to the Company's consolidated financial statements.

In May 2008, the FASB issued FASB Staff Position ("FSP") APB 14-1,Accounting for ~~the years ended December 31, 2007, 2006 and 2005 to correct errors related to~~Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement) ("FSP APB 14-1"), which clarifies the accounting for ~~customer refunds~~convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement. FSP APB 14-1 specifies that an issuer of such instruments should separately account for the liability and ~~credits and~~equity components of the ~~accounting~~instruments in a manner that reflect the issuer's non-convertible debt borrowing rate when interest costs are recognized in subsequent periods. FSP ABP 14-1 is effective for ~~gift cards issued to customers.~~

~~The Company’s decision to restate the aforementioned~~ financial statements ~~was made as a result of management’s identification of errors related to the accounting~~issued for ~~customer refunds~~fiscal years beginning after December 15, 2008 and credits. On October 20, 2008, management, including the CEO (principal executive officer) and Senior Vice President, Finance (principal financial officer), concluded, and the Board of Directors agreed with management’s conclusions that certain refunds and credits issued to customers were not completely and accurately recorded in the consolidated financial statements.

Management subsequently determined, and the Board of Directors adopted management’s conclusion, that a portion of the error previously believed to be related to the accounting for customer refunds and credits was actually related to the accounting for gift cards issued to customers and that gift cards issued to customers were not completely and accurately recorded in the consolidated financial statements.

These errors impacted accounts receivable and deferred revenue in the consolidated balance sheet as well as revenue and returns expense (a component of revenue), in the consolidated statement of operations. As a result, revenue, net of returns expense, was misstated in the consolidated statement of operations for the years ended December 31, 2007, 2006 and 2005 and accounts receivable and deferred revenue were misstated in the consolidated balance sheet as of December 31, 2007 and 2006.interim periods within those fiscal years. The ~~amounts of these errors were determined to be material to the consolidated financial statements.~~

The effect of these error corrections on the Consolidated Results of Operations for the years ended December 31, 2007 and 2006 is to increase the net loss by $4.4 million (including reducing $1.7 million of direct revenue and $5.1 million of fulfillment partner revenue and reducing $246,000 of direct cost of goods sold and $2.2 million of fulfillment partner cost of goods sold) and $5.8 million (including reducing $3.7 million of direct revenue and $5.7 million of fulfillment partner revenue and increasing $1.0 million of direct cost of goods sold and $2.6 million of fulfillment partner cost of goods sold), respectively and for the year ended December 31, 2005 is to decrease the net loss by $440,000 (including increasing $26,000 of direct revenue and $80,000 of fulfillment partner revenue and decreasing $225,000 of direct cost of goods sold and increasing $109,000 of interest income). The cumulative effect of these errors at December 31, 2004 has been recorded as a $1.1 million adjustment to increase the beginning balance of retained earnings as of January 1, 2005.

~~In addition, from the Company’s inception through the third quarter of 2007, the~~ Company had recorded revenue based on product ship date. In the fourth quarter of 2007, the Company determined that it should not record revenue until product delivery date because risk of loss transfers to the customer upon delivery and acceptance. In the fourth quarter of 2007, the Company performed a detailed analysis of this error and determinedanticipates that the adoption of FSP APB 14-1 will not have a material impact ~~of this error~~ on any prior annual or interim period was not material and the impact of recording the cumulative effect of the error in the fourth quarter of 2007 was immaterial to the full year. Therefore, the Company recorded the cumulative effect of the error in the fourth quarter of 2007. As the Company is now restating its previously issued consolidated financial statements to correct accounting errors related to customer refunds and credits and gift cards issued to customers, it has reversed the cumulative effect of the correction of the error in the fourth quarter of 2007 and restated all prior periods to reflect revenue recognition based on the product’s estimated delivery date in its consolidated financial statements for the years ended December 31, 2007, 2006, and 2005. The Company also recorded other miscellaneous adjustments as part of this restatement that were previously identified but determined to be immaterial.

The effect of this error correction related to product delivery date on the Consolidated Results of Operations for the years ended December 31, 2007 and 2006 is to decrease the net loss by $1.4 million (including recognizing $3.2 million of direct revenue and $9.4 million of fulfillment partner revenue and recognizing a corresponding $3.9 million of direct cost of goods sold and $7.3 million of fulfillment partner cost of goods sold) and $764,000 (including recognizing $2.0 million of direct revenue and deferring $607,000 of fulfillment partner revenue and recognizing $847,000 of direct cost of goods sold and deferring $199,000 of fulfillment partner cost of goods sold), respectively and increase the net loss for the year ended December 31, 2005 by $734,000 (including deferring $1.8 million of direct revenue and $2.7 million of fulfillment partner revenue and deferring $1.5 million of direct cost of goods sold and $2.2 million of fulfillment partner cost of goods sold). The cumulative effect of this error at December 31, 2004 has been recorded as a $1.4 million adjustment to reduce the beginning balance of retained earnings as of January 1, 2005.

~~F-13~~

~~Table of Contents~~statements.

~~The restated consolidated statements of operations and balance sheets have been restated as follows:~~

~~Consolidated Statements of Operations~~

~~(in thousands, except per share data)~~

Year Ended December 31, 2007

As Previously
Reported

Adjustments

As Restated

Revenue

Direct

$
195,622

1,466

$
197,088

Fulfillment partner

564,539

4,275

568,814

Total revenue

760,161

5,741

765,902

Cost of goods sold

Direct

164,368

3,640

168,008

Fulfillment partner

468,222

5,122

473,344

Total cost of goods sold

632,590

8,762

641,352

Gross profit

127,571

(3,021
)
124,550

Operating expenses:

Sales and marketing

55,458

—

55,458

Technology

59,453

—

59,453

General and administrative

41,976

—

41,976

Restructuring

12,283

—

12,283

Total operating expenses

169,170

—

169,170

Operating loss

(41,599
)
(3,021
)
(44,620
)

Interest income

4,788

—

4,788

Interest expense

(4,188
)
—

(4,188
)
Other income, net

(92
)
—

(92
)

Loss from continuing operations

(41,091
)
(3,021
)
(44,112
)
Loss from discontinued operations

(3,924
)
—

(3,924
)
Net loss

(45,015
)
(3,021
)
(48,036
)
Deemed dividend related to redeemable common shares

—

—

—

Net loss attributable to common shares

$
(45,015
)
$
(3,021
)
$
(48,036
)

Net loss per common share — basic and diluted

Loss from continuing operations

$
(1.73
)
$
(0.13
)
$
(1.86
)
Loss from discontinued operations

$
(0.17
)
$
—

$
(0.17
)
Net loss per common share – basic and diluted

$
(1.90
)
$
(0.13
)
$
(2.03
)

Weighted average common shares outstanding — basic and diluted

23,704

23,704

~~F-14~~

~~Table of Contents~~

Year Ended December 31, 2006

As Previously
Reported

Adjustments

As Restated

Revenue

Direct

$
303,202

(1,693
)
$
301,509

Fulfillment partner

484,948

(6,320
)
478,628

Total revenue

788,150

(8,013
)
780,137

Cost of goods sold

Direct

284,943

(169
)
284,774

Fulfillment partner

408,407

(2,848
)
405,559

Total cost of goods sold

693,350

(3,017
)
690,333

Gross profit

94,800

(4,996
)
89,804

Operating expenses:

Sales and marketing

70,897

—

70,897

Technology

65,158

—

65,158

General and administrative

46,837

—

46,837

Restructuring

5,674

—

5,674

Total operating expenses

188,566

—

188,566

Operating loss

(93,766
)
(4,996
)
(98,762
)

Interest income

3,566

—

3,566

Interest expense

(4,765
)
—

(4,765
)
Other income, net

81

—

81

Loss from continuing operations

(94,884
)
(4,996
)
(99,880
)
Loss from discontinued operations

(6,882
)
—

(6,882
)
Net loss

(101,766
)
(4,996
)
(106,762
)
Deemed dividend related to redeemable common shares

(99
)
—

(99
)

Net loss attributable to common shares

$
(101,865
)
$
(4,996
)
$
(106,861
)

Net loss per common share — basic and diluted

Loss from continuing operations

$
(4.67
)
$
(0.25
)
$
(4.92
)
Loss from discontinued operations

$
(0.34
)
$
—

$
(0.34
)
Net loss per common share – basic and diluted

$
(5.01
)
$
(0.25
)
$
(5.26
)

Weighted average common shares outstanding — basic and diluted

20,332

20,332

~~F-15~~

~~Table of Contents~~

Year Ended December 31, 2005

As Previously
Reported

Adjustments

As Restated

Revenue

Direct

$
324,875

(1,739
)
$
323,136

Fulfillment partner

474,441

(2,602
)
471,839

Total revenue

799,316

(4,341
)
794,975

Cost of goods sold

Direct

282,383

(1,736
)
280,647

Fulfillment partner

400,057

(2,202
)
397,855

Total cost of goods sold

682,440

(3,938
)
678,502

Gross profit

116,876

(403
)
116,473

Operating expenses:

Sales and marketing

77,155

—

77,155

Technology

27,901

—

27,901

General and administrative

33,043

—

33,043

Restructuring

—

—

—

Total operating expenses

138,099

—

138,099

Operating loss

(21,223
)
(403
)
(21,626
)

Interest income

(270
)
109

(161
)
Interest expense

(5,582
)
—

(5,582
)
Other income, net

4,728

—

4,728

Loss from continuing operations

(22,347
)
(294
)
(22,641
)
Loss from discontinued operations

(2,571
)
—

(2,571
)
Net loss

(24,918
)
(294
)
(25,212
)
Deemed dividend related to redeemable common shares

(185
)
—

(185
)

Net loss attributable to common shares

$
(25,103
)
$
(294
)
$
(25,397
)

Net loss per common share — basic and diluted

Loss from continuing operations

$
(1.16
)
$
(0.01
)
$
(1.17
)
Loss from discontinued operations

$
(0.13
)
$
—

$
(0.13
)
Net loss per common share – basic and diluted

$
(1.29
)
$
(0.01
)
$
(1.30
)

Weighted average common shares outstanding — basic and diluted

19,429

19,429

~~F-16~~

~~Table of Contents~~

~~Consolidated Balance Sheets~~

~~(in thousands)~~

As of December 31, 2007

As Previously
Reported

Adjustments

As Restated

Assets

Current assets:

Cash and cash equivalents

$
101,394

$
—

$
101,394

Marketable securities

46,000

—

46,000

Cash, cash equivalents and marketable securities

147,394

—

147,394

Accounts receivable, net

12,304

(1,096
)
11,208

Note receivable

1,506

—

1,506

Inventories, net

25,933

(290
)
25,643

Prepaid inventory

3,572

—

3,572

Prepaid expenses

7,572

—

7,572

Total current assets

198,281

(1,386
)
196,895

Property and equipment, net

27,197

—

27,197

Goodwill

2,784

—

2,784

Other long-term assets, net

86

—

86

Notes receivable

4,181

—

4,181

Total assets

232,529

$
(1,386
)
$
231,143

Liabilities, Redeemable Securities and Stockholders’ Equity

Current liabilities:

Accounts payable

$
70,648

$
(290
)
$
70,358

Accrued liabilities

35,241

1,914

37,155

Deferred revenue

17,357

5,608

22,965

Capital lease obligations, current

3,796

—

3,796

Total current liabilities

127,042

7,232

134,274

Other long-term liabilities

3,034

—

3,034

Convertible senior notes

75,623

—

75,623

Total liabilities

205,699

7,232

212,931

Stockholders’ equity:

Preferred stock, $0.0001 par value, 5,000 shares authorized, no shares issued and outstanding as of December 31, 2007

—

—

—

Common stock, $0.0001 par value, 100,000 shares authorized, 25,423 shares issued as of December 31, 2007

2

—

2

Additional paid-in capital

333,909

—

333,909

Accumulated deficit

(243,709
)
(8,618
)
(252,327
)
Treasury stock, 1,605 shares at cost as of December 31, 2004

(63,278
)
—

(63,278
)
Accumulated other comprehensive loss

(94
)
—

(94
)

Total stockholders’ equity

26,830

(8,618
)
18,212

Total liabilities, redeemable securities and stockholders’ equity

$
232,529

$
(1,386
)
$
231,143

~~F-17~~

~~Table of Contents~~

As of December 31, 2006

As Previously
Reported

Adjustments

As Restated

Assets

Current assets:

Cash and cash equivalents

$
126,965

$
—

$
126,965

Marketable securities

—

—

—

Cash, cash equivalents and marketable securities

126,965

—

126,965

Accounts receivable, net

11,638

4,692

16,330

Note receivable

6,702

—

6,702

Inventories, net

20,274

3,596

23,870

Prepaid inventory

2,241

—

2,241

Prepaid expenses

7,473

—

7,473

Current asset of held for sale subsidiary

4,718

—

4,718

Total current assets

180,011

8,288

188,299

Property and equipment, net

56,198

—

56,198

Goodwill

2,784

—

2,784

Other long-term assets, net

578

—

578

Long-term assets of held for sale subsidiary

16,594

—

16,594

Total assets

$
8,288

$
264,453

Liabilities, Redeemable Securities and Stockholders’ Equity

Current liabilities:

Accounts payable

$
66,039

(7,622
)
$
58,412

Accrued liabilities

37,492

942

38,434

Deferred revenue

2,650

20,570

23,220

Capital lease obligations, current

5,074

—

5,074

Current liabilities of held for sale subsidiary

3,684

—

3,684

Total current liabilities

114,939

13,885

128,824

Capital lease obligations, non-current

3,983

—

3,983

Convertible senior notes

75,279

—

75,279

Total liabilities

194,201

13,885

208,086

Stockholders’ equity:

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

—

—

—

Common stock, $0.0001 par value, 100,000 shares authorized, 25,069 shares issued as of December 31, 2005

2

—

2

Additional paid-in capital

325,771

—

325,771

Accumulated deficit

(198,694
)
(5,597
)
(204,291
)
Treasury stock, 1,654 shares at cost as of December 31, 2005

(64,983
)
—

(64,983
)
Accumulated other comprehensive loss

(132
)
—

(132
)

Total stockholders’ equity

61,964

(5,597
)
56,367

Total liabilities, redeemable securities and stockholders’ equity

$
256,165

$
8,288

$
264,453

~~F-18~~

~~Table of Contents~~

~~Overstock.com, Inc.~~

~~Consolidated Statements of Cash Flows~~

~~(in thousands)~~

Year ended December 31, 2005

As Previously
Reported

Adjustments

As Reported

Cash flows from operating activities of continuing operations:

Net loss

$
(24,918
)
$
(294
)
$
(25,212
)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities of continuing operations:

Loss from discontinued operations

2,571

—

2,571

Depreciation and amortization

14,111

—

14,111

Realized loss (gain) on marketable securities

3,351

—

3,351

Loss on disposition of property and equipment

1,457

—

1,457

Stock-based compensation

72

—

72

Stock-based compensation to consultants for services

(389
)
—

(389
)
Stock-based compensation—performance shares

—

—

—

Issuance of common stock from treasury for 401(k) matching contribution

443

—

443

Amortization of debt discount and deferred financing fees

620

—

620

Gain from retirement of convertible senior notes

(6,158
)
—

(6,158
)
Asset impairment and depreciation (restructuring)

—

—

—

Restructuring charges

—

—

—

Notes receivable accretion

—

—

—

Changes in operating assets and liabilities, net of effect of acquisition and discontinued operations:

Accounts receivable, net

(4,306
)
(4,449
)
(8,755
)
Inventories, net

(46,711
)
(1,534
)
(48,245
)
Prepaid inventory

2,689

—

2,689

Prepaid expenses

(5,022
)
—

(5,022
)
Other long-term assets

(2,151
)
—

(2,151
)
Accounts payable

35,210

(2,201
)
33,009

Accrued liabilities

22,131

233

22,364

Deferred revenue

937

8,245

9,182

Other long-term liabilities

—

—

—

Net cash provided by (used in) operating activities of continuing operations

(6,063
)
—

(6,063
)

Cash flows from investing activities of continuing operations:

Change in restricted cash

1,349

—

1,349

Purchases of marketable securities

(185,543
)
—

(185,543
)
Sales of marketable securities

216,265

—

216,265

Expenditures for property and equipment

(44,642
)
—

(44,642
)
Acquisition of Ski West

(25,111
)
—

(25,111
)
Proceeds from the sale of OTravel, net of cash transferred

—

—

—

Collection of note receivable

—

—

—

Proceeds from the sale of property and equipment

—

—

—

Other investments

—

—

—

Decrease in cash resulting from de-consolidation of variable interest entity

—

—

—

Net cash provided by (used in) investing activities of continuing operations

(37,682
)
—

(37,682
)

Cash flows from financing activities of continuing operations:

Payments on capital lease obligations

(7,086
)
—

(7,086
)
Drawdown on line of credit

11,868

—

11,868

Payments on line of credit

(11,868
)
—

(11,868
)
Payments to retire convertible senior notes

(35,670
)
—

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

—

—

—

Purchase of treasury stock

(24,133
)
—

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

(47,507
)
—

(47,507
)
Settlement of call options for cash

7,937

—

7,937

Exercise of stock options and warrants

7,315

—

7,315

Net cash provided by (used in) financing activities of continuing operations

(99,144
)
—

(99,144
)

Effect of exchange rate changes on cash

86

—

86

Cash (used in) provided by operating activities of discontinued operations

(45
)
—

(45
)
Cash (used in) provided by investing activities of discontinued operations

(98
)
—

(98
)

Net increase (decrease) in cash and cash equivalents

(142,946
)
—

(142,946
)
Less change in cash and cash equivalents from discontinued operations

143

—

143

Cash and cash equivalents, beginning of year

198,678

—

198,678

Cash and cash equivalents from continuing operations, end of year

$
55,875

—

$
55,875

~~F-19~~

~~Table of Contents~~

~~Overstock.com, Inc.~~

~~Consolidated Statements of Cash Flows~~

~~(in thousands)~~

Year ended December 31, 2006

As Previously
Reported

Adjustments

As Reported

Cash flows from operating activities of continuing operations:

Net loss

$
(101,766
)
$
(4,996
)
$
(106,762
)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities of continuing operations:

Loss from discontinued operations

6,882

—

6,882

Depreciation and amortization

32,327

—

32,327

Realized loss (gain) on marketable securities

(2,085
)
—

(2,085
)
Loss on disposition of property and equipment

599

—

599

Stock-based compensation

4,120

—

4,120

Stock-based compensation to consultants for services

23

—

23

Stock-based compensation—performance shares

—

—

—

Issuance of common stock from treasury for 401(k) matching contribution

787

—

787

Amortization of debt discount and deferred financing fees

417

—

417

Gain from retirement of convertible senior notes

—

—

—

Asset impairment and depreciation (restructuring)

791

—

791

Restructuring charges

4,883

—

4,883

Notes receivable accretion

—

—

—

Changes in operating assets and liabilities, net of effect of acquisition and discontinued operations:

Accounts receivable, net

(2,052
)
582

(1,470
)
Inventories, net

67,009

870

67,879

Prepaid inventory

7,388

—

7,388

Prepaid expenses

1,004

—

1,004

Other long-term assets

496

—

496

Accounts payable

(35,200
)
(200
)
(35,400
)
Accrued liabilities

(12,633
)
1,060

(11,573
)
Deferred revenue

717

2,684

3,401

Other long-term liabilities

—

—

—

Net cash provided by (used in) operating activities of continuing operations

(26,293
)
—

(26,293
)

Cash flows from investing activities of continuing operations:

Change in restricted cash

253

—

253

Purchases of marketable securities

—

—

—

Sales of marketable securities

56,756

—

56,756

Expenditures for property and equipment

(23,441
)
—

(23,441
)
Acquisition of Ski West

—

—

—

Proceeds from the sale of OTravel, net of cash transferred

—

—

—

Collection of note receivable

—

—

—

Proceeds from the sale of property and equipment

1

—

1

Other investments

(100
)
—

(100
)
Decrease in cash resulting from de-consolidation of variable interest entity

(102
)
—

(102
)

Net cash provided by (used in) investing activities of continuing operations

33,367

—

33,367

Cash flows from financing activities of continuing operations:

Payments on capital lease obligations

(2,957
)
—

(2,957
)
Drawdown on line of credit

86,681

—

86,681

Payments on line of credit

(86,681
)
—

(86,681
)
Payments to retire convertible senior notes

—

—

—

Issuance of common stock in offerings, net of issuance costs

64,406

—

64,406

Purchase of treasury stock

—

—

—

Purchased call options for purchase of treasury stock

—

—

—

Settlement of call options for cash

—

—

—

Exercise of stock options and warrants

2,534

—

2,534

Net cash provided by (used in) financing activities of continuing operations

63,982

—

63,982

Effect of exchange rate changes on cash

34

—

34

Cash (used in) provided by operating activities of discontinued operations

1,582

—

1,582

Cash (used in) provided by investing activities of discontinued operations

(566
)
—

(566
)

Net increase (decrease) in cash and cash equivalents

72,106

—

72,106

Less change in cash and cash equivalents from discontinued operations

(1,016
)
—

(1,016
)
Cash and cash equivalents, beginning of year

55,875

—

55,875

Cash and cash equivalents from continuing operations, end of year

$
126,965

—

$
126,965

~~F-20~~

~~Table of Contents~~

~~Overstock.com, Inc.~~

~~Consolidated Statements of Cash Flows~~

~~(in thousands)~~

Year ended December 31, 2007

As Previously
Reported

Adjustments

As Reported

Cash flows from operating activities of continuing operations:

Net loss

$
(45,015
)
$
(3,021
)
$
(48,036
)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities of continuing operations:

Loss from discontinued operations

3,924

—

3,924

Depreciation and amortization

29,495

—

29,495

Realized loss (gain) on marketable securities

—

—

—

Loss on disposition of property and equipment

1

—

1

Stock-based compensation

4,522

—

4,522

Stock-based compensation to consultants for services

189

—

189

Stock-based compensation—performance shares

(550
)
—

(550
)
Issuance of common stock from treasury for 401(k) matching contribution

494

—

494

Amortization of debt discount and deferred financing fees

344

—

344

Gain from retirement of convertible senior notes

—

—

—

Asset impairment and depreciation (restructuring)

2,169

—

2,169

Restructuring charges

10,114

—

10,114

Notes receivable accretion

(272
)
—

(272
)
Changes in operating assets and liabilities, net of effect of acquisition and discontinued operations:

Accounts receivable, net

(966
)
5,788

4,822

Inventories, net

(5,659
)
3,886

(1,773
)
Prepaid inventory

(1,331
)
—

(1,331
)
Prepaid expenses

(99
)
—

(99
)
Other long-term assets

471

—

471

Accounts payable

4,512

7,337

11,849

Accrued liabilities

(6,880
)
972

(5,908
)
Deferred revenue

14,707

(14,962
)
(255
)
Other long-term liabilities

(193
)
—

(193
)

Net cash provided by (used in) operating activities of continuing operations

9,977

—

9,977

Cash flows from investing activities of continuing operations:

Change in restricted cash

—

—

—

Purchases of marketable securities

(75,217
)
—

(75,217
)
Sales of marketable securities

29,258

—

29,258

Expenditures for property and equipment

(2,643
)
—

(2,643
)
Acquisition of Ski West

—

—

—

Proceeds from the sale of OTravel, net of cash transferred

9,892

—

9,892

Collection of note receivable

5,196

—

5,196

Proceeds from the sale of property and equipment

—

—

—

Other investments

—

—

—

Decrease in cash resulting from de-consolidation of variable interest entity

—

—

—

Net cash provided by (used in) investing activities of continuing operations

(33,514
)
—

(33,514
)

Cash flows from financing activities of continuing operations:

Payments on capital lease obligations

(5,261
)
—

(5,261
)
Drawdown on line of credit

2,423

—

2,423

Payments on line of credit

(2,423
)
—

(2,423
)
Payments to retire convertible senior notes

—

—

—

Issuance of common stock in offerings, net of issuance costs

—

—

—

Purchase of treasury stock

—

—

—

Purchased call options for purchase of treasury stock

—

—

—

Settlement of call options for cash

—

—

Exercise of stock options and warrants

3,230

—

3,230

Net cash provided by (used in) financing activities of continuing operations

(2,031
)
—

(2,031
)

Effect of exchange rate changes on cash

(3
)
—

(3
)
Cash (used in) provided by operating activities of discontinued operations

(204
)
—

(204
)
Cash (used in) provided by investing activities of discontinued operations

(53
)
—

(53
)

Net increase (decrease) in cash and cash equivalents

(25,828
)
—

(25,828
)
Less change in cash and cash equivalents from discontinued operations

257

—

257

Cash and cash equivalents, beginning of year

126,965

—

126,965

Cash and cash equivalents from continuing operations, end of year

$
101,394

—

$
101,394

~~F-21~~

~~Table of Contents~~

4.3. RESTRUCTURING EXPENSE

During the fourth quarter of 2006, the Company began a facilities consolidation and restructuring program designed to reduce the overall expense structure in an effort to improve future operating performance. The facilities consolidation and restructuring program was substantially completed by the end of the second quarter of 2007. ~~The Company incurred no restructuring charges during the third or fourth quarters of 2007.~~

During fiscal year 2006, the Company recorded $5.7 million of restructuring charges, of which $4.6 million related to costs to terminate a co-location data center lease. Other costs included in the restructuring charge related to $638,000 of accelerated depreciation of leasehold improvements in the ~~Company’s~~Company's current office facilities that the Company is ~~attempting to sublease,~~subleasing, and $450,000 of costs to return these office facilities to their original condition as required by the lease agreement.

During fiscal year 2007, the Company recorded $12.3 million of restructuring charges, of which $9.9 million related to the termination of a logistics services agreement, termination and settlement of a lease related to vacated warehouse facilities in Indiana, and abandonment and marketing for sub-lease office and data center space in the ~~Company’s~~Company's current corporate office facilities. The Company also recorded an additional $2.2 million of restructuring charges related to accelerated depreciation of leasehold improvements located in the abandoned office and co-location data center space and $200,000 of other miscellaneous restructuring charges.

Table of Contents

Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

3. RESTRUCTURING EXPENSE (Continued)

Restructuring liabilities along with charges to expense ~~cash payments or accelerated depreciation of leasehold improvements~~ associated with the facilities consolidation and restructuring program were as follows (in thousands):

Balance
12/31/2006

Charges to
Expense

Cash
payment or
accelerated depreciation

Balance
12/31/2007

Lease and contract termination costs

$
5,499

$
9,914

$
(11,378
)
$
4,035

Asset retirement obligation

450

—

(450
)
—

Accelerated depreciation of leasehold improvements

—

2,169

(2,169
)
—

Other restructuring expenses

—

200

(200
)
—

Total

$
5,949

$
12,283

$
(14,197
)
$
4,035

	Balance 12/31/2007		Charges to Expense		Cash payment or accelerated depreciation		Balance 12/31/2008

Lease and contract termination costs	$	4,035	$	—	$	851	$	3,184

Total	$	4,035	$	—	$	851	$	3,184

Under the restructuring program, the Company ~~has~~ recorded $18.0 million in restructuring charges through the end of ~~fiscal year~~the second quarter of 2007, including $5.7 million in fiscal year 2006 and $12.3 million in fiscal year ~~2007, respectively.~~2007. There were no restructuring charges during the year ended December 31, 2008. The costs incurred to date ~~within each restructuring category~~ approximate the costs that the Company had anticipated at the beginning of the program. The Company believes that, except for the additional lease and contract termination costs related to potentially abandoning and subleasing its current office facilities, the restructuring program is substantially complete. ~~However, as part of the program, the Company is still considering a complete relocation of its~~If we determine to move our corporate ~~office facilities, which would result in additional~~headquarters we expect to incurr future restructuring ~~charges, primarily for lease and contract termination costs.~~expenses.

5.4. ACQUISITION AND SUBSEQUENT DISCONTINUED OPERATIONS

On July 1, 2005, the Company acquired all the outstanding capital stock of Ski West, Inc. (“("Ski ~~West”~~West") for an aggregate of $25.1 million (including $111,000 of capitalized acquisition related expenses).

Ski West was an on-line travel company whose proprietary technology provided consumer access to a large, fragmented, hard-to-find inventory of lodging, vacation, cruise and transportation bargains. The travel offerings were primarily in popular ski areas in the U.S. and Canada. Effective upon the closing, Ski West became a wholly-owned subsidiary of the Company, integrated the Ski West travel offerings with the ~~Company’s~~Company's existing travel offerings and changed its name to OTravel.com, Inc ~~(“OTravel”~~("OTravel").

During the fourth quarter of 2006, in conjunction with the facilities consolidation and restructuring program described in Note 3, management decided to sell OTravel. The Company evaluated its plan to sell OTravel in accordance with SFAS No. 144, ~~Accounting for the Impairment of Long-lived Assets~~ ~~(“SFAS 144”),~~ which requires that long-lived assets be classified as held for sale only when certain criteria are met. The Company classified the OTravel assets and liabilities as “held for sale” as it met these criteria as of December 31, 2006, which include: management’s commitment to a plan to sell the assets; availability of the assets for immediate sale in their present condition; an active program to locate buyers and other actions to sell the assets has been initiated; sale of the assets is probable and their transfer is expected to qualify for recognition as a completed sale within one year; assets are being marketed at reasonable prices in relation to their fair value; and unlikelihood that significant changes will be made to the plan to the sell the assets. Results of operations for the subsidiary were included in the fulfillment partner segment prior to being classified as discontinued operations.

sale.

The Company also determined that the OTravel subsidiary met the definition of a ~~“component~~"component of an ~~entity”~~entity" and has been accounted for as a discontinued operation under SFAS No. 144. The results of operations for this subsidiary have been classified as discontinued operations ~~in all periods presented.~~until its sale on April 25, 2007. In conjunction with the discontinuance of OTravel, the Company performed an evaluation of the goodwill associated with the reporting unit pursuant to SFAS No. 142 and SFAS No. 144 and

~~F-22~~

~~Table of Contents~~

determined that goodwill of approximately $4.5 million was impaired as of December 31, 2006, based on a non-binding letter of intent from a third party to purchase this business. During the quarter ended March 31, 2007, the Company received a revised offer from this third party to purchase its OTravel business and, in April 2007, the Company completed the sale of OTravel under these revised terms. Accordingly, the Company evaluated its goodwill as of March 31, 2007 and, based on the estimated fair value of the discounted cash flows of the net proceeds from the sale, determined that an additional $3.8 million of goodwill was impaired.

Table of Contents

Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

4. ACQUISITION AND SUBSEQUENT DISCONTINUED OPERATIONS (Continued)

On April 25, 2007, the Company completed the sale of OTravel.com to Castles Travel, Inc., an affiliate of Kinderhook Industries, LLC, and Castles Media Company LLC, for $17.0 million. The Company received cash proceeds, net of cash transferred, of $9.9 million and two $3.0 million promissory notes. The $3.0 million senior note ~~matures~~matured three years from the closing date and ~~bears~~bore interest, payable quarterly, of 4.0%, 10.0% and 14.0% per year in the first, second and third years, respectively. The $3.0 million junior note ~~matures~~matured five years from the closing date and ~~bears~~bore interest of 8.0% per year, compounded annually, and iswas payable in full at maturity.

On January 21, 2009, the Company entered into a Note Purchase Agreement to sell both the senior and junior promissory notes to to Castles Travel, Inc. for approximately $1.3 million in cash and recognized a loss on the settlement of these notes and interest receivable of approximately $3.9 million as of December 31, 2008.

The following table is a summary of the ~~Company’s~~Company's discontinued operations for the years ended December 31 ~~2005 and~~ 2006, and the period ended April 25, 2007 (in thousands):

		Year ended December 31, 2006			Year-to-date period ended April 25, 2007

Sales		$	8,217		$	2,226
Cost of sales			(1,848	)		(650	)

Gross profit			6,369			1,576
Sales and marketing			(1,888	)		(447	)
Technology			(481	)		(60	)
General and administrative			(6,422	)		(1,152	)
Goodwill impairment			(4,460	)		(3,841	)

	Loss from discontinued operations	$	(6,882	)	$	(3,924	)

Year ended
December 31, 2005

Year ended
December 31, 2006

Year-to-date period
ended April 25, 2007

Sales

$
4,506

$
8,217

$
2,226

Cost of sales

(832
)
(1,848
)
(650
)

Gross profit

3,674

6,369

1,576

Sales and marketing

(2,500
)
(1,888
)
(447
)
Technology

(242
)
(481
)
(60
)
General and administrative

(3,503
)
(6,422
)
(1,152
)
Goodwill impairment

—

(4,460
)
(3,841
)

Loss from discontinued operations

$
(2,571
)
$
(6,882
)
$
(3,924
)

5. MARKETABLE SECURITIES

The ~~held for sale assets and liabilities consisted of the following (in thousands):~~

December 31, 2006

Assets of held for sale subsidiary:

Cash

$
1,365

Accounts receivable, net

3,267

Property and equipment, net

1,215

Goodwill and intangible assets, net

15,379

Other

86

Total assets of discontinued operations

$
21,312

Liabilities of held for sale subsidiary:

Current liabilities:

Accounts payable

$
2,947

Accrued liabilities

737

Total liabilities of discontinued operations

$
3,684

~~6. MARKETABLE SECURITIES~~

~~The Company’s~~Company's marketable securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of ~~shareholders’~~shareholders' equity, net of any tax effect. Realized gains or losses on the sale of marketable securities are determined using the specific-identification method.

The Company evaluates its investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and the ~~Company’s~~Company's ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of market value. The Company records an impairment charge to the extent that the carrying value of our available for sale securities exceeds the estimated fair market value of the securities and the decline in value is determined to be other-than-temporary. The Company ~~did not record any~~recorded $300,000 of impairment charges related to ~~other-than temporary~~other-than-temporary decline in value of its marketable securities for the ~~years ending~~year ended December 31, ~~2007 or 2006.~~

2008. No related impairment charges were recorded for the year ended December 31, 2007.

As of December 31, ~~2007,~~2008, the ~~Company’s~~Company's marketable securities consisted of U.S. agency securities and top tier commercial ~~paper, and AAA-rated asset-backed securities collateralized by automobile loans/leases and credit card receivables.~~paper. All marketable securities are classified as available-for-sale securities.

Table of Contents

Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

5. MARKETABLE SECURITIES (Continued)

The following table summarizes the ~~Company’s~~Company's marketable security investments as of December 31, 2007 (in thousands):

		Cost		Net Unrealized Gains (Losses)		Estimated Fair Market Value

Marketable securities:
U.S. Agency Securities		$	29,793	$	23	$	29,816
Commercial Paper			12,671		6		12,677
Asset-Backed Securities			3,495		12		3,507

	Total available-for-sale investments	$	45,959	$	41	$	46,000

The following table summarizes the Company's marketable security investments as of December 31, 2008 (in thousands):

Cost

Net Unrealized
Gains (Losses)

Estimated Fair
Market Value

Marketable securities:

U.S. Agency Securities

$
29,793

$
23

$
29,816

Commercial Paper

12,671

6

12,677

Asset-Backed Securities

3,495

12

3,507

Total available-for-sale investments

$
45,959

$
41

$
46,000

		Cost		Realized Loss		Net Unrealized Gains		Estimated Fair Market Value

Marketable securities:
U.S. Agency Securities		$	8,941	$	—	$	48	$	8,989
Asset-Backed Securities			300		300		—		—

	Total available-for-sale investments	$	9,241	$	300	$	48	$	8,989

The components of realized gains and losses on sales and impairment of marketable securities for the years ended December 31, ~~2005,~~ 2006, 2007 and ~~2007~~2008 were (in thousands):

~~F-23~~

	Years ended December 31,

	2006			2007		2008
Gross gains	$	2,141		$	—	$	—
Gross losses		(56	)		—		(334	)

Net realized gain (loss) on sales of marketable securities	$	2,085		$	—	$	(334	)

~~Table of Contents~~

Years ended December 31,

2005

2006

2007

Gross gains

$
—

$
2,141

$
—

Gross losses

(3,351
)
(56
)
—

Net realized gain (loss) on sales of marketable securities

$
(3,351
)
$
2,085

$
—

Derivative instruments

During the first quarter of 2005, the Company purchased $49.9 million of Foreign Corporate Securities (“("Foreign ~~Notes”~~Notes") which were scheduled to mature for $50.0 million in cash in November 2006. The Foreign Notes did not have a stated interest rate, but were structured to return the entire principal amount and a conditional coupon if held to maturity. The conditional coupon would provide a rate of return dependent on the performance of a ~~“basket”~~"basket" of eight Asian currencies against the U.S. dollar. If the Company redeemed the Foreign Notes prior to maturity, the Company would not realize the full amount of its initial investment.

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.

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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

5. MARKETABLE SECURITIES (Continued)

Under SFAS No. 133, the Foreign Notes ~~are~~were considered to be derivative financial instruments and were marked to market quarterly. Any unrealized gain or loss related to the changes in value of the conditional coupon was 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 Foreign Notes was 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 was attributable to changes in the fair value of the conditional coupon resulting in a loss of $2.6 million, which was recorded in net income, and changes in fair value of the bond instrument resulting in a gain of $1.1 million, which was recorded as a component of accumulated other comprehensive income (loss) in the Balance Sheet. At December 31, 2005, the Foreign Notes had a fair value of $48.5 million.

In March 2006, the Foreign Notes had a ~~fair~~carrying value of $47.6 million when the Company sold them for $49.5 million resulting in a gain on the bond instrument of $1.9 million, which the Company recognized in the second quarter of 2006 as a component of interest income. The Company had previously recorded $2.4 million of accumulated unrealized losses as a component of interest income over the period the bonds had been held.

The Company had pledged its Foreign Notes as collateral for a $30.0 million revolving line of credit. Subsequent to the sale of the Foreign Notes, the borrowings under the Amended Credit Agreement (see ~~“Note 11—Borrowings”~~"Note 13—Borrowings") are now collateralized by cash balances held at Wells Fargo Bank, National Association.

6. OTHER COMPREHENSIVE LOSS

The Company follows SFAS No. 130,Reporting Comprehensive Income. This Statement establishes requirements for reporting comprehensive income (loss) and its components. The Company's comprehensive loss is as follows (in thousands):

	Years ended December 31,

	2006			2007			2008
Net loss	$	(106,762	)	$	(48,036	)	$	(12,658	)
Net unrealized gain (loss) on marketable securities		(1,128	)		41			48
Foreign currency translation adjustment		34			(3	)		94

Comprehensive loss	$	(107,856	)	$	(47,998	)	$	(12,516	)

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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

7. ~~INVENTORIES~~ACCOUNTS RECEIVABLE

Accounts receivable consist of the following (in thousands):

	December 31,

	2007			2008
Credit card receivable	$	9,189		$	4,057
Accounts receivable, other		4,496			4,522

		13,685			8,579
Less: reserve for doubtful accounts		(2,477	)		(1,594	)

Accounts receivable, net	$	11,208		$	6,985

8. INVENTORIES

Inventories consist of the following (in thousands):

	December 31,

	2007			2008
Product inventory	$	24,293		$	17,074
Inventory outbound in-transit		3,112			2,787

		27,405			19,861
Less: reserve for obsolescence		(1,762	)		(2,138	)

	$	25,643		$	17,723

December 31,

2006
(Restated)

2007
(Restated)

Product inventory

$
26,859

$
24,293

Inventory in transit

3,596

3,112

30,455

27,405

Less: reserve for obsolescence

(6,585
)
(1,762
)

$
23,870

$
25,643

~~8. PROPERTY AND EQUIPMENT~~9. FIXED ASSETS

~~Property and equipment consists~~Fixed assets consist of the following (in thousands):

December 31,

2006

2007

Computer hardware and software

$
95,385

$
95,652

Furniture and equipment

11,534

11,351

Leasehold improvements

2,169

—

109,088

107,003

Less: accumulated depreciation and amortization

(52,890
)
(79,806
)

$
56,198

$
27,197

	December 31,

	2007			2008
Computer hardware and software, including internal-use software and website development	$	95,652		$	109,397
Furniture and equipment		11,351			12,288
Leasehold improvements		—			1,665

		107,003			123,350
Less: accumulated depreciation and amortization		(79,806	)		(100,206	)

	$	27,197		$	23,144

Depreciation and amortization of property and equipment totaled ~~$14.0 million,~~ $32.2 million, $29.5 million, and ~~$29.5~~$22.7 million for the years ended December 31, ~~2005,~~2006, 2007 and 2008, respectively. For the years ended December 31, 2006 and 2007, ~~respectively. The~~the Company incurred additional depreciation and amortization expense related to decreases in useful lives of certain fixed assets and leasehold

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~~Table of Contents~~

improvement in connection with the ~~Company’s~~Company's facilities consolidation. This additional depreciation expense was included in restructuring expense (see ~~“Note 4—~~"Note 3—Restructuring ~~Expense”~~Expense").

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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

9. FIXED ASSETS (Continued)

~~Property and equipment~~Fixed assets included assets under capital leases of $19.8 million at December 31, ~~2006~~2007 and ~~2007,~~2008, and accumulated amortization related to assets under capital leases of ~~$12.4~~$15.4 million and ~~$19.1~~$19.3 million at December 31, ~~2006~~2007 and ~~2007,~~2008, respectively.

9.10. OTHER LONG-TERM ASSETS

Other long-term assets consist of the following (in thousands):

December 31,

2006

2007

Domain names

$
466

$
490

Intangibles

26

20

Less: accumulated amortization

(435
)
(456
)

57

54

Deferred financing fees, net

173

—

Deposits and long-term prepaids

348

32

$
578

$
86

	December 31,

	2007			2008
Domain names	$	490		$	477
Intangibles		20			20
Less: accumulated amortization		(456	)		(474	)

		54			23
Deposits and long-term prepaid expenses		32			515

	$	86		$	538

Amortization of domain names and intangibles totaled ~~$142,000,~~ $110,000, $21,000 and ~~$21,000~~$18,000 for the years ended December 31, ~~2005,~~ 2006, 2007 and ~~2007,~~2008, respectively.

11. DEFERRED REVENUE

Deferred revenue consists of the following (in thousands):

	December 31,

	2007		2008
Payments owed or received prior to product delivery	$	19,003	$	14,381
Unredeemed gift cards		2,952		3,522
Club O membership fees and other		1,010		1,123

	$	22,965	$	19,026

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Overstock.com, Inc.

~~10.~~Notes to Consolidated Financial Statements (Continued)

12. ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):

	December 31,

	2007		2008
Inventory received but not invoiced	$	2,165	$	1,662
Allowance for returns		6,941		5,099
Accrued payroll and other related costs		10,783		3,917
Accrued marketing expenses		6,997		3,948
Credit card processing fee accrual		669		445
Accrued freight		665		881
Accrued professional expenses		1,638		1,205
Accrued taxes		486		526
Accrued lease termination costs		1,001		611
Other accrued expenses		5,810		6,860

	$	37,155	$	25,154

December 31,

2006
(Restated)

2007
(Restated)

Inventory received but not invoiced

$
243

$
2,165

Allowance for returns

4,557

6,941

Accrued payroll and other related costs

7,952

10,783

Accrued marketing expenses

10,835

6,997

Credit card processing fee accrual

818

669

Accrued freight

554

665

Accrued professional expenses

1,410

1,638

Accrued taxes

2,075

486

Lease termination costs

5,949

1,001

Other accrued expenses

4,041

5,810

$
38,434

$
37,155

13. BORROWINGS

~~11. BORROWINGS~~

~~$30.0 million~~Wells Fargo Credit Agreement

The Company has a credit agreement (as amended to date, the ~~“Credit Agreement”~~"Credit Agreement") with Wells Fargo Bank, National Association (“("Wells ~~Fargo”~~Fargo"). The Credit Agreement provides a revolving line of credit to the Company of up to $30.0 million which the Company uses primarily to obtain letters of credit to support inventory purchases. Interest on borrowings is payable monthly and accrued at either (i) 1.0% 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. The Credit Agreement expires on January 1, 2010, and requires the Company to comply with certain covenants, including restrictions on mergers, business combinations or transfer of assets.

At December 31, ~~2007,~~2008, no amounts were outstanding under the Credit Agreement, and letters of credit totaling ~~$2.8~~$2.2 million were issued on behalf of the Company.

~~$40.0 million WFRF~~Wells Fargo Retail Finance Agreement

~~The Company is a party to a~~On January 6, 2009, Overstock.com, Inc. (the "Company") entered into an Amended and Restated Loan and Security Agreement dated January 6, 2009 (the ~~“WFRF Agreement”~~"Agreement") with Wells Fargo Retail Finance, LLC ("WFRF"). The Agreement replaces the Company's Loan and ~~related security agreements~~Security Agreement dated December 12, 2005 with WFRF, which had previously been amended and ~~other agreements described~~had terminated in ~~the WFRF Agreement.~~

accordance with its terms.

The Amended WFRF Agreement ("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 ~~$40.0~~$35.0 million.

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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

13. BORROWINGS (Continued)

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 and receivables. The ~~Company’s~~Company's obligations under the WFRF Agreement and all related agreements are collateralized by all or substantially all of the ~~Company’s~~Company's and its ~~subsidiaries’~~subsidiaries' assets. The ~~Company’s~~Company's obligations under the WFRF Agreement are cross-collateralized with its assets pledged under its $30.0 million credit facility with Wells Fargo Bank, N.A. The WFRF Agreement contains standard default provisions and expires on ~~December 12, 2008.~~January 5, 2011. The conditions to the ~~Company’s~~Company's use of the facility include a 45-day advance notice requirement.

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~~Table of Contents~~

Advances under the WFRF Agreement bear interest at either (a) the rate announced, from time to time, within Wells Fargo Bank, N.A. at its principal office in San Francisco as its ~~“prime rate”~~"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~~lender's approval, including covenants that limit the ~~Company’s~~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. ~~The Company was in compliance with these covenants as of December 31, 2007.~~

At December 31, ~~2007,~~2008, no amounts were outstanding ~~and availability~~ under the ~~WFRF~~ Agreement ~~was $9.0 million.~~or under the Company's prior loan agreement with WFRF.

Wells Fargo Commercial Purchasing Card Agreement

The Company has a commercial purchasing card agreement (the "Purchasing Card") with Wells Fargo Bank, National Association ("Wells Fargo"). The Company uses the Purchasing Card for business purpose purchasing and must pay it in full each month. Outstanding amounts under the Purchasing Card are collateralized by cash balances held at Wells Fargo Bank, N.A, and therefore the facility does not provide additional liquidity to the Company. At December 31, 2008, $436,000 was outstanding and $564,000 was available under the Purchasing Card.

Capital leases

The Company leases certain software and computer equipment under three non-cancelable capital leases that expire at various dates through 2008.

Software and equipment relating to the capital leases totaled $19.8 million at December 31, ~~2006~~2007 and ~~2007,~~2008, with accumulated amortization of ~~$12.4~~$15.4 million and ~~$19.1~~$19.3 million at those respective dates. Depreciation of assets recorded under capital leases was ~~$7.2~~$5.5 million and ~~$6.5~~$3.9 million at December 31, ~~2006~~2007 and ~~2007,~~2008, respectively. As of December 31, 2008, the Company had no remaining capital leases.

~~Future minimum lease payments under capital leases are as follows (in thousands):~~

Twelve months ending December 31,

2008

$
4,086

Less: amount representing interest

(290
)

Present value of capital lease obligations

3,796

Less: current portion

(3,796
)

Capital lease obligations, non-current

$
—

~~12.~~ 3.75% ~~CONVERTIBLE SENIOR NOTES~~Convertible Senior Notes

In November 2004, the Company completed an offering of $120.0 million of 3.75% Convertible Senior Notes (the ~~“Senior Notes”~~"Senior Notes"). Proceeds to the Company were $116.2 million, net of $3.8 million

Table of Contents

Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

13. BORROWINGS (Continued)

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. The Company recorded amortization of discount and debt issuance costs related to this offering totaling $620,000, $417,000 and $344,000 during the years ended December 31, ~~2005,~~ 2006, 2007 and ~~2007,~~2008, respectively. Interest on the Senior Notes is payable semi-annually on June 1 and December 1 of each year. 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 ~~1,010,000~~885,478 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 the ~~Company’s~~Company's corporate existence and properties, and paying taxes and other claims in a timely manner.

~~In June and November 2005,~~Under the repurchase program, the Company retired ~~$33.0~~$9.5 million ~~and $10.0~~of the Senior Notes during the third quarter of 2008 for $6.6 million in cash, resulting in a gain of $2.8 million on early extinguishment of debt, net of $142,000 of associated unamortized discount. As of December 31, 2008, $67.5 million of the Senior Notes remained outstanding.

On February 17, 2009 the Board of Directors of Overstock.com, Inc. approved a debt repurchase program that authorizes the Company to utilize up to $20.0 million to repurchase a portion of its 3.75% Senior Notes. Under this repurchase program, the Company retired $4.9 million of the Senior Notes for ~~$27.9 million and $7.8~~$3.0 million in ~~cash for each respective retirement.~~cash. As a result of the ~~note~~Senior Notes retirements, ~~in June and November,~~ the Company ~~recognized~~expects to recognize a future gain of ~~$6.2~~$1.9 million, net of the associated unamortized discount of ~~$1.2 million during the year ended December 31, 2005. As of December 31, 2007, $77.0 million of the Senior Notes remained outstanding.~~$63,000 for this transaction (see Note 17—"Stock and Debt Repurchase Program").

~~13.~~14. COMMITMENTS AND CONTINGENCIES

Commitments

~~Commitments~~

Corporate office space

~~Through~~In July 2005, the Company leased 43,000 square feet of office space at Old Mill Corporate Center I for its principal executive offices under an operating lease which was originally scheduled to expire in January 2007. Beginning July 2005, this lease was terminated and replaced with a lease for approximately 154,000 rentable square feet in the Old Mill Corporate Center III in Salt Lake City, Utah for a term of ~~ten~~10 years. The total lease obligation over the ~~ten-year~~remaining term of ~~the new~~this lease is ~~$42.4~~$29.4 million, of which approximately ~~$7.6~~$4.0 million is payable in the next twelve months.

The Company entered into a Tenant Improvement Agreement (the “OMIII Agreement”) with Old Mill Corporate Center III, LLC (the “Lessor”) relating to the office building in February 2005. The OMIII Agreement sets forth the terms on which the Company paid the costs of certain improvements to the leased office space. The amount $7.7 million of the ~~costs was approximately $2.0 million. The OMIII Agreement also required the Company~~total lease obligation is offset by estimated sublease payments, of which $1.1 million is anticipated to ~~provide a letter of credit~~be received in the ~~amount~~next twelve months.

Table of ~~$500,000~~Contents

Overstock.com, Inc.

Notes to ~~the Lessor to provide funds for the removal of certain improvements upon the termination of the lease.~~Consolidated Financial Statements (Continued)

14. COMMITMENTS AND CONTINGENCIES (Continued)

In the fourth quarter of 2006, the Company commenced implementation of a facilities consolidation and restructuring program. Under the program, the Company recorded $638,000 of accelerated amortization of leasehold improvements related to its ~~current~~subleased office facilities, ~~that it is attempting to sublease,~~ and $450,000 of costs incurred to return its office facilities to their original condition as required by the lease agreement.

During fiscal year 2007, the Company recorded an additional $6.2 million of restructuring costs related to its marketing for sub-lease office and data center space in its current corporate office facilities. The Company also recorded an additional $2.2 million of restructuring charges related to accelerated depreciation of leasehold improvements located in the abandoned office and co-location data center space and $200,000 of other miscellaneous restructuring charges (see ~~“Note 4—~~Note 3—"Restructuring ~~Expense”~~Expense"). The company did not record any restructuring costs during the year ended December 31, 2008.

~~F-26~~

~~Table of Contents~~

Logistics and warehouse space

In July 2004, the Company entered into a logistics service agreement (the ~~“Logistics Agreement”~~"Logistics Agreement") wherein the handling, storage and distribution of some of its prepackaged products were performed by a third party. The Logistics Agreement and subsequent amendment set forth terms on which the Company paid various fixed fees based on square feet of storage and various variable costs based on product handling costs for a term of five years.

In December 2005, the Company entered into a warehouse facilities service and lease agreement (the ~~“License Agreement”~~"License Agreement") to license approximately 400,000 square feet of warehouse space in ~~Indiana.~~Indiana and purchase fulfillment services. The License Agreement was subsequently amended, reducing the amount of lease space to approximately 300,000 square feet and extending the term to 2011.

In the first quarter of 2007, the Company terminated the Logistics Agreement and gave notice of intent to sublease the Indiana warehouse facilities under the License Agreement. During the second quarter of 2007, the Company reached an agreement to terminate the Indiana warehouse facilities lease effective August 15, 2007. As a result of the termination of the License ~~agreement~~Agreement and warehouse lease, the Company incurred $3.7 million of related restructuring charges in 2007 (see Note ~~4—“~~3—"Restructuring ~~Expense”~~Expense").

The Company currently leases ~~561,000~~795,000 square feet for its warehouse facilities in Utah under operating leases which expire in August ~~2012.~~2012 and August 2015.

On April, 8, 2008, the Company entered into a lease agreement with Natomas Meadows, LLC (the "Natomas Lease"). The Natomas Lease is for a 686,865 square foot warehouse facility located in Salt Lake City, Utah (the "New warehouse"). The Natomas Lease provides that the Company ~~has also temporarily~~will lease the new warehouse in stages: on October 15, 2008, the Company leased ~~an additional 251,000~~the initial 232,900 square feet of ~~warehouse space in Utah under operating leases~~the New Warehouse; on February 1, 2009, the Company leased a total of 435,400 square feet; and, on September 1, 2009, the Company will lease the remainder, for a total of 686,865 square feet. The Natomas Lease term is seven years, and specifies rent, exclusive of common area maintenance fees, at a variable rate over the course of the staged lease term, ranging from $0.3300 per square foot for the ~~seasonal increase~~first stage, to $0.3950 per square foot for the last year of the Natomas Lease term. Including the space now leased in ~~inventory during~~ the ~~fourth quarter~~new warehouse, the Company currently has warehouse operations in two facilities in

Table of ~~2007.~~Contents

Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

14. COMMITMENTS AND CONTINGENCIES (Continued)

Salt Lake City, Utah. The Company constructed a 40,000 square foot customer service facility in the new warehouse and commenced use of the facility on November 3, 2008.

Co-location data center

In July 2005, the Company entered into a Co-location Center Agreement (the ~~“Co-location Agreement”~~"Co-location Agreement") to build out and lease 11,289 square feet of space at Old Mill Corporate Center II for an IT co-location data center. The Co-location Agreement set forth the terms on which the Lessor would incur the costs to build out the IT co-location data center and the Company would commence to lease the space upon its completion for a term of ten years. ~~In November~~However, during the fourth quarter of 2006, ~~however,~~ the Company made the determination to consolidate its facilities and to not occupy the IT co-location data center, and the Co-location Agreement was terminated effective December 29, 2006, for which the Company incurred a $4.6 million restructuring charge (see Note ~~4—“~~3—"Restructuring ~~Expense”~~Expense").

In December 2006, the Company entered into a Data Center Agreement (the ~~“OM~~"OM I ~~Agreement”~~Agreement") to lease 3,999 square feet of space at Old Mill Corporate Center I for an IT data center to allow the Company to consolidate other IT data center ~~facilities at the Old Mill Corporate Center II and at its current corporate offices~~ facilities.

~~Operating~~Computer equipment operating leases

~~In June 2005 and 2006, the~~The Company ~~entered into non-cancelable~~has two operating leases for certain computer equipment ~~expiring~~that expire in ~~April 2008~~the first and ~~June 2008, respectively.~~fourth quarters of 2010. It is expected that such leases will be renewed by exercising purchase options or replaced by leases of other computer equipment.

Summary of future minimum lease payments for all operating leases

Minimum future payments under all operating leases are as follows (in thousands):

Twelve months Ending December 31,

2008

$
7,647

2009

6,238

2010

5,987

2011

5,803

2012

5,526

Thereafter

11,196

$
42,397

Twelve months Ending December 31,

2009	$	8,060
2010		8,652
2011		8,989
2012		8,868
2013		8,325
Thereafter		15,036

	$	57,930

Rental expense for operating leases totaled ~~$4.0 million,~~ $11.5 million, $11.6 million and ~~$11.6~~$9.5 million for the years ended December 31, ~~2005,~~ 2006, 2007 and ~~2007,~~2008, respectively.

Legal Proceedings

From time to time, the Company receives claims of and ~~become~~becomes subject to consumer protection, employment, intellectual property and other commercial litigation related to the conduct of the ~~Company’s~~Company's business. Such litigation could be costly and time consuming and could divert its management and key personnel from its business operations. The uncertainty of litigation increases these risks. In connection with such litigation, the Company may be subject to significant damages or

Table of Contents

Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

14. COMMITMENTS AND CONTINGENCIES (Continued)

equitable remedies relating to the operation of its business and the sale of products on the ~~Company’s~~Company's website. Any such litigation may materially harm its business, prospects, results of operations, financial condition or cash flows. However, the Company does not currently believe that any of its outstanding litigation will have a material adverse effect on its financial statements.

On August 11, 2005, along with a shareholder plaintiff, the Company filed a complaint against Gradient Analytics, Inc.; Rocker Partners, LP; Rocker Management, LLC; Rocker Offshore Management Company, Inc. and their respective principals in the Superior Court of California, County of Marin. On October 12, 2005, the Company filed an amended complaint against the same entities alleging libel, intentional interference with prospective economic advantage and violations of ~~California’s~~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 each filed a motion to appeal the ~~court’s~~court's decision, the Company responded and the California Attorney General submitted an amicus brief supporting the ~~Company’s~~Company's view; the court has ruled that this appeal stays discovery in the case. On May 30, 2007 the California Court of Appeals upheld the lower ~~court’s~~court's ruling in the ~~Company’s~~Company's favor. Defendants filed motions for rehearing, which the Court of Appeals summarily denied on June 27, 2007. Defendants filed Petitions for Review before the California Supreme Court which the California Supreme court denied on September 19, 2007. On October 1, 2007, the Court of Appeals remitted the case back to the Superior Court. On December 4, 2007, Matthew Kliber, a former principal of Gradient Analytics, filed a motion for judgment on the pleading which the court denied on February 8, 2008. ~~Discovery in this case~~On October 10, 2008, the Company and Patrick Byrne reached a confidential settlement agreement with Gradient Analytics and its current and former principals and those defendants have been dismissed from the case. On October 22, 2008, the Company amended the complaint to name as additional Defendants Cathy Longinotti, Mark Montgomery, Phillip Renna and Terrence Warzecha because of their former or existing status as general partners of Copper River Partners, L.P. On December 15, 2008 all the newly named Defendants filed an Anti-SLAPP motion to strike the amended complaint; a demurrer to the second, fourth and fifth causes of action; and a motion to quash the summons for Defendants Longinotti, Renna and Warzecha for lack of jurisdiction. These motions are now pending . The Rocker parties moved to postpone the trial date and the court granted the motion. Trial is ~~currently stayed.~~now set for February 11, 2010. The Company intends to continue to pursue this action ~~vigorously. The court has set a trial date~~vigorously against all of ~~September 9, 2008.~~

the Rocker entities and their principals.

On November 9, 2007, Copper River Partners, L.P. (formerly known as Rocker Partners, LP) filed a cross-complaint against the Company and certain of its current and former directors. The Copper River cross-complaint alleges cross-defendants have engaged in violations of ~~California’s~~California's state securities laws, violations of ~~California’s~~California's unfair business practices act, tortuous interference with contract and prospective business advantage, and deceit. In January 2008, each of the cross-defendants filed various motions in opposition of this cross-complaint. On ~~January 30,~~April 23, 2008, ~~Gradient Analytics, Inc. filed~~the court dismissed Copper River's cross claims against former Company directors, John Byrne and Jason Lindsey, and current Company director Allison Abraham. In that same ruling, the court dismissed four of the six claims against former Company director John Fisher: securities fraud, unfair business practices, common law fraud and equitable indemnity. In a ~~motion for leave~~separate ruling on the same day relating to ~~file a cross-complaint against~~ the Company and Patrick ~~Byrne. The~~Byrne, the court ~~has not ruled on this motion. The proposed Gradient Analytics cross-complaint alleges~~dismissed the common law fraud claims and equitable indemnity claims and eliminated the possibility of money damages under Copper River's claims that ~~the Company~~Overstock and ~~Dr.~~ Byrne engaged in ~~violations~~unfair business practices. In other portions of ~~California’s~~the court's rulings, the court declined to dismiss Copper River's securities fraud claims and its request for an injunction for unfair business practices ~~act, interference with prospective business advantage, and libel. These cases are in~~against the ~~initial stages. The Company intends to defend these cross-complaints vigorously.~~

~~F-27~~

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Overstock.com, Inc.

~~On May 9, 2006~~Notes to Consolidated Financial Statements (Continued)

14. COMMITMENTS AND CONTINGENCIES (Continued)

Company and Patrick Byrne and the claims for tortuous interference with contract and prospective business advantage against the Company, ~~received a notice of an investigation and subpoena from the Securities and Exchange Commission, Salt Lake City District Office. On May 17, 2006,~~ Patrick Byrne ~~also received a subpoena from~~and John Fisher. On June 20, Copper River dismissed its complaints against Mr. Fisher. The parties are in the ~~Securities and Exchange Commission, Salt Lake City District Office. These subpoenas requested a broad range~~discovery phase of ~~documents, including, among other documents, all documents relating to~~ the Company’s accounting policies, the Company’s targets, projections or estimates related to financial performance, the Company’s recent restatement of its financial statements, the filing of its complaint against Gradient Analytics, Inc., the development and implementation of certain new technology systems and disclosures of progress and problems with those systems, communications with and regarding investment analysts, communications regarding shareholders who did not receive the Company’s proxy statement in April 2006, communications with certain shareholders, and communications regarding short selling, naked short selling, purchases and sales of Company stock, obtaining paper certificates, and stock loan or borrow of Company shares.case. The Company ~~and Dr. Byrne have responded~~intends to ~~these subpoenas and each continues to cooperate with~~defend the ~~Securities and Exchange Commission on this matter.~~

Copper River cross-complaint vigorously.

On February 2, 2007, along with five shareholder plaintiffs, the Company filed a lawsuit in the Superior Court of California, County of San Francisco against Morgan Stanley & Co. Incorporated, Goldman Sachs & Co., Bear Stearns Companies, Inc., Bank of America Securities LLC, Bank of New York, Citigroup Inc., Credit Suisse (USA) Inc., Deutsche Bank Securities, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., and UBS Financial Services, Inc. In September 2007, the Company filed an amended complaint adding two plaintiff shareholders, naming Lehman Brothers Holdings Inc. as a defendant, eliminating the previous claim of intentional interference with prospective economic advantage and clarifying various points of other claims in the original complaint. The suit alleges that the defendants, who control over 80% of the prime brokerage market, participated in an illegal stock market manipulation scheme and that the defendants had no intention of covering short sell orders with borrowed stock, as they are required to do, causing what are referred to as ~~“fails~~"fails to ~~deliver”~~deliver" and that the ~~defendants’~~defendants' actions caused and continue to cause dramatic distortions ~~with in~~within the nature and amount of trading in the ~~Company’s~~Company's stock as well as dramatic declines in the share price of the ~~Company’s~~Company's stock. The suit asserts that a persistent large number of ~~“fails~~"fails to ~~deliver”~~deliver" creates significant downward pressure on the price of a ~~company’s~~company's stock and that the amount of ~~“fails~~"fails to ~~deliver”~~deliver" has exceeded the ~~company’s~~Company's entire supply of outstanding shares. The suit accuses the defendants of violations of California securities laws and common law, specifically, conversion, trespass to chattels, intentional interference with prospective economic advantage, and violations of ~~California’s~~California's Unfair Business Practices Act. The Company is seeking damages of $3.48 billion. In April 2007 defendants filed a demurrer and motion to strike the ~~Company’s~~Company's complaint. The Company opposed the demurrer and motion to strike. In July 2007 the court substantially denied ~~defendants’~~defendants' demurrer and motion to strike. In November 2007, the defendants filed additional motions to strike. In February ~~2007,~~2008, the court denied ~~defendants’~~defendants' motion to strike the ~~Company’s~~Company's claims under ~~California’s~~California's Securities Anti-Fraud statute and ~~defendants’~~defendants' motion to strike the ~~Company’s~~Company's common law punitive damages claims, but granted in part the ~~defendants’~~defendants' motion to strike ~~Overstock’s~~Overstock's claims under ~~California’s~~California's Unfair Business Practices Act, while allowing the ~~Company’s~~Company's claims for injunctive relief under ~~California’s~~California's Unfair Business Practices Act. Lehman Brothers Holdings filed for bankruptcy on September 15, 2008 and Barclays Bank has purchased its investment banking and trading business. The ~~parties have begun discovery~~bankruptcy may adversely affect our ability to collect a judgment against Lehman. Dislocations in the financial markets and economy could result in additional bankruptcies or consolidations that may impact the litigation or our ability to collect a judgment. On January 12, 2009, Goldman Sachs Group, Inc,., Goldman Sachs &Co.; Goldman Sachs Execution & Clearing L.P., Citi Group, Inc, Citi Group Global markets, Inc., Credit Suisse (USA) Inc., and Credit Suisse Securities (USA) LLC filed a motion to strike portions of the Second Amended Complaint regarding allegations of collective action among defendants and the request for punitive damages. Also, on January 12, 2009, Goldman Sachs Group, Inc,., Goldman Sachs &Co.; Goldman Sachs Execution & Clearing L.P., Citi Group, Inc, Citi Group Global markets, Inc., Credit Suisse (USA) Inc., and Credit Suisse Securities (USA) LLC filed a demurrer to the first and second causes of action of the Second Amended Complaint for conversion and trespass to chattels. These motions are now pending. Discovery in this ~~case.~~case continues. No trial date has been set. The Company intends to vigorously prosecute this action.

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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

14. COMMITMENTS AND CONTINGENCIES (Continued)

On ~~March 29, 2007,~~April 15, 2008, the Company received a letter from the Office of the District Attorney of Marin County, California, stating that the District Attorneys of Marin and four other counties in Northern California have begun an investigation into the way the Company advertises products for sale, together with an administrative subpoena seeking related information and documents. The subpoena requests a range of documents, including documents relating to pricing methodologies, definitions of core and partner product, as well as other site-defined terms, and the methods of internal and external pricing of products, as well as documents related to the pricing of a list of product items identified in the subpoena. The Company has responded to the subpoena. The Company believes that it follows industry advertising practices and intends to cooperate with the investigation.

On May 30, 2008 the Company filed a complaint in New York state court against the New York State Department of Taxation and Finance, its Commissioner, the State of New York and its governor, alleging that a recently enacted New York state tax law is unconstitutional. The effect of the New York law is to require internet sellers to collect and remit New York sales taxes on their New York sales, even if the seller has no New York tax "nexus" other than with New York based independent contractors who are internet advertising affiliates. The complaint asks for the court to declare the law unconstitutional and enjoin its application to the Company. New York filed a motion to dismiss. The Company responded to the motion and filed a motion for summary judgment, and both motions were heard simultaneously. On January 12, 2009, the court granted New York's motion to dismiss and denied the Company's motion for summary judgment. On February 12, 2009, the Company filed notice to appeal the ruling.

On August 12, 2008, the Company along with seven other defendants, was sued in the United States District Court for the ~~Eastern~~Northern District of ~~Texas, Tyler Division,~~California, by ~~Orion IP, LLC.~~Sean Lane, and seventeen other individuals, on their own behalf and for others similarly in a class action suit, alleging violations of the Electronic Communications Privacy Act, Computer Fraud and Abuse Act, Video Privacy Protection Act, and California's Consumer legal Remedies Act and Computer Crime Law. The compliant relates to the Company's use of a product known as Facebook Beacon, created and provided to the Company by Facebook, Inc. Facebook Beacon provided the means for Facebook users to share purchasing data among their Facebook friends. Plaintiffs and Defendants, including the Company, have stipulated to an extension in the time for answering the complaint, while the parties engage in a mediation of the dispute. The Company has not responded to the Complaint. The Company has notified Facebook, Inc. of its indemnification obligations under the contract by which the Company obtained and deployed Facebook Beacon. The Company intends to vigorously defend this action and pursue with Facebook its indemnification rights under the Facebook Beacon agreement.

On November 14, 2008, the Company filed suit in Ohio state court against the Ohio Tax Commissioner, the Ohio Attorney General and the Governor of Ohio, alleging the Ohio Commercial Activity Tax is unconstitutional. Enacted in 2005, Ohio's Commercial Activity Tax is based on activities in Ohio that contribute to production or gross income for a company whether or not the company has a physical presence in or nexus within the state. The Company asks in its complaint for a judgment declaring the tax unconstitutional and for an injunction preventing any enforcement of the tax. The defendants have not answered the complaint, but have moved to dismiss the case. These motions to dismiss are now pending. The suit ~~alleges that~~is in its early stages.

On December 22, 2008, the Company, ~~and the~~along with other thirty-seven other defendants ~~infringe two~~was sued in a patent infringement law suit filed by Guardian Media Technologies, LTD in the United States District

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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

14. COMMITMENTS AND CONTINGENCIES (Continued)

Court, Central District of California. The Company is alleged to have sold products infringing patents owned by ~~Orion that relate~~the plaintiff involving certain processes designed to block content from being viewed on televisions and DVD players. The Company has not yet answered the ~~making~~complaint and ~~using supply chain methods, sales methods, sales systems, marketing methods, marketing systems, and inventory systems. On April 30, 2007,~~ the ~~Company filed an answer denying Orion’s allegations and a counterclaim asserting that Orion’s patent is invalid. The case~~suit is in its ~~discovery stages. The court has set a trial date of May 2009. As it has consistently done with similar suits filed by patent trolls,~~early stages and the Company intends to vigorously defend this action.

On ~~October 5, 2007~~January 22, 2009, the Company, along with seven other defendants was ~~served as defendant~~sued in a ~~case alleging violations~~patent infringement law suit by SBJ IP Holdings 1, LLC, in the United States District Court, Eastern District of Texas. The Company is alleged to have infringed a patent owned by the plaintiff involving certain processes by which online retail companies make product purchase recommendations to their customers. The Company has not yet answered the complaint and the suit is in its early stages and the Company intends to vigorously defend this action.

15. STOCKHOLDERS' EQUITY

Reincorporation

In May 2002, the Company reincorporated in Delaware. As a result of the ~~Fair and Accurate Credit Transactions Act (the “Act”). The plaintiff alleged that, because~~reincorporation, the Company ~~followed an industry practice~~is authorized to issue 100.0 million shares of ~~displaying~~$0.0001 par value common stock and 5.0 million 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 ~~customer on a confirmation page the expiration date~~Board of ~~the customer’s credit card while the customer was online and logged into the customer’s own account, the Company has violated certain provisions~~Directors, subject to prior rights of ~~the Act which prohibit a merchant from printing the credit card expiration date on a receipt. Filed in the U.S. District Court, Southern District~~holders of ~~Illinois, the case was styled~~all classes of stock outstanding having priority rights as ~~a class action lawsuit on behalf of the nominative plaintiff and all others similarly situated. On November 13, 2007, the Company moved~~ to ~~dismiss~~dividends. No dividends have been declared or ~~stay the case or transfer venue. On December 27, 2007, the court dismissed the complaint without prejudice~~paid on the ~~basis that the complaint should have been brought under the arbitration agreement between the plaintiff and the Company. Plaintiff has not appealed the dismissal, and the time for appeal has expired.~~Company's common stock through December 31, 2008.

~~14. REDEEMABLE COMMON STOCK~~Redeemable Common Stock

Redeemable common stock relates to warrants and securities that were subject to rescission. Sales of 858,000 shares of the common stock and the issuance of 185,000 warrants to certain individuals may not have fully complied 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 securities 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 the ~~Company’s~~Company's common stock in some states may have had 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 expired, at the annual rate mandated by the state in which such shares were purchased. These interest rates ranged from 8% to 10% per annum. The rescission rights lapsed on various dates through September 2006.

At December 31, 2005, there were 446,000 shares of common stock and no warrants subject to rescission rights outstanding. The Company had classified $3.2 million at December 31, 2005 related to the rescission rights outside of ~~shareholders’~~shareholders' equity, because the redemption features were deemed not within the control of the Company. Interest attributable to these securities was recorded as a deemed

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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

15. STOCKHOLDERS' EQUITY (Continued)

dividend and reflected as a deduction from net loss to arrive at net loss attributable to common shares in the Statements of Operations.

No amount has been classified outside of ~~shareholders’~~shareholders' equity as of December 31, 2006 and 2007 as these rescission rights, if any, fully expired prior to the end of 2006, leaving no outstanding redeemable common stock as of December 31, ~~2006~~2007 and ~~2007.~~2008.

~~15. STOCKHOLDERS’ EQUITY~~

~~Reincorporation~~

In May 2002, the Company reincorporated in Delaware. As a result of the reincorporation, the Company is authorized to issue 100.0 million shares of $0.0001 par value common stock and 5.0 million 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 common stock through December 31, 2007.

~~Warrants~~

In 2000, the Company issued warrants to certain shareholders in connection with the purchase of additional shares of common stock. At December 31, 2006 and 2007, there were no warrants outstanding to purchase common stock of the Company. During 2005, 2006 and 2007, the number of warrants exercised was 870,000 in 2005 and zero in 2006 and 2007.

~~F-28~~

~~Table of Contents~~

16. STOCK OFFERINGS

During 2006, the Company closed two offerings under an existing ~~“shelf”~~"shelf" registration statement, pursuant to which it sold 1.0 million shares of common stock in May and 2.7 million shares of common stock in December, with proceeds to the Company of approximately $25.0 million and $39.4 million, respectively, net of $594,000 of issuance costs.

There were no stock offerings during the ~~year~~years ended December 31, ~~2007.~~2007 and 2008.

17. STOCK AND DEBT REPURCHASE PROGRAM

During January 2005, the Company’s Board of Directors authorized a stock 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 stock repurchase program to $100.0 million. Additionally, on June 14, 2005, the Board of Directors authorized an amendment of its three-year stock 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 settlement of $41.1 million of structured stock repurchase transactions during the twelve months ended December 31, 2005. The purchased call options that did not settle in stock settled in cash totaling $7.9 million, which the Company received in July 2005.

On January 14, 2008, the ~~Company’s~~Company's Board of Directors authorized ~~an additional~~a repurchase program that ~~allows~~allowed the Company to purchase up to $20.0 million of its common stock and / or its 3.75% Senior Convertible ~~Senior~~ Notes due 2011 ("Senior Notes") through December 31, 2009. Under this repurchase program, the Company ~~has~~ repurchased approximately ~~1.1~~1.2 million shares of its common stock in open market purchases for ~~$12.0~~$13.4 million ~~through March 14,~~as of December 31, 2008.

In addition, during the year ended 2008, the Company retired $9.5 million of the Senior Notes for $6.6 million in cash. As a result of the Senior Notes retirements, the Company recognized a gain of $2.8 million, net of the associated unamortized discount of $142,000. As of December 31, 2008, $67.5 million of Senior Notes remain outstanding. The Company had fully utilized this authorized $20.0 million repurchase program as of December 31, 2008.

18. STOCK BASED AWARDS

~~Periods prior to the adoption of SFAS 123(R)~~

~~Prior to January 1, 2006, the Company accounted for stock-based awards under the intrinsic value method, which followed the recognition and measurement principles of APB Opinion No. 25,~~ ~~Accounting for Stock Issued to Employee~~, and related interpretations. The intrinsic value method of accounting resulted in compensation expense for stock options to the extent option exercise prices were set below market prices on the date of grant. Also, to the extent stock awards were forfeited prior to vesting, any previously recognized expense was reversed as an offset to operating expenses in the period of forfeiture.

The following table (in thousands, except for per share data) illustrates the effects on net loss and net loss per share as if the Company had applied the fair value recognition provisions of SFAS 123, ~~Accounting for Stock Based Compensation~~~~, as amended by SFAS No. 148,~~ ~~Accounting for Stock-Based Compensation—Transition and Disclosure~~ to options granted under the Company’s stock-based compensation plans prior to the adoption. For purposes of this pro forma disclosure, the value of the options was estimated using the Black-Scholes-Merton (“BSM”) option-pricing formula and amortized on a straight-line basis over the respective vesting periods of the awards. Disclosures for the years ended December 31, 2006 and 2007 are not presented because stock-based payments were accounted for under SFAS 123 (R)’s fair value method during these periods.

Year ended
December 31, 2005
(Restated)

Net loss, as reported

$
(25,212
)
Add: Stock-based employee compensation, as reported

72

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards

(3,996
)

Pro forma net loss—SFAS 123 fair value adjusted

$
(29,136
)

Net loss per common share

Basic and diluted—as reported

$
(1.30
)
Basic and diluted—pro forma

$
(1.50
)

Adoption of SFAS 123(R)

As of January 1, 2006, the Company adopted SFAS No. 123(R) using the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options is determined using the ~~BSM~~Black-Scholes-Merton ("BSM") valuation model, which is consistent with our valuation techniques previously utilized for options in footnote disclosures required under SFAS No. 123. Such value is recognized as expense over the service period, net of estimated forfeitures, using the straight-line method under SFAS 123(R).

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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

18. STOCK BASED AWARDS (Continued)

The adoption of SFAS No. 123(R) did not result in a cumulative benefit from accounting change, which reflects the net cumulative impact of estimating future forfeitures in the determination of period expense, rather than recording forfeitures when they occur as previously permitted, as we did not have unvested employee stock awards for which compensation expense was recognized prior to adoption of SFAS No. 123(R).

Prior to the adoption of SFAS No. 123(R), cash retained as a result of tax deductions relating to stock-based compensation was presented in operating cash flows, along with other tax cash flows, in accordance with the provisions of the Emerging Issues Task Force ~~(“EITF”~~("EITF") Issue No. 00-15,Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option. SFAS No. 123(R) supersedes EITF 00-15, amends SFAS No. 95,Statement of Cash Flows, and requires tax benefits relating to excess stock-based compensation deductions to be prospectively presented in the statement of cash flows

~~F-29~~

~~Table of Contents~~

as financing cash inflows. As of the adoption of SFAS No. 123(R), we had fully reserved against any tax benefits resulting from stock-based compensation deductions in excess of amounts reported for financial reporting purposes.

On March 29, 2005, the SEC published SAB No. 107, which provides the ~~Staff’s~~Staff's views on a variety of matters relating to stock-based payments. SAB No. 107 requires stock-based compensation be classified in the same expense line items as cash compensation. The Company has reclassified stock-based compensation from prior periods to correspond to current period presentation within the same operating expense line items as cash compensation paid to employees.

The application of SFAS No. 123(R) had the following effect on the year ended December 31, 2006 reported amounts relative to amounts that would have been reported using the intrinsic value method under previous accounting (in thousands, except per share amounts):

	Year ended December 31, 2006

Operating loss	$	(4,120	)
Net loss	$	(4,120	)
Net loss per common share—basic and diluted	$	(0.20	)

Year ended
December 31, 2006
(Restated)

Operating loss

$
(4,120
)
Net loss

$
(4,120
)
Net loss per common share—basic and diluted

$
(0.20
)

Valuation Assumptions ~~for Stock Options~~

During the twelve months ended December 31, 2006, 2007 and ~~2007,~~2008, total stock options granted to employees were ~~182,500~~183,000, 762,000 and ~~762,000~~11,000 respectively, with estimated total grant-date fair values of $2.4 million, ~~and~~ $8.1 million and $106,000, respectively. The Company estimates that the stock-based compensation for the awards not expected to vest during the years ended December 31, 2006, 2007 and ~~2007~~2008 was $643,000, ~~and~~ $2.4 million and $32,000, respectively. During the years ended December 31, 2006, 2007 and ~~2007,~~2008, the Company recorded stock-based compensation related to stock options of $4.1 million, ~~and~~ $4.5 million and $3.3 million, respectively.

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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

18. STOCK BASED AWARDS (Continued)

The fair value for each stock option granted during the twelve months ended December 31, ~~2005,~~ 2006, 2007 and ~~2007~~2008 was estimated at the date of grant using the BSM option-pricing model, assuming no dividends and the following assumptions.

	Years ended December 31,

	2006			2007			2008
Average risk-free interest rate		4.77	%		4.75	%		2.91	%
Average expected life (in years)		3.5			6.3			6.3
Volatility		65.1	%		68.5	%		70.6	%

Years ended December 31,

2005

2006

2007

Average risk-free interest rate

4.44
%
4.77
%
4.75
%
Average expected life (in years)

3.7

3.5

6.3

Volatility

73.3
%
65.1
%
68.5
%

Expected Volatility: The fair value of stock based payments were valued using a volatility factor based on the ~~Company’s~~Company's historical stock prices.

Expected Term: For ~~2005 and~~ 2006 option grants, the ~~Company’s~~Company's expected term represents the period that the ~~Company’s~~Company's stock-based awards are expected to be outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms and vesting provisions of the stock-based awards. For 2007 and 2008 option grants, the Company elected to use the ~~“simplified method”~~"simplified method" as discussed in SAB No. 107 to develop the estimate of the expected term. In December 2007, the SEC issued SAB No. 110,Certain Assumptions Used in Valuation Methods—Expected Term ("SAB No. 110"). According to SAB No. 110, under certain circumstances the SEC staff will continue to accept the use of the simplified method as discussed in SAB No. 107, in developing an estimate of expected term of "plain vanilla" share options in accordance with SFAS No. 123(R), beyond December 31, 2007. The Company adopted SAB No. 110 effective January 1, 2008 and will continue to use the simplified method in developing the expected term used for its valuation of stock-based compensation.

Expected Dividend: The Company has not paid any dividends and does not anticipate paying dividends in the foreseeable future.

Risk-Free Interest Rate: The Company bases the risk-free interest rate used on the implied yield currently available on U.S. Treasury zero-coupon issues with remaining term equivalent to the expected term of the options.

Estimated Pre-vesting Forfeitures: When estimating forfeitures, the Company considers voluntary and involuntary termination behavior.

Stock Option Activity

The ~~Company’s~~Company's board of directors adopted the Amended and Restated 1999 Stock Option Plan, the 2002 Stock Option Plan and the 2005 Equity Incentive Plan (collectively, the ~~“Plans”~~"Plans"), in May 1999, April 2002, and April 2005 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 or ten 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, and as of April 2005 the 2002 Stock Option Plan

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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

18. STOCK BASED AWARDS (Continued)

was terminated (except with regard to outstanding options). Future shares will be granted under the 2005 Equity Incentive Plan. As of December 31, ~~2007, 608,000~~2008, 1.2 million shares of stock based awards are available for future grants under the 2005 Equity Incentive Plan. The Company settles stock option exercises with newly issued common shares. The following is a summary of stock option activity (in thousands, except per share data):

2005

2006

2007

Shares

Weighted Average
Exercise Price

Shares

Weighted Average
Exercise Price

Shares

Weighted Average
Exercise Price

Outstanding—beginning of year

1,512

$
12.90

1,299

$
18.09

1,011

$
18.97

Granted at fair value

220

44.44

183

22.47

762

18.14

Exercised

(298
)
8.56

(276
)
9.19

(354
)
8.81

Canceled/forfeited

(135
)
24.08

(195
)
30.17

(258
)
23.65

Outstanding—end of year

1,299

18.09

1,011

18.97

1,161

20.48

Options exercisable at year-end

739

11.33

679

$
15.74

408

$
22.36

	2006					2007					2008

	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding—beginning of year		1,299		$	18.09		1,011		$	18.97		1,161		$	20.48
Granted at fair value		183			22.47		762			18.14		11			14.14
Exercised		(276	)		9.19		(354	)		8.81		(112	)		12.96
Canceled/forfeited		(195	)		30.17		(258	)		23.65		(86	)		20.45

Outstanding—end of year		1,011			18.97		1,161			20.48		974			21.27

Options exercisable at year-end		679		$	15.74		408		$	22.36		609		$	23.18

The following table summarizes information about stock options as of December 31, ~~2007~~2008 (in thousands, except per share data):

~~F-30~~

	Options Outstanding								Options Exercisable

Range of Exercise Prices	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contract Life		Aggregate Intrinsic Value		Shares		Weighted Average Exercise Price		Weighted Average Remaining Contract Life		Aggregate Intrinsic Value
$ 8.50 - $16.99		17	$	13.28		7.04	$	51		4	$	14.92		4.73	$	45
$17.00 - $17.99		577		17.11		8.05		—		276		17.11		8.04		—
$18.00 - $29.99		221		19.97		1.68		—		181		19.63		0.97		—
$30.00 - $58.30		159		39.04		2.87		—		147		39.18		2.72		—

.		974		21.27		5.74		51		609		23.18		4.63		45

~~Table of Contents~~

Options Outstanding

Options Exercisable

Range of Exercise Prices

Shares

Weighted
Average Exercise
Price

Weighted
Average
Remaining
Contract Life

Aggregate Intrinsic
Value

Shares

Weighted
Average Exercise
Price

Weighted
Average
Remaining
Contract Life

Aggregate Intrinsic
Value

$8.50-$16.99

145

$
12.74

0.94

$
1,185

135

$
12.53

0.49

$
1,137

$17.00-$17.99

604

17.11

9.01

2,317

2

17.44

3.57

7

$18.00-$29.99

234

19.96

2.59

346

165

19.33

1.45

317

$30.00-$58.30

178

38.81

3.76

—

106

39.72

1.86

—

.
1,161

20.48

5.09

3,848

408

22.36

1.28

1,461

Total unrecognized compensation costs related to nonvested awards was approximately $6.2 million, $7.3 million and ~~$7.3~~$4.2 million as of December 31, 2006, 2007 and ~~2007,~~2008, respectively. These nonvested awards are expected to be exercised over the weighted average period of ~~8.3~~7.6 years.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the ~~Company’s~~Company's average stock price of ~~$20.95~~$16.02 during the year ended December 31, ~~2007,~~2008, which would have been received by the option holders had all option holders exercised their options as of that date. ~~The total number of~~There were no in-the-money options exercisable as of December 31, ~~2007 was approximately 271,000.~~

2008.

The weighted average exercise price of options granted during the years ended December 31, 2006, 2007 and ~~2007~~2008 were $22.47, $18.14 and ~~$18.14~~$14.14 per share, respectively. The total fair values of the shares vested during the years ended December 31, 2006, 2007 and ~~2007~~2008 were $3.1 million, $3.7 million and ~~$3.7~~$5.2 million, respectively. The total intrinsic value of options exercised during the years ended December 31, 2006, 2007 and ~~2007~~2008 was $3.3 million, $4.5 million and ~~$4.5~~$364,000 million, respectively. The total cash received from employees as a result of employee stock option exercises during the years ended December 31, 2006, 2007 and ~~2007~~2008 were approximately $2.5 million, $3.2 million and ~~$3.2~~

Table of Contents

Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

18. STOCK BASED AWARDS (Continued)

$1.5 million, respectively. In connection with these exercises, there was no tax benefit realized by the Company due to the ~~Company’s~~Company's current loss position.

Restricted Stock Unit Activity

InFor the ~~first quarter of~~year ended December 31, 2008, ~~the Compensation Committee of the Board of Directors approved grants of approximately 460,000~~491,000 restricted stock units ~~to officers and employees~~were granted. The cost of restricted stock units is determined using the fair value of our common stock on the date of the ~~Company which~~grant and compensation expense is recognized in accordance with the vesting schedule. The weighted average grant date fair value of restricted stock units granted during the year ended December 31, 2008 was $12.64.

The following is a summary of restricted stock unit activity (amounts in thousands, except per share data):

			Grant Date Fair Value

Outstanding—beginning of year	—		$	—
Granted at fair value	491			12.64
Vested	—			—
Canceled/forfeited	(42	)		12.13

Outstanding—end of year	449			12.69

Restricted stock units vested at year-end	—			—

The restricted stock units vest over three years at 25% at the end of the first year, ~~an additional~~ 25% at the end of the second year and 50% at the end of the third year. During the years ended December 31, 2006, 2007 and 2008, the Company recorded stock based compensation related to restricted stock units of $0, $0 and $896,000.

At December 31, 2008, there were 449,000 restricted stock units that remained outstanding, no restricted stock units were vested as of December 31, 2008. On January 13, 2009, 337,000 additional restricted stock units were granted.

~~19. PERFORMANCE SHARE PLAN~~Performance Share Plan

In January 2006, the Board of Directors and Compensation Committee adopted the Overstock.com Performance Share Plan (the "Plan") and approved grants to executive officers and certain employees of the Company. The ~~Performance Share~~ Plan provides for a three-year period for the measurement of the ~~Company’s~~Company's attainment of the performance goal described in the form of a grant.

Table of Contents

Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

18. STOCK BASED AWARDS (Continued)

under the Plan were originally payable in cash. During interim and annual periods prior to the third quarter of 2007, the Company recorded compensation expense based upon the period-end stock price and estimates regarding the ultimate growth in economic value that iswas expected to occur. These estimates included assumed future growth rates in revenues, gross ~~margins~~profit percentages and other factors. If the Company were to use different assumptions, the estimated compensation charges ~~could be~~would have been significantly different.

An amendment to the ~~Performance Share~~ Plan to allow the Company to make payments in the form of common stock was approved by the shareholders on May 15, 2007. In the third quarter of 2007, the Company determined the fair value of the awards on the amendment date and determined ~~on August 7, 2007~~ to make the payments in the form of common stock, rather than cash. Therefore, the Company reclassified awards under the ~~performance share plan~~Plan from their current status as liability awards to equity awards in accordance with ~~FAS~~SFAS No. 123(R).

As of December 31, 2006, the Company had accrued $900,000 in total compensation expense under the plan. During the first six months of 2007, the Company accrued an additional $650,000 related to performance shares prior to the determination to make the payments in the form of common stock. The Company reclassified the total liability of approximately $1.6 million related to performance share awards granted prior to the determination to additional-paid-in-capital on August 7, 2007.

Over the remaining six months of 2007, the Company reduced the estimated compensation expense under the plan by approximately $550,000, based on changes in its estimate of growth in economic value over the remaining twelve months of the plan. As of December 31, 2007, the cumulative expense related to the performance share awards was $1.0 million.

During the year ended December 31, 2008, the Company reversed the cumulative $1.0 million in total compensation expense under the Plan as the Board determined no payments would be made under the Plan. The Plan expired on December 31, 2008.

~~20.~~19. 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. Beginning in 2006 through January 2008, the ~~Company’s~~Company's matching contribution is comprised of common stock issued from treasury to employees. For the remainder of 2008, the Company's matching contribution consisted cash matching payment. 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~~Company's matching contribution totaled ~~$261,000,~~ $389,000, $494,000 and ~~$494,000~~$570,000 during ~~2005,~~ 2006, 2007 and ~~2007,~~2008, respectively. In addition, the Company made discretionary contributions of ~~$342,000,~~ $409,000, $408,000, $0 during 2006, 2007 and ~~$408,000 during 2005, 2006 and 2007~~2008 to eligible participants as of the end of each respective calendar year. The contributions in 2006 and 2007 were settled with Company stock in the following year.

~~21.~~20. OTHER INCOME (EXPENSE), NET

Other income (expense), net consisted of the following (in thousands):

	Years ended December 31,

	2006		2007			2008
Gain from early retirement of 3.75% convertible senior notes	$	—	$	—		$	2,849
Loss on settlement of notes receivable		—		—			(3,929	)
Other		81		(92	)		(366	)

Other income (expense), net	$	81	$	(92	)	$	(1,446	)

Years ended December 31,

2005

2006

2007

Gain from early retirement of convertible senior notes

$
6,158

$
—

$
—

Loss on disposal of software

(1,457
)
—

—

Other

27

81

(92
)

Other income (expense), net

$
4,728

$
81

$
(92
)

~~F-31~~

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Overstock.com, Inc.

~~22.~~Notes to Consolidated Financial Statements (Continued)

21. INCOME TAXES

The components of the ~~Company’s~~Company's deferred tax assets and liabilities as of December 31, ~~2006~~2007 and ~~2007~~2008 are as follows (in thousands):

December 31,

2006
(Restated)

2007
(Restated)

Deferred tax assets and liabilities:

Net operating loss carry-forwards

$
64,232

$
72,695

Temporary differences:

Accrued expenses

5,722

6,498

Reserves and other

4,788

2,924

Depreciation

1,689

3,799

76,431

85,916

Valuation allowance

(76,431
)
(85,916
)

Net asset

$
—

$
—

			December 31,

			2007			2008
Deferred tax assets and liabilities:
	Net operating loss carry-forwards		$	72,695		$	72,459
	Temporary differences:
		Accrued expenses		6,498			5,365
		Reserves and other		2,924			4,115
		Depreciation		3,799			5,055

				85,916			86,994
Valuation allowance				(85,916	)		(86,994	)

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.

At December 31, ~~2006~~2007 and ~~2007,~~2008, the Company had net operating loss carry-forwards of approximately ~~$145.2~~$164.2 million and ~~$164.2~~$171.8 million, respectively, which may be used to offset future taxable income. An additional $21.9 million of net operating losses are limited under Internal Revenue Code Section 382 to $799,000 a year. These carry-forwards begin to expire in 2018.

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 (in thousands):

Years ended December 31,

2005
(Restated)

2006
(Restated)

2007
(Restated)

U.S. federal income tax benefit at statutory rate

$
8,805

$
37,367

$
16,813

State income tax benefit, net of federal expense

857

3,623

949

Stock compensation expense

(25
)
—

(2,267
)
Other

(389
)
(1,144
)
(3,969
)
Unrecognized benefit due to valuation allowance

(9,248
)
(39,846
)
(11,526
)

Income tax benefit

$
—

$
—

$
—

	Years ended December 31,

	2006			2007			2008
U.S. federal income tax benefit at statutory rate	$	37,367		$	16,813		$	4,431
State income tax benefit, net of federal expense		3,623			949			147
Stock based compensation expense		—			(2,267	)		(1,491	)
Other		(1,144	)		(3,969	)		(2,009	)
Unrecognized benefit due to valuation allowance		(39,846	)		(11,526	)		(1,078	)

Income tax benefit	$	—		$	—		$	—

The Company adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes (“ ("FIN ~~48”~~48") on January 1, 2007. As a result of a full valuation allowance, the Company does not have any unrecognized tax benefits and there iswas no effect on its financial condition or results of operations as a result of implementing FIN 48. The Company is subject to audit by the IRS and various states for periods since inception. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months. The ~~Company’s~~Company's policy is that it recognizes interest and penalties accrued on any unrecognized tax positions as a component of income tax expense. As of the date of adoption of FIN 48, the Company did not have any accrued interest or penalties associated with any unrecognized tax positions, nor did the Company recognize any interest expense or penalties during the year ended December 31, ~~2007.~~2008.

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Overstock.com, Inc.

~~23.~~Notes to Consolidated Financial Statements (Continued)

22. RELATED PARTY TRANSACTIONS

On occasion, Haverford-Valley, L.C. (an entity owned by the ~~Company’s~~Company's Chairman and Chief Executive Officer) and certain affiliated entities make travel arrangements for Company executives and pay the travel related expenses incurred by ~~our~~its executives on Company business. In ~~2005,~~ 2006, 2007, and ~~2007~~2008 the Company reimbursed Haverford-Valley L.C. ~~$274,000,~~ $267,000, $93,000, and ~~$93,000,~~$111,000, respectively, for these expenses.

~~24.~~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~~"Note 2—Summary of Significant Accounting ~~Policies”.~~Policies." There were no inter-segment sales or transfers during ~~2005,~~ 2006, 2007 or ~~2007.~~2008. 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 (in thousands):

~~F-32~~

	Direct		Fulfillment partner		Consolidated

2006
Revenue	$	301,509	$	478,628	$	780,137
Cost of goods sold		284,774		405,559		690,333

Gross profit		16,735		73,069		89,804
Operating expenses						(188,566	)
Other income (expense), net						(1,118	)

Loss from continuing operations					$	(99,880	)

2007
Revenue	$	197,088	$	568,814	$	765,902
Cost of goods sold		168,008		473,344		641,352

Gross profit		29,080		95,470		124,550
Operating expenses						(169,170	)
Other income (expense), net						508

Loss from continuing operations					$	(44,112	)

2008
Revenue	$	174,203	$	660,164	$	834,367
Cost of goods sold		154,501		536,957		691,458

Gross profit		19,702		123,207		142,909
Operating expenses						(153,822	)
Other income (expense), net						(1,745	)

Loss from continuing operations					$	(12,658	)

~~Table of Contents~~

Direct

Fulfillment partner

Consolidated

2005 (Restated)

Revenue

$
323,136

$
471,839

$
794,975

Cost of goods sold

280,647

397,855

678,502

Gross profit

42,489

73,984

116,473

Operating expenses

(138,099
)
Other income (expense), net

(1,015
)

Loss from continuing operations

$
(22,641
)

2006 (Restated)

Revenue

$
301,509

$
478,628

$
780,137

Cost of goods sold

284,774

405,559

690,333

Gross profit

16,735

73,069

89,804

Operating expenses

(188,566
)
Other income (expense), net

(1,118
)

Loss from continuing operations

$
(99,880
)

2007 (Restated)

Revenue

$
197,088

$
568,814

$
765,902

Cost of goods sold

168,008

473,344

641,352

Gross profit

29,080

95,470

124,550

Operating expenses

(169,170
)
Other income (expense), net

508

Loss from continuing operations

$
(44,112
)

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.

Table of Contents

Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

23. BUSINESS SEGMENTS (Continued)

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 Website. This segment also includes revenues and costs associated with the auctions and cars and real estate listing businesses. The costs for this 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.

During the years ~~2005~~2006 through ~~2007,~~2008, over 99% of sales were made to customers in the United States of America. At December 31, ~~2006~~2007 and ~~2007,~~2008, all of the ~~Company’s~~Company's fixed assets were located in the United States of America.

~~25.~~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.

~~26.~~25. DECONSOLIDATION OF VARIABLE INTEREST ENTITY

In April 2005, the Company entered into an agreement which allowed the Company to lend up to $10.0 million to an entity for the purpose of buying diamonds and other jewelry, primarily to supply a new category within the jewelry department which allowed customers purchasing diamond rings to select both a specific diamond and ring setting. Under the agreement, the Company was to receive fifty percent (50%) of any profits of the entity. In addition, the Company had 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 was the sum of (a) one thousand dollars, and (b) $3.0 million, which may have been 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. 46Revised, Consolidation of Variable Interest Entities—an Interpretation of ARB No. 51 (“ ("FIN ~~46”~~46"), and it was determined to be a variable interest entity for which the Company was determined to be the primary beneficiary. As such, the financial statements of the entity were consolidated into the financial statements of the Company.

Table of Contents

Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

25. DECONSOLIDATION OF VARIABLE INTEREST ENTITY (Continued)

In November 2004, the Company loaned the entity $8.4 million. The promissory note bore interest at 3.75% per annum. Interest on the loan was 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, was due and payable. The promissory note was collateralized by all of the assets of the entity.

In November 2006, an unrelated third party purchased the ~~Company’s~~Company's interests in the variable interest entity by executing a promissory note to the Company in exchange for termination of all agreements between the Company and the variable interest entity. The promissory note iswas equal to the net assets of the entity or $6.7 million and ~~bears~~bore no interest. The first payment on the note receivable was due and paid on February 1, 2007 in the amount of $3.7 million with remainder of balance due in twelve equal monthly payments of $251,000 beginning on March 1, 2007. In September 2007, the Company amended the note receivable deferring the final six monthly payments from February 1, ~~2008to~~2008 to July 1, 2008. As of December 31, 2007 and 2008, the Company had received payments on the note totaling $5.2 ~~million.~~

~~F-33~~million and $1.5 million, respectively. The promissory note was completely satisfied as of December 31, 2008.

Table of Contents

Overstock.com, Inc.

~~As a result of the agreement, the Company deconsolidated certain assets related~~Notes to the variable interest entity effective November 30, 2006. The operating results through November 30, 2006 relating to variable interest entity are included in the consolidated statements of operations. As a result of the deconsolidation, the following assets were removed from the Company’s accounts (in thousands):Consolidated Financial Statements (Continued)

Cash

$
102

Accounts Receivable, net

435

Inventory

5,986

Prepaids

4

Other Long-term assets

175

Total

$
6,702

~~27.~~26. QUARTERLY RESULTS OF OPERATIONS (unaudited)

The following tables set forth the ~~Company’s~~Company's unaudited quarterly results of operations data for the eight most recent quarters for the period ended December 31, ~~2007, as reported and as restated.~~2008. The Company has 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 it considers necessary for a fair statement of our financial position and operating results for the quarters presented.

			Three Months Ended

			Mar. 31, 2007			June 30, 2007			Sept. 30, 2007			Dec. 31, 2007			Mar. 31, 2008			June 30, 2008			Sept. 30, 2008			Dec. 31, 2008
			(in thousands, except per share data)
Consolidated Statement of Operations Data:
Revenue
	Direct revenue		$	46,990		$	43,658		$	39,270		$	67,170		$	51,764		$	39,832		$	34,176		$	48,431
	Fulfillment partner revenue			115,166			105,513			120,789			227,346			151,050			149,004			152,679			207,431

		Total revenue		162,156			149,171			160,059			294,516			202,814			188,836			186,855			255,862

Cost of goods sold
	Direct			41,469			36,456			33,268			56,815			44,803			34,871			30,633			44,194
	Fulfillment partner			96,077			86,523			99,425			191,319			124,040			120,756			124,103			168,058

		Total cost of goods sold		137,546			122,979			132,693			248,134			168,843			155,627			154,736			212,252

Gross profit				24,610			26,192			27,366			46,382			33,971			33,209			32,119			43,610

Operating expenses:
	Sales and marketing			11,284			7,962			8,835			27,377			15,019			14,244			11,934			16,437
	Technology			14,973			15,237			14,576			14,667			14,516			15,311			14,119			13,869
	General and administrative			10,689			10,429			9,724			11,134			9,563			10,867			10,321			7,622
	Restructuring			6,089			6,194			—			—			—			—			—			—

		Total operating expenses		43,035			39,822			33,135			53,178			39,098			40,422			36,374			37,928

Operating income (loss)				(18,425	)		(13,630	)		(5,769	)		(6,796	)		(5,127	)		(7,213	)		(4,255	)		5,682
Interest income, net				990			1,078			1,291			1,429			1,304			740			664			455
Interest expense				(1,029	)		(1,027	)		(1,029	)		(1,103	)		(901	)		(888	)		(847	)		(826	)
Other income (expense), net				—			—			(92	)		—			—			2			2,849			(4,297	)

Income (loss)Loss from continuing operations				(18,464	)		(13,579	)		(5,599	)		(6,470	)		(4,724	)		(7,359	)		(1,589	)		1,014
Discontinued operations:
Loss from discontinued operations				(3,624	)		(300	)		—			—			—			—			—			—

Net income (loss)			$	(22,088	)	$	(13,879	)	$	(5,599	)	$	(6,470	)	$	(4,724	)	$	(7,359	)	$	(1,589	)	$	1,014

Net income (loss) per common share—basic
	Income (loss) from continuing operations		$	(0.78	)	$	(0.57	)	$	(0.23	)	$	(0.27	)	$	(0.20	)	$	(0.32	)	$	(0.07	)	$	0.04
	Loss from discontinued operations		$	(0.16	)	$	(0.01	)	$	—		$	—		$	—		$	—		$	—		$	—
Net income (loss) per share—basic			$	(0.94	)	$	(0.58	)	$	(0.23	)	$	(0.27	)	$	(0.20	)	$	(0.32	)	$	(0.07	)	$	0.04
Weighted average common shares outstanding—basic				23,594			23,689			23,726			23,807			23,345			22,750			22,768			22,745
Net income (loss) per common share—diluted
	Income (loss) from continuing operations		$	(0.78	)	$	(0.57	)	$	(0.23	)	$	(0.27	)	$	(0.20	)	$	(0.32	)	$	(0.07	)	$	0.04
	Income (loss) from discontinued operations		$	(0.16	)	$	(0.01	)	$	—		$	—		$	—		$	—		$	—		$	—
Net income (loss) per share—diluted			$	(0.94	)	$	(0.58	)	$	(0.23	)	$	(0.27	)	$	(0.20	)	$	(0.32	)	$	(0.07	)	$	0.04
Weighted average common shares outstanding—diluted				23,594			23,689			23,726			23,807			23,345			22,750			22,768			22,827

Three Months Ended

Mar. 31,
2006
(As
Reported)

June 30,
2006
(As
Reported)

Sept. 30,
2006
(As
Reported)

Dec. 31,
2006
(As
Reported)

Mar. 31,
2007
(As
Reported)

June 30,
2007
(As
Reported)

Sept. 30,
2007
(As
Reported)

Dec. 31,
2007
(As
Reported)

(in thousands, except per share data)

Consolidated Statement of Operations Data:

Revenue

Direct revenue

$
79,710

$
68,770

$
56,564

$
98,158

$
45,701

$
43,578

$
39,446

$
66,897

Fulfillment partner revenue

98,334

90,422

100,321

195,871

112,229

105,389

122,484

224,437

Total revenue

178,044

159,192

156,885

294,029

157,930

148,967

161,930

291,334

Cost of goods sold

Direct

70,703

61,473

51,037

101,730

39,320

36,321

33,160

55,567

Fulfillment partner

83,587

75,411

84,483

164,926

93,295

86,343

100,509

188,075
��
Total cost of goods sold

154,290

136,884

135,520

266,656

132,615

122,664

133,669

243,642

Gross profit

23,754

22,308

21,365

27,373

25,315

26,303

28,261

47,692

Operating expenses:

Sales and marketing

12,659

11,911

17,282

29,045

11,284

7,962

8,835

27,377

Technology

13,424

14,897

16,157

20,680

14,973

15,237

14,576

14,667

General and administrative

11,850

11,050

11,078

12,859

10,689

10,429

9,724

11,134

Restructuring

—

—

—

5,674

6,089

6,194

—

—

Total operating expenses

37,933

37,858

44,517

68,258

43,035

39,822

33,135

53,178

Operating loss

(14,179
)
(15,550
)
(23,152
)
(40,885
)
(17,720
)
(13, 519
)
(4,874
)
(5,486
)
Interest income, net

315

2,215

459

577

990

1,078

1,291

1,429

Interest expense

(1,267
)
(1,275
)
(1,096
)
(1,127
)
(1,029
)
(1,027
)
(1,029
)
(1,103
)
Other income (expense), net

—

(1
)
(6
)
88

—

—

(92
)
—

Loss from continuing operations

(15,131
)
(14,611
)
(23,795
)
(41,347
)
(17,759
)
(13,468
)
(4,704
)
(5,160
)
Discontinued operations:

Loss from discontinued operations

(779
)
(1,128
)
(708
)
(4,267
)
(3,624
)
(300
)
—

—

Net loss

(15,910
)
(15,739
)
(24,503
)
(45,614
)
(21,383
)
(13,768
)
(4,704
)
(5,160
)
Deemed dividend related to redeemable common stock

(33
)
(33
)
(33
)
—

—

—

—

—

Net loss attributable to common shares

$
(15,943
)
$
(15,772
)
$
(24,536
)
$
(45,614
)
$
(21,383
)
$
(13,768
)
$
(4,704
)
$
(5,160
)
Net loss per common share —basic and diluted

Loss from continuing operations

$
(0.78
)
$
(0.73
)
$
(1.16
)
$
(1.95
)
$
(0.75
)
$
(0.57
)
$
(0.20
)
$
(0.22
)
Loss from discontinued operations

$
(0.04
)
$
(0.05
)
$
(0.03
)
$
(0.20
)
$
(0.16
)
$
(0.01
)
$
—

$
—

Net loss per share—basic and diluted

$
(0.82
)
$
(0.78
)
$
(1.19
)
$
(2.15
)
$
(0.91
)
$
(0.58
)
$
(0.20
)
$
(0.22
)
Weighted average common shares outstanding—basic and diluted

19,385

20,159

20,600

21,163

23,594

23,689

23,726

23,807

~~F-34~~

Table of Contents

Three Months Ended (1)

Mar. 31, 2006
(Restated)

June 30, 2006
(Restated)

Sept. 30, 2006
(Restated)

Dec. 31, 2006
(Restated)

Mar. 31, 2007
(Restated)

June 30, 2007
(Restated)

Sept. 30, 2007
(Restated)

Dec. 31, 2007
(Restated)

(in thousands, except per share data)

Consolidated Statement of Operations Data:

Revenue

Direct revenue

$
80,143

$
69,363

$
57,563

$
94,440

$
46,990

$
43,658

$
39,270

$
67,170

Fulfillment partner revenue

99,640

90,354

100,667

187,967

115,166

105,513

120,789

227,346

Total revenue

179,783

159,717

158,230

282,407

162,156

149,171

160,059

294,516

Cost of goods sold

Direct

71,831

62,178

52,073

98,692

41,469

36,456

33,268

56,815

Fulfillment partner

85,013

76,037

84,565

159,944

96,077

86,523

99,425

191,319

Total cost of goods sold

156,844

138,215

136,638

258,636

137,546

122,979

132,693

248,134

Gross profit

22,939

21,502

21,592

23,771

24,610

26,192

27,366

46,382

Operating expenses:

Sales and marketing

12,659

11,911

17,282

29,045

11,284

7,962

8,835

27,377

Technology

13,424

14,897

16,157

20,680

14,973

15,237

14,576

14,667

General and administrative

11,850

10,050

11,078

12,859

10,689

10,429

9,724

11,134

Restructuring

—

—

—

5,674

6,089

6,194

—

—

Total operating expenses

37,933

37,858

44,517

68,258

43,035

39,822

33,135

53,178

Operating loss

(14,994
)
(16,356
)
(22,925
)
(44,487
)
(18,425
)
(13,630
)
(5,769
)
(6,796
)
Interest income, net

315

2,215

459

577

990

1,078

1,291

1,429

Interest expense

(1,267
)
(1,275
)
(1,096
)
(1,127
)
(1,029
)
(1,027
)
(1,029
)
(1,103
)
Other income (expense), net

—

(1
)
(6
)
88

—

—

(92
)
—

Loss from continuing operations

(15,946
)
(15,417
)
(23,568
)
(44,949
)
(18,464
)
(13,579
)
(5,599
)
(6,470
)
Discontinued operations:

Loss from discontinued operations

(779
)
(1,128
)
(708
)
(4,267
)
(3,624
)
(300
)
—

—

Net loss

(16,725
)
(16,545
)
(24,276
)
(49,216
)
(22,088
)
(13,879
)
(5,599
)
(6,470
)
Deemed dividend related to redeemable common stock

(33
)
(33
)
(33
)
—

—

—

—

—

Net loss attributable to common shares

$
(16,758
)
$
(16,578
)
$
(24,309
)
$
(49,216
)
$
(22,088
)
$
(13,879
)
$
(5,599
)
$
(6,470
)

Net loss per common share—basic and diluted

Loss from continuing operations

$
(0.82
)
$
(0.77
)
$
(1.15
)
$
(2.12
)
$
(0.78
)
$
(0.57
)
$
(0.23
)
$
(0.27
)
Loss from discontinued operations

$
(0.04
)
$
(0.05
)
$
(0.03
)
$
(0.20
)
$
(0.16
)
$
(0.01
)
$
—

$
—

Net loss per share—basic and diluted

$
(0.86
)
$
(0.82
)
$
(1.18
)
$
(2.32
)
$
(0.94
)
$
(0.58
)
$
(0.23
)
$
(0.27
)
Weighted average common shares outstanding—basic and diluted

19,385

20,159

20,600

21,163

23,594

23,689

23,726

23,807

~~(1)~~As discussed in Note 3 to the consolidated financial statements as of December 31, 2007 and 2006 and for the years ended December 31, 2007, 2006 and 2005, the quarterly data for years ended December 31, 2007 and 2006 and the related notes thereto contained in this Amendment to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, have been restated in order to correct errors related to the accounting for customer refunds and credits and the accounting for gift cards issued to customers. The effect of the error adjustments for September 30, 2006 decreased net loss by $227,000. For the quarters ended March 31, June 30, September 30 and December 31, 2007, the effect of the error adjustments on the Consolidated Results of Operations is to increase net loss by $705,000, $111,000, $895,000 and $1.3 million.

~~F-35~~

~~Table of Contents~~

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, 2005

Deferred tax valuation allowance (As reported)

$
27,450

$
9,135

$
—

$
36,585

Deferred tax valuation allowance (Restated)

27,450

9,248

—

36,698

Allowance for sales returns (As reported)

2,835

62,178

59,437

5,576

Allowance for sales returns (Restated)

3,221

62,178

59,437

5,962

Reserve for inventory obsolescence

1,323

4,706

788

5,241

Allowance for doubtful accounts

750

2,202

1,141

1,811

Year ended December 31, 2006

Deferred tax valuation allowance (As reported)

$
36,585

$
37,805

$
—

$
74,390

Deferred tax valuation allowance (Restated)

36,698

39,846

113

76,431

Allowance for sales returns (As reported)

5,576

61,401

63,362

3,615

Allowance for sales returns (Restated)

5,962

61,401

62,806

4,557

Reserve for inventory obsolescence

5,241

4,471

3,127

6,585

Allowance for doubtful accounts

1,811

2,395

2,071

2,135

Year ended December 31, 2007

Deferred tax valuation allowance (As reported)

$
74,390

$
8,320

$
—

$
82,710

Deferred tax valuation allowance (Restated)

76,431

$
11,526

$
2,041

$
85,916

Allowance for sales returns (As reported)

3,615

55,553

54,140

5,028

Allowance for sales returns (Restated)

4,557

55,553

53,169

6,941

Reserve for inventory obsolescence

6,585

283

5,106

1,762

Allowance for doubtful accounts

2,135

1,197

855

2,477

~~1. RESTATEMENT OF FINANCIAL STATEMENT SCHEDULE~~

Overstock.com, Inc. (the “Company”) is restating its financial statement schedule as of December 31, 2007, 2006 and 2005 to correct errors related to the accounting for customer refunds and credits and the accounting for gift cards issued to customers.

~~F-36~~

		Balance at Beginning of Year		Charged to Expense		Deductions		Balance at End of Year

Year ended December 31, 2006
	Deferred tax valuation allowance	$	36,698	$	39,846	$	113	$	76,431
	Allowance for sales returns		5,962		61,401		62,806		4,557
	Reserve for inventory obsolescence		5,241		4,471		3,127		6,585
	Allowance for doubtful accounts		1,811		2,395		2,071		2,135
Year ended December 31, 2007
	Deferred tax valuation allowance	$	76,431	$	11,526	$	2,041	$	85,916
	Allowance for sales returns		4,557		55,553		53,169		6,941
	Reserve for inventory obsolescence		6,585		283		5,106		1,762
	Allowance for doubtful accounts		2,135		1,197		855		2,477
Year ended December 31, 2008
	Deferred tax valuation allowance	$	85,916	$	1,078	$	—	$	86,994
	Allowance for sales returns		6,941		2,278		4,121		5,098
	Reserve for inventory obsolescence		1,762		2,370		1,994		2,138
	Allowance for doubtful accounts		2,477		550		1,433		1,594

			Page


	Special Note Regarding Forward-Looking Statements		3
3 Part I
Item 1.	Business	~~Part I.~~		5
Item 1.1A.	Risk Factors	~~Business~~		6 18
Item ~~1A.~~1B.	~~Risk Factors~~		12
~~Item 1B.~~	Unresolved Staff Comments		22 39
Item 2.	Properties	~~Properties~~		22 39
Item 3.	Legal Proceedings	~~Legal Proceedings~~		23 40
Item 4.	Submission of Matters to a Vote of Security Holders		40
23 Part II
	~~Executive officers of the Registrant~~		23
	~~Part II.~~
Item 5.	Market for the ~~Registrant’s~~Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		24 41
Item 6.	Selected Financial Data ~~(Restated)~~		26 45
Item 7.	~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of ~~Operation (Restated)~~Operations		30 47
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		47 80
Item 8.	Financial Statements and Supplementary Data ~~(Restated)~~		47 80
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		80
Item 9A.	47Controls and Procedures		80
Item 9B.	Other Information		82
Part III
Item ~~9A.~~10.	~~Controls and Procedures (Restated)~~		48
~~Item 9B.~~	~~Other Information~~		49
	~~Part III.~~
~~Item 10.~~	Directors, Executive Officers and Corporate Governance		50 83
Item 11.	Executive Compensation	~~Executive Compensation~~		50 83
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		50 83
Item 13.	Certain Relationships and Related Transactions, and Director Independence		50 83
Item 14.	Principal Accounting Fees and Services		83
50 Part IV
	~~Part IV.~~
Item 15.	Exhibits, Financial Statement Schedules ~~(Restated)~~		51 84
Signatures					56 89
Financial Statements				F-1

Product class	2005		2006		2007
Home and garden(1)	41	%	42	%	44	%
Jewelry, watches, clothing and accessories	28	%	27	%	25	%
BMMG(2), electronics and computers	23	%	23	%	23	%
Other	8	%	8	%	8	%

Total	100	%	100	%	100	%

	Common Stock Price
	High	Low
Year Ended December 31, 2006
First Quarter	35.02	21.60
Second Quarter	30.63	19.00
Third Quarter	22.93	16.03
Fourth Quarter	19.09	13.40
Year Ended December 31, 2007
First Quarter	19.72	14.05
Second Quarter	15.80	19.98
Third Quarter	28.99	17.22
Fourth Quarter	39.39	14.75

	Year ended December 31,
	2003(4) (Restated)			2004(4) (Restated)			2005(4) (Restated)			2006(1)(4) (Restated)			2007(4) (Restated)
	(in thousands, except per share data)

Consolidated Statement of Operations Data:
Revenue
Direct revenue	$	136,317		$	212,264		$	323,136		$	301,509		$	197,088
Fulfillment partner revenue	98,286			278,357			471,839			478,628			568,814

Total revenue	234,603			490,621			794,975			780,137			765,902

Cost of goods sold
Direct	122,418			183,653			280,647			284,774			168,008
Fulfillment partner	86,902			240,530			397,855			405,559			473,344

Total cost of goods sold	209,320			424,183			678,502			690,333			641,352

Gross profit	25,283			66,438			116,473			89,804			124,550

Operating expenses:
Sales and marketing	20,228			40,559			77,155			70,897			55,458
Technology	2,549			8,509			27,901			65,158			59,453
General and administrative	14,987			22,024			33,043			46,837			41,976
Restructuring(2)	—			—			—			5,674			12,283

Total operating expenses	37,764			71,092			138,099			188,566			169,170

Operating loss	(12,481		)	(4,654		)	(21,626		)	(98,762		)	(44,620		)
Interest income, net	461			1,064			(161		)	3,566			4,788
Interest expense	(76		)	(775		)	(5,582		)	(4,765		)	(4,188		)
Other (expense) income, net	115			(49		)	4,728			81			(92		)

Loss from continuing operations	(11,981		)	(4,414		)	(22,641		)	(99,880		)	(44,112		)
Discontinued operations(3):	—			—			—			—			—
Loss from discontinued operations	—			—			(2,571		)	(6,882		)	(3,924		)

Net loss	(11,981		)	(4,414		)	(25,212		)	(106,762		)	(48,036		)
Deemed dividend related to redeemable common stock	(262		)	(188		)	(185		)	(99		)	—

Net loss attributable to common shares	$	(12,243	)	$	(4,602	)	$	(25,397	)	$	(106,861	)	$	(48,036	)

Net loss per common share—basic and diluted
Loss from continuing operations	$	(0.76	)	$	(0.26	)	$	(1.17	)	$	(4.91	)	$	(1.86	)
Loss from discontinued operations	$	—		$	—		$	(0.13	)	$	(0.34	)	$	(0.17	)
Net loss per common share—basic and diluted	$	(0.76	)	$	(0.26	)	$	(1.30	)	$	(5.25	)	$	(2.03	)
Weighted average common shares outstanding—basic and diluted	16,198			17,846			19,429			20,332			23,704

	As of December 31,
	2003 (4) (Restated)		2004 (4) (Restated)		2005 (4) (Restated)		2006 (4) (Restated)		2007 (4) (Restated)
	(in thousands)

Balance Sheet Data:
Cash and cash equivalents	$	28,846	$	198,678	$	55,875	$	126,965	$	101,394
Marketable securities	11,500		88,802		55,799		—		46,000
Working capital	45,668		267,640		79,561		59,475		62,621
Total assets	100,170		381,600		335,953		264,453		231,143
Total indebtedness	161		117,589		84,676		84,336		82,453
Redeemable common stock	2,978		3,166		3,205		—		—
Stockholders’ equity	55,298		169,504		89,148		56,367		18,212

	Year ended December 31, 2003
	As Reported			Adjustments		As Restated
	(in thousands, except per share data)

Consolidated Statement of Operations Data:
Revenue
Direct revenue	$	138,134		(1,817	)	$	136,317
Fulfillment partner revenue	100,811			(2,525	)	98,286

Total revenue	238,945			(4,342	)	234,603

Cost of goods sold
Direct	124,039			(1,621	)	122,418
Fulfillment partner	89,190			(2,288	)	86,902

Total cost of goods sold	213,229			(3,909	)	209,320

Gross profit	25,716			(433	)	25,283

Operating expenses:
Sales and marketing	20,228			—		20,228
Technology	2,549			—		2,549
General and administrative	14,987			—		14,987
Restructuring	—			—		—

Total operating expenses	37,764			—		37,764

Operating loss	(12,048		)	(433	)	(12,481		)
Interest income, net	461			—		491
Interest expense	(76		)	—		(76		)
Other (expense) income, net	115			—		115

Loss from continuing operations	(11,548		)	(433	)	(11,981		)
Discontinued operations:	—			—		—
Loss from discontinued operations	—			—

Net loss	(11,548		)	(433	)	(11,981		)
Deemed dividend related to redeemable common stock	(262		)	—		(262		)

Net loss attributable to common shares	$	(11,810	)	(433	)	$	(12,243	)

Net loss per common share—basic and diluted
Loss from continuing operations	$	(0.73	)	(0.03	)	$	(0.76	)
Loss from discontinued operations	$	—		—		$	—
Net loss per common share—basic and diluted	$	(0.73	)	(0.03	)	$	(0.76	)

Weighted average common shares outstanding—basic and diluted	16,198					16,198

	Year ended December 31, 2004
	As Reported			Adjustments		As Restated
	(in thousands, except per share data)

Consolidated Statement of Operations Data:
Revenue
Direct revenue	$	213,210		(946	)	$	212,264
Fulfillment partner revenue	281,425			(3,068	)	278,357

Total revenue	494,635			(4,014	)	490,621

Cost of goods sold
Direct	184,964			(1,311	)	183,653
Fulfillment partner	243,468			(2,938	)	240,530

Total cost of goods sold	428,432			(4,249	)	424,183

Gross profit	66,203			235		66,438

Sales and marketing	40,559			—		40,559
Technology	8,509			—		8,509
General and administrative	22,024			—		22,024
Restructuring	—					––

Total operating expenses	71,092			—		71,092

Operating loss	(4,889		)	235		(4,654		)
Interest income, net	1,173			(109	)	1,064
Interest expense	(775		)	—		(775		)
Other (expense) income, net	(49		)	—		(49		)

Loss from continuing operations	(4,540		)	126		(4,414		)
Discontinued operations(3):	—			—		—
Loss from discontinued operations	—			—		—

Net loss	(4,540		)	126		(4,414		)
Deemed dividend related to redeemable common stock	(188		)	—		(188		)

Net loss attributable to common shares	$	(4,728	)	126		$	(4,602	)

Net loss per common share—basic and diluted
Loss from continuing operations	$	(0.26	)	—		$	(0.26	)
Loss from discontinued operations	$	—		—		$	—
Net loss per common share—basic and diluted	$	(0.26	)	—		$	(0.26	)

Weighted average common shares outstanding—basic and diluted	17,846					17,846

	As of December 31, 2003
	As Reported		Adjustments		As Restated
	(in thousands)

Balance Sheet Data:
Cash and cash equivalents	$	28,846	—		$	28,846
Marketable securities	11,500		—		11,500
Working capital	46,101		(433	)	45,668
Total assets	98,549		1,621		100,170
Total indebtedness	161		—		161
Redeemable common stock	2,978		—		2,978
Stockholders’ equity	55,731		(433	)	55,298

	As of December 31, 2004
	As Reported		Adjustments		As Restated
	(in thousands)

Balance Sheet Data:
Cash and cash equivalents	$	198,678	—		$	198,678
Marketable securities	88,802		—		88,802
Working capital	267,947		(307	)	267,640
Total assets	377,543		4,057		381,600
Total indebtedness	117,589		—		117,589
Redeemable common stock	3,166		—		3,166
Stockholders’ equity	169,811		(307	)	169,504

	As of December 31, 2005
	As Reported		Adjustments		As Restated
	(in thousands)

Balance Sheet Data:
Cash and cash equivalents	$	55,875	—		$	55,875
Marketable securities	55,799		—		55,799
Working capital	80,162		(601	)	79,561
Total assets	325,913		10,040		335,953
Total indebtedness	84,676		—		84,676
Redeemable common stock	3,205		—		3,205
Stockholders’ equity	89,749		(601	)	89,148

Q1 2006 (Restated)		Q2 2006 (Restated)		Q3 2006 (Restated)		Q4 2006 (Restated)		FY 2006 (Restated)		Q1 2007 (Restated)		Q2 2007 (Restated)		Q3 2007 (Restated)		Q4 2007 (Restated)		FY 2007 (Restated)
12.8	%	13.5	%	13.6	%	8.4	%	11.5	%	15.2	%	17.6	%	17.1	%	15.7	%	16.3	%

	Three months ended December 31,						Twelve months ended December 31,
	2006 (Restated)			2007 (Restated)			2006 (Restated)			2007 (Restated)
Total revenue	$	282,407		$	294,516		$	780,137		$	765,902
Cost of goods sold	258,636			248,134			690,333			641,352

Gross profit	23,771			46,382			89,804			124,550
Less: Sales and marketing expense	29,045			27,377			70,897			55,458

Contribution	$	(5,274	)	$	19,005		$	18,907		$	69,092

Contribution margin	(1.9		)%	6.5		%	2.4		%	9.0		%

Change in the	Year ended December 31, 2007
Estimate of Average	(Restated)
Transit Times (Days)	Effect on Revenue			Effect on Net Income
-2	$	5,892		$	913
-1	$	2,710		$	420
As reported	As reported			As reported
1	$	(1,879	)	$	(291	)
2	$	(4,019	)	$	(623	)

	Years ended December 31,
	2005 (Restated)		2006 (Restated)		2007 (Restated)
	(as a percentage of total revenue)

Revenue
Direct revenue	40.6	%	38.6	%	25.7	%
Fulfillment partner revenue	59.4		61.4		74.3

Total revenue	100.0		100.0		100.0

Cost of goods sold
Direct	35.3		36.5		21.9
Fulfillment partner	50.0		52.0		61.8

Total cost of goods sold	85.3		88.5		83.7

Gross profit	14.7		11.5		16.3

Operating expenses:
Sales and marketing	9.7		9.1		7.2
Technology	3.5		8.4		7.8
General and administrative	4.2		6.0		5.5
Restructuring	—		0.7		1.6

Total operating expenses	17.4		24.2		22.1

Operating loss	(2.7	)	(12.7	)	(5.8	)
Interest income, net	0.0		0.5		0.6
Interest expense	(0.7	)	(0.6	)	(0.6	)
Other (expense) income, net	0.6		0.0		(0.0	)

Loss from continuing operations	(2.8	)%	(12.8	)%	(5.8	)%

	First Quarter (Restated)		Second Quarter (Restated)		Third Quarter (Restated)		Fourth Quarter (Restated)
2007	$	162,156	$	149,171	$	160,059	$	294,516
2006	179,783		159,717		158,230		282,407
2005	165,028		153,519		166,396		310,033
2004	82,660		86,140		102,659		219,162

	Years ended December 31,
	2005 (Restated)				2006 (Restated)
Total revenue	$	794,975	100	%	$	780,137	100	%

Cost of goods sold
Product costs and other cost of goods sold	618,571		78	%	629,477		81	%
Fulfillment costs	59,931		7	%	60,856		8	%

Total cost of goods sold	678,502		85	%	690,333		89	%

Gross profit	$	116,473	15	%	$	89,804	11	%

	Year ended December 31, 2005 (Restated)
Net loss, as reported	$	(25,212	)
Add: Stock-based employee compensation, as reported	72
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards	(3,996		)

Pro forma net loss	$	(29,136	)

Net loss per common share
Basic and diluted—as reported	$	(1.30	)
Basic and diluted—pro forma	$	(1.50	)

SFAS 123(R) Adjustments	Year ended December 31, 2006 (Restated)
Operating loss	$	(4,120	)
Net loss	$	(4,120	)
Net loss per common share—basic and diluted	$	(0.20	)

	Three Months Ended
	Mar. 31, 2006 (6) (Restated)			June 30, 2006 (6) (Restated)			Sept. 30, 2006 (6) (Restated)			Dec. 31, 2006 (6) (Restated)			Mar. 31, 2007 (6) (Restated)			June 30, 2007 (6) (Restated)			Sept. 30, 2007 (6) (Restated)			Dec. 31, 2007 (6) (Restated)
	(in thousands, except per share data)
Consolidated Statement of Operations Data:
Revenue
Direct revenue	$	80,143		$	69,363		$	57,563		$	94,440		$	46,990		$	43,658		$	39,270		$	67,170
Fulfillment partner revenue	99,640			90,354			100,667			187,967			115,166			105,513			120,789			227,346

Total revenue	179,783			159,717			158,230			282,407			162,156			149,171			160,059			294,516

Cost of goods sold
Direct	71,831			62,178			52,073			98,692			41,469			36,456			33,268			56,815
Fulfillment partner	85,013			76,037			84,565			159,944			96,077			86,523			99,425			191,319

Total cost of goods sold	156,844			138,215			136,638			258,636			137,546			122,979			132,693			248,134

Gross profit	22,939			21,502			21,592			23,771			24,610			26,192			27,366			46,382

Operating expenses:
Sales and marketing	12,659			11,911			17,282			29,045			11,284			7,962			8,835			27,377
Technology	13,424			14,897			16,157			20,680			14,973			15,237			14,576			14,667
General and administrative	11,850			11,050			11,078			12,859			10,689			10,429			9,724			11,134
Restructuring	—			—			—			5,674			6,089			6,194			—			—

Total operating expenses	37,933			37,858			44,517			68,258			43,035			39,822			33,135			53,178

Operating loss	(14,994		)	(16,356		)	(22,925		)	(44,487		)	(18,425		)	(13,630		)	(5,769		)	(6,796		)
Interest income, net	315			2,215			459			577			990			1,078			1,291			1,429
Interest expense	(1,267		)	(1,275		)	(1,096		)	(1,127		)	(1,029		)	(1,027		)	(1,029		)	(1,103		)
Other income (expense), net	—			(1		)	(6		)	88			—			—			(92		)	—

Loss from continuing operations	(15,946		)	(15,417		)	(23,568		)	(44,949		)	(18,464		)	(13,579		)	(5,599		)	(6,470		)
Discontinued operations:
Loss from discontinued operations	(779		)	(1,128		)	(708		)	(4,267		)	(3,624		)	(300		)	—			—

Net loss	(16,725		)	(16,545		)	(24,276		)	(49,216		)	(22,088		)	(13,879		)	(5,599		)	(6,470		)
Deemed dividend related to redeemable common stock	(33		)	(33		)	(33		)	—			—			—			—			—

Net loss attributable to common shares	$	(16,758	)	$	(16,578	)	$	(24,309	)	$	(49,216	)	$	(22,088	)	$	(13,879	)	$	(5,599	)	$	(6.470	)

Net loss per common share—basic and diluted

Loss from continuing operations	$	(0.82	)	$	(0.76	)	$	(1.15	)	$	(2.12	)	$	(0.78	)	$	(0.57	)	$	(0.23	)	$	(0.27	)

Loss from discontinued operations	$	(0.04	)	$	(0.06	)	$	(0.03	)	$	(0.20	)	$	(0.15	)	$	(0.01	)	$	—		$	—

Net loss per share—basic and diluted	$	(0.86	)	$	(0.82	)	$	(1.18	)	$	(2.32	)	$	(0.93	)	$	(0.58	)	$	(0.23	)	$	(0.27	)
Weighted average common shares outstanding—basic and diluted	19,385			20,159			20,600			21,163			23,594			23,689			23,726			23,807

	Three Months Ended
	Mar. 31, 2006		June 30, 2006		Sept. 30, 2006		Dec. 31, 2006		Mar. 31, 2007		June 30, 2007		Sept. 30, 2007		Dec. 31, 2007
	(Restated)		(Restated)		(Restated)		(Restated)		(Restated)		(Restated)		(Restated)		(Restated)
Additional Operating Data(1):
Gross bookings (in thousands)(2)	$	200,900	$	172,091	$	170,590	$	319,621	$	170,362	$	165,683	$	177,226	$	336,942
Number of orders(3)	1,856,000		1,568,000		1,529,000		3,061,000		1,481,000		1,288,000		1,457,000		2,973,000

Number of new B2C customers(4)	638,000		520,000		540,000		1,157,000		473,000		394,000		486,000		1,104,000

Average customer acquisition cost(5)	$	19.49	$	22.98	$	31.22	$	25.56	$	24.58	$	20.20	$	18.17	$	24.98

	Three Months Ended
	Mar. 31, 2006 (Restated)		June 30, 2006 (Restated)		Sept. 30, 2006 (Restated)		Dec. 31, 2006 (Restated)		Mar. 31, 2007 (Restated)		June 30, 2007 (Restated)		Sept. 30, 2007 (Restated)		Dec. 31, 2007 (Restated)
	(as a percentage of total revenue)
Revenue
Direct revenue	44.6	%	43.4	%	36.4	%	33.4	%	29.0	%	29.3	%	24.5	%	22.8	%
Fulfillment partner revenue	55.4		56.6		63.6		66.6		71.0		70.7		75.5		77.2

Total revenue	100.0		100.0		100.0		100.00		100.00		100.0		100.0		100.0

Cost of goods sold
Direct	40.0		38.9		32.9		34.9		25.6		24.4		20.8		19.3
Fulfillment partner	47.3		47.6		53.4		56.6		59.2		58.0		62.1		65.0

Total cost of goods sold	87.2		86.5		86.4		91.6		84.8		82.4		82.9		84.3

Gross profit	12.8		13.5		13.6		8.4		15.2		17.6		17.1		15.7

Operating expenses:
Sales and marketing	7.0		7.5		10.9		10.3		7.0		5.3		5.5		9.3
Technology	7.5		9.3		10.2		7.3		9.2		10.2		9.1		5.0
General and administrative	6.6		6.9		7.0		4.6		6.6		7.0		6.1		3.8
Restructuring	—		—		—		2.0		3.7		4.2		—		—

Total operating expenses	21.1		23.7		28.1		24.2		26.5		26.7		20.7		18.1

Operating loss	(8.3	)	(10.2	)	(14.5	)	(15.8	)	(11.4	)	(9.1	)	(3.6	)	(2.3	)
Interest income	0.2		1.4		0.3		0.2		0.6		0.7		0.8		0.5
Interest expense	(0.7	)	(0.8	)	(0.7	)	(0.4	)	(0.6	)	(0.7	)	(0.6	)	(0.4	)
Other income (expense), net	—		—		—		—		—		—		(0.1	)	—

Loss from continuing operations	(8.9	)%	(9.7	)%	(14.9	)%	(15.9	)%	(11.4	)%	(9.1	)%	(3.5	)%	(2.2	)%

	Payments Due by Period
Contractual Obligations	2008		2009		2010		2011		2012		Thereafter		Total
Long-term debt arrangements	$	—	$	—	$	—	$	77,000	$	—	$	—	$	77,000
Interest on convertible senior notes	2,888		2,888		2,888		2,647		—		—		11,311
Capital lease obligations	4,086		—		—		—		—		—		4,086
Operating leases	7,647		6,238		5,987		5,803		5,526		11,196		42,397
Purchase obligations	12,699		—		—		—		—		—		12,699
Line of credit	—		—		—		—		—		—		—

Total contractual cash obligations	$	27,320	$	9,126	$	8,875	$	85,450	$	5,526	$	11,196	$	147,493

	Amounts of Commitment Expiration Per Period
Other Commercial Commitments	2008		2009		2010		2011		2012		Thereafter		Total
Letters of credit	$	2,805	$	—	$	—	$	—	$	—	$	—	$	2,805

Total commercial commitments	$	2,805	$	—	$	—	$	—	$	—	$	—	$	2,805

	December 31,
	2006			2007
	(Restated)			(Restated)
Assets
Current assets:
Cash and cash equivalents	$	126,965		$	101,394
Marketable securities	—			46,000

Cash, cash equivalents and marketable securities	126,965			147,394
Accounts receivable, net	16,330			11,208
Note receivable (Note 26)	6,702			1,506
Inventories, net	23,870			25,643
Prepaid inventory	2,241			3,572
Prepaid expense	7,473			7,572
Current assets of held for sale subsidiary	4,718			—

Total current assets	188,299			196,895
Property and equipment, net	56,198			27,197
Goodwill	2,784			2,784
Other long-term assets, net	578			86
Notes receivable	—			4,181
Long-term assets of held for sale subsidiary	16,594			—

Total assets	$	264,453		$	231,143

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	58,412		$	70,358
Accrued liabilities	38,434			37,155
Deferred revenue	23,220			22,965
Capital lease obligations, current	5,074			3,796
Current liabilities of held for sale subsidiary	3,684			—

Total current liabilities	128,824			134,274
Capital lease obligations, non-current	3,983			—
Other long-term liabilities	—			3,034
Convertible senior notes	75,279			75,623

Total liabilities	208,086			212,931

Commitments and contingencies (Notes 11, 12 and 13)
Stockholders’ equity:
Preferred stock, $0.0001 par value, 5,000 shares authorized, no shares issued and outstanding as of December 31, 2006 and 2007	—			—
Common stock, $0.0001 par value, 100,000 shares authorized, 25,069 and 25,423 shares issued as of December 31, 2006 and 2007, respectively	2			2
Additional paid-in capital	325,771			333,909
Accumulated deficit	(204,291		)	(252,327		)

Treasury stock, 1,654 and 1,605 shares at cost as of December 31, 2006 and 2007, respectively	(64,983		)	(63,278		)
Accumulated other loss	(132		)	(94		)

Total stockholders’ equity	56,367			18,212

Total liabilities and stockholders’ equity	$	264,453		$	231,143

	Common stock			Additional Paid-						Treasury stock					Accumulated Other Comprehensive
	Shares	Amount		in capital			Accumulated Deficit			Shares		Amount			Income (Loss)			Total
Balance at December 31, 2004 (as Reported)	19,390	$	2	$	241,830		$	(71,726	)	(35	)	$	(100	)	$	(195	)	$	169,811

Cumulative effect of restatement (1)	—	—		—			(307		)	—		—			—			(307		)
Balance at January 1, 2005 (Restated)	19,390	$	2	$	241,830		$	(72,033	)	(35	)	$	(100	)	$	(195	)	$	169,504
Exercise of stock options and warrants	1,167	—		7,315			—			—		—			—			7,315
Treasury stock issued to employees as compensation	—	—		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		)	—			—
Amortization of stock-based compensation	—	—		72			—			—		—			—			72
Stock-based compensation to consultants in exchange for services	—	—		(389		)	—			—		—			—			(389		)
Deemed dividend related to redeemable common stock	—	—		—			(185		)	—		—			—			(185		)
Lapse of rescission rights on redeemable common stock	14	—		146			—			—		—			—			146
Comprehensive loss (Restated):
Net loss (Restated)	—	—		—			(25,212		)	—		—			—			(25,212		)
Net unrealized loss on marketable securities	—	—		—			—			—		—			(54		)	(54		)
Unrealized gain on foreign notes	—	—		—			—			—		—			1,125			1,125
Cumulative translation adjustment	—	—		—			—			—		—			86			86

Total comprehensive loss (Restated)																		(24,055		)

Balance at December 31, 2005 (Restated)	20,571	2		250,939			(97,430		)	(1,687	)	(65,325		)	962			89,148
Issuance of common stock in offerings	3,776	—		64,406			—			—		—			—			64,406
Exercise of stock options	276	—		2,534			—			—		—			—			2,534
Treasury stock issued to employees as compensation	—	—		445			—			33		342			—			787

Stock-based compensation from employee options	—	—		4,120			—			—		—			—			4,120
Stock-based compensation to consultants in exchange for services	—	—		23			—			—		—			—			23
Deemed dividend related to redeemable common stock	—	—		—			(99		)	—		—			—			(99		)
Lapse of rescission rights on redeemable common stock	446	—		3,304			—			—		—			—			3,304
Comprehensive loss (Restated):
Net loss (Restated)	—	—		—			(106,762		)	—		—			—			(106,762		)

Unrealized (loss) on marketable securities	—	—		—			—			—		—			(1,128		)	(1,128		)
Cumulative translation adjustment	—	—		—			—			—		—			34			34

Total comprehensive loss (Restated)																		(107,856		)

Balance at December 31, 2006 (Restated)	25,069	2		325,771			(204,291		)	(1,654	)	(64,983		)	(132		)	56,367
Exercise of stock options	354	—		3,230			—			—		—			—			3,230
Treasury stock issued for 401(k) matching contribution	—	—		(391		)	—			26		885			—			494
Treasury stock issued for prior-year 401(k) discretionary contribution	—	—		(412		)	—			23		820			—			408

Stock-based compensation from employee options	—	—		4,522			—			—		—			—			4,522
Stock-based compensation to consultants in exchange for services	—	—		189			—			—		—			—			189
Stock-based compensation related to performance shares	—	—		1,000			—			—		—			—			1,000
Comprehensive loss (Restated):
Net loss (Restated)	—	—		—			(48,036		)	—		—			—			(48,036		)

Unrealized gain on marketable securities	—	—		—			—			—		—			41			41
Cumulative translation adjustment	—	—		—			—			—		—			(3		)	(3		)

Total comprehensive loss (Restated)																		(47,998		)

Balance at December 31, 2007 (Restated)	25,423	$	2	$	333,909		$	(252,327	)	(1,605	)	$	(63,278	)	$	(94	)	$	18,212

Supplemental disclosures of cash flow information:
Interest paid	$	5,108		$	3,677	$	3,882
Equipment and software acquired under capital leases	15,438			2,273		—
Asset retirement obligation	—			450		—
Deemed dividend on redeemable common stock	185			99		—
Lapse of rescission rights on redeemable common stock	146			3,304		—
Settlement of purchased call options for treasury stock	41,121			—		—

Promissory note received in exchange for deconsolidation of variable interest entity	—			6,702		—
Prior year discretionary 401(k) contribution settled in treasury stock	—			—		408
Supplemental disclosure on non-cash investing activities:
Fair value of assets acquired	26,447			—		—
Fair value of liabilities assumed	(1,336		)	—		—

Cash paid to purchase business	$	25,111		$	—	$	—

	Year Ended December 31, 2007
	As Previously Reported			Adjustments			As Restated

Revenue
Direct	$	195,622		1,466			$	197,088
Fulfillment partner	564,539			4,275			568,814

Total revenue	760,161			5,741			765,902

Cost of goods sold
Direct	164,368			3,640			168,008
Fulfillment partner	468,222			5,122			473,344

Total cost of goods sold	632,590			8,762			641,352

Gross profit	127,571			(3,021		)	124,550

Operating expenses:
Sales and marketing	55,458			—			55,458
Technology	59,453			—			59,453
General and administrative	41,976			—			41,976
Restructuring	12,283			—			12,283

Total operating expenses	169,170			—			169,170

Operating loss	(41,599		)	(3,021		)	(44,620		)

Interest income	4,788			—			4,788
Interest expense	(4,188		)	—			(4,188		)
Other income, net	(92		)	—			(92		)

Loss from continuing operations	(41,091		)	(3,021		)	(44,112		)
Loss from discontinued operations	(3,924		)	—			(3,924		)
Net loss	(45,015		)	(3,021		)	(48,036		)
Deemed dividend related to redeemable common shares	—			—			—

Net loss attributable to common shares	$	(45,015	)	$	(3,021	)	$	(48,036	)

Net loss per common share — basic and diluted
Loss from continuing operations	$	(1.73	)	$	(0.13	)	$	(1.86	)
Loss from discontinued operations	$	(0.17	)	$	—		$	(0.17	)
Net loss per common share – basic and diluted	$	(1.90	)	$	(0.13	)	$	(2.03	)

Weighted average common shares outstanding — basic and diluted	23,704						23,704

	Year Ended December 31, 2005
	As Previously Reported			Adjustments			As Restated

Revenue
Direct	$	324,875		(1,739		)	$	323,136
Fulfillment partner	474,441			(2,602		)	471,839

Total revenue	799,316			(4,341		)	794,975

Cost of goods sold
Direct	282,383			(1,736		)	280,647
Fulfillment partner	400,057			(2,202		)	397,855

Total cost of goods sold	682,440			(3,938		)	678,502

Gross profit	116,876			(403		)	116,473

Operating expenses:
Sales and marketing	77,155			—			77,155
Technology	27,901			—			27,901
General and administrative	33,043			—			33,043
Restructuring	—			—			—

Total operating expenses	138,099			—			138,099

Operating loss	(21,223		)	(403		)	(21,626		)

Interest income	(270		)	109			(161		)
Interest expense	(5,582		)	—			(5,582		)
Other income, net	4,728			—			4,728

Loss from continuing operations	(22,347		)	(294		)	(22,641		)
Loss from discontinued operations	(2,571		)	—			(2,571		)
Net loss	(24,918		)	(294		)	(25,212		)
Deemed dividend related to redeemable common shares	(185		)	—			(185		)

Net loss attributable to common shares	$	(25,103	)	$	(294	)	$	(25,397	)

Net loss per common share — basic and diluted
Loss from continuing operations	$	(1.16	)	$	(0.01	)	$	(1.17	)
Loss from discontinued operations	$	(0.13	)	$	—		$	(0.13	)
Net loss per common share – basic and diluted	$	(1.29	)	$	(0.01	)	$	(1.30	)

Weighted average common shares outstanding — basic and diluted	19,429						19,429

	As of December 31, 2007
	As Previously Reported			Adjustments			As Restated
Assets
Current assets:
Cash and cash equivalents	$	101,394		$	—		$	101,394
Marketable securities	46,000			—			46,000
Cash, cash equivalents and marketable securities	147,394			—			147,394
Accounts receivable, net	12,304			(1,096		)	11,208
Note receivable	1,506			—			1,506
Inventories, net	25,933			(290		)	25,643
Prepaid inventory	3,572			—			3,572
Prepaid expenses	7,572			—			7,572

Total current assets	198,281			(1,386		)	196,895

Property and equipment, net	27,197			—			27,197
Goodwill	2,784			—			2,784
Other long-term assets, net	86			—			86
Notes receivable	4,181			—			4,181

Total assets	232,529			$	(1,386	)	$	231,143

Liabilities, Redeemable Securities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	70,648		$	(290	)	$	70,358
Accrued liabilities	35,241			1,914			37,155
Deferred revenue	17,357			5,608			22,965
Capital lease obligations, current	3,796			—			3,796

Total current liabilities	127,042			7,232			134,274
Other long-term liabilities	3,034			—			3,034
Convertible senior notes	75,623			—			75,623

Total liabilities	205,699			7,232			212,931

Stockholders’ equity:
Preferred stock, $0.0001 par value, 5,000 shares authorized, no shares issued and outstanding as of December 31, 2007	—			—			—
Common stock, $0.0001 par value, 100,000 shares authorized, 25,423 shares issued as of December 31, 2007	2			—			2
Additional paid-in capital	333,909			—			333,909
Accumulated deficit	(243,709		)	(8,618		)	(252,327		)
Treasury stock, 1,605 shares at cost as of December 31, 2004	(63,278		)	—			(63,278		)
Accumulated other comprehensive loss	(94		)	—			(94		)

Total stockholders’ equity	26,830			(8,618		)	18,212

Total liabilities, redeemable securities and stockholders’ equity	$	232,529		$	(1,386	)	$	231,143

	As of December 31, 2006
	As Previously Reported			Adjustments			As Restated
Assets
Current assets:
Cash and cash equivalents	$	126,965		$	—		$	126,965
Marketable securities	—			—			—
Cash, cash equivalents and marketable securities	126,965			—			126,965
Accounts receivable, net	11,638			4,692			16,330
Note receivable	6,702			—			6,702
Inventories, net	20,274			3,596			23,870
Prepaid inventory	2,241			—			2,241
Prepaid expenses	7,473			—			7,473
Current asset of held for sale subsidiary	4,718			—			4,718

Total current assets	180,011			8,288			188,299

Property and equipment, net	56,198			—			56,198
Goodwill	2,784			—			2,784
Other long-term assets, net	578			—			578
Long-term assets of held for sale subsidiary	16,594			—			16,594

Total assets				$	8,288		$	264,453

Liabilities, Redeemable Securities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	66,039		(7,622		)	$	58,412
Accrued liabilities	37,492			942			38,434
Deferred revenue	2,650			20,570			23,220
Capital lease obligations, current	5,074			—			5,074
Current liabilities of held for sale subsidiary	3,684			—			3,684

Total current liabilities	114,939			13,885			128,824
Capital lease obligations, non-current	3,983			—			3,983
Convertible senior notes	75,279			—			75,279

Total liabilities	194,201			13,885			208,086

Stockholders’ equity:
Preferred stock, $0.0001 par value, 5,000 shares authorized, no shares issued and outstanding as of December 31, 2005	—			—			—
Common stock, $0.0001 par value, 100,000 shares authorized, 25,069 shares issued as of December 31, 2005	2			—			2
Additional paid-in capital	325,771			—			325,771
Accumulated deficit	(198,694		)	(5,597		)	(204,291		)
Treasury stock, 1,654 shares at cost as of December 31, 2005	(64,983		)	—			(64,983		)
Accumulated other comprehensive loss	(132		)	—			(132		)

Total stockholders’ equity	61,964			(5,597		)	56,367

Total liabilities, redeemable securities and stockholders’ equity	$	256,165		$	8,288		$	264,453

	Balance 12/31/2006		Charges to Expense		Cash payment or accelerated depreciation			Balance 12/31/2007
Lease and contract termination costs	$	5,499	$	9,914	$	(11,378	)	$	4,035
Asset retirement obligation	450		—		(450		)	—
Accelerated depreciation of leasehold improvements	—		2,169		(2,169		)	—
Other restructuring expenses	—		200		(200		)	—

Total	$	5,949	$	12,283	$	(14,197	)	$	4,035