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WayfairTable of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-KCommission file number 000-49799OVERSTOCK.COM, INC.(Exact name of Registrant as specified in its charter)Delaware(State or other jurisdiction ofincorporation or organization) 87-0634302(I.R.S. EmployerIdentification Number)6350 South 3000 EastSalt Lake City, Utah 84121(Address of principal executive offices including zip code)(801) 947-3100(Registrant's telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:Title of Each Class Name of Each Exchange on WhichRegisteredCommon Stock, $0.0001 par value Nasdaq Global MarketSecurities 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 ý 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 ý 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 shorterperiod that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 knowledge, in definitiveproxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. Yes ý No 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 "large accelerated filer","accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the act). Yes o No ý 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 most recently completed second quarter (June 30,2009), was approximately $108.2 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 theoutstanding 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 necessarilyconclusive. As of March 25, 2010 there were 22,960,613 shares of the registrant's Common Stock outstanding.DOCUMENTS INCORPORATED BY REFERENCE(Mark One) ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934For the fiscal year ended December 31, 2009ORo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934For the transition period from to Large accelerated filer o Accelerated filer ý Non-accelerated filer o(Do not check if asmaller reporting company) Smaller reporting company o Certain information required by Part III of Form 10-K is incorporated by reference to the Registrant's proxy statement for the 2010 Annual Stockholders Meeting, which will be filed with the Securitiesand Exchange Commission within 120 days after the end of the fiscal year to which this Report relates. Table of Contents EXPLANATORY NOTE On January 29, 2010, the Audit Committee of the Board of Directors of Overstock.com, Inc. concluded, based on the recommendation of management,that we would restate (1) our consolidated financial statements for the year ended December 31, 2008 and (2) our quarterly consolidated financial statementsfor all interim periods for the year ended December 31, 2008 and the interim periods ended March 31, 2009, June 30, 2009 and September 30, 2009 withinthis Form 10-K to correct the following errors:•Accounting for amounts that we pay our drop ship fulfillment partners and an amount due from a vendor that went undiscovered for a period oftime. Specifically, these errors related to (1) amounts we paid to partners or deducted from partner payments related to return processingservices and product costs and (2) amounts we paid to a freight vendor based on incorrect invoices from the vendor. Once discovered, weapplied "gain contingency" accounting for the recovery of such amounts, which was an inappropriate accounting treatment. •Amortization of the expense related to restricted stock units. Previously the expense was based on the actual three year vesting schedule,which incorrectly understated the expense as compared to a three year straight line amortization. We also corrected for the use of an outdatedforfeiture rate in calculating share-based compensation expense under the plans.The following additional adjustments were also included in this restatement:•Correction of certain amounts related to customer refunds and credits. •Recognition of co-branded credit card bounty revenue and promotion expense over the estimated term of the credit card relationships.Previously the revenue was incorrectly recognized when the card was issued. •Reduction in the restructuring accrual and correction of the related expense due to a 2008 sublease benefit which was previously excludedfrom the accrual calculation and the accretion of interest expense related to the restructuring accrual, which was not previously recorded. •Change in our accounting for external audit fees to the "as incurred" method instead of the "ratable" method. •Other miscellaneous adjustments, none of which were material either individually or in the aggregate. Certain of these adjustments wererelated to a reduction in revenue and cost of goods sold in equal amounts for certain consideration we received from vendors, an increase ininventory, accounts payable and accrued liabilities to record our sales return allowance on a gross basis, an adjustment to our cash andrestricted cash balances due to compensating balance arrangements and an adjustment to record redeemable common stock for certain sharespreviously issued to employees. Table of Contents The increase (decrease) to net income (loss) attributable to common shares of the above adjustments is as follows (in thousands): 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 thisForm 10-K. This Form 10-K amends the consolidated financial statements as of and for the year ended December 31, 2008 included in the Annual Report onForm 10-K/A for the year ended December 31, 2008, as filed on March 5, 2009. Except as required to reflect the effects of the restatement for the items above, no additional modifications or updates to the 2008 financial statements ordata in this filing have been made to the 2008 financial statements or data. Other information not affected by the restatement remains unchanged and reflectsthe disclosures made at the time of the original filing. This filing does not describe other events occurring after the original filing, including exhibits, ormodify or update those disclosures affected by subsequent events. This filing should be read in conjunction with our filings made with the SEC subsequentto the filing of the Original Filing, as those filings may have been amended, as information in such reports and documents may update or supersede certaininformation contained in this filing. Concurrent with the filing of this Form 10-K, we are filing amended quarterly reports on Form 10-Q/A for the quartersended March 31, 2009, June 30, 2009 and September 30, 2009 to restate our previously filed consolidated statements for the interim periods ended March 31,2008 and 2009, June 30, 2008 and 2009 and September 30, 2008 and 2009. Accordingly, this filing only amends and restates the 2008 financial statements and data in Item 1 of Part I, Items 6,7 and 8 on Form 10-K/A for the yearended December 31, 2008, as filed on March 5, 2009, in each case, solely as a result of, and to reflect, the restatement, and no other information in the AnnualReport on Form 10-K/A for the year ended December 31, 2008, as filed on March 5, 2009 is amended hereby. Additionally, pursuant to the rules of the SEC,Item 15 of Part IV of the Annual Report on Form 10-K/A for the year ended December 31, 2008, as filed on March 5, 2009 has been Three Months Ended Three Months Ended March 31,2008 June 30,2008 September 30,2008 December 31,2008 Year endedDecember 31,2008 March 31,2009 June 30,2009 September 30,2009 The effect of the adjustmentsrelated to (1) amounts theCompany paid to partnersor deducted frompayments to partnersrelated to returnprocessing services andproduct costs and(2) amounts the Companypaid to a freight vendorbased on incorrectinvoices from the vendor. $927 $955 $1,248 $(1,394)$1,736 $(1,606)$297 $(394)The effect of the adjustmentsrelated to accounting forcertain of the Company'sshare-based compensationplans. (71) (87) (97) (95) (350) (340) (290) (254)The effect of the adjustmentsrelated to customerrefunds and credits. — — — (186) (186) 9 (3) (9)The effect of the adjustmentsrelated to the co-brandedcredit card bounty revenueand promotion expense. 221 74 51 (48) 298 48 95 55 The effect of the adjustmentsrelated to restructuringexpense and interestexpense related to theaccretion of therestructuring accrual. — 251 (60) 5 196 (17) (179) (13)The effect of the adjustmentsrelated to external auditfees. (316) 104 29 (7) (190) (221) 14 32 The effect of othermiscellaneousadjustments 53 14 (2) 6 71 271 (4) (9) Total impact of the effect ofthe adjustments $814 $1,311 $1,169 $(1,719)$1,575 $(1,856)$(70)$(592) Table of Contentsamended by the currently dated certifications of our principal executive officer and principal financial officer included in this Form 10-K. As required bySections 302 and 906 of the Sarbanes-Oxley Act of 2002, the certifications of our principal executive officer and principal financial officer, are attached tothis Form 10-K as Exhibits 31.1, 31.2, 32.1 and 32.2. Table of Contents OVERSTOCK.COM, INC.ANNUAL REPORT ON FORM 10-KINDEX Overstock.com and Worldstock are registered trademarks, and Worldstock.com and Club O are trademarks of Overstock.com, Inc. The Overstock.comlogo and Worldstock.com logo are also trademarks of Overstock.com, Inc. Other service marks, trademarks and trade names referred to in this Form 10-K areproperty of their respective owners. Page Special Note Regarding Forward-Looking Statements 6Part I Item 1. Business 8Item 1A. Risk Factors 18Item 1B. Unresolved Staff Comments 43Item 2. Properties 43Item 3. Legal Proceedings 43Item 4. Removed and Reserved 43Part II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities 44Item 6. Selected Financial Data 48Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 52Item 7A. Quantitative and Qualitative Disclosures About Market Risk 80Item 8. Financial Statements and Supplementary Data 80Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 80Item 9A. Controls and Procedures 80Item 9B. Other Information 84Part III Item 10. Directors, Executive Officers and Corporate Governance 85Item 11. Executive Compensation 85Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 85Item 13. Certain Relationships and Related Transactions, and Director Independence 85Item 14. Principal Accounting Fees and Services 85Part IV Item 15. Exhibits, Financial Statement Schedules 86Signatures 89Financial Statements F-1 Table of Contents SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements within the meaning ofSection 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 ofthe safe harbor provisions of these laws. These forward-looking statements involve risks and uncertainties, and relate to future events or our future financial oroperating performance. The forward-looking statements include all statements other than statements of historical fact, including, without limitation:•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 onlinemarketing campaigns to be a cost-effective method of attracting customers; our belief that we can internally develop cost-effective brandingcampaigns; •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; the potential for additional issuances of our securities; •our future ability to repurchase or retire or refinance our publicly traded debt; •our expansion in international markets; •our plans to devote substantial resources to our sales and marketing teams; •our strategy to develop strategic business relationships with additional wholesalers and distributors; our belief that manufacturers willrecognize us as an efficient liquidation solution; •our belief that current or future litigation or regulatory action will likely not have a material adverse effect on our business; •the results of upgrades to our infrastructure and the likelihood that additional future upgrades can be implemented without disruption of ourbusiness; •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 thatprogram; •the possibility that we will relocate our corporate offices or consolidate our warehouses; •statements about our community site business and its anticipated functionality;6 Table of Contents•our belief that we can maintain inventory levels at appropriate levels despite the seasonal nature of our business; and •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 onlypredictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider the risks outlined in this Form 10-K, including those described in Item 1A under the caption "Risk Factors." These factors may cause our actual results to differ materially from thosecontemplated by any forward-looking statement. Except as otherwise required by law, we expressly disclaim any obligation to release publicly any update orrevisions to any forward-looking statements to reflect any changes in our expectations or any change in events, conditions or circumstances on which any ofour forward-looking statements are based. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannotguarantee future results, levels of activity, performance or achievements.7 Table of Contents PART I ITEM 1. BUSINESS The following description of our business contains forward-looking statements relating to future events or our future financial or operatingperformance that involve risks and uncertainties, as set forth above under "Special Note Regarding Forward-Looking Statements." Our actual results coulddiffer materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in Section 1A under theheading "Risk Factors" and elsewhere in this Form 10-K.Introduction We are an online retailer offering closeout and discount brand and non-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 sell these productsthrough an internet website located at www.overstock.com ("Website"). We also sell books, magazines, CDs, DVDs and video games ("BMMG"). We alsooperate as part of our Website an online auctions business—a marketplace for the buying and selling of goods and services—as well as online sites for listingcars and real estate for sale. In October 2009, we also launched O.biz, a website where customers can shop for bulk and business related items. Though our twowebsites are located at different domain addresses, the technology and equipment and processes supporting the Overstock.com Website and the process oforder fulfillment described herein are the same for the O.biz website. Our company, based in Salt Lake City, Utah, was founded in 1997. We launched the Website in March 1999. Our Website offers our customers anopportunity to shop for bargains conveniently, while offering our suppliers an alternative inventory liquidation or sales channel. We continually add new,sometimes limited inventory products to our Website in order to create an atmosphere that encourages customers to visit frequently and purchase productsbefore our inventory sells out. We offer approximately 168,000 non books and media products in multiple departments found under the shopping tab("Shopping Tab" or "Shopping Section") on our Website, and offer approximately 661,000 media products in the Books & Media department. We sellproducts primarily in the United States, with a small amount of products (less than 1% of sales) sold internationally. As used herein, "Overstock.com," "we," "our" and similar terms include Overstock.com, Inc. and its subsidiaries, unless the context indicates otherwise.Industry Overview We deal primarily in closeout and discount merchandise. Closeout merchandise is typically available in inconsistent quantities and often is onlyavailable to consumers after it has been purchased and resold by disparate liquidation wholesalers. We believe that the traditional liquidation market istherefore characterized by fragmented supply and fragmented demand. We use the Internet to aggregate both supply and demand and create a more efficientmarket for liquidation merchandise. Our objective is to provide a one-stop destination for discount shopping for products and services sold through theInternet. Manufacturers and retailers traditionally hold inventory to buffer against uncertain demand within their normal, "inline" sales channels. Inline saleschannels are manufacturers' primary distribution channels, which are characterized by regularly placed orders by established retailers at or near wholesaleprices. The disposal of excess, or overstock, inventory represents a substantial burden for many manufacturers, especially those who produce high-qualitybranded merchandise. Manufacturers seek to avoid liquidating through traditional retail channels where the manufacturer's discounted products may be soldalongside other full-price products. This can result in weaker pricing and decreased brand8 Table of Contentsstrength, 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 comparedwith their inline channels. Despite the challenges manufacturers encountered in the liquidation market, the proliferation of outlet malls, wholesale clubs, and discount chains isevidence of the strong level of consumer demand for discount and closeout merchandise. However, consumers face several difficulties in shopping for thismerchandise. For example, many traditional liquidation outlets are in remote locations and have limited shopping hours, which we believe makes shoppingburdensome and inconvenient. In addition, in the traditional liquidation outlet there are space constrains limiting the number of products that can be offeredat any given time. We also believe that the market for online liquidation is characterized by a limited number of competitors, some of which use an auction model to pricetheir goods. Furthermore, we believe that many of the online companies that do offer overstock or liquidation merchandise are focused on single productlines. Lastly, small retailers are under competitive pressure from large national retailers. Small retailers generally do not have purchasing leverage withmanufacturers; consequently, they are more likely to pay full wholesale prices and are more likely to receive inferior service. We believe that small retailersgenerally 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.Our Business We provide manufacturers with a one-stop liquidation channel to sell both large and small quantities of excess and closeout inventory withoutdisrupting sales through traditional channels. Much of the merchandise offered on our Website is from well-known, brand-name manufacturers. In theShopping Section of our Website, we currently have approximately 661,000 BMMG products (books, magazines, CDs, DVDs, and video games) andapproximately 168,000 non-BMMG products in eleven major departments. Our customers are able to access and purchase our products 24 hours a day fromthe convenience of their computer. Our team of customer service representatives assists customers by telephone, instant online chat and e-mail. Our objectiveis to become the dominant Internet-based closeout solution for holders of brand-name merchandise, allowing them to dispose of that merchandise discreetlyand with high recovery values, and to ultimately become a one-stop Internet-based discount shopping destination. We use the Internet to create a more efficient market for liquidation, closeout and other discount merchandise. We provide consumers and businesseswith quick and convenient access to high-quality, brand-name merchandise at discount prices. We have organized our shopping business (sales of productoffered through the Shopping Section of our Website) into two principal segments—a "direct" business and a "fulfillment partner" business (see Item 15 ofPart IV, "Financial Statements—Note 25—Business Segments"). Virtually all of our sales are to customers located in the United States. Less than 1% of oursales are made indirectly to international customers. During the years ended December 31, 2007, 2008, and 2009, no single customer accounted for more than1% 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 (seeItem 2 of Part I, "Properties"). During the year ended December 31, 2009, we fulfilled approximately 15% of our order volume through our9 Table of Contentswarehouses. Our warehouses generally ship between 7,000 and 10,000 orders per day and up to approximately 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") through our Website. Weare 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 agross basis. Our use of the term "partner" or "fulfillment partner" does not mean that we have formed any legal partnerships with any of our fulfillmentpartners. We currently have fulfillment partner relationships with approximately 1,250 third parties which post approximately 161,000 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 isrecorded net of returns, coupons and other discounts. 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. Unless otherwise indicated or required by the context, the discussion herein of our consolidated financial statements, accounting policies and relatedmatters, pertains to the Shopping Section of our Website and our O.biz website and not necessarily to the much smaller Auctions, Cars or Real Estate sectionsof our Website.Consignment In September 2009, we began offering a consignment service to suppliers where the suppliers' merchandise is stored in and shipped from our leasedwarehouses. We pay the consignment supplier upon sale of the consigned merchandise to the consumer. Revenue from our consignment service business isincluded in the fulfillment partner segment.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, andusers 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 itemsreturned from our shopping business through our auction service, and for these sales, we record the revenue on a gross basis. Revenue from our auctionbusiness is included in the fulfillment partner segment.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 toreview vehicle descriptions, post offers to purchase, and provides the means for purchasers to contact sellers for further information and negotiations on thepurchase of an advertised vehicle. Revenue from our car listing business is included in the fulfillment partner segment.Real Estate listing business 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 listingsacross the country. Listing categories include foreclosures, live and on-line auctions, for sale by owner listings, broker/agent listings and numerous10 Table of Contentsaggregated classified ad listings. Revenue from the real estate business is included in the fulfillment partner segment.International business We began selling products through our Website to customers outside the United States in late August 2008. As of December 31, 2009, we were selling tocustomers in 58 countries. We do not have operations outside the United States, and are using a U.S. based third party to provide logistics and fulfillment forall international orders. Revenue generated from our international business is included in either direct or fulfillment partner revenue, depending on whetherthe product is shipped from our warehouses or from a fulfillment partner.O.biz In October 2009, we introduced O.biz, a website where customers and businesses can shop for bulk and business related items, offering manufacturers,distributors and other retailers an alternative sales channel for liquidating their inventory. Revenue generated from our O.biz website is included in eitherdirect or fulfillment partner revenue, depending on whether the product is shipped from our warehouses or from a fulfillment partner.Manufacturer, Supplier and Distribution Relationships It is difficult to establish closeout buying relationships with manufacturers. Trust and experience gained through past interactions are important. To date,we have not entered into contracts with manufacturers or liquidation wholesalers that guarantee the availability of merchandise for a set duration. Ourmanufacturer and supplier relationships are based on historical experience with manufacturers and liquidation wholesalers and do not obligate or entitle us toreceive merchandise on a long-term or short-term basis. In our direct business, we purchase the products from manufacturers or liquidation wholesalers usingstandard purchase orders. Generally, suppliers do not control the terms under which products are sold through our Website.ProductsOnline Products Our Website is organized into five main sections: Shopping, Auctions, Cars, Real Estate, and Community. The Shopping section is organized into elevenmain departments: Furniture, Home & Garden, Bedding & Bath, Clothing & Shoes, Jewelry, Watches, Electronics, Sports, Books & Media, Worldstock andMore. Each of these departments has multiple categories that more specifically define the products offered within that department. For 2007, 2008 and 2009,the percentages of gross sales contributed by similar classes of products were as follows:11Product class 2007 2008 2009 Home and garden(1) 44% 50% 53%Jewelry, watches, clothing and accessories 25% 24% 24%BMMG(2), electronics and computers 23% 18% 14%Other 8% 8% 9% 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." Table of Contents The number of total products we offer has grown from less than 100 in 1999, to more than 168,000 non-BMMG products and approximately 661,000BMMG products (books, magazines, CDs, DVDs and video games) as of December 31, 2009. As the number of products and product categories changethroughout 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 andgain access to a broader market.Fulfillment OperationsGeneral When customers place orders on our Website, orders are fulfilled either by a third-party fulfillment partner or directly from our warehouses in Salt LakeCity, Utah. We monitor all of these sources for accurate order fulfillment and timely shipment.Payment Terms Generally, we require verification of receipt of payment, or authorization from credit card or other payment vendors whose services we offer to ourcustomers (such as PayPal and BillMeLater), before we ship products to consumers or business purchasers. From time to time we grant credit to our businesspurchasers with normal credit terms (typically 30 days). However, for most sales in our fulfillment partner business, we generally receive payments from ourcustomers before our payments to our suppliers are due.Fulfillment for Direct Business During 2009, we fulfilled approximately 15% of our order volume through our leased warehouses in Salt Lake City, Utah (see Item 2 of Part I,"Properties"). Our warehouse staff generally shipped between 7,000 and 10,000 orders per day, and up to 32,000 orders per day during peak periods. We alsoprocess returns of direct and fulfillment partner merchandise in the Salt Lake City warehouses. Our warehouses store approximately 7,000 non-BMMGproducts offered on our Website.Fulfillment Partner Business During 2009, approximately 85% of our order volume was for inventory owned and shipped by third-party fulfillment partners. We currently coordinatewith approximately 1,250 fulfillment partners that collect orders through our Website. These third-party fulfillment partners perform essentially the sameoperations as our warehouse: order picking and shipping; however, we handle returns and customer service related to substantially all orders placed throughour Website.Sales and Marketing We use a variety of methods to target our consumer audience, including online campaigns, such as advertising through portals, keywords, searchengines, affiliate marketing programs, banners, e-mail and direct mail campaigns, and we are able to monitor and evaluate their results. We seek to identifyand eliminate campaigns that do not meet our expectations. We also do brand advertising through television, radio, and print ads. We generally developthese campaigns internally and believe that doing so is cost-effective.Customer Service We are committed to providing superior customer service. We staff our customer service department with dedicated in-house professionals andoutsourced professionals who respond to phone,12 Table of Contentsinstant online chat and e-mail inquiries on products, ordering, shipping status, returns and other areas of customer inquiry. As a result of this commitment, wemaintained our #2 rank in customer service rankings among all U.S. retailers, according to rankings published in the 2010 NRF Foundation/AmericanExpress Customer Service Survey. Our customer service staff processes approximately 15,000 calls per week and up to approximately 32,000 calls per week during seasonal peak periods.The same staff processes approximately 10,000 e-mail messages each week and up to approximately 18,000 e-mail messages per week during seasonal peakperiods, with a turnaround goal of one business day. We use automated e-mail and phone systems to route traffic to appropriate customer servicerepresentatives. The demands on our customer service staff increase significantly during peak periods, including the several weeks before and after theChristmas holiday.Technology We use our internally developed Website, our O.biz website and a combination of proprietary technologies and commercially available licensedtechnologies and solutions to support our operations. We use the services of XO Communications, Inc., Qwest Communications International, Inc. andVerizon, Inc. to obtain connectivity to the Internet over multiple Gig-E and OC48 links. We currently store our data on several Oracle and Teradata databasesusing Dell and IBM computer hardware connected to multiple large scale Hitachi and EMC storage devices. Currently, we use Dell and IBM servers for ourWebsite, which are connected to the Oracle and Teradata databases and operate in a multi-processing Linux environment designed to accommodate largevolumes of Internet traffic. Currently, our primary computer infrastructure resides at our co-location facility in Salt Lake City. We also have a second datacenter which we use primarily for backups, redundancy, development, testing, and our corporate systems infrastructure.Competition The online liquidation services market is intensely competitive and has relatively low barriers to entry, as new competitors can launch new websites atrelatively 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", some of which may specifically adopt our methods andtarget 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 •traditional retailers and liquidators such as Ross Stores, Inc., Wal-Mart Stores, Inc., TJX Companies, Inc., Costco Wholesale Corporation, J.C.Penney Company, Inc., Sears Holding13 Table of ContentsCorporation, Target Corporation, Best Buy Co., Inc. and Barnes and Noble, Inc., most of which 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 yetfocused on the liquidation market, and from retail companies who are currently not yet operating online. Many of our current and potential competitors have greater brand recognition, longer operating histories, larger customer bases and significantly greaterfinancial, marketing and other resources than we do. Further, any of them may enter into strategic or commercial relationships with larger, more establishedand well-financed companies, including exclusive distribution arrangements with our vendors that could deny us access to their products. Many of themcould devote greater resources to marketing and promotional campaigns and devote substantially more resources to their website and systems developmentthan we do. New technologies and the continued enhancement of existing technologies also may increase competitive pressures on us. We cannot ensure thatwe will be able to compete successfully against current and future competitors or address increased competitive pressures (see Item 1A—"Risk Factors").Seasonality Our business is affected by seasonality, which historically has resulted in higher sales volume during our fourth quarter, which ends December 31. Werecognized 38.5%, 30.6% and 36.8% of our annual revenue during the fourth quarter of 2007, 2008, and 2009, respectively.Financial Information about Geographic Areas See Item 15 of Part IV, "Financial Statements"—Note 25—"Business Segments" for more information.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 restrictionswith our employees, customers, suppliers, affiliates and others to establish and protect our proprietary rights. Despite these precautions, it may be possible fora third party to copy or otherwise obtain and use our intellectual property without authorization. In addition, we cannot ensure that others will notindependently develop similar intellectual property. Although we have registered and are pursuing the registration of our key trademarks in the United Statesand some internationally, some of our trade names may not be eligible to receive registered trademark protection. In addition, effective trademark protectionmay not be available or we may not seek protection in every country in which we market or sell our products and services, 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 andoperations. 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 and become subject to regulatory investigations or actions, consumer protection, employment, intellectual propertyand other commercial litigation related to the conduct of our business. Such litigation could be costly and time consuming and could divert our managementand key personnel from our business operations. The uncertainty of litigation increases14 Table of Contentsthese risks. In connection with such litigation, we may be subject to significant damages or equitable remedies relating to the operation of our business andthe sale of products on our Website. Any such litigation may materially harm our business, prospects, results of operations, financial condition or cash flows. These and other types of claims could result in increased costs of doing business through legal expenses, adverse judgments or settlements or require usto change our business practices in expensive ways. In addition, litigation could result in interpretations of the law that require us to change our businesspractices or otherwise increase our costs. Additional litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validityand scope of the proprietary rights of others. Any litigation, regardless of outcome or merit, could result in substantial costs and diversion of management andtechnical resources, any of which could materially harm our business (see Item 1A—"Risk Factors"). See the information set forth under Item 15 of Part IV, "Financial Statements—Note 16—Commitments and Contingencies, subheading LegalProceedings," contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K.Government Regulation Our services are subject to federal and state consumer protection laws including laws protecting the privacy of consumer information and regulationsprohibiting unfair and deceptive trade practices. In particular, under federal and state financial privacy laws and regulations, we must provide notice toconsumers of our policies on sharing non-public information with third parties, must provide advance notice of any changes to our policies and, with limitedexceptions, must give consumers the right to prevent sharing of their non-public personal information with unaffiliated third parties. Furthermore, the growthand 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, libeland personal privacy apply to the Internet and commercial online services. These issues may take years to resolve. In addition, new state tax regulations maysubject 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 subjectus to additional state and local sales and income taxes. New legislation or regulation, the application of laws and regulations from jurisdictions whose lawsdo not currently apply to our business or the application of existing laws and regulations to the Internet and commercial online services could result insignificant additional taxes on our business. These taxes could have an adverse effect on our cash flows and results of operations. Furthermore, there is apossibility 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, 2009, we had approximately 1,300 full-time employees. We seasonally augment our workforce with temporary employees during ourfourth quarter to handle increased workload in both our warehouse and customer service operations. We have never had a work stoppage, and none of ouremployees are represented by a labor union. We consider our employee relationships to be good. Competition for qualified personnel in our industry hashistorically been intense, particularly for software engineers, computer scientists, and other technical staff.15 Table of ContentsExecutive Officers The following persons were executive officers of Overstock.com as of March 31, 2010: Dr. Patrick M. Byrne has served as our Chief Executive Officer (principal executive officer) and as a Director since October 1999, as Chairman of theBoard from February 2001 through October 2005, and since July 2006. From September 1997 to May 1999, Dr. Byrne served as President and ChiefExecutive Officer of Fechheimer Brothers, Inc., a manufacturer and distributor of uniforms. From 1995 until its sale in September 1999, Dr. Byrne wasChairman, 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 inChinese studies from Dartmouth College, a Master's Degree from Cambridge University as a Marshall Scholar, and a Ph.D. in philosophy from StanfordUniversity. Mr. Jonathan E. Johnson III joined Overstock.com in September 2002 and currently serves as our President and Corporate Secretary. He has served as ourGeneral 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 andChief Financial Officer. From October 1997 to April 1999, Mr. Johnson practiced law in the Los Angeles offices of Milbank, Tweed, Hadley & McCloy andfrom September 1994 to September 1997, he practiced law in the Los Angeles offices of Graham & James. From February 1994 to August 1994, Mr. Johnsonserved 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 servedas 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 YoungUniversity. Mr. Geoffrey R. Atkinson currently serves as our Senior Vice President, CRM & Buying. Since joining the Company in 2005, Mr. Atkinson has workedprimarily on marketing and customer retention. Mr. Atkinson has previously served as Senior Vice President of Marketing and Vice President of TacticalMarketing. Before joining Overstock.com, Mr. Atkinson worked in marketing and branding at Smith Sport Optics, a manufacturer of sunglasses and gogglesfor sports and leisure, in Sun Valley, Idaho. Mr. Atkinson holds a Bachelor of Arts Degree in Sociology from Dartmouth College. Mr. Stephen J. Chesnut was appointed Senior Vice President, Finance, effective January 5, 2009. Effective February 2, 2010, Mr. Chesnut was appointedSenior Vice President, Finance and Risk Management. From August 2007 to August 2008, Mr. Chesnut served as Vice President, Strategy/MarketDevelopment/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 HD16Executive Officers Age PositionPatrick M. Byrne 47 Chief Executive Officer and Chairman of the Board of DirectorsJonathan E. Johnson III 44 President and Corporate SecretaryGeoffrey R. Atkinson 28 Senior Vice President, CRM & BuyingStephen J. Chesnut 50 Senior Vice President, Finance and Risk ManagementSamuel J. Peterson 34 Senior Vice President, Technology and MerchandisingStormy D. Simon 41 Senior Vice President, Marketing and Customer CareStephen P. Tryon 48 Senior Vice President, Supply Chain and Human Capital Management Table of ContentsSupply (prior to its sale by Home Depot); Director, Finance and Chief Financial Officer for Home Depot Supply; Director, New Concept Development; andDirector, Strategic Planning. Prior to joining The Home Depot from 1986 to 1998, Mr. Chesnut served in a variety of operational, planning and financialpositions for Target Stores Inc. Mr. Chesnut holds a Bachelor's of Science Degree in Accounting and Business Management from Southern Utah Universityand a Master of Business Administration Degree, Finance and Strategic Planning, from Brigham Young University. Mr. Samuel J. Peterson currently serves as our Senior Vice President, Technology and Merchandising. Mr. Peterson previously served as the VicePresident, 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 mediaand travel industries. Mr. Stephen P. Tryon joined Overstock.com in August 2004, and serves as Senior Vice President, Supply Chain and Human Capital Management, withprimary responsibility for logistics and supervision of the Company's warehouse operations, and most recently, managing the Company's training and humanresources. 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 withthe Army, his assignments included director of plans for the 10th Mountain Division, Congressional Fellow for United States Senator Max Cleland, AssistantProfessor of Philosophy at the United States Military Academy, and commander of a company of paratroopers. Mr. Tryon received a Bachelor's of ScienceDegree in Applied Sciences from the U.S. Military Academy and a Master's Degree of Arts in Philosophy from Stanford University.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 onForm 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 ofcharge through our Internet Website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities andExchange Commission. Our Internet Website and the information contained therein or connected thereto are not a part of or incorporated into this AnnualReport on Form 10-K.17 Table of Contents 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 resultsand cash flows could be materially adversely affected, and the market price of our securities could decrease. These are not the only risks we face. Inaddition, the global economic climate amplifies many of these risks.Risks Relating to OverstockGeneral economic factors may adversely affect our financial performance. General economic conditions may adversely affect our financial performance. In the United States, changes in interest rates, changes in fuel and otherenergy costs, weakness in the housing market, inflation or deflation or expectations of either inflation or deflation, higher levels of unemployment,unavailability or limitations of consumer credit, higher consumer debt levels or efforts by consumers to reduce debt levels, higher tax rates and other changesin tax laws, overall economic slowdown, changes in consumer desires affecting demand for the products and services we sell and other economic factorscould adversely affect consumer demand for the products and services we sell, change the mix of products we sell to a mix with a lower average gross marginand 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 othereconomic factors in the United States can increase our cost of sales and operating, selling, general and administrative expenses, and otherwise adverselyaffect our operations and operating results. These factors affect not only our operations, but also the operations of suppliers from whom we purchase goods, acondition that can result in an increase in the cost to us of the goods we sell to our customers.Decreases in discretionary consumer spending may have an adverse effect on us. A substantial portion of the products and services we offer are products or services that consumers may view as discretionary items rather than necessities.As a result, our results of operations are sensitive to changes in macro-economic conditions that impact consumer spending, including discretionaryspending. Difficult macro-economic conditions, particularly high levels of unemployment, also impact our customers' ability to obtain consumer credit.Other factors, including consumer confidence, employment levels, interest rates, tax rates, consumer debt levels, and fuel and energy costs could reduceconsumer spending or change consumer purchasing habits. A continued slowdown in the U.S. or global economy, or an uncertain economic outlook, couldmaterially adversely affect consumer spending habits and our operating results.We have a history of significant losses. If we do not maintain profitability, our financial condition and our stock price could suffer. We have a history of losses and we may incur operating and net losses in the foreseeable future. We incurred a net loss of $11 million for the year endedDecember 31, 2008. As of December 31, 2009, our accumulated deficit was $256 million. We need to generate significant revenues to achieve or maintainprofitability, and we may not be able to do so. Although we had a net income attributed to common shares of $7.7 million in 2009, we may not be able tosustain or increase profitability on a quarterly or annual basis in the future. If our revenues grow more slowly than we anticipate or decline, or if our expensesexceed our expectations, our financial results would be harmed and our business, prospects, operating results and financial condition could fall below theexpectations of public market analysts and investors.18 Table of Contents We will continue to incur significant operating expenses and capital expenditures to:•further enhance our distribution and order fulfillment capabilities; •further improve our order processing systems and capabilities; •develop enhanced technologies and features; •continue to expand our customer service capabilities to better serve our customers' needs; •expand or modify our product offerings; •build out and 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 ormarketing analytics arrangements, and continuing or increasing our national television and radio advertising, direct mail and/or othermarketing campaigns. Because we will incur many of these expenses before we receive any revenues from our improvement and enhancement efforts, our losses may be greaterthan 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 futurerevenue projections. Many of our expenses are fixed in the short term, and we may not be able to reduce spending quickly or at all if our revenues are lowerthan we project. Therefore, any significant shortfall in revenues would likely harm our business, prospects, operating results and financial condition. Inaddition, we may find that these efforts are more expensive than we anticipate, which would adversely affect our profitability. Also, the timing of theseexpenses may contribute to fluctuations in our quarterly operating results.We have identified material weaknesses in our internal control over financial reporting. We are required to make an assessment of the effectiveness of our internal control over financial reporting. Our management concluded, and the AuditCommittee of the Board of Directors agreed with management's conclusions, that the following control failures constitute material weaknesses in theCompany's internal control over financial reporting as of December 31, 2009 (see Item 9A of Part II, "Controls and Procedures"):•We lacked a sufficient number of accounting professionals with the necessary knowledge, experience and training to adequately account forand perform adequate supervisory reviews of significant transactions that resulted in misapplications of GAAP. •Information technology program change and program development controls were inadequately designed to prevent changes in our accountingsystems which led to the failure to appropriately capture and accurately process data. The Public Company Accounting Oversight Board (United States) ("PCAOB"), defines a material weakness as a deficiency, or combination ofdeficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financialstatements will not be prevented or detected on a timely basis. If we are unable to correct the identified deficiencies in our internal control in a timely manner, or if we identify other material weaknesses or deficienciesin the future, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the rules and formsof the SEC could be adversely affected. This failure could cause investors to lose confidence in our reported financial information, negatively affect themarket price of our common19 Table of Contentsstock, subject us to investigations and penalties, and adversely impact our business and financial condition.We may need to implement additional finance and accounting systems, procedures and controls as we grow our business and organization and to satisfynew reporting requirements. As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC,including expanded disclosures and accelerated reporting requirements and more complex accounting rules. Compliance with these and other newrequirements may increase our costs and require additional management time and resources. We may need to implement additional finance and accountingsystems, procedures and controls to satisfy our reporting requirements. If our internal control over financial reporting is determined to be ineffective, suchfailure could cause investors to lose confidence in our reported financial information, negatively affect the market price of our common stock, subject us toregulatory investigations and penalties, and adversely impact our business and financial condition.Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters couldsignificantly affect our financial results. Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a widerange of matters that are relevant to our business, including but not limited to, revenue recognition, sales returns allowance, impairment of long-lived assetsand warehouse closing costs, inventories, income taxes, unclaimed property laws and litigation, are highly complex and involve many subjectiveassumptions, estimates and judgments by our management. Changes in these rules or their interpretation or changes in underlying assumptions, estimates orjudgments by our management could significantly change our reported or expected financial performance.Our cash, cash equivalents and short-term investments are subject to a risk of loss based upon the solvency of the financial institutions in which they aremaintained. We maintain the majority of our cash, cash equivalents and short-term investments in accounts with major financial institutions within the United States,in the form of demand deposits, money market accounts, time deposits, U.S. Treasury Bills and other short-term investments. Our deposits in these institutionsmay generally exceed the amounts of insurance provided, or deposits may not at all be covered by insurance. If any of these institutions becomes insolvent, itcould substantially harm our financial condition and we may lose some, or all, of such deposits.If we fail to accurately forecast our expenses and revenues, our business, operating results and financial condition may suffer and the price of oursecurities may decline. Our limited operating history and the rapidly evolving nature of our industry make forecasting operating results difficult. Since 2005, we havecompleted several large, complex and expensive infrastructure upgrades in order to increase our ability to handle larger volumes of sales and to develop orincrease our ability to perform a variety of analytical procedures relating to our business, and we are continuing the work to upgrade and further expand theseand other components of our infrastructure. We have experienced difficulties with the implementation of various aspects of 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 reduce spending if our revenues are lowerthan we project is limited. Therefore, any significant shortfall in the revenues for which we have built and are continuing to build our infrastructure wouldlikely harm our business, prospects, operating results and financial condition and cause our results of operation to fall below the expectations of publicmarket analysts and investors.20 Table of ContentsThe seasonality of our business places increased strain on our operations. A disproportionate amount of our sales normally occur during our fourth quarter. If we do not stock or restock popular products in sufficient amounts tomeet customer demand, this could significantly affect our revenue and our future growth. If we liquidate products, as we have in the past, we may be requiredto take significant inventory markdowns or write-offs, which could reduce gross profits. We may experience an increase in our net shipping cost due tocomplimentary upgrades, split-shipments, and additional long-zone shipments necessary to ensure timely delivery for the holiday season. If too manycustomers access our Website within a short period of time due to increased holiday demand, we may experience system interruptions that make our Websiteunavailable 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 fulfillmentcompanies and customer service co-sourcers may be unable to meet the seasonal demand.We depend on our relationships with independent fulfillment partners for a large portion of the products that we offer for sale on our Website. If we failto maintain these relationships, our business will suffer. At December 31, 2009, we had relationships with approximately 1,250 independent fulfillment partners 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 96% of thenon-BMMG products available on our Website. We may expand the number of fulfillment partner relationships and the number of products offered for saleby our fulfillment partners on our Website. If we do not maintain our existing relationships or build new relationships with fulfillment partners on acceptablecommercial terms, we may not be able to maintain a broad selection of merchandise, and customers may not shop at or purchase from our Website. Inaddition, manufacturers may decide not to offer particular products for sale on the Internet or on sites like ours. If we are unable to maintain our existing orbuild new fulfillment partner relationships or if product manufacturers refuse or restrict sale of their products via the Internet, or though sites like ours, ourbusiness and prospects would suffer severely. In general, we agree to offer the fulfillment partners' products on our Website and these fulfillment partners agree to conduct a number of other traditionalretail operations with respect to their respective products that we offer for sale on our Website, including maintaining inventory, preparing merchandise forshipment to individual customers and timely distribution of purchased merchandise. We have no effective means to ensure that these third parties willcontinue to perform these services to our satisfaction or on commercially reasonable terms. In addition, because we do not take possession of these fulfillmentparties' products, we are unable to fulfill these traditional retail operations ourselves. Our customers could become dissatisfied and cancel their orders ordecline to make future purchases if these third parties are unable to deliver products on a timely basis. If our customers become dissatisfied with the servicesprovided by these third parties, our reputation and the Overstock.com brand could suffer. We do not have any long-term agreements with any of these fulfillment partners. Our agreements with fulfillment partners are terminable at will by eitherparty immediately upon notice.We rely on our relationships with manufacturers, retailers and other suppliers to obtain sufficient quantities of quality merchandise on acceptableterms. If we fail to maintain our supplier relationships on acceptable terms, our sales and profitability could suffer. We do not have contracts with manufacturers or liquidation wholesalers that guarantee the availability of merchandise for a set duration. Our contracts orarrangements with suppliers do not21 Table of Contentsprovide for the continuation of particular pricing practices and may be terminated by either party at any time. Our current suppliers may not continue to selltheir 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 tomaintain high levels of product quality and selection because none of the manufacturers, suppliers and liquidation wholesalers from whom we purchaseproducts 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 inventory to other traditional or online merchandise liquidatorsor retailers, which could in turn limit the selection of products available on our Website. If we are unable to develop and maintain relationships with suppliersthat will allow us to obtain sufficient quantities of merchandise on acceptable commercial terms, such inability could harm our business, prospects, results ofoperation and financial condition.Risks associated with the suppliers from whom our products are sourced and the safety of those products could adversely affect our financialperformance. The products we sell are sourced from a wide variety of domestic and international suppliers. Global sourcing of many of the products we sell is animportant factor in our financial performance. Our ability to find qualified suppliers who meet our standards, and to access products in a timely and efficientmanner is a significant challenge, especially with respect to suppliers located and goods sourced outside the United States. Political and economic instabilityin the countries in which foreign suppliers are located, the financial instability of suppliers, suppliers' failure to meet our supplier standards, labor problemsexperienced by our suppliers, the availability of raw materials to suppliers, merchandise quality issues, currency exchange rates, transport availability andcost, transport security, inflation, and other factors relating to the suppliers and the countries in which they are located are beyond our control. In addition,the United States' foreign trade policies, tariffs and other impositions on imported goods, trade sanctions imposed on certain countries, the limitation on theimportation of certain types of goods or of goods containing certain materials from other countries and other factors relating to foreign trade are beyond ourcontrol. These and other factors affecting our suppliers and our access to products could adversely affect our financial performance. Our customers count on us to provide them with safe products. Concerns regarding the safety of products that we source from our suppliers and then sellcould cause shoppers to avoid purchasing certain products from us, or to seek alternative sources of supply for all of their needs, even if the basis for theconcern is outside of our control. Any lost confidence on the part of our customers would be difficult and costly to reestablish. As such, any issue regardingthe safety of any items we sell, regardless of the cause, could adversely affect our financial performance.We depend upon third-party delivery services to deliver products to our customers on a timely and consistent basis. Deterioration in our relationshipwith any one of these third parties could decrease our ability to track shipments, cause shipment delays, and increase our shipping costs and the numberof damaged products. We rely upon multiple third parties for the shipment of products to customers. We cannot be sure that these relationships will continue on terms we findacceptable, or 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 todeliver products for us, whether through labor shortage, slow down or stoppage, deteriorating financial or business condition, responses to terrorist attacks,natural disasters, 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 or natural disasters can prevent any carriers from performing their delivery services, which can have an22 Table of Contentsadverse effect on our customers' satisfaction with us. In any of these circumstances, we may be unable to engage alternative carriers on a timely basis, uponterms we find acceptable, or at all. Changing carriers, or absence of carrier availability could have a negative effect on our business, prospects, operatingresults and financial condition. Potential adverse consequences effecting customer satisfaction include:•reduced visibility and accuracy of order status and package tracking; •delays in order processing and product delivery; •increased delivery costs, resulting in reduced profit margins; and •reduced shipment quality, which may result in delivery of damaged products.We depend upon our credit card processor and payment card association. Our customers primarily use credit cards to buy from us. We are dependent upon our credit card processor to process the sales transactions and remit theproceeds to us. The credit card processor has the right to withhold funds otherwise payable to us to establish a reserve based on its assessment of the inherentrisks of credit card processing and its assessment of the risks of processing our customers' credit cards, and has done so from time to time in the past. Thecredit card processor may establish, increase or decrease the amount of any reserve at any time. Any increase in the amount of the reserve established by theprocessor would have an adverse effect on our cash flow, and any material unexpected increase could have a material adverse effect on our liquidity,business, prospects, results of operations and financial condition. We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which couldchange or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to finesand higher transaction fees and lose our ability to accept credit and debit card payments from our customers, process electronic funds transfers, or facilitateother types of online payments, and our business and operating results could be adversely affected.A significant number of merchandise returns could harm our business, financial condition and results of operations. We generally allow our customers to return products, subject to our returns policies. If merchandise returns are significant, our business, prospects,financial condition and results of operations could be harmed. Further, we modify our policies relating to returns from time to time and any policies intendedto reduce the number of product returns may result in customer dissatisfaction and fewer repeat customers.Our pricing strategy may not meet customers' price expectations or result in net income. Demand for our products is generally highly sensitive to price. Our pricing strategies have had, and may continue to have, a significant impact on our netsales and net income. We often offer discounted prices, free or discounted shipping as a means of attracting customers and encouraging repeat purchases.Such offers and discounts may reduce our margins. In addition, our competitors' pricing and marketing strategies are beyond our control and can significantlyimpact the results of our pricing strategies. If we fail to meet our customers' price expectations in any given period, or if our competitors decide to engage inaggressive pricing strategies, our business and results of operations would suffer.23 Table of ContentsIf the products that we offer on our Website do not reflect our 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' tastes and preferences. Consumers' tastes are subject to frequent,significant and sometimes unpredictable changes. Because some of the products that we sell consist of manufacturers' and retailers' excess inventory, we havelimited control over some of the specific products that we are able to offer for sale. If our merchandise fails to satisfy customers' tastes or respond to changes incustomer preferences, our sales could suffer and we could be required to mark down unsold inventory, as we have in the past, which would depress our profitmargins. In addition, any failure to offer products in line with customers' preferences could allow our competitors to gain market share. This could have anadverse effect on our business, prospects, results of operations and financial condition.We face risks relating to our inventory. For our direct business, we purchase the merchandise that we sell on our Website. We assume the risks of inventory damage, theft and obsolescence, aswell as risks of price erosion for products that we purchase directly. These risks are especially significant because some of the merchandise we sell on ourWebsite 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 wepurchase. Subject to our returns policies, we accept returns of products sold through our fulfillment partners and we have the risk of reselling the returnedproducts. In the past we have recorded charges for obsolete inventory and have had to sell certain merchandise at a discount or loss. It is impossible to determinewith 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 onour ability to liquidate our inventory rapidly, the ability of our buying staff to purchase inventory at attractive prices relative to its resale value and ourability to manage customer returns and the shrinkage resulting from theft, loss and misrecording of inventory. If we are unsuccessful in any of these areas, wemay be forced to sell our inventory at a discount or loss. We purchase some of our 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 profit margins.If we do not successfully optimize and operate our warehouse and customer service operations, our business could be harmed. We have expanded, contracted and otherwise modified our warehouse and customer service operations in the past, and expect that we will continue to doso. If we do not successfully optimize and operate our warehouse and customer service operations, it could significantly limit our ability to meet customerdemand. 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 orwarehousing capacity. We may be unable to adequately staff our fulfillment and customer service centers. In addition, we rely on a limited number ofcompanies 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 theyexperience 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 Executive24 Table of ContentsOfficer. 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 executiveofficers or other key employees for any reason, including without limitation, illness or call to military service, or loss to competitors as a result ofcompensation differentials or other reasons, could harm our business, prospects, financial condition and results of operations. We do not have employmentagreements with any of our key personnel and we do not maintain "key person" life insurance policies. Our future success also depends on our ability toidentify, attract, hire, train, retain and motivate other highly-skilled technical, managerial, editorial, merchandising, marketing and customer servicepersonnel. Competition for such personnel is intense, and we cannot assure you that we will be able to successfully attract, assimilate or retain sufficientlyqualified personnel. Our failure to retain and attract the necessary technical, managerial, editorial, merchandising, marketing and customer service personnelcould harm our revenues, business, prospects, financial condition and results of operations.We have 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 assurancethat 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 ofdirect/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 ourbusiness. We cannot offer any assurance that these or any other modifications will be successful or will not result in harm to the business. The additions andmodifications to our business have increased the complexity of our business and placed significant strain on our management, personnel, operations, systems,technical performance, financial resources, and internal financial control and reporting functions. Future additions to or modifications of our business arelikely to have similar effects. We may not be able to manage growth effectively, which could damage our reputation, limit our growth and negatively affectour operating results.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 ourefforts 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 mayharm 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 receivedby consumers could damage our reputation or the Overstock.com brand. We may expand the number of categories of products we carry on our Website andthese 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 expandedservices or products to offset their cost could harm our business, prospects, financial condition and results of operations.We are expanding our international business, causing our business to become increasingly susceptible to numerous international business risks andchallenges that could affect our profitability. We have begun selling products in international markets, and in the future we may expand into these markets more aggressively. International sales andtransactions are subject to inherent risks and challenges that could adversely affect our profitability, including:•the need to develop new supplier and manufacturer relationships;25 Table of Contents•the need to comply with additional U.S. and foreign laws and regulations to the extent applicable, including but not limited to, restrictions onadvertising 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, and geopolitical events such as war and terrorist attacks. To the extent we generate international sales and transactions in the future, any negative impact on our international operations could negatively impactour business. In particular, gains and losses on the conversion of foreign payments into United States dollars may contribute to fluctuations in our results ofoperations and fluctuating exchange rates could cause reduced gross revenues and/or gross profit percentages from non-dollar-denominated internationalsales. Additionally, penalties for non-compliance with laws applicable to international business and trade, such as the U.S. Foreign Corrupt Practices Act,could negatively impact our business.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 directcustomers 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 todevelop or maintain these relationships on acceptable terms, our ability to attract new customers and our financial condition could be harmed. If theunderlying technology's development evolves in a manner that is no longer beneficial to us our financial condition could be harmed. In addition, certain ofour 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 thosepayments. Accordingly, if these relationships or agreements that we may enter into in the future fail to produce the sales that we anticipate, our results ofoperations 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 periodicallyconduct national television and radio branding and advertising campaigns. Such campaigns are expensive and may not result in the cost effective acquisitionof customers. Further, many of the parties with which we may have online-advertising arrangements could provide advertising services for other online or traditionalretailers and merchandise liquidators. As a result, these parties may be reluctant to enter into or maintain relationships with us. Failure to achieve sufficienttraffic or generate sufficient revenue from purchases originating from third parties may result in termination of these relationships by these third parties.Further, in the past we have terminated our relationships with third party internet advertising affiliates in certain states as a result of efforts by those states torequire us to collect sales taxes based on the presence of those third party internet advertising affiliates in those states, and we are likely do so again in thefuture if necessary. Without these relationships, our revenues, business, prospects, financial condition and results of operations could suffer.26 Table of ContentsWe 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 canlaunch new websites at a relatively low cost. We currently compete with numerous competitors, including:•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 •traditional retailers and liquidators such as Ross Stores, Inc., Wal-Mart Stores, Inc., TJX Companies, Inc., Costco Wholesale Corporation, J.C.Penny Company, Inc., Sears Holding Corporation, Target Corporation, Best Buy Co., Inc., and Barnes and Noble, Inc., most of which also havean online presence.We compete with liquidation "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 developservices that compete with our services. In addition, manufacturers and retailers may decide to create their own websites to sell their own excess inventoryand the excess inventory of third parties. Competitive pressures created by any one of our competitors, or by our competitors collectively, could harm ourbusiness, 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 decisionsor acquisitions that could harm our business, prospects, financial condition and results of operations. For example, to the extent that we enter new lines ofbusinesses 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. In the past we have entered the online auctions, car listing and real estate listing businesses in which we competewith large established businesses including eBay, Inc., AutoTrader.com, Inc. and Realtor.com. Many of our current and potential competitors described above have longer operating histories, larger customer bases, greater brand recognition andsignificantly greater financial, marketing and other resources than we do. In addition, online retailers and liquidation e-tailers may be acquired by, receiveinvestments from or enter into other commercial relationships with larger, well-established and well-financed companies. Some of our competitors may beable to secure merchandise from manufacturers on more favorable terms, devote greater resources to marketing and promotional campaigns, adopt moreaggressive pricing or inventory availability policies and devote substantially more resources to website and systems development than we do. Increasedcompetition may result in reduced operating margins, loss of market share and a diminished brand franchise. We cannot provide assurance that we will beable to compete successfully against current or future competitors.Our operating results depend on our Website, network infrastructure and transaction-processing systems. Capacity constraints or system failures wouldharm 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 transactionvolume and the attractiveness of the services that we provide to suppliers and third parties and would harm our business, prospects, operating results andfinancial condition.27 Table of Contents We use internally developed systems for our Website and certain aspects of transaction processing, including personalization databases utilized forinternal analytics, recommendations 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 increasessubstantially, we will need to further expand and upgrade our technology, transaction processing systems and network infrastructure. We have experiencedand expect to continue to experience temporary capacity constraints due to sharply increased traffic during sales or other promotions and during the holidayshopping season. Capacity constraints can cause unanticipated system disruptions, slower response times, delayed page presentation, degradation in levels ofcustomer 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 toproject accurately the rate or timing of traffic increases or successfully upgrade our systems and infrastructure to accommodate future traffic levels on ourWebsite. In addition, we may be unable to upgrade and expand our transaction processing systems in an effective and timely manner or to integrate anynewly developed or purchased functionality with our existing systems. For example, in the past we have experienced difficulties with our implementation ofinfrastructure upgrades, which resulted in our inability to upload new products to our Website for a period of time. Any such difficulties with our transactionprocessing 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 inreporting accurate financial information.If the facility where substantially all of our computer and communications hardware is located fails, our business, results of operations and financialcondition will be harmed. If the facility where substantially all of our computer and communications hardware is located fails, our business, results of operations and financialcondition 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 theefficient and uninterrupted operation of our computer and communications systems. Substantially all of our computer and communications hardware islocated at a single co-location facility in Salt Lake City, Utah, with a partially redundant back-up system located less than six miles from the co-locationfacility. In the event of an earthquake or major local disaster, both our primary and back-up sites could be affected. Although we have designed our back-upsystem in an effort to minimize service interruptions in the event of a failure of our main facility, our systems and operations are vulnerable to damage orinterruption from fire, flood, power loss, telecommunications failure, terrorist attacks, acts of war, break-ins, earthquake and similar events. In the event of afailure of our primary facility, the failover to our back-up facility would take at least several hours, during which time our Website would be completely shutdown. Our back-up facility is designed to support sales at a level slightly above our average daily sales, but is not adequate to support sales at a high level.The back-up facility may not process effectively during time of higher traffic to our Website and may process transactions more slowly and may not supportall of the functionality of our primary site. These limitations could have an adverse effect on our conversion rate and sales. Our disaster recovery plan may beinadequate, and we do not carry business interruption insurance sufficient to compensate us for losses that could occur. Despite the implementation ofnetwork security measures, our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, the occurrence of any ofwhich could lead to interruptions, delays, loss of critical data or the inability to accept and fulfill customer orders. The occurrence of any of the foregoingrisks could harm our business, prospects, financial condition and results of operations.28 Table of ContentsWe 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 todeter misappropriation of our proprietary information, detect unauthorized use and take appropriate steps to enforce our intellectual property rights. Inaddition, 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' couldput 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 theirintellectual property rights, including their domain names, could impair our operations. These failures could harm our business, results of operations andfinancial 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 forinjunctive relief has increased the defense litigation costs of patent infringement claims, especially those asserted by third parties whose sole or primarybusiness is to assert such claims. Such claims, whether or not meritorious, may result in significant expenditure of financial and managerial resources, and thepayment of damages or settlement amounts. Additionally, we may become subject to injunctions prohibiting us from using software or business processes wecurrently 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 financiallyfeasible 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 tointellectual 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 materialdelays in introducing new services, products and enhancements. If this happens, our customers may forego the use of our Website and use those of ourcompetitors. The Internet and the online commerce industry are rapidly changing. If competitors introduce new products and services using new technologiesor if new industry standards and practices emerge, our existing Website and our proprietary technology and systems may become obsolete. Our failure torespond to technological change or to adequately maintain, upgrade and develop our computer network and the systems used to process customers' ordersand 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 noassurance that our applications will be successful or that we will be able to secure significant protection for our service marks or trademarks in the UnitedStates or elsewhere as we expand internationally. Our competitors or others could adopt product or service marks similar to our marks, or try to prevent usfrom using our marks, thereby impeding our ability to build brand identity and possibly leading to customer confusion. Any claim by another party againstus or customer confusion related to our trademarks, or our failure to obtain trademark registration, could negatively affect our business.29 Table of ContentsWe may not be able to enforce protection of our intellectual property rights under the laws of other countries. We have begun to sell products internationally and consequently we are subject to risks of doing business internationally as related to our intellectualproperty, including:•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 •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 propertylitigation. We have received in the past, and we anticipate we will receive in the future, communications alleging that certain items listed or sold through ourWebsite infringe third-party copyrights, trademarks and trade names or other intellectual property rights or that we have otherwise infringed third 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 unlawfulactivities carried out by third parties through our Website. In the future, we may implement measures to protect against these potential liabilities that couldrequire us to spend substantial resources and/or to reduce revenues by discontinuing certain service offerings. Any costs incurred as a result of liability orasserted liability relating to the sale of unlawful goods or the unlawful sale of goods could harm our revenues, business, prospects, financial condition andresults of operations. Resolving litigation or claims regarding patents or other intellectual property, whether meritorious or not, could be costly, time-consuming, causeservice delays, divert our management and key personnel from our business operations, require expensive or unwanted changes in our methods of doingbusiness or require us to enter into costly royalty or licensing agreements, if available. As a result, these claims could harm our business. Negative publicity generated as a result of the foregoing could damage our reputation, harm our business and diminish the value of our brand name.We are involved in substantial litigation. From time to time we receive claims of and become subject to consumer protection, employment, intellectual property and other commercial litigationrelated to the conduct and operation of our business and the sale of products on our Website. In connection with such litigation, we may be subject tosignificant damages or equitable remedies. In addition, we have in the past been, are now, and in the future may be, involved in substantial litigation inwhich we are the plaintiff, including litigation regarding the constitutionality of certain state tax laws, and the prime broker litigation described below. Anyof such litigation, whether as plaintiff or defendant, could be costly and time consuming and could divert management and key personnel from our regularbusiness operations. We do not currently believe that any of our outstanding litigation will have a material adverse effect on our financial position, results ofoperations cash flow or business. However, due to the uncertainty of litigation and depending on the amount and the timing, an unfavorable resolution ofsome or all of these matters could materially affect our business, results of operations, financial position, or cash flows.30 Table of ContentsOur 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 MorganStanley & Co. Incorporated, Goldman Sachs & Co., Bear Stearns Companies, Inc., Bank of America Securities LLC, Bank of New York, Citigroup Inc., CreditSuisse (USA) Inc., Deutsche Bank Securities, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., and UBS Financial Services, Inc. In September 2007, we filedan amended complaint articulating in greater detail the allegations against the defendants. The use of management's time and attention in connection withthe 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 otheraspects 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 may be liable if third parties misappropriate our customers' personal information. If third parties are able to penetrate our network security or otherwise misappropriate our customers' personal information or credit card information, or ifwe give third parties improper access to our customers' personal information or credit card information, we could be subject to liability. This liability couldinclude claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims or damages for alleged violations of stateor federal laws governing security protocols for the safekeeping of customers' personal or credit card information. This liability could also include claims forother misuses of personal information, including unauthorized marketing purposes. These claims could result in litigation. Liability for misappropriation ofthis information could adversely affect our business. In addition, the Federal Trade Commission and state agencies have been investigating various Internetcompanies regarding their use of personal information. We could incur additional expenses if new regulations regarding the use of personal information areintroduced or if government agencies investigate our privacy practices. We rely on encryption and authentication technology licensed from third parties as well internally developed technology to provide the security andauthentication necessary to effect secure transmission of confidential information such as customer credit card numbers. We cannot provide assurance thatadvances in computer capabilities internet technology, new discoveries in the field of cryptography or other events or developments will not result in acompromise 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 harmour reputation, business, prospects, financial condition and results of operations. A party who is able to circumvent our security measures couldmisappropriate proprietary information or cause interruptions in our operations. We may be required to expend significant capital and other resources toprotect against such security breaches or to alleviate problems caused by such breaches. We cannot assure you that our security measures will preventsecurity 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 injuryto 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 beadequate to cover every claim that could be asserted. If a successful claim were brought against us in excess of our insurance coverage, it could adverselyaffect our business. Even unsuccessful claims could result in the expenditure of funds and management time and could have a negative impact on ourbusiness.31 Table of ContentsWe have significant indebtedness. As a result of the sale of our 3.75% Convertible Senior Notes (the "Senior Notes") in November 2004, we incurred $120.0 million of indebtedness, dueDecember 1, 2011. As of December 31, 2009, a face amount of $60.0 million of the Senior Notes remained outstanding. The degree to which we are leveragedcould materially and adversely affect our ability to obtain additional financing for working capital, acquisitions or other purposes and could make us morevulnerable 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. Although only half of theSenior Notes we originally issued remain outstanding, the remaining face amount of $60.0 million principal obligation is a significant amount, and we willhave to refinance any portion of the amount due December 1, 2011 that we are unable to repay with proceeds from operations. If we fail to comply with ourdebt 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 willbe affected by a range of economic, competitive and business factors. We cannot control many of these factors, including general economic conditions andthe health of the internet retail industry. If our operations do not generate sufficient cash flow from operations to satisfy our debt service obligations, we mayneed to borrow additional funds to make these payments or undertake alternative financing plans, such as refinancing or restructuring our debt, or reducing ordelaying capital investments and acquisitions. Additional funds or alternative financing may not be available to us on acceptable terms, or at all. Ourinability to generate sufficient cash flow from operations or obtain additional funds or alternative financing on acceptable terms could have a materialadverse effect on our business, prospects, financial condition and results of operations.Public statements we or our chief executive officer, Patrick M. Byrne, have made or may make in the future may antagonize regulatory officials orothers. We and our chief executive officer, Patrick M. Byrne, have from time to time made public statements regarding our or his beliefs about matters of publicinterest, including statements regarding naked short selling. Some of those public statements have been critical of the Securities and Exchange Commissionand other regulatory agencies. These public statements may have consequences for us, whether as a result of increased regulatory scrutiny or otherwise.We remain subject to an investigation by the Securities and Exchange Commission. As previously announced, we have received a notice from the Securities and Exchange Commission ("SEC") stating that the SEC is conducting aninvestigation concerning our previously-announced financial restatements of 2006 and 2008 and other matters. The subpoena accompanying the noticecovers documents related to the restatements and also to our billings to our partners in the fourth quarter of 2008 and related collections, and our accountingfor and implementation of software relating to our accounting for customer refunds and credits, including offsets to partners, and related matters. We havebeen cooperating and intend to continue to cooperate fully with the investigation. However, an unfavorable resolution of this matter could materially affectour business, results of operations, financial position or cash flow.We remain subject to an investigation by District Attorneys in California. As previously announced, in April 2008, we received a letter from the Office of the District Attorney of Marin County, California, stating that the DistrictAttorneys of Marin and four other32 Table of Contentscounties in Northern California have begun an investigation into the way we advertise products for sale, together with an administrative subpoena seekingrelated information and documents. The subpoena requested a range of documents, including documents relating to pricing methodologies, definitions ofcore 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 thepricing of a list of product items identified in the subpoena. We have responded to the subpoena. In January 2010 attorneys for the Company receivedcorrespondence from the Office of the District Attorney of County of Santa Clara in which the respective offices of the various district attorneys have made acollective proposal to resolve the dispute by the Company's payment of $8,500,000 in penalties and reimbursement. The Company disagrees with theproposal and continues to discuss this matter with the authorities involved. We believe that we follow industry advertising practices and intend to continueto cooperate with the investigation. However, an unfavorable resolution of this matter could materially affect our business, results of operations, financialposition or cash flow.Risks Relating to our Auctions Site BusinessOur auctions business is a developing business. Our auctions business began operation in September 2004. The online auctions business is a business in development, and we cannot ensure that ouronline auctions business will succeed. Our auctions business exposes us to additional risks, including legal and regulatory risks, and requires us to competewith 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" andthe liability of traditional "auctioneers" in conducting auctions. Although the vast majority of these regulations contemplated only traditional auctions, notonline auctions, the potential application of these types of regulations to online auction sites is not clear. We are aware that several states and some foreignjurisdictions have attempted to impose such regulations on other companies operating online auction sites or on the users of those sites. In addition, certainstates 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 onour auction site business, we will incur costs in complying with these laws, and we may from time to time be required to make changes in our business thatmay increase our costs, reduce our revenues, cause us to prohibit the listing of certain items in certain locations, or make other changes that may adverselyaffect our auctions business.Current and future laws could affect our auctions business. Like our shopping site business, our auction site business is subject to many of the same laws and regulations that apply to other companies conductingbusiness 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 toonline 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 additionallaws and regulations may apply to transactions between users of our site, such as those requiring a license to sell or purchase certain items or mandatingparticular disclosures in connection with an offer or sale of an item. Periodically, states have targeted online auction business as sites used for disposal ofstolen, or past-date merchandise, like expired baby formula, and have cited these concerns in proposing legislation to broadly prohibit the sale of many typesof items through internet auction and imposing onerous recordkeeping requirements, without similar application of these laws to traditional retailestablishments, online or printed classified advertising publications, or other types of sales list services. To the extent that such current or future laws orregulations prevent or inhibit users from selling items33 Table of Contentson 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 numerouscategories 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 thatusers 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 criminalliability 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 unlawfultransactions using our site, or in our efforts to prevent any such transactions, may harm our business. In addition, any negative publicity we receive regardingany such transactions or allegations may damage our reputation, our ability to attract new customers to our main shopping site, and the Overstock.com brandname generally.Fraudulent activities using our auctions business and disputes between users of our auctions business may harm our business. We have periodically received complaints from users alleging that they have not received the purchase price or the goods they expected to receive andthat, in some cases, users have been arrested and convicted for engaging in fraudulent activities using those companies' auction sites. We do not have theability to require users of our services to fulfill their obligations to make payments or to deliver items. We periodically receive complaints from buyers aboutthe quality or authenticity of the items they purchase, requests for reimbursement of amounts paid, and communications threatening or commencing legalactions against us or our users which may negatively impact our business.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 ortrademark infringement, or other theories based on the nature and content of the materials disseminated through their services. We are aware that privatelawsuits 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 ofinformation. 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 inthe future against us for comments made by users. Recent court decisions have narrowed the scope of the immunity provided to Internet service providers likeus under the Communications Decency Act. This trend, if continued, may increase our potential liability to third parties for the user-provided content on oursite.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 newcustomers to our main shopping site, and the Overstock.com brand name generally. Negative publicity resulting from actual or alleged fraudulent ordeceptive conduct by users of our auctions business could also damage our reputation, our ability to attract new customers to our main shopping site, and theOverstock.com brand name generally.34 Table of ContentsRisks Relating to our Cars Site and Real Estate BusinessesOur cars site and real estate businesses are relatively new businesses that may not succeed. Our car listing site and real estate listing businesses began operation in December 2006 and August 2008, respectively. The listing sites are listingservices for automobile and real estate sellers. The online car listing service and real estate listing service are relatively new businesses for us. We cannotensure that our expansion into these businesses will succeed. Our entry into these businesses will require us to devote substantial financial, technical,managerial and other resources to this car listing and real estate listing sites. It also exposes us to additional risks, including legal and regulatory risks, and itrequires us to compete with established businesses having substantially greater experience in the online car listing and real estate listing service businessesand substantially greater resources than we have.Our car listing 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 agentsand public advertisement for car and real estate sales. Generally, these regulations govern the conduct of those sellers advertising their automobiles for saleand 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 in advertising laws." The application of these regulations to online car listing service and realestate listing providers is not clear. Although we do not expect these laws to have a significant effect on our listing businesses, we will incur costs incomplying with these laws, and we may from time to time be required to make changes in our businesses that may increase our costs, reduce our revenues,cause us to prohibit certain listing or advertising practices, or make other changes that may adversely affect our car and real estate listing businesses.Current and future laws could affect our car and real estate listing businesses. Like our shopping business, our car and real estate listing services are subject to most of the same laws and regulations that apply to other companiesconducting business on and off the Internet. In addition, our car and real estate listing services may be affected by other laws and regulations, such as thosethat expressly apply to advertising automobiles and real estate for sale. To the extent that such current or future laws or regulations prevent users from sellingitems on our car and real estate listing sites, they could harm our business.Our business may be harmed if our car and real estate listing 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 platforms of the listing servicesare accessible to subscribers who have the ability to feature their cars and real estate listings for sale and supply the descriptions of the vehicles andproperties, including the general condition of the vehicle or property and other important information. We have no ability to know whether the informationsellers provide is correct. While our site terms and conditions of usage prohibit unlawful acts, we cannot rule out the possibility that users of our car and realestate listing sites will engage in unlawful transactions, or fail to comply with all laws and regulations applicable to them and their transactions. We may besubject 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 using our site, or in our efforts to prevent any such transactions, may harm our business. In addition, anynegative publicity we receive regarding any such transactions or allegations may damage our reputation, our ability to attract new customers to our mainshopping site, and the Overstock.com brand name generally.35 Table of ContentsFraudulent activities using our car and real estate listing sites and disputes between users of our car and real estate listing 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 allegingimproprieties in connection with listings and occasionally these complaints may result in regulatory action. With any online listing service there is thepossibility that sellers may attempt to employ "bait and switch" techniques, attracting consumers with advertisements of low cost, good condition vehicles inhopes of switching buyer interest to another less favorable vehicle or different property once a potential purchaser responds. Additionally, sellers mayattempt to sell vehicles and real estate without accurate descriptions of the condition of the vehicles or real estate. We have occasionally received complaintsof this nature regarding both our car and real estate listing services. In response to serious or repeat complaints concerning a car or real estate dealer, we maytake action to prohibit such persons from listing inventory, but we do not have the ability to require users of our services to fulfill their obligations to makeaccurate disclosures or comply with consumer laws prohibiting "bait and switch" or other prohibited seller tactics. We are aware that other companiesproviding similar services periodically are threatened or by or subject to legal actions against the listing service for damages because of user conduct. Wemay encounter similar legal actions in connection with our cars and real estate listing businesses, which may harm our business or reputation amongconsumers.Risks Relating to our Community SiteOur 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. Omuseallows Community site users to read about and or write "guides" about a universe of subjects in which they may have a particular expertise or interest. TheCommunity site is also expected to have services intended to establish user forum participation, provide customers access to recent news about Overstockand allow users the opportunity to participate in forum reading and writing, to create weblogs or post comments to the weblogs or "blogs" of other site users,or in our Omuse collaborative writing platform. Presently Omuse is the only operating platform on the Community site. We cannot ensure that our expansioninto this business will succeed. It is a business which allows persons to contribute content within certain guidelines and subject to terms and conditions. Wecannot assure that our community users will abide by these terms and conditions, or that we will be able to interdict or remove inappropriate or infringingmaterial. Our entry into this business will require us to devote substantial financial, technical, managerial and other resources to this site. It is uncertainwhether we will benefit financially from the Community site. The Community site will also expose us to additional risks, including legal and regulatoryrisks, including, but not limited to, legal actions for possible intellectual property infringement, and claims for libel. Additionally, our entry into theCommunity site service will require us to compete with established businesses having substantially greater experience in the Community site servicebusiness and which have substantially greater resources than we have.Risks Relating to the Internet IndustryOur 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 andcommunication. Factors which could reduce the widespread use of the Internet include:•actual or perceived lack of security of information or privacy protection;36 Table of Contents•possible disruptions, computer viruses or other damage to the Internet servers or to users' computers; •significant increases in the costs of transportation of goods; and •governmental regulation.Customers may be unwilling to use the Internet to purchase goods. Our long-term future depends heavily upon the general public's willingness to use the Internet as a means to purchase goods. E-commerce remains arelatively new concept and large numbers of customers may not begin or continue to use the Internet to purchase goods. The demand for and acceptance ofproducts sold over the Internet are highly uncertain and most e-commerce businesses have a short track record. If consumers are unwilling to use the Internetto 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 securelyover public networks. Third parties may have the technology or know-how to breach the security of customer transaction data. Any breach of our e-commercesecurity systems could cause customers to lose confidence in the security of our Website and choose not to purchase from our Website. Likewise, if there is abreach of e-commerce security systems operated by another large e-commerce retailer, whether or not the breach affected the systems we operate such a breachcould cause could also cause our customers to lose confidence in the security of our site as well. If someone is able to circumvent our security measures, he orshe could destroy or steal valuable information or disrupt our operations. Concerns about the security and privacy of transactions over the Internet couldinhibit the growth of the Internet and e-commerce. Our security measures may not effectively prohibit others from obtaining improper access to ourinformation. 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 seriouslydisrupt our operations. Similar activities targeting other large e-commerce sites, if successful, could similarly cause serious disruption to our operations andbusiness.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 toadequately control fraudulent credit card transactions could reduce our net revenues and our gross profit percentage. We have implemented technology tohelp us detect and reject the fraudulent use of credit card information. However, we may in the future suffer losses as a result of orders placed with fraudulentcredit card data even though the associated financial institution approved payment of the orders. Under current credit card practices, we may be liable forfraudulent credit card transactions because we do not obtain a cardholder's signature. If we are unable to detect or control credit card fraud, our liability forthese transactions could harm our business, results of operation or financial condition. Further, to the extent that our efforts to prevent fraudulent orders resultin our inadvertent refusal to fill legitimate orders, we would lose the benefit of legitimate potential sales and risk the alienation of legitimate customers.37 Table of ContentsIf 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 partiesthat we offer for sale on our Website, or that we should pay commercial activity taxes, 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 foreignjurisdictions may seek to impose sales tax collection obligations on us because we are engaged in online commerce, even though we have no physicalpresence 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. We challenged theconstitutionality of a New York state law which requires internet retailers to collect and remit New York sales taxes on their New York sales who have nophysical presence or "tax nexus" in New York, if the retailer uses the services of New York based internet advertisers. 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 advertisingaffiliates. The states of Rhode Island and North Carolina have passed similar internet affiliate advertizing statutes, and in those states we have terminated ouruse of locally based internet advertisers. Several other states currently have similar tax proposals under consideration. If such laws survive constitutionalchallenge, 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 statesthe 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 foreigncountry successfully asserts that we should collect sales or other taxes on the sale of our merchandise in compliance with these or any other state law. At leastone state, Ohio, asserts that we should pay a commercial activity tax because we sell merchandise in Ohio, though we have no physical presence there. Wechallenged in Ohio state court the constitutionality of the commercial activity tax; however, the court declined the case for the reason that it was not a ripecontroversy, whereupon the state of Ohio assessed us $612,784 in taxes, interest, and penalties, which assessment we are now contesting throughadministrative procedures. We believe the assessment to be wrong and will vigorously contest the assessment. If Ohio is successful and its assessmentwithstands constitutional challenge in both administratively and in court appeals, the enforcement of the assessment could harm our business. If other statessimilarly enact and are successful in enforcing similar commercial activity tax laws, these also could harm our business. The State of Colorado recently passed a law requiring remote vendors to notify Colorado purchasers of their obligation to pay Colorado use tax on theirpurchases. The implementing regulations require a detailed, specific notice on the purchase invoice, and the law requires vendors to notify Coloradopurchasers annually by U.S. mail of all their annual purchases, and provide to the State of Colorado the same information in the first quarter of the year forprevious year's purchases. Other states may enact legislation similar to the Colorado law. Such laws could harm our business by imposing unreasonablenotice burdens upon us, or by such detailed notices, discourage customers from making purchases over the internet.Economic pressure on states could harm our business. The current economic climate has resulted in a sharp decline in state revenues, and states have projected large state budget shortfalls in the years ahead.These shortfalls require state legislatures and agencies to examine the means to increase state revenues. States may increase sales and use tax rates, create newtax laws covering previously untaxed activities, or increase existing licenses or create new fees all of which may directly or indirectly harm our business.Similarly, administrative agencies and executive agencies may apply more rigorous enforcement efforts, take inflexible, unreasonable or unprecedentedpositions respecting these laws they administer, especially if the laws they administer carry monetary penalties and fines which either the state or theadministrative agency may utilize to balance their budgets. To the extent that states pass additional revenue measures, or significantly38 Table of Contentsincrease their enforcement efforts of existing laws, these activities could directly or indirectly harm our business.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 lawsspecifically directed towards conducting business on the Internet. However, due to the increasing popularity and use of the Internet, many laws andregulations relating to the Internet are being debated at the state and federal levels. These laws and regulations could cover issues such as user privacy,behavioral advertizing, freedom of expression, pricing, fraud, quality of products and services, taxation, advertising, intellectual property rights andinformation security. Applicability to the Internet of existing laws governing issues such as property ownership, copyrights and other intellectual propertyissues, taxation, libel, obscenity and personal privacy could also harm our business. For example, United States and foreign laws regulate our ability to usecustomer information and to develop, buy and sell mailing lists. The vast majority of these laws were adopted prior to the advent of the Internet and do notcontemplate or address the unique issues raised thereby. Those laws that do reference the Internet are only beginning to be interpreted by the courts and theirapplicability and reach are therefore uncertain. Additionally, laws governing the permissible contents of products may adversely affect us. Recently theUnited States Congress passed the Consumer Product Safety Improvement Act ("CPSIA"), which created more stringent safety requirements for children'sproducts 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, orwhich we may have sold subsequent to the effective dates of the legislation, through regulatory or civil actions against us. These current and future laws andregulations 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, security, retention, transfer and use of personaluser information. For example, we are subject to various telemarketing laws that regulate the manner in which we may solicit future suppliers and customers.Such statutes and regulations, along with increased governmental or private enforcement, may increase the cost of growing our business. In addition, manyjurisdictions have laws that limit the uses of personal user information gathered online or offline or require companies to establish privacy policies. Forexample, the Federal Trade Commission has adopted regulations regarding the collection and use of personal identifying information obtained from childrenunder 13. New laws affecting privacy, security, retention, transfer and use of personal user information have been passed by several jurisdictions, bothdomestic and foreign, including laws that require us to establish procedures to notify users of privacy and security policies, obtain consent from users forcollection and use of personal information, and/or provide users with the ability to access, correct and delete personal information stored by us. Compliancewith new and existing privacy and security laws is very difficult and costly, as interpretation and application of these laws evolves over time. Additionalrestrictions and requirements regarding data security and privacy are under nearly continuous consideration by foreign countries, Congress and variousstates. These data protection statutes, regulations and interpretations may further restrict our ability to collect demographic and personal information fromusers, which could be costly or harm our marketing efforts, and could require us to implement new and potentially costly processes, procedures and/orprotective measures.39 Table of ContentsRisks Relating to the Securities Markets and Ownership of Our SecuritiesThe price of our securities may be volatile and you may lose all or a part of your investment. The market price of our common stock historically has been subject to significant fluctuations. These fluctuations could continue. It is possible that infuture periods our results of operations may be below the expectations of public market analysts and investors. If this occurs, the market price of our securitiesmay decline. Some of the factors that could affect the market price of our securities are as follows:•changes in securities analysts' recommendations or estimates of our financial performance or publication of research reports by analysts; •changes in market valuations of similar companies; •announcements by us or our competitors of significant contracts, acquisitions, commercial relationships, joint ventures or capitalcommitments; •general market conditions; •actual or anticipated fluctuations in our operating results; •intellectual property or litigation developments; •changes in our management team; •economic factors unrelated to our performance; and •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 adverselyaffect the trading price of our securities. In the past, following periods of volatility in the market price of a public company's securities, securities class actionlitigation has often been instituted against that company. Such litigation could result in substantial cost and a diversion of management's attention andresources.Sales by our significant stockholders could have an adverse effect on the market price of our stock. Several of our stockholders own significant portions of our common stock. If one or more of stockholders were to sell all or a portion of their holdings ofour common stock, the market price of our common stock could be negatively impacted. The effect of such sales, or of significant portions of our stock beingoffered or made available for sale, could result in strong downward pressure on our stock price. Investors should be aware that they could experiencesignificant short-term volatility in our stock if such stockholders decide to sell all or a portion of their holdings of our common stock at once or within a shortperiod of time. In addition, the transfer of ownership of 50% or more of our outstanding shares within a three year period could adversely affect our ability touse our net operating losses to offset future taxable net income.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 ourcontrol, and any of which could harm our business. As a result, we believe that quarterly comparisons of our operating results are not necessarily meaningfuland 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 thisreport, additional factors that have caused and/or could cause our quarterly operating results to fluctuate and in turn affect the market price of our securitiesinclude:•increases in the cost of advertising;40 Table of Contents•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; •increases in the cost of fuel and transportation; •our ability to successfully integrate operations and technologies from acquisitions or other business combinations; •offering new lines of products; and •our ability to attract users to our auctions, car listing and real estate sites.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 retailpatterns. Sales in the retail and wholesale industry tend to be significantly higher in the fourth calendar quarter of each year than in the preceding threequarters due primarily to increased shopping activity during the holiday season. However, there can be no assurance that our sales in the fourth quarter willexceed 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 increasedsales effectively. Further, we generally increase our inventories substantially in anticipation of holiday season shopping activity, which has a negative effecton our cash flow. Securities analysts and investors may inaccurately estimate the effects of seasonality on our results of operations in one or more futurequarters and, consequently, our operating results may fall below expectations, causing the market price of our securities to decline. We generally havepayment terms with our vendors that extend beyond the amount of time necessary to collect proceeds from our customers. As a result of holiday sales, atDecember 31 of each year, our cash, cash equivalents, and marketable securities balances typically reach their highest level (other than as a result of cashflows provided by or used in investing and financing activities). This operating cycle results in a corresponding increase in accounts payable at December 31.Our accounts payable balance generally declines during the first three months of the year, resulting in a corresponding decline in our cash, cash equivalents,and marketable securities balances.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 foreseeablefuture. 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 cannotassure 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.41 Table of ContentsOur Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws and the Delaware General Corporation Law contains 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 acquisitionproposals 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 is elected at each of our annual meetings of stockholders, which will make it more difficult for a potential acquirer tochange the management of our company, even after acquiring a majority of the shares of our common stock. These provisions, which cannot be amendedwithout the approval of two-thirds of our stockholders, could diminish the opportunities for a stockholder to participate in tender offers, including tenderoffers at a price above the then current market value of our common stock. In addition, our board of directors, without further stockholder approval, may issuepreferred 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 ourcompany. The issuance of preferred stock could also adversely affect the voting powers of the holders of common stock, including the loss of voting controlto others. We are also afforded the protections of Section 203 of the Delaware General Corporation Law, which could delay or prevent a change in control ofour company or could impede a merger, consolidation, takeover or other business combination involving our company or discourage a potential acquirerfrom 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 Morgan Stanley & Co. Incorporated, Goldman Sachs & Co., Bear Stearns Companies, Inc., Bankof 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. We believe that the defendants have engaged in unlawful actions and have caused substantial harm toOverstock, and that certain of the defendants have made efforts to drive the market price of Overstock's common stock down. To the extent that thedefendants or other persons engage in any such actions or take any other actions to interfere with or destroy or harm Overstock's existing and/or prospectivebusiness relationships with its suppliers, bankers, customers, lenders, investors, prospective investors or others, our business, prospects, financial conditionand 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 thosethat might prevail in the absence of any such efforts. The practice of "abusive naked short selling" continues to place our stock at risk for manipulativeattacks by large investment pools and prime brokers. Abusive naked short selling is the practice by which short sellers place large short sell orders for shareswithout first borrowing the shares to be sold, or without having first adequately located such shares and arranged for a firm contract to borrow such sharesprior to the delivery date set to close the sale. While selling broker dealers are by rule required to deliver shares to close a transaction by a certain date, andwhile purchasing broker-dealers are obligated by rule to purchase the sold quantity of shares when they are not delivered to close the sale, these rules areoften ignored. Abusive naked short selling has a depressive effect on share prices when it is allowed to persist because the economic effect of abusive nakedshort selling is the oversupply of counterfeit stock to the market. We believe the regulations designed to address this abusive practice are both inadequatelystructured and inadequately enforced. Consequently, we believe that without the enactment of adequate regulations and the enforcement necessary to curbthese abuses, the manipulations achieved through abusive naked short selling are likely to continue. We believe that our stock has been subject to theseabusive practices by those attempting to manipulate its price downward. To the extent that our stock is subject to these practices in the future, our stock maybe more volatile than it might otherwise be and/or may trade at prices below those that might prevail in the absence of such abuses.42 Table of ContentsOur 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 alsorequires mandatory close-outs for open fail-to-deliver positions in threshold securities persisting for over 13 days, with the aim that no security would appearon the threshold for any extended period. Despite that aim, our common stock has frequently appeared on the Regulation SHO threshold list for extended andsometimes continuous periods and, while we do not currently appear on the Regulation SHO threshold list, in the past our stock has been on the list for moretrading 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 allother information in this Form 10-K and in any reports we file with the SEC after we file this Form 10-K, before deciding whether to purchase or hold oursecurities. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also become important factors that mayharm our business. The occurrence of any of the risks described in this Form 10-K could harm our business. The trading price of our securities could declinedue to any of these risks and uncertainties, and investors may lose part or all of their investment. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Corporate office space We lease approximately 154,000 rentable square feet in the Old Mill Corporate Center III in Salt Lake City, Utah for a term expiring in 2015.Logistics and warehouse space We lease a combined 1,002,678 square feet for our warehouse operations in two facilities in Salt Lake City, Utah under operating leases which expire inAugust 2012 and February 2016.Co-location data center We lease approximately 4,000 square feet of space at Old Mill Corporate Center I for an IT data center. The lease expires on May 1, 2017. We lease an additional 2,864 square feet for an offsite IT data center located in Salt Lake City, Utah. The lease expires on June 30, 2011. We believe that the above listed facilities will be sufficient for our needs for at least the next twelve months, subject to seasonal requirements foradditional warehouse and customer service space during the fourth quarter. ITEM 3. LEGAL PROCEEDINGS The information set forth under Item 15 of Part IV, "Financial Statements—Note 16—Commitments and Contingencies, subheading Legal Proceedings,"contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K is incorporated by reference in answer to this Item. ITEM 4. RESERVED 43 Table of Contents PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES Market information Our common stock is traded on the NASDAQ Global Market under the symbol "OSTK." The following table sets forth, for the periods indicated, the highand low sales prices per share for our common stock as reported by NASDAQ.44 CommonStock Price High Low 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 Year Ended December 31, 2009 First Quarter 12.12 6.71 Second Quarter 14.14 8.94 Third Quarter 15.94 10.39 Fourth Quarter 17.99 12.66 Table of Contents STOCK PERFORMANCE GRAPH The following graph shows a comparison of cumulative total stockholder return, calculated on a dividend reinvested basis, from the market closing priceon December 31, 2004 through December 31, 2009 for Overstock.com, Inc., NASDAQ Market Index—U.S. and the Hemscott Internet Software and ServicesIndex. It also includes the NASDAQ Market Index and the Morningstar Online Retail Industry Group Index. We have been informed that the HemscottInternet Software and Services Index and the NASDAQ Market Index—US are being phased out, and we will replace them with the Morningstar Online RetailIndex because it is composed of companies in businesses similar in many ways to our business, and the NASDAQ Market Index to provide a broad-basedindex. The graph assumes that $100 was invested in our common stock and the above indices at the closing prices on December 31. Historic stock priceperformance is not necessarily indicative of future stock price performance.Holders As of March 25, 2010, there were 317 holders of record of our common stock. Because many of our shares of common stock are held by brokers and otherinstitutions 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 notanticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directorsand will depend on our results of operations, financial conditions, contractual and legal restrictions and other factors the board deems relevant. Our FinancingAgreement with U.S. Bank National Association prohibits dividend payments and other distributions following the occurrence of a "Triggering Event," asdefined in the Financing Agreement. A "Triggering Event" would include any failure by us to keep $20 million in certain accounts with U.S. Bank, as well asany Event of Default under the Financing Agreement.45 Table of ContentsRecent sales of unregistered securities In June 2009, we discovered that we had inadvertently issued 203,737 more shares of our common stock in connection with our 401(k) plan than hadbeen registered with the Securities and Exchange Commission for offer in connection with the 401(k) plan. These shares were contributed to or otherwiseacquired by participants in the 401(k) plan between August 16, 2006, and June 17, 2009. As a result, certain participants in the 401(k) plan may have or havehad rescission rights relating to the unregistered shares, although we believe that the federal statute of limitations applicable to any such rescission rightswould be one year, and that the statute of limitations had already expired at June 30, 2009 with respect to most of the inadvertent issuances. At December 31,2009, approximately 65,000 shares or $744,000 of our common stock plus interest were classified outside stockholders' equity because of the potentialrescission rights. On August 31, 2009, we entered into a Tolling and Standstill Agreement (the "Agreement") with the Overstock.com, Inc. Employee Benefits Committee(the "Committee") relating to the Overstock.com, Inc. 401(k) plan (the "Plan"). We entered into the Agreement in order to preserve certain rights, if any, ofPlan participants who acquired shares of our common stock in the Plan between July 1, 2008 and June 30, 2009. We intend to make a rescission offer to affected participants in the Plan who acquired shares of our common stock between July 1, 2008 and June 30,2009, subject to compliance with applicable regulatory requirements. Based on the closing price of our common stock of $13.56 at December 31, 2009, we anticipate that of the $744,000 of affected stock, it would beuneconomical for participants to attempt to rescind their acquisitions of more than $169,000 of the stock. In December 2009, we implemented a Non Qualified Deferred Compensation plan for senior management. The plan allows eligible members of seniormanagement to defer their receipt of compensation from us beginning in 2010, subject to the restrictions contained in the plan. To the extent that interests inthe plan constitute securities, we believe that the issuance of the interests was exempt from the registration requirements of the Securities Act of 1933, asamended, pursuant to Section 4(2) thereof and Rule 506 of Regulation D thereunder as a transaction not involving a public offering. The interests were notsold for cash or other consideration, and there were no proceeds to us.Issuer purchases of equity securities The following table sets forth all purchases made by us or on our behalf or any "affiliated purchaser" as defined in Rule 10b-18(a)(3) under the ExchangeAct, of shares of our common stock made during each month within the fourth quarter of 2009, including all purchases made pursuant to publicly announcedplans or programs and those not made pursuant to publicly announced plans or programs. Column (a) sets forth the total number of shares purchased, and thefootnotes to the table disclose the number of shares purchased other than pursuant to a publicly announced plan or program and the nature of any suchpurchases. Column (b) sets forth the average price paid per share. Column (c) sets forth the total number of shares purchased as part of publicly announcedrepurchase plans or programs. Column (d) sets forth the maximum number (or approximate dollar value) of shares that may yet be purchased under the plansor programs. The footnotes to the table indicate the date each plan or program was announced, the dollar amount or share amount approved, the expiration date, ifany, of each plan or program, each plan or program that has expired during the period covered by the table, and each plan or program we have46 Table of Contentsdetermined to terminate prior to expiration, or under which we do not intend to make further purchases.(1)Represents shares withheld for minimum tax withholding purposes upon the vesting of a portion of certain restricted stock unit grants.Stock based compensationStock options Our board of directors adopted the 2002 Stock Option Plan and the 2005 Equity Incentive Plan (collectively, the "Plans"), in 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 toour 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 eitherfive or ten years and vest on a straight line basis in accordance with a vesting schedule determined by our Board of Directors, usually over four years from thegrant date. As of the initial public offering, the Amended and Restated 1999 Stock Option Plan was terminated. Subsequent awards will be made under the2005 Equity Incentive Plan. As of December 31, 2009, 1.2 million shares of stock based awards were available for future grants under the 2005 EquityIncentive Plan. The following is a summary of stock option activity (amounts in thousands, except per share data): Stock options vest over four years at 28% at the end of the first year and 2% each month thereafter. During the years ended December 31, 2007, 2008 and2009, we recorded stock based compensation related to stock options of $4.5 million, $3.3 million and $2.2 million, respectively.47Period (a)Total Numberof Shares(or Units)Purchased (b)Average PricePaid perShare orUnit (c)Total Numberof Shares(or Units)Purchased asPart ofPubliclyAnnouncedPlans orPrograms (d)Maximum Number(or ApproximateDollar Value) ofShares (or Units)that May Yet BePurchased Underthe Plansor Programs October 1, 2009 to October 31, 2009 248(1) 14.84 — — November 1, 2009 to November 30, 2009 — — — — December 1, 2009 to December 31, 2009 — — — — Total 248(1)$14.84 — $— 2007 2008 2009 Shares WeightedAverageExercisePrice Shares WeightedAverageExercisePrice Shares WeightedAverageExercisePrice Outstanding—beginning of year 1,011 $18.97 1,161 $20.48 974 $21.27 Granted at fair value 762 18.14 11 14.14 — — Exercised (354) 8.81 (112) 12.96 (2) 15.82 Expired/forfeited (258) 23.65 (86) 20.45 (251) 24.12 Outstanding—end of year 1,161 20.48 974 21.27 721 20.29 Options exercisable at year-end 408 22.36 609 23.18 543 21.17 Table of ContentsRestricted stock units activity During the years ended December 31, 2008 and 2009, 491,000 and 366,000 restricted stock units were granted. The cost of restricted stock units isdetermined using the fair value of our common stock on the date of the grant and compensation expense is recognized on a straight line basis over the threeyear vesting schedule. The weighted average grant date fair value of restricted stock units granted during the years ended December 31, 2008 and 2009 was$12.64 and $10.15, respectively. The following is a summary of restricted stock unit activity (amounts in thousands, except per share data): Restricted stock units vest over three years at 25% at the end of the first year, 25% at the end of the second year and 50% at the end of the third year.During the years ended December 31, 2007, 2008 and 2009, we recorded stock based compensation related to restricted stock units of $0, $1.4 million and$2.6 million. At December 31, 2009, approximately 640,000 restricted stock units were outstanding. On February 1, 2010, we granted 250,000 additional restrictedstock units. ITEM 6. SELECTED FINANCIAL DATA Restatement As discussed in Item 15 of Part IV "Financial Statements"—Note 3—"Restatement of Financial Statements", on January 29, 2010, the Audit Committee ofthe Board of Directors concluded, based on the recommendation of management, that we would restate (1) our consolidated financial statements for the yearended December 31, 2008 and (2) our quarterly consolidated financial statements for all interim periods for the year ended December 31, 2008 and theinterim periods ended March 31, 2009, June 30, 2009 and September 30, 2009 within this Form 10-K to correct the following errors:•Accounting for amounts that we pay our drop ship fulfillment partners and an amount due from a vendor that went undiscovered for a period oftime. Specifically, these errors related to (1) amounts we paid to partners or deducted from partner payments related to return processingservices and product costs and (2) amounts we paid to a freight vendor based on incorrect invoices from the vendor. Once discovered, weapplied "gain contingency" accounting for the recovery of such amounts, which was an inappropriate accounting treatment. •Amortization of the expense related to restricted stock units. Previously the expense was based on the actual three year vesting schedule,which incorrectly understated the expense as compared to a three year straight line amortization. We also corrected for the use of an outdatedforfeiture rate in calculating share-based compensation expense under the plans.The following additional adjustments were also included in this restatement:•Correction of certain amounts related to customer refunds and credits.48 2008 2009 Units Weighted AverageGrant DateFair Value Units Weighted AverageGrant DateFair Value Outstanding—beginning of year — $— 449 $12.69 Granted at fair value 491 12.64 366 10.15 Vested — — (110) 12.64 Forfeited (42) 12.13 (65) 11.55 Outstanding—end of year 449 12.69 640 11.35 Table of Contents•Recognition of co-branded credit card bounty revenue and promotion expense over the estimated term of the credit card relationships.Previously the revenue was incorrectly recognized when the card was issued. •Reduction in the restructuring accrual and correction of the related expense due to a 2008 sublease benefit which was previously excludedfrom the accrual calculation and the accretion of interest expense related to the restructuring accrual, which was not previously recorded. •Change in our accounting for external audit fees to the "as incurred" method instead of the "ratable" method. •Other miscellaneous adjustments, none of which were material either individually or in the aggregate. Certain of these adjustments wererelated to a reduction in revenue and cost of goods sold in equal amounts for certain consideration we received from vendors, an increase ininventory, accounts payable and accrued liabilities to record our sales return allowance on a gross basis, an adjustment to our cash andrestricted cash balances due to compensating balance arrangements and an adjustment to record redeemable common stock for certain sharespreviously issued to employees.49 Table of Contents The following selected consolidated financial data as of December 31, 2008 (Restated) and 2009 and for each of the three years in the period endedDecember 31, 2009, are derived from our audited consolidated financial statements included elsewhere in this Form 10-K. The historical results do notnecessarily indicate results expected for any future period. This information should be read in conjunction with "Management's Discussion and Analysis ofFinancial Condition and Results of Operations" and the consolidated financial statements and the related notes thereto included elsewhere in this Form 10-K.50 Year ended December 31, 2005 2006(1) 2007 2008(4) 2009 (Restated) (in thousands, except per share data) Consolidated Statement of Operations Data: Revenue, net Direct $323,136 $301,509 $197,088 $173,687 $150,901 Fulfillment partner 471,839 478,628 568,814 656,163 725,868 Total net revenue 794,975 780,137 765,902 829,850 876,769 Cost of goods sold Direct 280,647 284,774 168,008 153,967 130,890 Fulfillment partner 397,855 405,559 473,344 531,647 581,127 Total cost of goods sold 678,502 690,333 641,352 685,614 712,017 Gross profit 116,473 89,804 124,550 144,236 164,752 Operating expenses: Sales and marketing 77,155 70,897 55,458 57,668 55,549 Technology 27,901 65,158 59,453 56,677 52,336 General and administrative 33,043 46,837 41,976 39,348 48,906 Restructuring(2) — 5,674 12,283 (299) (66) Total operating expenses 138,099 188,566 169,170 153,394 156,725 Operating income (loss) (21,626) (98,762) (44,620) (9,158) 8,027 Interest income — 3,566 4,788 3,163 170 Interest expense (5,743) (4,765) (4,188) (3,565) (3,470)Other income (expense), net 4,728 81 (92) (1,446) 3,277 Income (loss) from continuing operations before income taxes (22,641) (99,880) (44,112) (11,006) 8,004 Provision for income taxes — — — — (257) Income (loss) from continuing operations (22,641) (99,880) (44,112) (11,006) 7,747 Loss from discontinued operations(3) (2,571) (6,882) (3,924) — — Net income (loss) (25,212) (106,762) (48,036) (11,006) 7,747 Deemed dividend related to redeemable common stock (185) (99) — (77) (48) Net income (loss) attributable to common shares $(25,397)$(106,861)$(48,036)$(11,083)$7,699 Net income (loss) per common share—basic: Income (loss) from continuing operations after dividendrelated to redeemable common stock $(1.17)$(4.91)$(1.86)$(0.48)$0.34 Loss from discontinued operations $(0.13)$(0.34)$(0.17)$— $— Net income (loss) attributable to common share—basic $(1.30)$(5.25)$(2.03)$(0.48)$0.34 Weighted average common shares outstanding—basic 19,429 20,332 23,704 22,901 22,821 Net income (loss) per common share—diluted: Income (loss) from continuing operations after dividendrelated to redeemable common stock $(1.17)$(4.91)$(1.86)$(0.48)$0.33 Loss from discontinued operations $(0.13)$(0.34)$(0.17)$— $— Net income (loss) attributable to common shares—diluted $(1.30)$(5.25)$(2.03)$(0.48)$0.33 Weighted average common shares outstanding—diluted 19,429 20,332 23,704 22,901 23,067 Table of Contents The effect of the adjustments on the consolidated statement of operations for the year ended December 31, 2008 is to decrease net loss attributable tocommon shares by $1.6 million. The effect of the adjustments on net loss per common share for the year ended December 31, 2008 is to decrease net loss percommon share by $0.07. 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 Form 10-K.51 As of December 31, 2005 2006(2)(4) 2007(3)(4) 2008(4)(5) 2009 (Restated) (in thousands) Balance Sheet Data: Cash and cash equivalents $55,875 $114,695 $92,809 $96,457 $139,757 Restricted cash — 12,270 8,634 4,262 4,414 Marketable securities 55,799 — 46,000 8,989 — Working capital 79,561 59,475 62,621 41,780 51,236 Total assets 335,953 264,453 231,143 181,136 216,500 Total indebtedness 84,676 84,336 78,418 67,821 61,687 Redeemable common stock 3,205 — — 1,263 744 Stockholders' equity (deficit) 89,148 56,367 18,212 (2,246) 10,800 (1)Effective January 1, 2006, we adopted ASC 718 and recognized stock-based compensation of $4.1 million, $4.5 million, $3.6 million,and $4.8 million during the years ended December 31, 2006, 2007, 2008 and 2009, respectively. (2)During the fourth quarter of 2006, we commenced implementation of a facilities consolidation and restructuring program designed toreduce the overall expense structure in an effort to improve future operating performance (see Item 15 of Part IV, "FinancialStatements"—Note 4—"Restructuring 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 tosell our travel subsidiary ("OTravel"). As a result, OTravel's operations have been classified as a discontinued operation and thereforeare not included in the results of continuing operations. The loss from discontinued operations for OTravel was $2.6 million for theyear ended December 31, 2005, $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—seeItem 15 of Part IV, "Financial Statements"—Note 5—"Acquisition and Subsequent Discontinued Operations"). (4)In the Consolidated Balance Sheets we adjusted amounts related to our Letters of Credit and Purchasing Card, which are collateralizedby cash balances held at our bank, from Cash and cash equivalents to Restricted cash. (5)As discussed in Item 15 of Part IV "Financial Statements"—Note 3—"Restatement of Financial Statements," on January 29, 2010, theAudit Committee of the Board of Directors concluded, based on the recommendation of management that we would restate ourconsolidated financial statements for the year ended December 31, 2008 within this Form 10-K. Table of Contents ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Allstatements other than statements of historical fact, including statements regarding guidance, industry prospects or future results of operations or financialposition, made in this Annual Report on Form 10-K are forward-looking. We use words such as anticipates, believes, expects, future, intends, and similarexpressions 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 we invest in new business opportunities and the timing of thoseinvestments, 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 incomeand other taxes, competition, management of growth, potential fluctuations in operating results, international growth and expansion, fluctuations inforeign exchange rates, the outcomes of legal proceedings and claims, fulfillment center optimization, risks of inventory management, seasonality, thedegree to which we enter into, maintain, and develop commercial agreements, acquisitions, and strategic transactions, payments risks, and risks offulfillment throughput and productivity. In addition, the recent global economic climate amplifies many of these risks. These risks and uncertainties, as wellas other risks and uncertainties that could cause our actual results to differ significantly from management's expectations, are described in greater detail inItem 1A of Part I, "Risk Factors."Restatement On January 29, 2010, the Audit Committee of the Board of Directors concluded, based on the recommendation of management, that we would restate(1) our consolidated financial statements for the year ended December 31, 2008 and (2) our quarterly consolidated financial statements for all interim periodsfor the year ended December 31, 2008 and the interim periods ended March 31, 2009, June 30, 2009 and September 30, 2009 within this Form 10-K to correctthe following errors:•Accounting for amounts that we pay our drop ship fulfillment partners and an amount due from a vendor that went undiscovered for a period oftime. Specifically, these errors related to (1) amounts we paid to partners or deducted from partner payments related to return processingservices and product costs and (2) amounts we paid to a freight vendor based on incorrect invoices from the vendor. Once discovered, weapplied "gain contingency" accounting for the recovery of such amounts, which was an inappropriate accounting treatment. •Amortization of the expense related to restricted stock units. Previously the expense was based on the actual three year vesting schedule,which incorrectly understated the expense as compared to a three year straight line amortization. We also corrected for the use of an outdatedforfeiture rate in calculating share-based compensation expense under the plans.The following additional adjustments were also included in this restatement:•Correction of certain amounts related to customer refunds and credits. •Recognition of co-branded credit card bounty revenue and promotion expense over the estimated term of the credit card relationships.Previously the revenue was incorrectly recognized when the card was issued. •Reduction in the restructuring accrual and correction of the related expense due to a 2008 sublease benefit which was previously excludedfrom the accrual calculation and the accretion of interest expense related to the restructuring accrual, which was not previously recorded.52 Table of Contents•Change in our accounting for external audit fees to the "as incurred" method instead of the "ratable" method. •Other miscellaneous adjustments, none of which were material either individually or in the aggregate. Certain of these adjustments wererelated to a reduction in revenue and cost of goods sold in equal amounts for certain consideration we received from vendors, an increase ininventory, accounts payable and accrued liabilities to record our sales return allowance on a gross basis, an adjustment to our cash andrestricted cash balances due to compensating balance arrangements and an adjustment to record redeemable common stock for certain sharespreviously issued to employees. The effect of the adjustments on the consolidated statement of operations as of and for the year ended December 31, 2008 is to decrease net lossattributable to common shares by $1.6 million. All amounts in Management's Discussion and Analysis of Financial Condition and Results of Operations forthe year ended December 31, 2008 have been adjusted, as appropriate, for the effects of the restatement. 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 thisForm 10-K.Overview We are an online retailer offering closeout and discount brand and non-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 and video games ("BMMG"). We also operate as part of our Website an online auctions business—a marketplace for the buying andselling of goods and services—as well as online sites for listing cars and real estate for sale. We also recently launched O.biz, a website where customers canshop for bulk and business related items. We offer approximately 168,000 products under multiple departments under the shopping tab on our Website, and offer approximately 661,000 mediaproducts in the Books etc. department on our Website. We have organized our shopping business (sales of product offered through the Shopping section ofour Website) into two principal segments—a "direct" business and a "fulfillment partner" business (see Item 15 of Part IV, "Financial Statements"—Note 25—"Business Segments"). We include revenue from our auctions, car listings, real estate and consignment operations in the fulfillment partner segment.Revenue generated from our O.biz website and our international sales is included in either direct or fulfillment partner revenue, depending on whether theproduct is shipped from our warehouses or from a fulfillment partner. Less than 1% of our sales are made indirectly to international customers. During theyears ended December 31, 2007, 2008, and 2009, 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 leased warehouses in Salt Lake City, Utah.During the years ended December 31, 2008 and 2009, we fulfilled approximately 15% of our order volume through our warehouses. Our warehousesgenerally ship between 7,000 and 10,000 orders per day and up to approximately 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") through our Website. Weare considered to be the primary53 Table of Contentsobligor 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" or "fulfillment partner" does not mean that we have formed any legal partnerships with any of our fulfillment partners. We currently have fulfillmentpartner relationships with approximately 1,250 third parties which post approximately 161,000 non-BMMG products, as well as most of the BMMGproducts, 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. 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. Unless otherwise indicated or required by the context, the discussion herein of our financial statements, accounting policies and related matters, pertainsto the Shopping section of our Website and the O.biz section of our website and not necessarily to the much smaller Auctions, Cars or Real Estate sections ofour Website.Consignment In September 2009, we began offering a consignment service to suppliers where the suppliers' merchandise is stored in and shipped from our leasedwarehouses. We pay the consignment supplier upon sale of the consigned merchandise to the consumer. Revenue from our consignment service business isincluded in the fulfillment partner segment.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, andusers 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 itemsreturned 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 includedin the fulfillment partner segment.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 toreview vehicle descriptions, post offers to purchase, and provides the means for purchasers to contact sellers for further information and negotiations on thepurchase of an advertised vehicle. Revenue from our car listing business is included in the fulfillment partner segment.Real-Estate listing business 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 listingsacross the country. Listing categories include foreclosures, live and on-line auctions, for sale by owner listings, broker/agent listings and numerousaggregated classified ad listings. Advertising revenue from the real-estate business is included in the fulfillment partner segment.International business We began selling products through our Website to customers outside the United States in late August 2008. As of December 31, 2009 we were selling tocustomers in 58 countries. We do not have operations outside the United States, and are using a U.S. based third party to provide logistics and fulfillment forall international orders. Revenue generated from our international business is included54 Table of Contentsin either direct or fulfillment partner revenue, depending on whether the product is shipped from our warehouses or from a fulfillment partner.O.biz In October 2009, we introduced O.biz, a website where customers and businesses can shop for bulk and business related items, offering manufacturers,distributors and other retailers an alternative sales channel for liquidating their inventory. Revenue generated from our O.biz website is included in eitherdirect or fulfillment partner revenue, depending on whether the product is shipped from our warehouses or from a fulfillment partner.Critical Accounting Policies and Estimates The preparation of financial statements in conformity with generally accepted accounting principles of the United States ("GAAP") requires estimatesand assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities inthe consolidated financial statements and accompanying notes. The Securities and Exchange Commission ("SEC") has defined a company's criticalaccounting policies and estimates as the ones that are most important to the portrayal of the company's financial condition and results of operations, andwhich 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 inherentlyuncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accountingpolicies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, seeItem 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 underdifferent assumptions, judgments, or conditions. Our critical accounting policies are as follows:•revenue recognition; •estimating valuation allowances and accrued liabilities (specifically, the allowances for returns, credit card chargebacks, doubtful accountsand obsolete and damaged inventory); •internal use software and website development (acquired and developed internally); •accounting for income taxes; •valuation of long-lived and intangible assets and goodwill; •stock-based compensation; and •loss contingencies.Revenue recognition We derive our revenue primarily from two sources: direct revenue and fulfillment partner revenue, including listing fees and commissions collected fromproducts being listed and sold through the Auctions tab of our Website as well as advertisement revenue derived from our cars and real estate listing business,and from advertising on our shopping pages. We have organized our operations into two principal segments based on the primary source of revenue: Directrevenue and Fulfillment partner revenue (see Item 15 of Part IV, "Financial Statements"—Note 25—"Business Segments"). Revenue is recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery hasoccurred or the service has been provided; (3) the55 Table of Contentsselling 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 our customers. As we ship high volumes of packages through multiple carriers, it isnot 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 thefollowing factors: (i) the shipping carrier (as carriers differ in transit times); (ii) the fulfillment source (either our warehouses or those of our fulfillmentpartners); (iii) the delivery destination; and (iv) actual transit time experience, which shows that delivery date is typically one to eight business days from thedate 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 ourestimates. The following table shows the effect that hypothetical changes in the estimate of average shipping transit times would have had on the reportedamount of revenue and net income for the year ended December 31, 2009 (in thousands): When we are the primary obligor in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers, or haveseveral 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 usinga fixed percentage, revenue is recorded on a net basis. Currently, the majority of both direct revenue and fulfillment partner revenue is recorded on a grossbasis, as we are the primary obligor. In our statements of operations, we present revenue net of sales taxes. We periodically provide incentive offers to our customers to encourage purchases. Such offers include discount offers, such as percentage discounts offcurrent purchases and other similar offers, which, when used by our customers, are treated as a reduction of revenue.Direct revenue Direct revenue is derived from merchandise sales to individual consumers and businesses that are fulfilled from our leased warehouses. Direct revenuecomes from sales that occur primarily through our Website, but may also occur through offline channels.Fulfillment partner revenue Fulfillment partner revenue is derived from merchandise sales through our Website which fulfillment partners ship directly to our customers fromwarehouses maintained by our fulfillment partners. We provide an online auction service on our Website. The Auctions business allows sellers to list items for sale, buyers to bid on items of interest, andusers to browse through listed items online. Except in limited circumstances where we auction-list returned merchandise, we are not the seller of auction-listed items and have no control over the pricing of those items. Therefore, the listing fees for items sold at auction by sellers are recorded as revenue duringthe period items are listed or sold on a56 Year ended December 31, 2009 Change in theEstimate of AverageTransit Times (Days) Increase(Decrease)Revenue Increase(Decrease) NetIncome -2 $ 4,659 $ 683 -1 $ 2,702 $ 395 As reported As reported As reported 1 $(3,824) $(585)2 $(4,645) $(705) Table of Contentsnet basis. The revenue for the merchandise returned to the Company that we sell at auction is recorded on a gross basis. Revenue from the auctions businesshas been included in the fulfillment partner segment. We provide 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 buyersto review vehicle descriptions, post offers to purchase, and provides the means for purchasers to contact sellers for further information and negotiations on thepurchase of an advertised vehicle. Revenue from the cars listing business is recorded net and is included in the fulfillment partner segment. We provide 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 listingsacross the country. Listing categories include foreclosures, live and on-line auctions, for sale by owner listings, broker/agent listings and numerousaggregated classified ad listings. Revenue from the real estate listing business is recorded net and is included in the fulfillment partner segment. We began selling products through our Website to customers outside the United States in August 2008. As of December 31, 2009, we were selling tocustomers in 58 countries. We do not have operations outside the United States, and are using a U.S. based third party to provide logistics and fulfillment forall international orders. Revenue generated from the international business is included in either direct or fulfillment partner revenue, depending on whetherthe product is shipped from our leased warehouses or from a fulfillment partner.Sales returns allowance We inspect all returned items when they arrive at our processing facility. We will refund the full cost of the merchandise returned and all originalshipping charges if the returned item is defective or we have made an error, such as shipping the wrong product. If the return is not a result of a product defect or our error and our customer initiates a return of an unopened item within 30 days of delivery, except forcomputers and electronics, we will refund the full cost of the merchandise minus the original shipping charge and actual return shipping fees. However, wewill reduce refunds for returns initiated more than 30 days after delivery or that are received at our returns processing facility more than 45 days after initialdelivery. If our customer returns an item that has been opened or shows signs of wear, we will issue a partial refund minus both the original shipping charge andreturn shipping fees. Total net revenue is recorded net of estimated returns. We maintain an allowance for returns based on current period revenues and historical returnsexperience. Management analyzes actual historical returns, current economic trends and changes in order volume and acceptance of its products whenevaluating the adequacy of the sales returns allowance in any accounting period. Our actual product returns have not differed materially from our estimates.We are not currently aware of any trends that would significantly change future returns experience compared to historical experience. The allowance forreturns was $16.2 million and $11.9 million at December 31, 2008, and 2009, respectively.Credit card chargeback allowance Revenue is recorded net of credit card chargebacks. We maintain an allowance for credit card chargebacks based on current period revenues andhistorical chargeback experience. The allowance for chargebacks was $365,000 and $139,000 at December 31, 2008 and 2009, respectively.57 Table of ContentsAllowance for doubtful accounts From time to time, we grant credit to certain of our business customers on normal credit terms (typically 30 days). We perform credit evaluations of ourcustomers' financial condition and payment history and maintain an allowance for doubtful accounts receivable based upon our historical collectionexperience and expected collectability of all accounts receivable. The allowance for doubtful accounts receivable was $1.6 million and $1.7 million atDecember 31, 2008 and 2009, respectively.Valuation of inventories We write down our inventory for estimated obsolescence and to lower of cost or market value based upon assumptions about future demand and marketconditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Onceestablished, the original cost of the inventory less the related inventory allowance represents the new cost basis of such products. Reversal of the allowance isrecognized only when the related inventory has been sold or scrapped. At December 31, 2008, our inventory balance was $24.7 million (including$9.8 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.At December 31, 2009, our inventory balance was $23.4 million (including $8.0 million of inventory in-transit), net of allowance for obsolescence ordamaged inventory of $2.2 million.Internal-use software and website development Included in fixed assets is the capitalized cost of internal-use software and website development, including software used to upgrade and enhance ourWebsite and processes supporting our business. We capitalize costs incurred during the application development stage of internal-use software and amortizethese costs over the estimated useful life of two to three years. Costs incurred related to design or maintenance of internal-use software are expensed asincurred. During the year ended December 31, 2008 and 2009, we capitalized $9.0 million and $5.4 million, respectively, of costs associated with internal-usesoftware and website development, both developed internally and acquired externally, in each period. Amortization of costs associated with internal-usesoftware and website development was $11.6 million and $6.0 million for those respective periods. The decrease in costs associated with internal-usesoftware and website development is primarily related to the greater number of software licenses purchased in 2008 compared to 2009.Accounting for income taxes Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuationallowance recorded against our deferred tax assets. As of December 31, 2008 and 2009, we have recorded a full valuation allowance of $86.4 million and$80.2 million, respectively, against our net deferred tax asset balance due to uncertainties related to our deferred tax assets as a result of our history ofoperating losses. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which ourdeferred 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 tochange the valuation allowance, which could materially impact our financial position and results of operations. We are subject to audit by the IRS and various states for periods since inception. Our policy is that we recognize interest and penalties accrued on anyunrecognized tax positions as a component of income tax expense. We do not have any material uncertain tax positions, accrued interest or penaltiesassociated with unrecognized tax positions. There have been no material changes relating to these matters during the year ended December 31, 2009.58 Table of Contents We have provided a full valuation allowance on the deferred tax assets, consisting primarily of net operating loss carry-forwards, net of expectedreversals of existing deferred tax liabilities, because of uncertainty regarding their realizability.Valuation of goodwill Goodwill is not amortized, but must be tested for impairment at least annually. Other long-lived assets must also be evaluated for impairment whenmanagement believes that a triggering event has occurred. Future adverse changes in market conditions or poor operating results of underlying investmentscould result in losses or an inability to recover the carrying value of the asset that may not be reflected in an asset's current carrying value, thereby possiblyrequiring an impairment charge in the future. In accordance with this guidance, we test for impairment of goodwill at least annually or as circumstancesdictate. Goodwill totaled $2.8 million as of December 31, 2008 and December 31, 2009. There were no impairments to goodwill recorded during the year ended December 31, 2008, and 2009.Stock-based compensationStock options We measure compensation cost for all outstanding unvested stock-based awards at fair value on date of grant and recognize compensation expense overthe service period for awards expected to vest on a straight line basis. The estimation of stock-based awards that will ultimately vest requires judgment, and tothe extent actual results differ from our estimates, such amounts will be recorded as an adjustment in the period estimates are revised. We consider manyfactors when estimating expected forfeitures, including types of awards, and historical experience. Actual results may differ substantially from theseestimates. We use the Black-Scholes-Merton valuation model to estimate the value of stock options granted to employees. Several of the primary estimatesused 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 2007 and 2008 option grants, we elected to use the "simplified method" as discussed in Staff Accounting Bulletin("SAB") No. 107, Share Based Payment ("SAB No. 107"), to develop an estimate of expected term. In December 2007, the SEC issued SABNo. 110, Certain Assumptions Used in Valuation Methods—Expected Term ("SAB No. 110"). According to SAB No. 110, under certaincircumstances the SEC staff will continue to accept the use of the simplified method as discussed in SAB No. 107, in developing an estimate ofexpected term of "plain vanilla" share options in accordance with ASC Topic 718, beyond December 31, 2007.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 issueswith remaining term equivalent to the expected term of the options.Estimated Pre-vesting Forfeitures: When estimating forfeitures, we consider voluntary and involuntary termination behavior and historicalexperience.59 Table of ContentsRestricted stock units During the year ended December 31, 2009, we granted a total of 366,000 restricted stock units to employees. The restricted stock units vest over threeyears at 25% at the end of the first year, 25% at the end of the second year and 50% at the end of the third year, and are subject to the employee's continuingservice to us. At December, 2009, there were 640,000 un-vested restricted stock units that remained outstanding. The cost of restricted stock units is determined using the fair value of our shares of common stock on the date of the grant and compensation expense isrecognized straight line over the three year vesting schedule. (see Item 15 of Part IV, "Financial Statements"—Note 20—"Stock-Based Awards").Loss contingencies In the normal course of business, we are involved in legal proceedings and other potential contingencies. We accrue a liability for such matters when it isprobable that a loss has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probableamount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the rangeis accrued.Accounting pronouncements issued not yet adopted See Item 15 of Part IV, "Financial Statements"—Note 2—"Accounting Policies" subheading "Accounting Pronouncements Issued Not Yet Adopted."Executive Commentary This executive commentary is intended to provide investors with a view of our business through the eyes of our management. As an executivecommentary, 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 Analysisof Financial Condition and Results of Operations", as well as our interim and audited financial statements, and the discussion of our business and riskfactors and other information included elsewhere in this report. This executive commentary includes forward-looking statements, and investors arecautioned to read the "Special Note Regarding Forward-Looking Statements" included elsewhere in this report. Revenue grew 27% in the fourth quarter of 2009 and 6% for the full year of 2009, compared to the same periods of 2008, in spite of the weakness in theoverall US economy. Our business model continues to mature. Through expanding the number of partners we work with, and the number of categories andproducts we offer on our Website, the fulfillment partner business now generates over 80% of our revenue. Our direct business, which accounted for over 40%of total revenues in 2005, has contributed a consistently smaller percentage of total revenues over the last five years as our emphasis has shifted to thefulfillment partner business. In 2009, the direct business generated 17% of total revenue. We have marketing and pricing initiatives that are attracting shoppers to our Website. While pricing initiatives create pressure on gross profit, we havebeen able to offset part of this pressure on gross profit through strong revenue growth and supply chain efficiencies. Marketing expense as a percent ofrevenue was the lowest it has been in our history. We believe that we have used relatively effective advertising campaigns and maintained a disciplinedapproach to marketing expenditures. As a result of increased gross profit and controlled spending on advertising, we saw a 26% growth in 2009 contribution(which is gross profit less marketing expense), while our operating expenses increased by60 Table of Contentsonly 2%. This operating leverage helped result in our first profitable year. Net income for the year was $7.7 million, or $0.33 per share on a diluted basis. These operational results improved our liquidity position this year as well. Net cash provided by operating activities was $46.1 million, we returned topositive book value, and our working capital increased by $9.5 million from year end last year despite our use of nearly $11.8 million for capitalexpenditures and the retirement of long-term debt. The balance of our Management's Discussion and Analysis of Financial Condition and Results of Operations provides further information about thematters discussed above and other important matters affecting our business.Results of Operations The following table sets forth our results of operations expressed as a percentage of total revenue for 2007, 2008 and 2009:61 Years ended December 31 2007 2008 2009 (Restated) (as a percentageof total revenue) Revenue, net Direct 25.7% 20.9% 17.2% Fulfillment partner 74.3 79.1 82.8 Total net revenue 100.0 100.0 100.0 Cost of goods sold Direct 21.9 18.5 14.9 Fulfillment partner 61.8 64.1 66.3 Total cost of goods sold 83.7 82.6 81.2 Gross profit 16.3 17.4 18.8 Operating expenses: Sales and marketing 7.2 6.9 6.3 Technology 7.8 6.9 6.0 General and administrative 5.5 4.7 5.6 Restructuring 1.6 — — Total operating expenses 22.1 18.5 17.9 Operating income (loss) (5.8) (1.1) 0.9 Interest income 0.6 0.4 — Interest expense (0.6) (0.4) (0.4)Other income (expense), net — (0.2) 0.4 Net income (loss) from continuing operations before incometaxes (5.8) (1.3) 0.9 Provision for income taxes — — — Net income (loss) from continuing operations (5.8)% (1.3)% 0.9% Table of ContentsComparison of Years Ended December 31, 2008 and 2009Revenue Total net revenue increased 6% from $829.9 million for the year ended December 31, 2008, to $876.8 million for the year ended December 31, 2009. Direct revenue decreased 13% from $173.7 million in 2008 to $150.9 million in 2009, and fulfillment partner revenue increased 11% from$656.2 million to $725.9 million. Total net revenue increased 27% from $253.8 million for the three month period ended December 31, 2008 to $322.4 million for the three month periodended December 31, 2009. Direct revenue increased 14% from $48.2 million to $55.1 million. Fulfillment partner revenue increased 30% from$205.6 million to $267.3 million for the three month period ended December 31, 2009. Total revenues from Auctions, Cars and Real Estate businesses were $1.0 million and $2.1 million for the years ended December 31, 2008 and 2009,respectively. Total revenues from International sales were $1.3 million and $5.1 million for the years ended December 31, 2008 and 2009, respectively. See "Executive Commentary" above for additional discussion regarding revenue and revenue growth.Gross profit Our overall gross margins fluctuate based on several factors, including our sales volume mix between our direct business and fulfillment partnerbusiness; changes in vendor and / or customer pricing, including competitive pricing, and inventory management decisions within the direct business; salescoupons and promotions; product mix of sales; operational and fulfillment costs. Gross margin increased 140 basis points, from 17.4% in 2008 to 18.8% in 2009, and gross profit was $144.2 million and $164.8 million, respectively, a14% increase. For the three month periods ended December 31, gross margin increased from 16.5% in 2008 to 17.1% in 2009, an increase of 60 basis points,and gross profit increased from $42.0 million to $55.0 million, respectively, a 31% increase. The 140 basis point improvement for the year ended December 31, 2009 was primarily due to the implementation of process improvements to our supplychain, particularly in returns, and in our customer service organization during the year, and lower return rates and net returns-related costs. Theseimprovements were offset somewhat by an initiative we implemented in the second half of the year to lower prices on many of the products we sold on ourWebsite. Our BMMG and Computers & Electronics categories accounted for a smaller percentage of our revenues compared to last year. These productstypically generate lower gross profits compared to more profitable categories such as Home and Garden. As a result, our overall gross margin benefited fromthe shift in sales mix away from our BMMG and Computers & Electronics categories. The other factors described above did not have a significant impact onthe change in gross profit. Gross margins for the past eight quarterly periods and fiscal years ending December 31, 2008 and 2009 were: During 2008, we discovered that we had underbilled our fulfillment partners for certain fees and charges related to returns during the years endedDecember 31, 2007 and 2008, due to a systems issue.62 Q1 2008 Q2 2008 Q3 2008 Q4 2008 FY 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 FY 2009 (Restated) (Restated) (Restated) (Restated) (Restated) (Restated) (Restated) (Restated) Direct 13.5% 12.5% 10.4% 8.8% 11.4% 12.9% 18.0% 11.8% 11.9% 13.3%FulfillmentPartner 18.4% 19.7% 19.7% 18.3% 19.0% 21.0% 21.3% 20.7% 18.1% 19.9%Combined 17.2% 18.2% 18.0% 16.5% 17.4% 19.5% 20.7% 19.3% 17.1% 18.8% Table of ContentsOf the total $5.5 million underbilling, $2.8 million related to the year ended December 31, 2007 and $2.7 million related to the year ended December 31,2008. We contacted the affected fulfillment partners and in our negotiations with them over several months, we agreed to forgive the $2.8 million related to the2007 amounts and to seek to recover the $2.7 million related to 2008 over time from our future sales of the fulfillment partners' products during the remainderof 2008 and 2009. As a result of the negotiations we later agreed to forgive an additional $375,000. We recovered a total of $2.3 million throughDecember 31, 2009, including $1.8 million during the three months ended December 31, 2008 and $615,000 during the year ended December 31, 2009. Wehave recorded the amounts recovered related to 2008 in the period that they originated. See Note 3 of the consolidated financial statements (see Item 15 ofPart IV, "Financial Statements"—Note 3—"Restatement of Financial Statements") for additional information. During our review of our partner billing system for returns, we additionally discovered that we had underbilled our fulfillment partners for certain feesand charges related to returns during the fourth quarter of 2008 and the year ended December 31, 2009 totaling approximately $187,000 and $1.2 million,respectively. We have made the determination to not seek recovery of these amounts from our fulfillment partners and consequently have not recognized anyrelated recoveries in our consolidated financial statements. Cost of goods sold includes stock-based compensation expense of $198,000 and $167,000 for the years ended December 31, 2008 and 2009,respectively. Direct Gross Profit—Gross profit for our direct business increased 2% from $19.7 million for the year ended December 31, 2008 to $20.0 million for thesame period in 2009, and gross margin increased from 11.4% to 13.3%. For the three month periods ended December 31, gross profit increased 53% from$4.3 million in 2008 to $6.6 million in 2009, and gross margin increased from 8.8% to 11.9%. Fulfillment Partner Gross Profit—Our fulfillment partner business generated gross profit of $124.5 million and $144.7 million for the years endedDecember 31, 2008 and 2009, respectively, an increase of 16%, and gross margin increased from 19.0% to 19.9%. For the three month periods endedDecember 31, gross profit increased 29% from $37.7 million in 2008 to gross profit of $48.5 million in 2009, and gross margin decreased from 18.3% to18.1% See "Executive Commentary" above for additional discussion.Fulfillment costs Fulfillment costs include all warehousing costs, including fixed overhead and variable handling costs (excluding packaging costs), as well as credit cardfees and customer service costs, all of which we include as costs in calculating gross margin. We believe that some companies in our industry, including someof our competitors, account for fulfillment costs within operating expenses, and therefore exclude fulfillment costs from gross margin. As a result, our grossmargin may not be directly comparable to others in our industry.63 Table of Contents The following table has been included to provide investors additional information regarding our classification of fulfillment costs, gross profit andmargin, thus enabling investors to better compare our gross margin with others in our industry (in thousands): 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 inthe number of units received and fulfilled, the extent to which we use third party fulfillment services and warehouses, and our ability to effectively managecustomer service costs and credit card fees. There have been no significant changes in our fulfillment costs during the year ended December 31, 2009. See "Gross profit" above for additional discussion.Operating expenses Sales and marketing expenses. We direct customers to our Website primarily through a number of targeted online marketing channels, such assponsored search, affiliate marketing, portal advertising, e-mail campaigns, and other initiatives. We also use nationwide television, print and radioadvertising campaigns to promote sales. Sales and marketing expenses totaled $57.7 million and $55.5 million for the years ended December 31, 2008 and 2009, respectively, representing 6.9%and 6.3% of total net revenue for those respective periods. The decrease in sales and marketing costs was primarily due to more efficient marketing spending.We were able to generate more revenue per dollar of advertising spent in 2009, particularly with online marketing campaigns. Higher compensation expenseoffset some of the improvement in lower advertising costs. Sales and marketing expenses also include stock-based compensation expense of $347,000 and $634,000 for the years ended December 31, 2008 and2009, respectively. Costs associated with our discounted shipping and other promotions, such as coupons, are not included in marketing expense. Rather they are accountedfor as a reduction of revenue and therefore affect sales growth and gross margin. We consider discounted shipping and other promotions as an effectivemarketing 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 solutions, website search, andexpansion of new and existing product categories, as well as continuing to enhance the customer experience, improving our process efficiency andsupporting our logistics infrastructure. Technology expenses totaled $56.7 million and $52.3 million for the years ended December 31, 2008 and 2009, representing 6.9% and 6.0% of revenuefor those periods, respectively. Technology expenses decreased 8% primarily due to decreased depreciation expense of approximately $10.2 million forrelated technology equipment and software development as more items were fully depreciated. This64 Year ended December 31, 2007 2008 2009 (Restated) Total net revenue $765,902 100%$829,850 100%$876,769 100% Cost of goods sold Product costs and other cost of goods sold 594,276 78% 638,368 77% 664,537 76% Fulfillment costs 47,076 6% 47,246 6% 47,480 5% Total cost of goods sold 641,352 84% 685,614 83% 712,017 81% Gross profit $124,550 16%$144,236 17%$164,752 19% Table of Contentsdecrease was partially offset by an increase in compensation of approximately $7.2 million related to an increase in technology staff and an increase inannual bonus expense of $1.4 million for the year ended December 31, 2009 due to improved company financial performance. Technology expenses include stock-based compensation expense of $870,000 and $961,000 for the years ended December 31, 2008 and 2009,respectively. General and administrative expenses. For the years ended December 31, 2008 and 2009, general and administrative ("G&A") expenses totaled$39.3 million and $48.9 million, representing 4.7% and 5.6% of total revenue for those periods, respectively. The $9.6 million or 24% increase in G&Aexpenses, is primarily due to an increase in compensation expense of approximately $6.0 million related to an increase in general and administrative staff, anincrease in annual bonus expense of $3.8 million and also $1.25 million related to the termination of a consulting arrangement with Icent LLC. Icent LLC'schief executive officer is James V. Joyce, who resigned from his position as a member of the Board of Directors on April 1, 2009. The increase in G&Aexpenses is also related to additional facilities costs relating to the lease of a new customer service center and an increase in legal expenses of approximately$4.3 million during the year ended December 31, 2009 compared to the same period in 2008. However, the increase in legal expense for 2009 was offset by$7.1 million received from the settlement of legal matters. General and administrative expenses include stock-based compensation expense of approximately $2.2 million and $3.0 million for the years endedDecember 31, 2008 and 2009, respectively. Restructuring. Under the restructuring program, we recorded $12.3 million of restructuring charges for the year ended December 31, 2007. There wereno restructuring charges during the years ended December 31, 2008 and 2009 and we reversed approximately $299,000 and $66,000 of the lease terminationcosts liability during the years ended December 31, 2008 and 2009, respectively, due to changes in the estimate of sublease income. (see Item 15 of Part IV,"Financial Statements"—Note 4—"Restructuring Expense").Depreciation expense Depreciation expense is classified within the corresponding operating expense categories on the consolidated statements of operations as follows (inthousands):Non-operating income (expense) Interest income and interest expense. Interest income is primarily derived from the investment of our cash and cash equivalents. The decrease in interestincome from $3.2 million for the year ended December 31, 2008 to $170,000 for the year ended December 31, 2009, is due to a decrease in total cash, lowerinterest rates and the settlement of notes receivable related to our travel subsidiary (see65 Year endedDecember 31, 2008 2009 (Restated) Cost of goods sold—direct $1,674 $1,264 Sales and marketing — — Technology 21,140 10,943 General and administrative 154 676 Total depreciation and amortization, including internal-usesoftware and website development $22,968 $12,883 ` Table of ContentsItem 15 of Part IV, "Financial Statements"—Note 5—"Acquisition and Subsequent Discontinued Operations"). Interest expense is largely related to interestincurred on our Senior Notes, and to a lesser extent our capital lease obligations. Interest expense for the years ended December 31, 2008 and 2009 totaled$3.6 million and $3.5 million, respectively. Other income, net. For the year ended December 31, 2009, other income was $3.3 million, which relates primarily to gains from the earlyextinguishment of a portion of our 3.75% Convertible Senior Notes ("Senior Notes"). For the year ended December 31, 2009, we retired a total of $7.4 millionof our Senior Notes for $4.6 million in cash and recorded a $2.8 million gain, net of amortization of debt discount 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 amortizationof 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 Statements"—Note 19—"Stockand Debt Repurchase Program"), a $3.9 million loss on the settlement of notes receivable (see Item 15 of Part IV, "Financial Statements"—Note 5—"Acquisition and Subsequent Discontinued Operations") and a $300,000 other-than-temporary impairment of marketable securities.Sale of discontinued operations On January 21, 2009, we entered into a Note Purchase Agreement to settle both the senior and junior promissory notes related to the sale of our travelsubsidiary 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 in other income (expense), net during the year ended December 31, 2008 (see Item 15 of Part IV, "Financial Statements","Financial Statements"—Note 5—"Acquisition and Subsequent Discontinued Operations"). We agreed to the reduced amount for the notes due to concernregarding the financial viability of the entity holding the notes, as a result of the impact of the economic downturn on the travel industry that began duringthe latter part of 2008.Income taxes Our provision for income taxes for the year ended December 31, 2009 of $257,000 is for federal alternative minimum taxes and state taxes. As ofDecember 31, 2008 and 2009, we had net operating loss carry forwards of approximately $166.1 million and $160.4 million and state net operating losscarry-forwards of approximately $145.8 million and $140.1 million, respectively, which may be used to offset future taxable income. An additional$15.9 million of net operating losses ("NOLs"), related to the acquisition of Gear.com, are limited under Internal Revenue Code Section 382 to $799,000 ayear plus any excess over limitations not utilized in prior years. The annual limitation available in a given year for NOLs subject to IRC Section 382 is theproduct of the Company's value on the date of ownership change and the federal long-term tax-exempt rate.Seasonality Based upon our historical experience, revenue typically increases during the fourth quarter because of the holiday retail season. The actual quarterlyresults for each quarter could differ materially depending upon consumer preferences, availability of product and competition, among other risks anduncertainties. Accordingly, there can be no assurances that seasonal variations will not materially affect66 Table of Contentsour results of operations in the future. The following table reflects our total net revenues for each of the quarters since 2007 (in thousands):Comparison of Years Ended December 31, 2007 and 2008Revenue Total revenue increased 8% to $829.9 million for the year ended December 31, 2008, from $765.9 million in 2007. During the three months endedDecember 31, 2007 and 2008, total revenue was $294.5 million and $253.8 million, respectively, a 14% decrease. Direct revenue decreased 12% from$197.1 million in 2007 to $173.7 million in 2008. In the fourth quarter, direct revenue decreased 28%, from $67.2 million in 2007 to $48.2 million in 2008.Fulfillment partner revenue increased 15% during 2008, but decreased 10% during the fourth quarter. For the year ended December 31, 2008, fulfillmentpartner revenue was $656.2 million compared to $568.8 million in 2007. For the three months ended December 31, 2008, fulfillment partner revenue was$205.6 million compared to $227.3 million in 2007. We experienced strong revenue growth in the first three quarters of 2008. As of September 30, 2008, year-to-date revenue growth was 22% compared to adecrease of 6% for the same prior year period. However, our business experienced a significant slowdown in Q4 as consumers reduced discretionary spendingdue to the economic turmoil. As a result, total revenue increased 8% for 2008 to $829.9 million from $765.9 million for 2007 notwithstanding a decrease of14% in Q4 2008 revenue to $253.8 million from $294.5 million in Q4 2007. The fulfillment partner business continued to increase as percentage of total revenue in 2008. This is due to an increase in the number of non-mediaproducts 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 2007, a219% increase. The fulfillment partner business accounted for 79% of total revenue during 2008 and 81% during Q4, and it grew 15% for the full year,despite decreasing 10% in Q4 2008 as we continued to add products to existing and new categories from new and existing partners. As of December 31, 2008,we had 1,200 fulfillment partners compared to 730 as of December 31, 2007. Our direct business decreased 12% during the year ended December 31, 2008 compared to the prior year. As we have added partner products to ourWebsite, some suppliers have transitioned into fulfillment partners, eliminating the need for us to purchase their inventory, and as a result, we haveexperienced a shift from direct to fulfillment partner business.Gross profit Our overall gross margins fluctuate based on several factors, including our sales volume mix between our direct business and fulfillment partnerbusiness; changes in vendor and / or customer pricing, including competitive pricing, and inventory management decisions within the direct business; salescoupons and promotions; product mix of sales; operational and fulfillment costs. Gross margin for the year ended December 31, 2008 increased 110 basis points, from 16.3% in 2007 to 17.4% in 2008. Gross profit for the years endedDecember 31, 2007 and 2008 amounted to $124.6 million and $144.2 million, respectively, a 16% increase. For the three months ended December 31, 2008,gross profit percentage increased 80 basis points, from 15.7% in 2007 to 16.5% in67 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter 2009 (Restated, except for Q4 2009) $185,729 $174,898 193,783 322,359 2008 (Restated) 201,800 188,202 186,007 253,841 2007 162,156 149,171 160,059 294,516 Table of Contents2008, and gross profit decreased 9% from $46.4 million in Q4 2007 to $42.0 million in Q4 2008. Gross profit percentages for the quarters and fiscal yearsduring 2007 and 2008 were: The improvement in gross margin was primarily due to increased revenues and supply chain efficiencies during 2008. The other factors described abovedid not have a significant impact on the change in gross profit. During 2008, we discovered that we had underbilled our fulfillment partners for certain fees and charges related to returns during the years endedDecember 31, 2007 and 2008, due to a systems issue. Of the total $5.5 million underbilling, $2.8 million related to the year ended December 31, 2007 and$2.7 million related to the year ended December 31, 2008. We contacted the affected fulfillment partners and in our negotiations with them over several months, we agreed to forgive the $2.8 million related to the2007 amounts and to seek to recover the $2.7 million related to 2008 over time from our future sales of the fulfillment partners' products during the remainderof 2008 and 2009. As a result of the negotiations we later agreed to forgive an additional $375,000. We recovered a total of $2.3 million throughDecember 31, 2009, including $1.8 million during the three months ended December 31, 2008 and $615,000 during the year ended December 31, 2009. Wehave recorded the amounts recovered related to 2008 in the period that they originated. See Note 3 of the financial statements (see Item 15 of Part IV,"Financial Statements"—Note 3—"Restatement of Financial Statements") for additional information. Cost of goods sold includes stock-based compensation of $460,000 and $198,000 for the years ended December 31, 2007 and 2008, respectively. Direct Gross Profit—Gross profit for our direct business declined 32% from $29.1 million during the year ended December 31, 2007 to $19.7 million forthe same period in 2008. Gross profit for our direct business as a percentage of direct revenue decreased from 14.8% in 2007 to 11.4% in 2008. For the three-month periods ended December 31, 2007 and 2008, gross profit for our direct business totaled $10.4 million and $4.3 million, respectively, a 59% decrease.Gross margin for our direct business for those three-month periods decreased from 15.4% in 2007 to 8.8% in 2008. Gross margin for our direct businessdecreased along with a decrease in direct revenue of 12% for the year ended December 31, 2008, decreasing 28% for the fourth quarter of 2008 compared tothe respective periods in 2007. While fulfillment costs continue to improve, these benefits are more than offset by our fixed warehouse cost being amortizedover a smaller direct revenue base. Fulfillment Partner Gross Profit—Our fulfillment partner business generated gross profit of $95.5 million and $124.5 million for the years endedDecember 31, 2007 and 2008, respectively, a 30% improvement. Gross margin for the fulfillment partner business also increased from 16.8% in 2007 to19.0% in 2008 for those respective periods. The increase in gross profit dollars for our fulfillment partner business is the result of the 15% increase infulfillment 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 cardfees 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, and68 Q1 2007 Q2 2007 Q3 2007 Q4 2007 FY 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 FY 2008 (Restated) (Restated) (Restated) (Restated) (Restated) Direct 11.7% 16.5% 15.3% 15.4% 14.8% 13.5% 12.5% 10.4% 8.8% 11.4%Fulfillment Partner 16.6% 18.0% 17.7% 15.8% 16.8% 18.4% 19.7% 19.7% 18.3% 19.0%Combined 15.2% 17.6% 17.1% 15.7% 16.3% 17.2% 18.2% 18.0% 16.5% 17.4% Table of Contentstherefore exclude fulfillment costs from gross profit percentage. As a result, our gross profit percentage may not be directly comparable to others in ourindustry. The following table has been included to provide investors additional information regarding our classification of fulfillment costs and gross profitpercentage, thus enabling investors to better compare our gross profit percentage with others in our industry (in thousands): 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 inthe number of units received and fulfilled, the extent to which we utilize third party fulfillment services and warehouses, and our ability to effectivelymanage customer service costs and credit card fees.Operating expenses Sales and marketing. Sales and marketing expenses totaled $55.5 million and $57.7 million for the years ended December 31, 2007 and 2008,representing 7% of total revenue for those respective periods, and a 4% increase from 2007 to 2008. We direct customers to our Website primarily through anumber of targeted online marketing channels, such as sponsored search, affiliate marketing, portal advertising, e-mail campaigns, and other initiatives. Wealso use nation-wide television, print and radio advertising campaigns to promote sales. Sales and marketing expenses also include stock-basedcompensation of $336,000 and $347,000 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 ofrevenue and therefore affect sales growth and gross profit percentage. We consider discounted shipping promotions as an effective marketing tool, and intendto 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 andexisting product categories, as well as technology infrastructure to continue to enhance the customer experience, improve our process efficiency and supportour web services infrastructure. Technology expenses totaled $59.5 million and $56.7 million for the years ended December 31, 2007 and 2008, respectively (7.8% and 6.9% of revenuefor 2007 and 2008). From 2007 to 2008, technology expenses decreased 5% primarily due to decreased depreciation expense. Technology expenses alsoincluded stock-based compensation of $764,000 and $870,000 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 $39.3 million for the years endedDecember 31, 2007 and 2008, respectively, representing approximately 5.5% and 4.7% of total revenue. The decrease in G&A expenses 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). Inaddition, the performance goal69 Years ended December 31, 2007 2008 (Restated) Total net revenue $765,902 100%$829,850 100% Cost of goods sold Product costs and other cost of goods sold 594,276 78% 638,368 77% Fulfillment costs 47,076 6% 47,246 6% Total cost of goods sold 641,352 84% 685,614 83% Gross profit $124,550 16%$144,236 17% Table of Contentsdescribed in the Performance Share Plan (the "Plan") was not attained as of the end of 2008 and $1.0 million in total compensation expense accrued under thePlan was reversed. This year over year decrease was offset in part by an increase of approximately $1.5 million related to consulting costs and professionalfees. We incurred stock-based compensation within general and administrative expenses of approximately $2.6 million and $2.2 million for the years endedDecember 31, 2007 and 2008, respectively. Overall, our total operating expenses decreased 9% during the year ended December 31, 2008 compared to the previous year, while total revenuesincreased 8% and gross profit increased 16%. Restructuring expenses. During the year ended December 31, 2007, we recorded $12.3 million of restructuring charges, of which $9.9 million related tothe termination of a logistics services agreement, termination and settlement of a lease related to vacated warehouse facilities in Indiana, and abandonmentand marketing for sub-lease office and data center space in our current corporate office facilities. We also recorded an additional $2.2 million of restructuringcharges related to accelerated depreciation of leasehold improvements located in the abandoned office and co-location data center space and $200,000 ofother miscellaneous restructuring charges. During the year ended December 31, 2008, we reduced accrued restructuring liabilities by $299,000, primarily due to a change in the estimate ofsublease income.Depreciation expense Depreciation expense is classified within the corresponding operating expense categories in the consolidated statements of operations as follows (inthousands):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 2007and 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 Senior Notes and our facility fees related to our credit lines. Interest expense for the yearsended December 31, 2007 and 2008 totaled $4.2 million and $3.6 million, respectively.70 Year Ended December 31, 2007 2008 (Restated) Cost of goods sold—direct $1,882 $1,674 Sales and marketing — — Technology 27,507 21,140 General and administrative 106 154 Total depreciation and amortization, including internal-usesoftware and website development $29,495 $22,968 Table of Contents Other income, net. Other income (expense) for the year ended December 31, 2007 was $(92,000). For the year ended December 31, 2008, other income(expense) was $(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 the3.75% Senior Notes (see Item 15 of Part IV, "Financial Statements"—Note 19—"Stock and Debt Repurchase Program"), a $3.9 million loss on the settlementof notes receivable (see Item 15 of Part IV, "Financial Statements"—Note 5—"Acquisition and Subsequent Discontinued Operations") and a $300,000 other-than-temporary impairment of marketable securities.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 adiscontinued 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 ASCTopic 350, Intangibles—Goodwill and Other ("ASC 350") and ASC Topic 360-10-15, Impairment or Disposal of Long-Lived Assets ("ASC 360") anddetermined 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 topurchase 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 ofnotes. 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 5—"Acquisition and Subsequent Discontinued Operations"). On January 21, 2009, we entered into a Note Purchase Agreement to settle 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 in otherexpense as of December 31, 2008 (see Item 15 of Part IV, "Financial Statements"—Note 5—"Acquisition and Subsequent Discontinued Operations").Income taxes For the years ended December 31, 2007 and 2008, we incurred net operating losses, and consequently paid insignificant amounts of federal, state andforeign income taxes. As of December 31, 2007 and 2008, we had net operating loss carry-forwards of approximately $164.2 million and $166.1 million,respectively, which may be used to offset future taxable income. An additional $15.9 million of net operating losses are limited under Internal Revenue CodeSection 382 to $799,000 a year. These net operating loss carry-forwards will begin to expire in 2018.Liquidity and capital resourcesHistorical 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 ourcommon stock and promissory notes. During the second quarter of 2002, we completed our initial public offering pursuant to which we receivedapproximately $26.1 million in cash, net of underwriting discounts, commissions, and other related expenses. Additionally, we completed follow-onofferings 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 inproceeds from the issuance of our71 Table of Contentsconvertible senior notes in a transaction exempt from registration under the Securities Act. During 2006, we received $64.4 million from two stock offeringsin May and December.Current sources of liquidity While we believe that the cash and cash equivalents currently on hand, amounts available under our credit facility and expected cash flows from futureoperations will be sufficient to continue operations for at least the next twelve months, we may require additional financing. However, there can be noassurance that if additional financing is necessary it will be available, or, if available, that such financing can be obtained on satisfactory terms. Failure togenerate sufficient revenues, profits or to raise additional capital could have a material adverse effect on our ability to continue as a going concern and toachieve 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 marketablesecurities. At December 31, 2009, our cash and cash equivalents balance was $139.8 million. Cash flow information is as follows: Free Cash Flow. "Free Cash Flow" (a non-GAAP measure) for the years ended December 31, 2008 and 2009, was $(12.3) million and $38.8 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, 2008 and 2009, our operating activities resulted in net cash inflowsof $6.4 million and $46.1 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 receivablesfrom these sales transactions to settle quickly. We have payment terms with our fulfillment partners that generally extend beyond the amount of timenecessary to collect proceeds from our customers. As a result, following our seasonally strong fourth quarter sales, at December 31 of each year, our cash, cashequivalents, marketable securities and accounts payable balances typically reach their highest level (other than as a result of cash flows provided by or usedin investing and financing activities). However, our accounts payable balance normally declines during the first three months following year-end, whichnormally results in a decline in our cash, cash equivalents, and marketable securities balances from the year-end balance. The seasonality of our businesscauses payables and accruals to grow significantly in the fourth quarter, and then decrease in the first quarter when they are paid. The $46.1 million of net cash provided by operating activities during the year ended December 31, 2009 was primarily due to positive net income of$7.7 million for the year ended December 31, 2009. Net cash was also provided by increases in accounts payable of $18.6 million due to increased unpaidpurchases of inventory related to both increased fulfillment partner sales at the end of the fourth quarter and increased purchases of inventory made at the endof the fourth quarter to meet holiday sales demand and other demand. A $9.1 million increase in accrued liabilities also contributed to this increase in cashprovided by operating activities and related to an increased payroll and bonus accrual.72 Year ended December 31 2007 2008 2009 (Restated) (in thousands) Cash provided by (used in): Operating activities $13,660 $6,444 $46,117 Investing activities (33,514) 19,533 2,868 Financing activities (2,031) (22,327) (5,685) Table of ContentsThe increase in cash provided by operations related to the increase of accounts payable and accrued liabilities was partially offset by $4.5 million ofincreased accounts receivable related primarily to uncleared credit card transactions at year end and $2.1 million of increased inventory prepayments made asof December 31, 2009 to secure inventory to be delivered in the first quarter of 2010 to support sales. Prepayments for inventory at the end of the prior yearwere lower due to the decreased sales demand experienced by the retail industry due to generally poor economic conditions. In December 2008, our credit card processor informed us that it would begin requiring a reserve from us due to the inherent risks of credit card processingand its assessment of the risks of processing our customer credit cards, and began withholding approximately 1% of our daily credit card remittances as areserve. The credit card processor indicated that it expected to continue such withholding until the reserve reached a total of $3.5 million, which it did inAugust 2009. During September 2009, our processor informed us that it had reassessed the reserve requirement and reduced our reserve to $1.75 million andrefunded the excess balance of $1.75 million to us. At December 31, 2009 the remaining reserve was $1 million, which is included in Accounts Receivable inthe consolidated balance sheet. Subsequent to the end of the year, the credit card processor refunded the $1 million or the full amount of the reserve, reducingthe reserve to zero. The credit card processor may increase or decrease the amount of this reserve at any time based on its assessment of the inherent risks of credit cardprocessing and its assessment of the risks of processing our customers' credit cards. Any increase in the amount of the reserve established by the processorcould have an adverse effect on our cash flow, and any material unexpected increase could have a material adverse effect on our liquidity, business,prospects, results of operations and financial condition. Cash provided by investing activities. Cash provided by investing activities corresponds with purchases, sales, and maturities of marketable securitiesand cash expenditures for fixed assets, including internal-use software and website development costs. For the years ended December 31, 2008 and 2009, investing activities resulted in net cash inflows of $19.5 million and $2.9 million, respectively. Investing activities for the year ended December 31, 2009 provided net cash of $2.9 million, primarily from the sale of marketable securities of$8.9 million and the collection of a $1.3 million note receivable related to a settlement of notes from the sale of our travel subsidiary to Castles Travel (seeItem 1 of Part I, "Financial Statements"—Note 5—"Acquisition and Subsequent Discontinued Operations"), partially offset by capital expenditures of$7.3 million. Investing activities resulted in cash inflows of $19.5 million for the year ended December 31, 2008, resulting from payments received from purchases,sales and maturities, net of purchases, of marketable securities of $36.7 million and a note receivable of $1.5 million related to the sale of the Company'sinterest in a variable interest entity, offset in part by outflows for expenditures of fixed assets of $18.7 million. Cash used in financing activities. For the years ended December 31, 2008 and 2009, financing activities resulted in net cash outflows of $22.3 millionand $5.7 million, respectively. The cash used in 2009 was primarily for the retirement of long-term debt (see Item 1 of Part I, "Financial Statements"—Note 19—"Stock and Debt Repurchase Program"). For the year ended December 31, 2008, financing activities included cash outflows of $3.8 million for capital leaseobligations, $6.6 million paid to retire convertible senior notes and $13.5 million used to buy back stock. These outflows were partially offset by$1.5 million received from stock option exercises.73 Table of ContentsRedeemable common stock In June 2009, we discovered that we had inadvertently issued 203,737 more shares of our common stock in connection with our 401(k) plan than hadbeen registered with the Securities and Exchange Commission for offer in connection with the 401(k) plan. These shares were contributed to or otherwiseacquired by participants in the 401(k) plan between August 16, 2006, and June 17, 2009. As a result, certain participants in the 401(k) plan may have or havehad rescission rights relating to the unregistered shares, although we believe that the federal statute of limitations applicable to any such rescission rightswould be one year, and that the statute of limitations had already expired at June 30, 2009 with respect to most of the inadvertent issuances. At December 31,2008 and 2009, approximately 98,000 shares or $1.3 million and 65,000 shares or $744,000 of our common stock plus interest were classified outsidestockholders' equity because of the potential rescission rights. On August 31, 2009, we entered into a Tolling and Standstill Agreement (the "Agreement") with our Employee Benefits Committee (the "Committee")relating to the Overstock.com, Inc. 401(k) plan (the "Plan"). We entered into the Agreement in order to preserve certain rights, if any, of Plan participants whoacquired shares of our common stock in the Plan between July 1, 2008 and June 30, 2009. We intend to make a rescission offer to affected participants in thePlan who acquired shares of our common stock between July 1, 2008 and June 30, 2009, subject to compliance with applicable regulatory requirements. Based on the closing price of Overstock common stock of $13.56 at December 31, 2009, we anticipate that of the $744,000 of affected stock outstandingas of December 31, 2009, it would be uneconomical for participants to attempt to rescind their acquisitions of more than $163,000 of the stock.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 duringthe year ended December 31, 2008. These common stock repurchases were executed at approximately $11.31 per share which was at the low end of our 52-week historical trading range. We made the repurchases because we believed that the stock was trading at attractively low prices, that we had sufficient cashon hand for all reasonably possible contingencies, and that the use of the cash to repurchase shares was in the best interest of the Company and thestockholders. In addition, during the third quarter of 2008, we retired $9.5 million of the Senior Notes for $6.6 million in cash at an approximate 16% yield to maturity.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. We had fullyutilized 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 authorized us to utilize up to $20.0 million to repurchaseadditional 3.75% Senior Notes. Under this repurchase program, we retired a total of $7.4 million of our Senior Notes for $4.6 million in cash and recorded a$2.8 million gain, net of amortization of debt discount of $92,000, during the year ended December 31, 2009 at an approximate 23% yield to maturity (seeItem 1 of Part I, "Financial Statements"—Note 19—"Stock and Debt Repurchase Program").74 Table of ContentsShelf 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, onDecember 12, 2006, we issued approximately 2,734,000 shares for net proceeds of approximately $39.4 million. We did not issue any shares of commonstock under the shelf registration statement during the years ended December 31, 2007, 2008 or 2009. During 2008, we filed a new shelf registrationstatement with the Securities and Exchange Commission, which was declared effective on December 5, 2008. The new shelf registration statement registersofferings of our securities in an aggregate amount of up to $500.0 million. However, as a result of our inability to timely file a Quarterly Report on Form 10-Qfor the quarter ended September 30, 2009 containing financial statements reviewed by an independent registered public accounting firm in accordance withapplicable requirements, our shelf registration statement is currently unavailable to us.Contractual obligations and commitments The following table summarizes our contractual obligations as of December 31, 2009 and the effect such obligations and commitments are expected tohave on our liquidity and cash flow in future periods (in thousands): Purchase Obligations. The amount of purchase obligations shown above is based on assumptions regarding the legal enforceability against us ofpurchase orders we had outstanding at December 31, 2009. Under different assumptions regarding our rights to cancel our purchase orders or differentassumptions regarding the enforceability of the purchase orders under applicable law, the amount of purchase obligations shown in the table above would beless.Borrowings Wells Fargo Credit Agreement. We had a credit agreement (as amended to date, the "Credit Agreement") with Wells Fargo Bank, National Association("Wells Fargo"). The Credit Agreement provided a revolving line of credit to us of up to $30.0 million which we use primarily to obtain letters of credit tosupport 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 applicablefixed 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 businessday a change in daily LIBOR is announced by the bank.75 Payments Due by Period Contractual Obligations 2010 2011 2012 2013 2014 Thereafter Total Long-term debt arrangements $— $59,994 $— $— $— $— $59,994 Interest on long-term debt 2,250 2,250 — — — — 4,500 Capital lease obligations 646 793 116 1,555 Operating leases 8,534 8,490 7,948 7,305 7,499 7,264 47,040 Purchase obligations 13,906 517 — — — — 14,423 Line of credit — — — — — — — Toal contractual cash obligations $25,336 $72,044 $8,064 $7,305 $7,499 $7,264 $127,512 Amounts of Commitment Expiration Per Period Other Commercial Commitments 2010 2011 2012 2012 2013 Thereafter Total Letters of credit $2,580 $— $— $— $— $— $2,580 Table of Contents Borrowings and outstanding letters of credit under the Credit Agreement are required to be completely collateralized by cash balances held at WellsFargo Bank, N.A, and therefore the facility does not provide additional liquidity to us. On December 23, 2009, we terminated our credit facility with Wells Fargo Bank, National Association, subject to provisions relating to outstandingletters of credit issued by Wells Fargo for our account and other transitional provisions. On December 31, 2009, per the provisions relating to the outstandingletters of credit, the letters of credit issued by Wells Fargo expired on December 31, 2009, and were replaced by $2.6 million of letters of credit issued by U.S.Bank National Association ("U.S. Bank") on behalf of the Company. Wells Fargo Retail Finance Agreement. On January 6, 2009 we entered into an Amended and Restated Loan and Security Agreement dated January 6,2009 (the "WFRF Agreement") with Wells Fargo Retail Finance, LLC ("WFRF"). The WFRF Agreement replaced our Loan and Security Agreement datedDecember 12, 2005 with WFRF, which had previously been amended and had terminated in accordance with its terms. On August 3, 2009, we terminated the WFRF Agreement. Wells Fargo Commercial Purchasing Card Agreement. We had a commercial purchasing card agreement (the "Purchasing Card") with Wells FargoBank, National Association ("Wells Fargo") that expired on January 1, 2010. We used the Purchasing Card for business purpose purchasing and must pay it infull each month. We are required to maintain a cash balance of $1.4 million at Wells Fargo Bank, N.A. as collateral for the Purchasing Card, and theseamounts are included in Restricted cash in the accompanying consolidated balance sheets, and therefore the facility does not provide additional liquidity tous. At December 31, 2008 and 2009, $436,000 and $1.0 million, respectively, was outstanding. No further amounts were available to the Purchasing Card asof December 31, 2009. U.S. Bank Financing Agreement. On December 23, 2009 we entered into (i) a Financing Agreement dated December 22, 2009 (the "FinancingAgreement") with U.S. Bank National Association ("U.S. Bank"), and (ii) a Security Agreement dated December 22, 2009 with U.S. Bank (the "SecurityAgreement") and related agreements described in the Financing Agreement and/or Security Agreement. The Financing Agreement provides for revolving loans and other financial accommodations to or for the benefit of the Company of (i) up to $10 millionfor cash-collateralized advances, and (ii) up to $10 million for advances supported by the Company's non-cash collateral. The maximum credit potentiallyavailable under the revolving facility is $20 million. Our obligations under the Financing Agreement and all related agreements are secured by all orsubstantially all of our assets, excluding our interest in certain litigation. Subject to certain exceptions, the full amount of the revolving facility is expectedto be available to us as long as $20 million is maintained on deposit with U.S. Bank. The obligation of U.S. Bank to make advances under the FinancingAgreement is subject to the conditions set forth in the Financing Agreement. Our failure to keep at least $20 million on deposit in certain accounts with U.S. Bank would constitute a "triggering event" under the FinancingAgreement. If a triggering event occurs, we would become subject to financial covenants (i) limiting our capital expenditures to $20 million annually, and(ii) requiring us to maintain a fixed charges coverage ratio of at least 1.10 to 1.00 as of the end of any fiscal quarter for the period of the prior four quarters.The occurrence of a triggering event could also result in a decrease in the amount available to us under the non cash-collateralized portion of the facility, asavailability would then depend, in part, on the Borrowing Base (as defined in the Financing Agreement). The Financing Agreement and the credit facilityterminate on October 2, 2011. As of December 31, 2010, we had $20.0 million in compensating cash balances held at U.S. Bank.76 Table of Contents Subject to certain interest rate floors and other exceptions, advances under the Financing Agreement bear interest at either (a) Libor plus 1% for cash-collateralized financing, including letters of credit, or (b) Libor plus 2.5% for non cash- collateralized advances. The default rate of interest is 2.0% perannum over the otherwise applicable interest rate. An unused line fee of 0.375% is payable annually on the unused portion of the $10 million portion of thefacility available for non cash-collateralized advances. The Financing Agreement includes affirmative covenants as well as negative covenants that prohibit a variety of actions without the approval of U.S.Bank, including, without limitation, covenants that (subject to certain exceptions) limit our ability to (a) incur or guarantee debt or enter into indemnityagreements, (b) create or permit liens, (c) enter into any merger or consolidation or purchase or otherwise acquire all or substantially all of the assets ofanother person or the assets comprising any line of business or business unit of another person, (d) except for permitted acquisitions, purchase the securitiesof, create, invest in, or form any subsidiary or other entity, (e) make loans or advances, (f) purchase, acquire or redeem shares of our capital stock or othersecurities, (g) change our capital structure or issue any new class of capital stock, (h) change our business objectives, purposes or operations in a mannerwhich could reasonably be expected to have a material adverse effect, (i) change our fiscal year, (j) enter into transactions with affiliates, (k) sell assets exceptfor the sale of inventory in the ordinary course of business, (l) make payments except regularly scheduled interest payments on our convertible debt or, afterthe occurrence of a triggering event, repurchase, redeem, defease, or acquire our convertible debt, (m) permit judgments to be rendered against us in excess ofcertain limits or having specified effects, depending in part on whether a triggering event has occurred or would occur, (n) take certain actions regarding ourreceivables, and (o) take certain actions regarding our inventory. With certain exceptions, a termination fee of up to 1.0% of the non cash-collateralized portion of the facility is payable by us if we terminate the facilityprior to its stated termination date. At December 31, 2009, no amounts were outstanding under the Financing Agreement, and letters of credit totaling $2.6 million were issued on our behalfand collateralized by cash balances held at U.S. Bank, which are included in Restricted cash in the accompanying consolidated balance sheets. U.S. Bank Purchasing Card Agreement. We have a commercial purchasing card agreement (the "Purchasing Card") with U.S. Bank NationalAssociation ("U.S. Bank"). We use the Purchasing Card for business purpose purchasing and must pay it in full each month. At December 31, 2009, $0 wasoutstanding and $5.0 million was available under the Purchasing Card. 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"). Proceeds to us were $116.2 million, net of $3.8 million of initial purchaser's discount and debt issuance costs. The discount and debtissuance costs are being amortized using the straight-line method which approximates the interest method. We recorded amortization of discount and debtissuance costs related to this offering totaling $344,000, $334,000 and $331,000 during the years ended December 31, 2007, 2008 and 2009, 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 areunsecured and rank equally in right of payment with all existing and future unsecured, unsubordinated debt and senior in right of payment to any existingand 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 pershare or approximately 787,000 shares in aggregate (subject to adjustment in certain events, including stock splits, dividends and other distributions andcertain repurchases of our stock, as well as certain fundamental changes in the ownership of us). Beginning December 1, 2009, we have the right to redeemthe Senior Notes, in whole or in part, for cash at 100% of the principal amount plus accrued and unpaid interest. Upon the77 Table of Contentsoccurrence of a fundamental change (including the acquisition of a majority interest in us, certain changes in our board of directors or the termination oftrading 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 theprincipal 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 paymentswhen due, maintaining our corporate existence and properties, and paying taxes and other claims in a timely manner. Wilmington Trust Company currentlyserves as Trustee under the indenture. Under the repurchase program discussed above, we retired a total $7.4 million of our Senior Notes for $4.6 million in cash and recorded a $2.8 milliongain, net of amortization of debt discount of $92,000 for the year ended December 31, 2009 (see Item 15 of Part IV, "Financial Statements"—Note 19—"Stockand Debt Repurchase Program"). As of December 31, 2009, a face amount of $60.0 million of the Senior Notes remain outstanding with a carrying amount of$59.5 million and $528,000 of debt discount.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 toinvestors.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 financialinformation. Contribution and Contribution Margin. Contribution (a non-GAAP financial measure) (which we reconcile to "Gross profit" in our statement ofoperations) consists of gross profit less sales and marketing expense and reflects an additional way of viewing our results. Contribution Margin isContribution as a percentage of revenues. When viewed with our GAAP gross profit less sales and marketing expenses, we believe Contribution andContribution margin provides management and users of the financial statements information about our ability to cover our fixed operating costs, such astechnology and general and administrative expenses. Contribution and Contribution Margin are used in addition to and in conjunction with resultspresented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. You should review our financial statementsand publicly-filed reports in their entirety and not rely on any single financial measure. The material limitation associated with the use of Contribution is thatit is an incomplete measure of profitability as it does not include all operating expenses or non-operating income and expenses. Management compensatesfor these limitations when using this measure by looking at other GAAP measures, such as operating income (loss) and net income (loss).78 Table of Contents For further details on Contribution, see the calculation of this non-GAAP measure below (in thousands): Free Cash Flow. Free cash flow (a non-GAAP financial measure) reflects an additional way of viewing our cash flows and liquidity that, when viewedwith our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows and liquidity. Free cash flow, which wereconcile to "Net cash provided by (used in) operating activities", is cash flows from operations reduced by "Expenditures for fixed assets, including internal-use software and website development." We believe that cash flows from operating activities is an important measure, since it includes both the cash impactof the continuing operations of the business and changes in the balance sheet that impact cash. However, we believe free cash flow is a useful measure toevaluate our business since purchases of fixed assets are a necessary component of ongoing operations and free cash flow measures the amount of cash wehave available for future investment, debt retirement or other changes to our capital structure after we have paid all of our expenses. Therefore, we believe it isimportant to view free cash flow as a complement to our entire consolidated statements of cash flows as calculated below (in thousands):79 Year endedDecember 31, 2008 2009 (Restated) Total revenue $829,850 $876,769 Cost of goods sold 685,614 712,017 Gross profit 144,236 164,752 Less: Sales and marketing expense 57,668 55,549 Contribution $86,568 $109,203 Contribution margin 10.4% 12.5% Year endedDecember 31, 2008 2009 (Restated) Net cash provided by operating activities $6,444 $46,117 Expenditures for fixed assets, including internal-use software andwebsite development (18,707) (7,275) Free cash flow $(12,263)$38,842 Table of Contents 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 ofcash and cash equivalents, marketable securities, trade accounts and contracts receivable, accounts payable and long-term obligations. We considerinvestments 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 ininterest 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 fluctuationsdue to volatility of the stock market in general, investment-specific circumstances, and changes in general economic conditions. At December 31, 2009, we had $139.8 million in cash and cash equivalents. Hypothetically, an increase or decrease in interest rates of one hundred basispoints would have an estimated impact of $1.4 million on our earnings or loss, or the fair market value or cash flows of these instruments. At December 31, 2009, we had approximately a face amount $60.0 million of convertible senior notes outstanding which bear interest at a fixed rate of3.75%. At December 31, 2009, there were no borrowings outstanding under our lines of credit and letters of credit totaling $2.6 million were outstandingunder 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 fairvalue 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 torepurchase our convertible senior notes in the open market, changes in the fair value of convertible senior notes have no impact on our cash flows orconsolidated financial statements. The estimated fair value of our 3.75% convertible senior notes at December 31, 2009 was $53.6 million. The fair value ofthe 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 The financial statements and supplementary data required by this item are included in Part IV, Item 15 of this Form 10-K and are presented beginning onpage F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE We did not have any circumstances described in Item 304(b) of Regulation S-K. However, see the information included in our Report on Form 8-K/Adated November 23, 2009 for a description of our disagreement with our previous independent registered public accounting firm. ITEM 9A. CONTROLS AND PROCEDURES (a) Restatement On January 29, 2010, the Audit Committee of the Board of Directors concluded, based on the recommendation of management, that we would restate(1) our consolidated financial statements for the year ended December 31, 2008 and (2) our quarterly consolidated financial statements for all interim periodsin the year ended December 31, 2008 and the interim periods ended March 31, 2009, June 30, 2009 and September 30, 2009 within this Form 10-K to correctthe following errors:•Accounting for amounts that we pay our drop ship fulfillment partners and an amount due from a vendor that went undiscovered for a period oftime. Specifically, these errors related to80 Table of Contents(1) amounts we paid to partners or deducted from partner payments related to return processing services and product costs and (2) amounts wepaid to a freight vendor based on incorrect invoices from the vendor. Once discovered, we applied "gain contingency" accounting for therecovery of such amounts, which was an inappropriate accounting treatment.•Amortization of the expense related to restricted stock units. Previously the expense was based on the actual three year vesting schedule,which incorrectly understated the expense as compared to a three year straight line amortization. We also corrected for the use of an outdatedforfeiture rate in calculating share-based compensation expense under the plans.The following additional adjustments were also included in this restatement:•Correction of certain amounts related to customer refunds and credits. •Recognition of co-branded credit card bounty revenue and promotion expense over the estimated term of the credit card relationships.Previously the revenue was incorrectly recognized when the card was issued. •Reduction in the restructuring accrual and correction of the related expense due to a 2008 sublease benefit which was previously excludedfrom the accrual calculation and the accretion of interest expense related to the restructuring accrual, which was not previously recorded. •Change in our accounting for external audit fees to the "as incurred" method instead of the "ratable" method. •Other miscellaneous adjustments, none of which were material either individually or in the aggregate. Certain of these adjustments wererelated to a reduction in revenue and cost of goods sold in equal amounts for certain consideration we received from vendors, an increase ininventory, accounts payable and accrued liabilities to record our sales return allowance on a gross basis, an adjustment to our cash andrestricted cash balances due to compensating balance arrangements and an adjustment to record redeemable common stock for certain sharespreviously issued to employees.(b) Disclosure Controls and Procedures We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the"Exchange Act"), that are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act, is recorded,processed, summarized, and reported within the time periods specified by the Commission's rules and forms. Disclosure controls and procedures includecontrols and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are properlyrecorded, processed, summarized and reported within the time periods required by the Commission's rules and forms. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (principalexecutive officer) and Senior Vice President, Finance and Risk Management (principal financial officer), of the effectiveness of the design and operation ofthese disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e), as of December 31, 2009. Based on this evaluation, theChief Executive Officer (principal executive officer) and Senior Vice President, Finance and Risk Management (principal financial officer) concluded thatour disclosure controls and procedures were not effective as of December 31, 2009, the end of the period covered by this Annual Report on Form 10-K, due tothe material weaknesses described below.(c) Management's Report on Internal Control over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.81 Table of Contents Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and thepreparation 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 overfinancial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate. Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making our assessment of theeffectiveness of internal control over financial reporting, management used the criteria set forth in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission ("COSO"). A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is areasonable possibility that a material misstatement of the registrant's annual or interim financial statements will not be prevented or detected on a timelybasis. As a result of our evaluation of our internal control over financial reporting, management identified the following material weaknesses in our internalcontrol over financial reporting:•We lacked a sufficient number of accounting professionals with the necessary knowledge, experience and training to adequately account forand perform adequate supervisory reviews of significant transactions that resulted in misapplications of GAAP. •Information technology program change and program development controls were inadequately designed to prevent changes in our accountingsystems which led to the failure to appropriately capture and accurately process data. These material weaknesses resulted in the restatement of the financial statements described in Item 9A(a) and material post closing adjustments whichhave been reflected in the financial statements for the year ended December 31, 2009. Additionally, as a result of the material weaknesses, we have concludedthat we did not maintain effective internal control over financial reporting as of December 31, 2009. The effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by KPMG LLP, an independent registeredpublic accounting firm, as stated in their report which is in Item 9A(d).(d) Independent Registered Public Accounting Firm's Report on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm The Board of Directors and StockholdersOverstock.com, Inc.: We have audited Overstock.com, Inc.'s internal control over financial reporting as of December 31, 2009, based on criteria established in InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Overstock.com, Inc.'smanagement is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal controlover financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting (Item 9A(c)). Our responsibility isto express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over82 Table of Contentsfinancial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal controlbased on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internalcontrol over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately andfairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the companyare being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financialstatements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonablepossibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. Materialweaknesses related to the lack of a sufficient number of accounting professionals with the necessary knowledge, experience and training to adequatelyaccount for and perform adequate supervisory reviews of significant transactions and the inadequate design of information technology program change andprogram development controls have been identified and included in management's assessment. We also have audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2009, and the related consolidatedstatements of operations, changes in stockholders' (deficit)/equity and comprehensive income (loss), and cash flows for the year ended December 31, 2009 ofOverstock.com, Inc. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2009consolidated financial statements, and this report does not affect our report dated March 31, 2010, which expressed an unqualified opinion on thoseconsolidated financial statements. In our opinion, because of the effect of the aforementioned material weaknesses on the achievement of the objectives of the control criteria,Overstock.com, Inc. has not maintained effective internal control over financial reporting as of December 31, 2009, based on criteria established in InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.KPMG LLP/s/ KPMGSalt Lake City, UtahMarch 31, 201083 Table of Contents(e) Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting that occurred during the fourth quarter that have materially affected, or arereasonably likely to materially affect, our internal control over financial reporting. As of December 31, 2009, we had not remediated the material weaknesses. We have done and/or initiated the following actions subsequent toDecember 31, 2009:•We have and are continuing to hire additional accounting professionals with the necessary knowledge and experience to properly account forsignificant transactions. •We have reorganized our accounting and financial reporting department to improve supervisory review. •We are hiring additional experienced and qualified professionals for our internal audit department. •We have reorganized our supply chain department to provide comprehensive oversight over our returns process and partner billing accuracy. •We are reviewing the systems and controls in place to appropriately capture amounts to be paid to fulfillment partners or deducted frompartner payments. •We are enhancing our information systems testing to improve the completeness and accuracy of data provided by our information systems. •We have engaged a consulting firm to evaluate our information systems for improvement opportunities. ITEM 9B. OTHER INFORMATION None.84 Table of Contents PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information regarding our Executive Officers required by Item 10 of Part III is set forth in Item 1 of Part I "Business—Executive Officers." Informationrequired by Item 10 of Part III regarding our Directors and any material changes to the process by which security holders may recommend nominees to theBoard of Directors is included in our definitive proxy statement for our 2010 annual meeting of stockholders, and is incorporated herein by reference.Information relating to compliance with Section 16(a) of the 1934 Act is set forth in our definitive proxy statement for our 2010 annual meeting ofstockholders and is incorporated herein by reference. We have adopted a Code of Business Conduct and Ethics, which is applicable to all employees of the Company, including the principal executiveofficer, principal financial officer, and principal accounting officer. The Code includes provisions that are specifically applicable to our senior financialofficers. 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 personwithout 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 our definitive proxy statement for the 2010 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 our definitive proxy statement for the 2010 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 our definitive proxy statement for the 2010 annual meeting of stockholders. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this Item is incorporated by reference to our definitive proxy statement for the 2010 annual meeting of stockholders.85 Table of Contents PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) 1. Financial Statements INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 2. Financial Statement Schedule Schedule II Valuation and Qualifying Accounts listed in (a)(1) above is included herein. Schedules other than those listed above have been omitted asthey 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.86 PageReport of Independent Registered Public Accounting Firm F-2Report of Independent Registered Public Accounting Firm F-3Consolidated Balance Sheets F-4Consolidated Statements of Operations F-5Consolidated Statement of Stockholders' Equity (Deficit) and Comprehensive Loss F-6Consolidated Statements of Cash Flows F-7Notes to Consolidated Financial Statements F-8Schedule II Valuation and Qualifying Accounts F-55Exhibit Number Description of Document 3.1(a)Amended and Restated Certificate of Incorporation. 3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to our Report on Form 8-K filed onFebruary 5, 2009). 4.1(b)Form of specimen common stock certificate. 4.2(b)Investor Rights Agreement, dated March 4, 2002. 10.1(b)Form of Indemnification Agreement between Overstock.com, Inc. and each of its directors and officers. 10.2(b)Amended and Restated 1999 Stock Option Plan and form of agreements thereunder. 10.3 Form of agreements under 2002 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.5 toour Registration Statement on Form S-1 (File No. 333-83728), which became effective on May 29, 2002). 10.4 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). 10.5 Intellectual Property Assignment Agreement with Douglas Greene dated February 28, 2002 (incorporated byreference to Exhibit 10.14 to our Registration Statement on Form S-1 (File No. 333-83728), which becameeffective on May 29, 2002). 10.6 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 10.18to our Registration Statement on Form S-1 (File No. 333-83728), which became effective on May 29, 2002). Table of Contents87Exhibit Number Description of Document 10.7 Sublease Agreement by and between Overstock.com, Inc., Old Mill Technology Center, LLC, and Old MillBuilding LLC (incorporated by reference to Exhibit 99.1 to our Report on Form 8-K/A filed on December 7,2004). 10.8 Sublease Agreement by and between Overstock.com, Inc., Document Controls Systems, Inc., and Old MillBuilding LLC (incorporated by reference to Exhibit 99.2 to our Report on Form 8-K/A filed on December 7,2004). 10.9 Sublease Agreement by and between Overstock.com, Inc., Information Technology International, Inc., andOld Mill Building LLC (incorporated by reference to Exhibit 99.3 to our Report on Form 8-K/A filed onDecember 7, 2004). 10.10 Old Mill Corporate Center Fourth Amendment to the Lease Agreement (incorporated by reference toExhibit 99.4 to our Report on Form 8-K/A filed on December 7, 2004). 10.11 Co-location Center Agreement (incorporated by reference to Exhibit 99.5 to our Report on Form 8-K/A filedon December 7, 2004). 10.12 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). 10.13 Registration Rights Agreement, dated November 23, 2004 by and among Overstock.com, Inc., LehmanBrothers., Piper Jaffray & Co., Legg Mason Wood Walker Incorporated and WR Hambrecht+ Co, LLC(incorporated by reference to Exhibit 10.2 to our Report on Form 8-K filed on November 24, 2004). 10.14 Purchase Agreement dated November 17, 2004 with Lehman Brothers Inc. as Representative (incorporatedby reference to Exhibit 10.34 to our report on Form 10-K for the year ended December 31, 2004 filed onMarch 16, 2005). 10.15 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) 10.16 Underwriting Agreement dated May 13, 2004 with WR Hambrecht & Co., LLC and JMP Securities LLC. asRepresentatives (incorporated by reference to Exhibit 1.1 to our Report on Form 8-K filed on May 14, 2004 10.17 2002 Stock Option Plan, as amended (incorporated by reference to Exhibit 99.6 to our Report on Form 8-Kfiled May 7, 2004) 10.18 2005 Equity Incentive Plan (incorporated by reference to Appendix A to Overstock.com, Inc.'s definitiveproxy statement filed with the SEC on March 28, 2008. 10.19 Form of Restricted Stock Unit Grant Notice and Restricted Stock Agreement under the 2005 EquityIncentive Plan (incorporated by reference to Exhibit 10.1 to our Report on Form 8-K filed on January 15,2008) 10.20 Lease Agreement with Natomas Meadows, LLC dated April 8, 2008 (incorporated by reference toExhibit 10.1 to our Report on Form 8-K filed on April 11, 2008). 10.21 First Amendment to Lease amending the terms of the Lease Agreement with Natomas Meadows, LLC datedDecember 16, 2008 (incorporated by reference to Exhibit 10.1 to our Report on Form 8-K filed onDecember 17, 2008). 10.22 Offer Letter to Stephen J. Chesnut dated December 18, 2008 (incorporated by reference to exhibit 10.1 to ourReport on Form 8-K dated January 5, 2009). 10.23 Lease Termination Agreement with Landmark Building One, LLC dated March 20, 2009 (incorporated byreference to exhibit 10.1 to our Report on Form 8-K dated March 23, 2009). 10.24 Letter agreement dated August 3, 2009 terminating Amended and Restated Loan and Security Agreementwith Wells Fargo Retail Finance (incorporated by reference to Exhibit 10.1 to the registrant's Form 8-K filedAugust 3, 2009). Table of Contents88Exhibit Number Description of Document 10.25 Financing Agreement with U.S. Bank National Association dated as of December 22, 2009 (incorporated byreference to exhibit 10.1 to our Report on Form 8-K dated December 23, 2009). 10.26 Security Agreement with U.S. Bank National Association dated as of December 22, 2009 (incorporated byreference to exhibit 10.2 to our Report on Form 8-K dated December 23, 2009) 10.27 Revolving Note (Regular Advances) in favor of U.S. Bank National Association dated as of December 22,2009 (incorporated by reference to exhibit 10.3 to our Report on Form 8-K dated December 23, 2009) 10.28 Revolving Note (Cash Secured Advances) in favor of U.S. Bank National Association dated as ofDecember 22, 2009 (incorporated by reference to exhibit 10.4 to our Report on Form 8-K datedDecember 23, 2009) *10.29(c)Summary of unwritten compensation arrangements with Directors 21 Subsidiaries of the Registrant (incorporated by reference to exhibit 21 filed with the registrant's Form 10-Kfor the year ended December 31, 2008 as filed on February 23, 2009) *23.1 Consent of Independent Registered Public Accounting Firm *23.2 Consent of Independent Registered Public Accounting Firm 24.1 Powers of Attorney (see signature page) *31.1 Exhibit 31 Certification of Chief Executive Officer *31.2 Exhibit 31 Certification of Chief Financial Officer *32.1 Section 1350 Certification of Chief Executive Officer *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. Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this Form 10-K to be signed on its behalfby the undersigned, thereunto duly authorized, on March 31, 2010. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated. 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 Stephen J. Chesnut, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, tosign 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 theSecurities and Exchange Commission, hereby ratifying and conforming all that said attorney-in-fact, or his or their substitute or substitutes, may do or causeto be done by virtue hereof.89 OVERSTOCK.COM, INC. By: /s/ PATRICK M. BYRNEPatrick M. ByrneChief Executive Officer Signature Title Date /s/ PATRICK M. BYRNEPatrick M. Byrne Chief Executive Officer (Principal ExecutiveOfficer), Chairman of the Board March 31, 2010 /s/ STEPHEN J. CHESNUTStephen J. Chesnut Senior Vice President, Finance and RiskManagement (Principal Financial Officer andPrincipal Accounting Officer) March 31, 2010 /s/ ALLISON H. ABRAHAMAllison H. Abraham Director March 31, 2010 /s/ BARCLAY F. CORBUSBarclay F. Corbus Director March 31, 2010 /s/ JOSEPH J. TABACCO, JR.Joseph J. Tabacco, Jr. Director March 31, 2010 Table of Contents INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1Report of Independent Registered Public Accounting Firm F-2Report of Independent Registered Public Accounting Firm F-3Consolidated Balance Sheets F-4Consolidated Statements of Operations F-5Consolidated Statement of Stockholders' Equity (Deficit) and Comprehensive Income (Loss) F-6Consolidated Statements of Cash Flows F-7Notes to Consolidated Financial Statements F-8Schedule II Valuation and Qualifying Accounts F-55 Table of Contents Report of Independent Registered Public Accounting Firm The Board of Directors and StockholdersOverstock.com, Inc.: We have audited the accompanying consolidated balance sheet of Overstock.com, Inc. and subsidiaries as of December 31, 2009, and the relatedconsolidated statements of operations, stockholders' equity (deficit) and comprehensive income (loss), and cash flows for the year ended December 31, 2009.In connection with our audit of the consolidated financial statements, we also have audited financial statement schedule II. These consolidated financialstatements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on theseconsolidated financial statements and financial statement schedule based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditprovides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Overstock.com, Inc.and subsidiaries as of December 31, 2009, and the results of their operations and their cash flows for the year ended December 31, 2009, in conformity withU.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Overstock.com Inc.'sinternal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 31, 2010 expressed an adverse opinion on theeffectiveness of the Company's internal control over financial reporting.Salt Lake City, UtahMarch 31, 2010F-2 /s/ KPMG LLP Table of Contents Report of Independent Registered Public Accounting Firm To Board of Directors and Stockholders of Overstock.com, Inc.: In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financialposition of Overstock.com and its subsidiaries at December 31, 2008, and the results of their operations and their cash flows for each of the two years in theperiod ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion,the financial statement schedule appearing under Item 15(a)(2) for each of the two years in the period ended December 31, 2008 presents fairly, in all materialrespects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements andfinancial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statementsand financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in thefinancial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 3 to the consolidated financial statements, the financial statements for 2008 have been restated for the correction of errors./s/ PricewaterhouseCoopers LLPSalt Lake City, UtahFebruary 23, 2009, except for Note 3, for which the date is March 31, 2010.F-3 Table of Contents Overstock.com, Inc. Consolidated Balance Sheets (in thousands) See accompanying notes to consolidated financial statements.F-4 December 31,2008 December 31,2009 (Restated) Assets Current assets: Cash and cash equivalents $96,457 $139,757 Restricted cash 4,262 4,414 Marketable securities 8,989 — Accounts receivable, net 7,100 11,640 Notes receivable (Note 5) 1,250 — Inventories, net 24,719 23,375 Prepaid inventory, net 761 2,879 Prepaids and other assets 9,552 10,275 Total current assets 153,090 192,340 Fixed assets, net 24,724 20,618 Goodwill 2,784 2,784 Other long-term assets, net 538 758 Total assets $181,136 $216,500 Liabilities and Stockholders' Equity (Deficit) Current liabilities: Accounts payable $57,981 $76,623 Accrued liabilities 34,097 43,296 Deferred revenue 19,232 20,665 Capital lease obligations, current — 520 Total current liabilities 111,310 141,104 Capital lease obligations, non-current — 806 Other long-term liabilities 4,251 3,580 Convertible senior notes, net of debt discount of $901,000 and $528,000 as of December 31,2008 and 2009, respectively 66,558 59,466 Total liabilities 182,119 204,956 Commitments and contingencies (Note 16) Redeemable common stock, $0.0001 par value, 98 and 65 shares outstanding as ofDecember 31, 2008 and 2009, respectively (Note 18). 1,263 744 Stockholders' equity (deficit): Preferred stock, $0.0001 par value, 5,000 shares authorized, no shares issued andoutstanding as of December 31, 2008 and 2009 — — Common stock, $0.0001 par value, 100,000 shares authorized, 25,438 and 25,583 sharesissued as of December 31, 2008 and 2009, respectively, and 22,645 and 22,776 sharesoutstanding as of December 31, 2008 and 2009, respectively 2 2 Additional paid-in capital 337,707 343,040 Accumulated deficit (263,333) (256,056) Treasury stock, 2,793 and 2,807 shares at cost as of December 31, 2008 and 2009,respectively (76,670) (76,186) Accumulated other comprehensive income 48 — Total stockholders' equity (deficit) (2,246) 10,800 Total liabilities and stockholders' equity (deficit) $181,136 $216,500 Table of Contents Overstock.com, Inc. Consolidated Statements of Operations (in thousands, except per share data) See accompanying notes to consolidated financial statements.F-5 Year ended December 31 2007 2008 2009 (Restated) Revenue, net Direct $197,088 $173,687 $150,901 Fulfillment partner 568,814 656,163 725,868 Total net revenue 765,902 829,850 876,769 Cost of goods sold Direct(1) 168,008 153,967 130,890 Fulfillment partner 473,344 531,647 581,127 Total cost of goods sold 641,352 685,614 712,017 Gross profit 124,550 144,236 164,752 Operating expenses: Sales and marketing(1) 55,458 57,668 55,549 Technology(1) 59,453 56,677 52,336 General and administrative(1) 41,976 39,348 48,906 Restructuring 12,283 (299) (66) Total operating expenses 169,170 153,394 156,725 Operating income (loss) (44,620) (9,158) 8,027 Interest income 4,788 3,163 170 Interest expense (4,188) (3,565) (3,470)Other income (expense), net (92) (1,446) 3,277 Income (loss) from continuing operations before income taxes (44,112) (11,006) 8,004 Provision for income taxes — — (257) Income (loss) from continuing operations (44,112) (11,006) 7,747 Loss from discontinued operations (Note 5) (3,924) — — Net income (loss) (48,036) (11,006) 7,747 Deemed dividend related to redeemable common stock — (77) (48) Net income (loss) attributable to common shares $(48,036)$(11,083)$7,699 Net income (loss) per common share—basic: Income (loss) from continuing operations after dividend related to redeemablecommon stock $(1.86)$(0.48)$0.34 Loss from discontinued operations (0.17) — — Net income (loss) attributable to common shares—basic (2.03) (0.48) 0.34 Weighted average common shares outstanding—basic 23,704 22,901 22,821 Net income (loss) per common share—diluted: Income (loss) from continuing operations after dividend related to redeemablecommon stock $(1.86)$(0.48)$0.33 Loss from discontinued operations (0.17) — — Net income (loss) attributable to common shares—diluted (2.03) (0.48) 0.33 Weighted average common shares outstanding—diluted 23,704 22,901 23,067 (1)Includes stock-based compensation as follows (Note 20):Cost of goods sold—direct $460 $198 $167 Sales and marketing 336 347 634 Technology 764 870 961 General and administrative 2,601 2,216 3,023 Table of ContentsOverstock.com, Inc.Consolidated Statements of Stockholders' Equity (Deficit)and Comprehensive Income (Loss)(in thousands)See accompanying notes to consolidated financial statements.F-6 Common stock Treasury stock AdditionalPaid-inCapital AccumulatedDeficit Accumulated OtherComprehensiveIncome (loss) Shares Amount Shares Amount Total Balances at December 31, 2006 25,069 $2 $325,771 $(204,291) 1,654 $(64,983)$(132)$56,367 Stock-based compensation to employees anddirectors — — 4,522 — — — — 4,522 Stock-based compensation to consultants inexchange for services — — 189 — — — — 189 Stock based compensation related to performanceshares — — 1,000 — — — — 1,000 Exercise of stock options 354 — 3,230 — — — — 3,230 Treasury stock issued for 401(k) matchingcontribution — — (391) — (26) 885 — 494 Treasury stock issued for prior-year 401(k)matching contribution — — (412) — (23) 820 — 408 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) Balances at December 31, 2007 25,423 $2 $333,909 $(252,327) 1,605 $(63,278)$(94)$18,212 Stock-based compensation to employees anddirectors (Restated) — — 4,372 — — — — 4,372 Stock-based compensation to consultants inexchange for services — — 259 — — — — 259 Stock based compensation related to performanceshares — — (1,000) — — — — (1,000)Exercise of stock options 113 — 1,471 — — — — 1,471 Purchase of treasury stock — — — — 1,190 (13,452) — (13,452)Treasury stock issued for 401(k) matchingcontribution — — (41) — (2) 60 — 19 Issuance of redeemable common stock (Restated)(Note 18) (155) — (2,386) — — — — (2,386)Lapse of rescission rights of redeemable stock(Restated) (Note 18) 57 — 1,200 — — — — 1,200 Deemed dividend related to redeemable commonstock (Restated) (Note 18) — (77) — — — — (77)Comprehensive loss: Net loss (Restated) — — — (11,006) — — — (11,006) Unrealized gain on marketable securities — — — — — — 48 48 Cumulative translation adjustment — — — — — — 94 94 Total comprehensive loss (Restated) — — — — — — — (10,864) Balances at December 31, 2008 (Restated) 25,438 $2 $337,707 $(263,333) 2,793 $(76,670)$48 $(2,246) Stock-based compensation to employees anddirectors — — 4,775 — — — — 4,775 Stock-based compensation to consultants inexchange for services — — 10 — — — — 10 Common stock issued upon vesting of restrictedstock 110 — — — — — — — Exercise of stock options 2 — 29 — — — — 29 Purchase of treasury stock — — — — 36 (340) — (340)Treasury stock issued for 401(k) matchingcontribution — — — (470) (22) 824 — 354 Issuance of redeemable common stock (Note 18) (39) — (400) — — — — (400)Lapse of rescission rights of redeemable stock(Note 18) 72 — 967 — — — — 967 Deemed dividend related to redeemable commonstock (Note 18) — (48) — — — — (48)Comprehensive income: Net income — — — 7,747 — — — 7,747 Reclassification adjustment included in netincome — — — — — — (48) (48) Total comprehensive income — — — — — — — 7,699 Balances at December 31, 2009 25,583 $2 $343,040 $(256,056) 2,807 $(76,186)$— $10,800 Table of Contents Overstock.com, Inc. Consolidated Statements of Cash Flows (in thousands) See accompanying notes to consolidated financial statements.F-7 Year ended December 31 2007 2008 2009 (Restated) Cash flows from operating activities of continuing operations: Net income (loss) $(48,036)$(11,006)$7,747 Adjustments to reconcile net income (loss) to net cash provided by operating activities of continuing operations: Loss from discontinued operations 3,924 — — Depreciation and amortization 29,495 22,968 12,883 Realized loss on marketable securities — 334 48 Loss on settlement of notes receivable (Note 5) — 3,929 — Loss on disposition of fixed assets 1 140 183 Stock-based compensation to employees and directors 4,522 4,372 4,775 Stock-based compensation to consultants for services 189 259 10 Stock-based compensation relating to performance share plan (550) (1,000) — Amortization of debt discount 344 334 331 Gain from early extinguishment of debt — (2,849) (2,810) Asset impairment 2,169 — — Restructuring charges (reversals) 10,114 (299) (66) Notes receivable accretion (272) (545) — Changes in operating assets and liabilities, net of effect of discontinued operations: Restricted cash 3,636 4,372 (152) Accounts receivable, net 4,822 4,654 (4,540) Inventories, net (1,773) 3,790 1,344 Prepaid inventory, net (1,331) 2,177 (2,118) Prepaids and other assets (52) (2,027) (604) Other long-term assets, net 471 (516) (120) Accounts payable 11,849 (10,774) 18,642 Accrued liabilities (5,414) (7,636) 9,131 Deferred revenue (255) (3,733) 1,433 Other long-term liabilities (193) (500) — Net cash provided by operating activities of continuing operations 13,660 6,444 46,117 Cash flows from investing activities of continuing operations: Purchases of marketable securities (75,217) (35,548) — Maturities of marketable securities 29,258 64,542 — Sale of marketable securities prior to maturity — 7,740 8,893 Expenditures for fixed assets, including internal-use software and website development (2,643) (18,707) (7,275) Proceeds from the sale of discontinued operations, net of cash transferred 9,892 — — Collection of note receivable 5,196 1,506 1,250 Net cash provided by (used in) investing activities of continuing operations (33,514) 19,533 2,868 Cash flows from financing activities of continuing operations: Payments on capital lease obligations (5,261) (3,796) (348) Drawdowns on line of credit 2,423 12,963 1,612 Payments on line of credit (2,423) (12,963) (1,612) Capitalized financing costs — — (245) Paydown on direct financing arrangement — — (218) Payments to retire convertible senior notes — (6,550) (4,563) Purchase of treasury stock — (13,452) (340) Exercise of stock options 3,230 1,471 29 Net cash used in financing activities of continuing operations (2,031) (22,327) (5,685) Effect of exchange rate changes on cash (3) — — Cash used in operating activities of discontinued operations (204) — — Cash used in investing activities of discontinued operations (53) — — Net increase (decrease) in cash and cash equivalents (22,145) 3,650 43,300 Less change in cash and cash equivalents from discontinued operations 257 — — Cash and cash equivalents, beginning of period 114,695 92,807 96,457 Cash and cash equivalents, end of period from continuing operations $92,807 $96,457 $139,757 Supplemental disclosures of cash flow information: Cash paid during the year: Interest paid $3,882 $3,390 $3,006 Non-cash investing and financing activities: Equipment and software acquired under capital lease obligations $— $— $1,632 Tenant improvements acquired under other obligation $— $1,864 $— Promissory notes received for sale of discontinued operations $6,000 $— $— Issuance of redeemable common stock $— $2,386 $400 Lapse of rescission rights of redeemable stock $— $1,200 $967 Issuance of common stock from treasury for 401(k) matching contribution $494 $19 $354 Prior year discretionary 401(k) contribution settled in treasury stock $408 $— $— Table of Contents Overstock.com, Inc. Notes to Consolidated Financial Statements 1. BUSINESS AND ORGANIZATION Overstock.com, Inc. (the "Company") is an online "closeout" retailer offering discount, brand-name merchandise for sale primarily over the Internet. TheCompany'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 and video games ("BMMG"). As part of itsWebsite, the Company also offers an online auction service, which acts as an online marketplace for the buying and selling of goods and services, as well asan online site for listing cars and homes for sale. In October 2009, the Company launched O.biz, a website where customers can shop for bulk and businessrelated items. The Company was formed on May 5, 1997 as D2—Discounts Direct, a limited liability company. On December 30, 1998, the Company was reorganizedas a C Corporation in the State of Utah and reincorporated in Delaware in May 2002. On October 25, 1999, the Company changed its name toOverstock.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 inMexico. The Company ceased operations of its Mexico Operations on October 24, 2008. The Company has organized its operations into two principal segments based on the primary source of revenue: Direct revenue and Fulfillment partnerrevenue (see "Note 25—Business Segments").2. ACCOUNTING POLICIESPrinciples of consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The consolidatedfinancial statements include the accounts of the Company's OTravel subsidiary through April 25, 2007 and the Company's Overstock Mexico, S. de R. L. deC.V. subsidiary through October 24, 2008 (see "Note 5—Acquisition and Subsequent Discontinued Operations"). All intercompany account balances andtransactions have been eliminated in consolidation.Use of estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires estimates and assumptions that affectthe reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated financial statementsand 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 and valuation of fixed assets and internally-developed software, valuation of acquiredintangibles and goodwill, income taxes, stock-based compensation, restructuring liabilities and contingencies. Actual results could differ materially fromthose estimates.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 ofpurchase, as cash equivalents. Cash equivalents as of December 31, 2008 and 2009 are $97.4 million and $129.2 million, respectively.F-8 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)Restricted cash The Company considers cash that is legally restricted and cash that is held as a compensating balance for letter of credit arrangements as restricted cash.At December 31, 2008 and 2009, restricted cash was $4.3 million and $4.4 million and was held primarily in money market accounts.Marketable securities Marketable securities consist of funds deposited into capital management accounts at one financial institution. The Company generally invests excesscash in short- to intermediate-term fixed income securities and money market mutual funds, including municipal, government and corporate bonds which areclassified as 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 excludedfrom earnings and reported as a component of accumulated other comprehensive income (loss), net of related tax effect. The Company periodically evaluates whether declines in fair values of its investments are other-than-temporary. This evaluation consists of a review ofqualitative and quantitative factors, including quoted market prices, if available, other publicly available information, or other conditions that bear on thevalue of its investments. At December 31, 2008, gross unrealized gains on marketable securities were $48,000. The Company recorded an "other thantemporary" impairment of marketable securities of $300,000 and realized losses of $34,000 during the year ended December 31, 2008 and realized losses of$48,000 during the year ended December 31, 2009. The Company had no marketable securities at December 31, 2009.Fair value of financial instruments The Company's financial instruments, including cash, cash equivalents, notes receivable, accounts receivable, accounts payable and accrued liabilitiesare carried at cost, which approximates their fair value because of the short-term maturity of these instruments. The Company accounts for its assets using a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observableor unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's marketassumptions. 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 notactive, 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 fairvalue.F-9 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued) The fair value of these financial instruments was determined using the following levels of inputs as of December 31, 2008 (in thousands): The fair value of these financial instruments was determined using the following levels of inputs as of December 31, 2009 (in thousands): The estimated fair value of the Company's 3.75% Convertible Senior Notes due 2011 ("Senior Notes") outstanding at December 31, 2008 andDecember 31, 2009 was $38.1 million on a carrying value of $66.6 million and $53.6 million on a carrying value of $59.5 million, respectively. The fairvalue of the Senior Notes was derived using a convertible debt pricing model with observable market inputs, which include stock price, dividend payments,borrowing costs, equity volatility, interest rates and interest spread.Accounts receivable Accounts receivable consist principally of trade amounts due from customers and from uncleared credit card transactions at period end. Accountsreceivable are recorded at invoiced amounts and do not bear interest.Allowance for doubtful accounts From time to time, the Company grants credit to some of its business customers on normal credit terms (typically 30 days). The Company performs creditevaluations of its customers' financial conditionF-10 Fair Value Measurementsas of December 31, 2008: Total Level 1 Level 2 Level 3 Assets: Cash equivalents and restricted cash—Moneymarket mutual funds $101,678 $101,678 $— $— Available-for-sale-securities 8,989 8,989 — — Total assets $110,667 $110,667 $— $— Fair Value Measurementsas of December 31, 2009: Total Level 1 Level 2 Level 3 Assets: Cash equivalents and restricted cash—Money market mutual funds $133,583 $133,583 $— $— Liabilities: Restructuring accrual(1) $2,685 $— $— $2,685 (1)The fair value was determined based on the income approach, in which the Company used internal cash flowprojections over the life of the underlying lease agreements discounted based on a credit adjusted risk-free rate ofreturn. See the Level 3 roll forward related to the restructuring accrual at Note 4—Restructuring Expense. Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)and payment history and maintains an allowance for doubtful accounts receivable based upon its historical collection experience and expected collectabilityof all accounts receivable. The allowance for doubtful accounts receivable was $1.6 million and $1.7 million at December 31, 2008 and 2009, respectively.Concentration of credit risk Cash equivalents include short-term, highly liquid instruments with maturities at date of purchase of 90 days or less. At December 31, 2008 and 2009,two banks held the Company's cash and cash equivalents. The Company does not believe that, as a result of this concentration, it is subject to any unusualfinancial 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, investmentsecurities, and receivables. The Company invests its cash primarily in money market securities which are uninsured. The Company's accounts receivable are derived primarily from revenue earned from customers located in the United States. The Company maintains anallowance for doubtful accounts based upon the expected 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") method of accounting, and are valued at the lower of cost or market. The Company establishes allowances for estimated obsolescence and to lowerof cost or market value based upon assumptions about future demand and market conditions. Once established, the original cost of the inventory less therelated allowance represents the new cost basis of such products. Reversal of these allowances is recognized only when the related inventory has been sold orscrapped.Prepaid inventory, net Prepaid inventory represents inventory paid for in advance of receipt. Prepaid inventory at December 31, 2008 and 2009 was $761,000 and $2.9 millionrespectively.Prepaids and other assets Prepaids and other assets represent expenses paid prior to receipt of the related goods or services, including advertising, maintenance, packaging,insurance and other miscellaneous costs. Total prepaids and other assets at December 31, 2008 and 2009 were $9.6 million and $10.3 million, respectively.Fixed Assets Fixed assets, which include assets such as furniture and fixtures, technology infrastructure, internal-use software and website development, are recordedat cost and depreciated or amortizedF-11 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)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: Leasehold improvements are amortized over the shorter of the term of the related leases or estimated useful lives. Depreciation and amortization expenseis classified within the corresponding operating expense categories on the consolidated statements of operations as follows (in thousands): Upon sale or retirement of assets, cost and related accumulated depreciation and amortization are removed from the balance sheet and the resulting gainor loss is reflected in the consolidated statements 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 andenhance its Website and processes supporting the Company's business. The Company capitalizes costs incurred during the application development stage ofinternal-use software and amortizes these costs over the estimated useful life of two to three years. The Company expenses costs incurred related to design ormaintenance of internal-use software as incurred. During the year ended December 31, 2008 and 2009, the Company capitalized $9.0 million and $5.4 million, respectively, of costs associated withinternal-use software and website development, both developed internally and acquired externally. Amortization of costs associated with internal-usesoftware and website development was $11.6 million and $6.0 million for those respective periods. The decrease in costs associated with internal-usesoftware and website development is primarily related to a greater number of software licenses purchased in 2008 compared to 2009.Leases The Company accounts for its lease agreements as either operating or capital leases depending on certain defined criteria. On certain of its leaseagreements, the Company may receive rent holidays andF-12 Life(years) Computer software 2-3 Computer hardware 3 Furniture and equipment 3-5 Year ended December 31, 2007 2008 2009 (Restated) Cost of goods sold—direct $1,882 $1,674 $1,264 Sales and marketing — — — Technology 27,507 21,140 10,943 General and administrative 106 154 676 Total depreciation and amortization, includinginternal-use software and website development $29,495 $22,968 $12,883 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)other incentives. The Company recognizes lease costs on a straight-line basis without regard to deferred payment terms, such as rent holidays that defer thecommencement date of required payments. Additionally, tenant improvement allowances are amortized as a reduction in rent expense over the term of thelease. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the life of the lease, without assumingrenewal 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).Other long-term assets Other long-term assets include long-term prepaid expenses and deposits.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 thecarrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the assets' carrying amount to future undiscounted net cashflows the assets are expected to generate. Cash flow forecasts are based on trends of historical performance and 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 berecognized is measured by the amount by which the carrying amount of the assets exceeds their fair values. The Company did not record any impairment oflong-lived assets during 2007, 2008 and 2009.Goodwill Goodwill represents the excess of the purchase price paid over the fair value of the tangible net assets acquired in business combinations. Goodwill is not amortized but tested for impairment at least annually. When evaluating whether goodwill is impaired, the Company compares the fairvalue of the reporting unit to which the goodwill is assigned to its carrying amount. If the carrying amount exceeds its fair value, then the amount of theimpairment loss must be measured. The impairment loss, if any, is calculated by comparing the implied fair value of the goodwill to its carrying amount. Incalculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to the other assets and liabilities within the reporting unit basedon 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. In conjunction with the discontinuance of the Company's travel subsidiary ("OTravel"), the Company performed an evaluation of the goodwillassociated with the reporting unit and determined that goodwill of approximately $3.8 million was impaired in 2007 (see "Note 5—Acquisition andSubsequent Discontinued Operations"). The Company evaluated its goodwill as of December 31, 2008 and 2009 and determined that no impairment chargeshould be recorded.F-13 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)Revenue recognition The Company derives revenue primarily from two sources: direct revenue and fulfillment partner revenue, including listing fees and commissionscollected from products being listed and sold through the Auctions tab of its Website as well as advertisement revenue derived from its cars and real estatelisting businesses, and from advertising on its shopping pages. The Company has organized its operations into two principal segments based on the primarysource of revenue: Direct revenue and fulfillment partner revenue (see Note 25—"Business Segments"). Revenue is recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery hasoccurred 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 isreasonably assured. Revenue related to merchandise sales is recognized upon delivery to the Company's customers. As the Company ships high volumes ofpackages through multiple carriers, it is not practical for the Company to track the actual delivery date of each shipment. Therefore, the Company usesestimates to determine which shipments are delivered and therefore recognized as revenue at the end of the period. The delivery date estimates are based onaverage shipping transit times, which are calculated using the following factors: (i) the shipping carrier (as carriers differ in transit times); (ii) the fulfillmentsource (either the Company's warehouses or those of its fulfillment partners); (iii) the delivery destination; and (iv) actual transit time experience, whichshows that delivery date is typically one to eight business days from the date of shipment. The Company evaluates the criteria outlined in ASC Topic 605-45, Principal Agent Considerations, in determining whether it is appropriate to recordthe 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, issubject to inventory risk, has latitude in establishing prices and selecting suppliers, or has several but not all of these indicators, revenue is recorded gross. Ifthe 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. TheCompany presents revenue net of sales taxes. The Company periodically provides incentive offers to its customers to encourage purchases. Such offers include current discount offers, such aspercentage discounts off current purchases, and other similar offers. Current discount offers, when used by customers, are treated as a reduction of revenue.Co-branded Credit Card During the years ended December 31, 2007, 2008 and 2009, the Company had a co-branded credit card agreement with a third-party bank, for theissuance of credit cards bearing the Overstock brand, under which the bank paid the Company fees for new accounts, renewed accounts and for card usage.New and renewed account fees are recognized as revenues on a straight-line basis over the estimated life of the credit card relationship. Credit card usage feesare recognized as revenues as actual credit card usage occurs. The Company's co-branded credit card agreement with the third-party bank terminated effectiveAugust 30, 2009.F-14 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)Direct revenue Direct revenue consists of merchandise sold through the Company's Website to individual consumers and businesses that is fulfilled from its leasedwarehouses.Fulfillment partner revenue Fulfillment partner revenue is derived from merchandise sales through the Company's Website which fulfillment partners ship directly to consumers andbusinesses from warehouses maintained by the fulfillment partners. The Company provides an online auction service on 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. Except in limited circumstances where the Company auction-lists returned merchandise, the Company is notthe seller of auction-listed items and has no control over the pricing of those items. Therefore, the listing fees for items sold at auction by sellers are recordedas revenue during the period these items are listed or sold on a net basis. The revenue for the merchandise returned that the Company sells at auction isrecorded on a gross basis. Revenue from the auctions business is included in the fulfillment partner segment. The Company provides 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 andallows buyers to review vehicle descriptions, post offers to purchase, and provides the means for purchasers to contact sellers for further information andnegotiations on the purchase of an advertised vehicle. Revenue from its cars listing business is recorded net and is included in the fulfillment partnersegment. The Company provides an online site for listing real estate for sale as a part of its Website. The real estate listing service allows customers to searchactive listings across the country. Listing categories include foreclosures, live and on-line auctions, for sale by owner listings, broker/agent listings andnumerous aggregated classified ad listings. Revenue from the real estate business is recorded net and is included in the fulfillment partner segment. Total revenue from Auctions, Cars and Real Estate businesses was $1.4 million, $1.0 million and $2.1 million for the years ended December 31, 2007,2008 and 2009, respectively.International business The Company began selling products through its Website to customers outside the United States in August 2008. As of December 31, 2009, theCompany was selling to customers in 58 countries. The Company does not have operations outside the United States, and is using a U.S. based third party toprovide logistics and fulfillment for all international orders. Revenue generated from the international business is included in either direct or fulfillmentpartner revenue, depending on whether the product is shipped from the Company's leased warehouses or from a fulfillment partner. Total revenue from International sales was $1.3 million and $5.1 million for the years ended December 31, 2008 and 2009, respectively. In September 2009, the Company began offering a consignment service to suppliers where the suppliers' merchandise is stored in and shipped from theCompany's leased warehouses. The Company pays the consignment supplier upon sale of the consigned merchandise to the consumer.F-15 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued) In October 2009, the Company introduced O.biz, a website where customers and businesses can shop for bulk and business related items, while offeringmanufacturers, distributors and other retailers an alternative sales channel for liquidating their inventory.Deferred revenue Customer orders are recorded as deferred revenue prior to estimated delivery of products ordered or services rendered. In addition, amounts received inadvance for Club O membership fees are recorded as deferred revenue and recognized ratably over the membership period. The Company sells gift cards andrecords related deferred revenue at the time of the sale. Gift cards are sold without expiration dates and revenue is recognized upon redemption. If a gift cardis not redeemed, the Company recognizes revenue when the likelihood of its redemption becomes remote based on the Company's historical redemptionexperience. The Company considers the likelihood of redemption to be remote after 36 months.Sales returns allowance The Company inspects all returned items when they arrive at its processing facility. The Company will refund the full cost of the merchandise returnedand all original shipping charges if the returned item is defective or there has been a Company error, such as shipping the wrong product. If the return is not a result of a product defect or Company error and the customer initiates a return of an unopened item within 30 days of delivery,except for computers and electronics, the Company will refund the full cost of the merchandise minus the original shipping charge and actual return shippingfees. However, the Company will reduce refunds for returns initiated more than 30 days after delivery or that are received at its returns processing facilitymore than 45 days after initial delivery. If the Company's customer returns an item that has been opened or shows signs of wear, it will issue a partial refund minus both the original shippingcharge and return shipping fees. Total net revenue is recorded net of estimated returns. The Company records an allowance for returns based on current period revenues and historicalreturns experience. The Company analyzes actual historical returns, current economic trends and changes in order volume and acceptance of its productswhen evaluating the adequacy of the sales returns allowance in any accounting period. The Company's actual product returns have not differed materiallyfrom its estimates. The Company is not currently aware of any trends that it expects would significantly change future returns experience compared tohistorical experience. The sales returns allowance was $16.2 million at December 31, 2008 and $11.9 million at December 31, 2009.Credit card chargeback allowance Revenue is recorded net of credit card chargebacks. The Company maintains an allowance for credit card chargebacks based on current period revenuesand historical chargeback experience. The allowance for chargebacks was $365,000 at December 31, 2008, and $139,000 at December 31, 2009.F-16 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)Valuation of inventories The Company writes down its inventory for estimated obsolescence and to lower of cost or market value based upon assumptions about future demandand 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 allowance represents the new cost basis of such products. Reversal of theseallowances is recognized only when the related inventory has been sold or scrapped. At December 31, 2008, the Company's inventory balance was$24.7 million (including $9.8 million of inventory in-transit), net of allowance for obsolescence or damaged inventory of $2.1 million. At December 31,2009, the Company's inventory balance was $23.4 million (including $8.0 million of inventory in-transit), net of allowance for obsolescence or damagedinventory of $2.2 million.Cost of goods sold Cost of goods sold includes product costs, warehousing costs, outbound shipping costs, handling and fulfillment costs, customer service costs and creditcard fees, and is recorded in the same period in which related revenues have been recorded. Fulfillment costs include warehouse handling labor costs, fixedwarehouse costs, credit card fees and customer service costs. Cost of goods sold, including product cost and other costs and fulfillment costs are as follows (inthousands):Advertising expense The Company expenses the costs of producing advertisements the first time the advertising takes place and expenses the cost of communicatingadvertising in the period during which the advertising space or airtime is used. Internet advertising expenses are recognized as incurred based on the terms ofthe 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 numberof clicks on keywords or links to the Company's Website generated during a given period. Advertising expense is included in sales and marketing expensesand totaled $51.0 million, $52.8 million and $48.9 million during the years ended December 31, 2007, 2008 and 2009, respectively. Prepaid advertising,which consist primarily of prepaid advertising airtime, (included in Prepaids and other assets in the accompanying Consolidated Balance Sheets) was$877,000 and $1.6 million at December 31, 2008 and 2009, respectively.F-17 Year ended December 31, 2007 2008 2009 (Restated) Total net revenue $765,902 100%$829,850 100%$876,769 100% Cost of goods sold Product costs and other cost of goods sold 594,276 78% 638,368 77% 664,537 76% Fulfillment costs 47,076 6% 47,246 6% 47,480 5% Total cost of goods sold 641,352 84% 685,614 83% 712,017 81% Gross profit $124,550 16%$144,236 17%$164,752 19% Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)Stock-based compensation The Company measures compensation expense for all outstanding unvested share-based awards at fair value on date of grant and recognizescompensation expense over the service period for awards expected to vest on a straight line basis. The estimation of stock awards that will ultimately vestrequires 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 and historical experience. Actual results may differsubstantially from these estimates (see "Note 20—Stock Based Awards").Loss contingencies In the normal course of business, the Company is involved in legal proceedings and other potential loss contingencies. The Company accrues a liabilityfor such matters when it is probable that a loss has been incurred and the amount can be reasonably estimated. When only a range of possible loss can beestablished, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, theminimum amount in the range is accrued.Restructuring Restructuring expenses are primarily comprised of lease termination costs. ASC Topic 420, Exit or Disposal Cost Obligations, requires that when anentity ceases using a property that is leased under an operating lease before the end of its term contract, the termination costs should be recognized andmeasured at fair value when the entity ceases using the facility. Key assumptions in determining the restructuring expenses include the terms that may benegotiated to exit certain contractual obligations (see "Note 4—Restructuring Expense").F-18 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)Income taxes Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basisusing enacted tax rates in effect for the year in which the differences are expected to affect taxable income. The effect on deferred tax assets and liabilitiesrelated to a change in tax rates is recognized in income in the period that includes the enacted date. Deferred tax assets are evaluated for future realization and are 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 its deferred assets including expectations of future taxableincome, the carry-forward periods available for tax reporting purposes, the reversals of our deferred tax liabilities and other relevant factors. At December 31,2008 and 2009, the Company has established a full valuation allowance against its deferred tax assets, net of expected reversals of existing deferred taxliabilities. Significant judgment is required in making this assessment, and it is very difficult to predict when, if ever, the Company's assessment mayconclude that the remaining portion of the deferred tax assets are realizable.Foreign currency translation For the Company's subsidiary located in Mexico, the subsidiary's local currency was considered its functional currency. As a result, all of the subsidiary'sassets and liabilities were translated into U.S. dollars at exchange rates existing at the balance sheet dates, revenue and expenses were translated at weightedaverage exchange rates, and stockholders' equity was recorded at historical exchange rates. The resulting foreign currency translation adjustments wererecorded as a separate component of stockholders' equity (deficit) in the consolidated balance sheets as part of accumulated other comprehensive income(loss). Transaction gains and losses were included in other income (expense) in the consolidated financial statements and were not significant for any periodpresented. The Company's subsidiary was located in Mexico and ceased operations on October 24, 2008.Earnings (loss) per share Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common shares by the weighted average number of commonshares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) attributable to common shares for the periodby the weighted average number of common and potential common shares outstanding during the period. Potential common shares, comprising incrementalcommon shares issuable upon the exercise of stock options, restricted stock units and convertible senior notes are included in the calculation of diluted netincome (loss) per common share to the extent such shares are dilutive.F-19 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued) The following table sets forth the computation of basic and diluted net income (loss) per common share for the periods indicated (in thousands, exceptper share data): The following shares were excluded from the calculation of diluted weighted average shares outstanding as their effect would have been anti-dilutive (inthousands):Accounting pronouncements issued not yet adopted In October 2009, the FASB issued Accounting Standards Update 2009-13 ("ASU 2009-13"), which amends ASC Topic 605, Revenue Recognition, torequire companies to allocate revenue in multiple-element arrangements based on an element's estimated selling price if vendor-specific or other third-partyevidence of value is not available. ASU 2009-13 is effective beginning January 1, 2011. EarlierF-20 Year ended December 31, 2007 2008 2009 (Restated) Income (loss) from continuing operations $(44,112)$(11,006)$7,747 Deemed dividend related to redeemable common stock — (77) (48)Income (loss) from continuing operations attributable to common shares $(44,112)$(11,083)$7,699 Loss from discontinued operations (3,924) — — Net income (loss) attributable to common shares $(48,036)$(11,083)$7,699 Weighted average common shares outstanding—basic 23,704 22,901 22,821 Effect of dilutive securities: Stock options and restricted stock units — — 246 Convertible senior notes — — — Weighted average common shares outstanding—diluted 23,704 22,901 23,067 Net income (loss) per common share—basic: Income (loss) from continuing operations after dividend related to common stock $(1.86)$(0.48)$0.34 Loss from discontinued operations $(0.17)$— $— Net income (loss) per common share—basic $(2.03)$(0.48)$0.34 Net income (loss) per common share—diluted: Income (loss) from continuing operations after dividend related to common stock $(1.86)$(0.48)$0.33 Loss from discontinued operations $(0.17)$— $— Net income (loss) per common share—diluted $(2.03)$(0.48)$0.33 Year endedDecember 31, 2007 2008 2009 Stock options and restricted stock units 1,200 1,423 740 Performance share plan 376 — — Convertible senior notes 1,010 885 787 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)application is permitted. The Company is currently evaluating both the timing and the impact of the pending adoption of ASU 2009-13 on its consolidatedfinancial statements. In January 2010, the FASB issued ASU 2010-6, Improving Disclosures About Fair Value Measurements, which requires reporting entities to make newdisclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-valuemeasurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair- value measurements.ASU 2010-6 is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective forannual periods beginning after December 15, 2010. The Company does not expect the adoption of ASU 2010-6 to have a material impact on its consolidatedfinancial statements.Reclassifications In the consolidated statement of operations the Company reclassified expense related to a third party technology provider from technology expense togeneral to administrative expense. For the year ended December 31, 2008, the Company reclassified $1.5 million from technology expense to general toadministrative expense.3. RESTATEMENT OF FINANCIAL STATEMENTS On January 29, 2010, the Audit Committee of the Board of Directors concluded, based on the recommendation of management, that the Company wouldrestate (1) its consolidated financial statements for the year ended December 31, 2008 and (2) its quarterly consolidated financial statements for all interimperiods for the year ended December 31, 2008 within this Form 10-K to correct the following errors:•Accounting for amounts that the Company pays its drop ship fulfillment partners and an amount due from a vendor that went undiscovered fora period of time. Specifically, these errors related to (1) amounts the Company paid to partners or deducted from partner payments related toreturn processing services and product costs and (2) amounts the Company paid to a freight vendor based on incorrect invoices from thevendor. Once discovered, the Company applied "gain contingency" accounting for the recovery of such amounts, which was an inappropriateaccounting treatment. •Amortization of the expense related to restricted stock units. Previously the expense was based on the actual three year vesting schedule,which incorrectly understated the expense as compared to a three year straight line amortization.The following additional adjustments were also included in this restatement:•Correction of certain amounts related to customer refunds and credits •Recognition of co-branded credit card bounty revenue and promotion expense over the estimated term of the credit card relationships.Previously the revenue was incorrectly recognized when the card was issued. •Reduction in the restructuring accrual and correction of the related expense due to a 2008 sublease benefit which was previously excludedfrom the accrual calculation and the accretion of interest expense related to the restructuring accrual, which was not previously recorded.F-21 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)3. RESTATEMENT OF FINANCIAL STATEMENTS (Continued)•Change in the Company's accounting for external audit fees to the "as incurred" method instead of the "ratable" method. •Other miscellaneous adjustments, none of which were material either individually or in the aggregate. Certain of these adjustments wererelated to a reduction in revenue and cost of goods sold in equal amounts for certain consideration the Company received from vendors, anincrease in inventory, accounts payable and accrued liabilities to record the Company's sales return allowance on a gross basis, an adjustmentto the Company's cash and restricted cash balances due to compensating balance arrangements and an adjustment to record redeemablecommon stock for certain shares previously issued to employees. The effect of the adjustments on the consolidated statement of operations for the year ended December 31, 2008 is to decrease net loss attributable tocommon shares by $1.6 million. The effect of the adjustments on net loss per common share from continuing operations for the year ended December 31,2008 is to decrease net loss per common share by $0.07. The (increase) decrease to net loss attributable to common shares of the above adjustments is as follows (in thousands):F-22 Year endedDecember 31,2008 The effect of the adjustments related to (1) amounts the Company paid to partners or deducted frompayments to partners related to return processing services and product costs and (2) amounts the Companypaid to a freight vendor based on incorrect invoices from the vendor. $1,736 The effect of the adjustments related to accounting for certain of the Company's share-based compensationplans. (350)The effect of the adjustments related to customer refunds and credits. (186)The effect of the adjustments related to the co-branded credit card bounty revenue and promotion expense. 298 The effect of the adjustments related to restructuring expense and interest expense related to the accretion ofthe restructuring accrual. 196 The effect of the adjustments related to external audit fees. (190)The effect of other miscellaneous adjustments 71 Total impact of the effect of the adjustments $1,575 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)3. RESTATEMENT OF FINANCIAL STATEMENTS (Continued) Overstock.comConsolidated Statement of Operations(in thousands, except per share data) F-23 Year ended December 31, 2008 As PreviouslyReported Adjustments As Restated Revenue, net Direct $174,203 $(516)$173,687 Fulfillment partner 660,164 (4,001) 656,163 Total net revenue 834,367 (4,517) 829,850 Cost of goods sold Direct 154,501 (534) 153,967 Fulfillment partner 536,957 (5,310) 531,647 Total cost of goods sold 691,458 (5,844) 685,614 Gross profit 142,909 1,327 144,236 Operating expenses: Sales and marketing 57,634 34 57,668 Technology 57,815 (1,138) 56,677 General and administrative 38,373 975 39,348 Restructuring — (299) (299) Total operating expenses 153,822 (428) 153,394 Operating loss (10,913) 1,755 (9,158)Interest income 3,163 — 3,163 Interest expense (3,462) (103) (3,565)Other income (expense), net (1,446) — (1,446) Net loss (12,658) 1,652 (11,006) Deemed dividend related to redeemable common stock — (77) (77) Net loss attributable to common shares $(12,658)$1,575 $(11,083) Net loss per common share—basic and diluted: Loss from continuing operations after dividend realted to common stock $(0.55)$0.07 $(0.48) Net loss per common share—basic and diluted $(0.55)$0.07 $(0.48) Weighted average common shares outstanding—basic and diluted 22,901 22,901 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)3. RESTATEMENT OF FINANCIAL STATEMENTS (Continued) Overstock.comConsolidated Balance Sheet(in thousands) F-24 December 31, 2008 As PreviouslyReported Adjustments As Restated Assets Current assets: Cash and cash equivalents $100,577 $(4,120)$96,457 Restricted cash — 4,262 4,262 Marketable securities 8,989 — 8,989 Accounts receivable, net 6,985 115 7,100 Notes receivable 1,250 — 1,250 Inventories, net 17,723 6,996 24,719 Prepaid inventory, net 761 — 761 Prepaids and other assets 9,694 (142) 9,552 Total current assets 145,979 7,111 153,090 Fixed assets, net 23,144 1,580 24,724 Goodwill 2,784 — 2,784 Other long-term assets, net 538 — 538 Total assets $172,445 $8,691 $181,136 Liabilities and Stockholders' Equity (Deficit) Current liabilities: Accounts payable $62,120 $(4,139)$57,981 Accrued liabilities 25,154 8,943 34,097 Deferred revenue 19,026 206 19,232 Total current liabilities 106,300 5,010 111,310 Other long-term liabilities 2,572 1,679 4,251 Convertible senior notes, net 66,558 — 66,558 Total liabilities 175,430 6,689 182,119 Redeemable common stock, $0.0001 par value, 98 shares outstanding as ofDecember 31, 2008 — 1,263 1,263 Stockholders' equity (deficit): Preferred stock, $0.0001 par value, 5,000 shares authorized, no shares issuedand outstanding as of December 31, 2008 — — — Common stock, $0.0001 par value, 100,000 shares authorized, 25,438 sharesissued and 22,645 shares outstanding as of December 31, 2008 2 — 2 Additional paid-in capital 338,620 (913) 337,707 Accumulated deficit (264,985) 1,652 (263,333) Treasury stock, 2,793 shares at cost as of December 31, 2008 (76,670) — (76,670) Accumulated other comprehensive income 48 — 48 Total stockholders' deficit (2,985) 739 (2,246) Total liabilities and stockholders' equity (deficit) $172,445 $8,691 $181,136 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)3. RESTATEMENT OF FINANCIAL STATEMENTS (Continued) Overstock.comConsolidated Statement of Cash Flows(in thousands) F-25 Year Ended December 31, 2008 As PreviouslyReported Adjustments As Restated Cash flows from operating activities: Net loss $(12,658)$1,652 $(11,006)Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization, including internal-use software and websitedevelopment 22,667 301 22,968 Realized loss on marketable securities 334 — 334 Loss on settlement of notes receivable 3,929 — 3,929 Loss on disposition of fixed assets 140 — 140 Stock-based compensation to employees and directors 4,022 350 4,372 Stock-based compensation to consultants for services 259 — 259 Stock-based compensation relating to performance share plan (1,000) — (1,000) Issuance of common stock from treasury for 401(k) matching contribution 19 (19) — Amortization of debt discount 334 — 334 Gain from early extinguishment of debt (2,849) — (2,849) Restructuring charges — (299) (299) Notes receivable accretion (545) — (545) Changes in operating assets and liabilities: Restricted cash — 4,372 4,372 Accounts receivable, net 4,769 (115) 4,654 Inventories, net 7,920 (4,130) 3,790 Prepaid inventory, net 2,177 — 2,177 Prepaids and other assets (2,122) 95 (2,027) Other long-term assets, net (516) — (516) Accounts payable (8,238) (2,536) (10,774) Accrued liabilities (12,281) 4,645 (7,636) Deferred revenue (3,939) 206 (3,733) Other long-term liabilities (462) (38) (500) Net cash provided by operating activities 1,960 4,484 6,444 Cash flows from investing activities: Purchases of marketable securities (35,548) — (35,548) Maturities of marketable securities 64,542 — 64,542 Sales of marketable securities prior to maturity 7,740 — 7,740 Expenditures for fixed assets, including internal-use software and websitedevelopment (18,690) (17) (18,707) Collection of note receivable 1,506 — 1,506 Net cash provided by investing activities 19,550 (17) 19,533 Cash flows from financing activities: Payments on capital lease obligations (3,796) — (3,796) Drawdowns on line of credit 12,963 — 12,963 Paydowns on line of credit (12,963) — (12,963) Payments to retire convertible senior notes (6,550) — (6,550) Purchase of treasury stock (13,452) — (13,452) Exercise of stock options 1,471 — 1,471 Net cash used in financing activities (22,327) — (22,327) Net decrease in cash and cash equivalents (817) 4,467 3,650 Cash and cash equivalents, beginning of year 101,394 (8,587) 92,807 Cash and cash equivalents, end of year $100,577 $(4,120)$96,457 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)4. RESTRUCTURING ACCRUAL During the fourth quarter of 2006, the Company began a facilities consolidation and restructuring program designed to reduce the overall expensestructure in an effort to improve future operating performance. The facilities consolidation and restructuring program was substantially completed by the endof the second quarter of 2007. Restructuring liabilities along with charges to expense associated with the facilities consolidation and restructuring program were as follows (inthousands): Under the restructuring program, the Company recorded $12.3 million of restructuring charges for the year ended December 31, 2007. There were norestructuring charges during the year ended December 31, 2008 and 2009. The Company reversed approximately $299,000 and $66,000 of the leasetermination costs liability during the years ended December 31, 2008 and 2009, respectively, due to changes in the estimate of the sublease income.5. ACQUISITION AND SUBSEQUENT DISCONTINUED OPERATIONS On July 1, 2005, the Company acquired all the outstanding capital stock of Ski West, Inc. ("Ski West") for an aggregate of $25.1 million (including$111,000 of capitalized acquisition related expenses). Ski West was an on-line travel company whose proprietary technology provided consumer access to a large, fragmented, hard-to-find inventory oflodging, vacation, cruise and transportation bargains. The travel offerings were primarily in popular ski areas in the U.S. and Canada. Effective upon theclosing, Ski West became a wholly-owned subsidiary of the Company, integrated the Ski West travel offerings with the Company's existing travel offeringsand changed its name to OTravel.com, Inc ("OTravel"). During the fourth quarter of 2006, in conjunction with the facilities consolidation and restructuring program described in Note 4, management decidedto sell OTravel. The Company evaluated its plan to sell OTravel in accordance with ASC Topic 360-10-15, Impairment or Disposal of Long-Lived Assets("ASC 360"), which requires that long-lived assets be classified as held for sale. The Company also determined that the OTravel subsidiary met the definition of a "component of an entity" and has been accounted for as a discontinuedoperation under ASC Topic 360. The results of operations for this subsidiary have been classified as discontinued operations 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 ASC350, Intangibles—Goodwill and Other ("ASC 350") and ASC 360 and determined that goodwill of approximately $4.5 million was impaired as ofDecember 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, theCompany received a revised offer from this third party to purchase its OTravel business and, in April 2007, the Company completed the sale of OTravel underthese revised terms. Accordingly, the Company evaluated its goodwill as of March 31, 2007 and, based on the estimated fair value of the discounted cashflows of the net proceeds from the sale, determined that an additional $3.8 million of goodwill was impaired.F-26 Balance12/31/2007 AccretionExpense Net CashPayments Adjustments Balance12/31/2008 AccretionExpense Net CashPayments Adjustments Balance12/31/2009 (Restated) Lease and contract terminationcosts $4,035 $351 $(1,099)$(299)$2,988 $285 $(522)$(66)$2,685 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)5. ACQUISITION AND SUBSEQUENT DISCONTINUED OPERATIONS (Continued) The following table is a summary of the Company's discontinued operations for the period ended April 25, 2007 (in thousands): In 2007, the Company completed the sale of OTravel.com to Castles Travel, Inc., an affiliate of Kinderhook Industries, LLC, and Castles MediaCompany 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 matured three years from the closing date and bore interest, payable quarterly, of 4.0%, 10.0% and 14.0% per year in the first, secondand third years, respectively. The $3.0 million junior note matured five years from the closing date and bore interest of 8.0% per year, compounded annually,and was payable in full at maturity. On January 21, 2009, the Company entered into a Note Purchase Agreement to settle the senior and junior promissory notes to Castles Travel, Inc. forapproximately $1.3 million in cash and recognized a loss on the settlement of these notes and interest receivable of approximately $3.9 million during theyear ended December 31, 2008.6. MARKETABLE SECURITIES The Company's marketable securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensiveincome (loss), a component of stockholders' equity (deficit), net of any tax effect. Realized gains or losses on the sale of marketable securities are determinedusing the specific-identification method and recognized in the statement of operations. The Company evaluates its investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time andextent to which fair value has been below cost basis, the financial condition of the issuer and the Company's ability and intent to hold the investment for aperiod of time which may be sufficient for anticipated recovery of market value. The Company records an impairment charge to the extent that the carryingvalue of its 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 recorded an "other than temporary" impairment of marketable securities of $300,000 and realized losses of $34,000 during the yearended December 31, 2008. The Company had no marketable securities at December 31, 2009.F-27 Year-to-date periodended April 25, 2007 Sales $2,226 Cost of sales (650) Gross profit 1,576 Sales and marketing (447)Technology (60)General and administrative (1,152)Goodwill impairment (3,841) Loss from discontinued operations $(3,924) Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)6. MARKETABLE SECURITIES (Continued) The following table summarizes the Company's marketable security investments as of December 31, 2008 (in thousands): The components of realized losses on sales and impairment of marketable securities for the years ended December 31, 2007, 2008 and 2009 were (inthousands):7. OTHER COMPREHENSIVE LOSS The Company's comprehensive income (loss) is as follows (in thousands):8. ACCOUNTS RECEIVABLE Accounts receivable consist of the following (in thousands):F-28 Cost Net UnrealizedGains Estimated FairMarket Value Marketable securities: U.S. Agency Securities $8,941 $48 $8,989 Years ended December 31, 2007 2008 2009 Net realized loss on sales of marketable securities $— $(334)$(48) Year ended December 31, 2007 2008 2009 (Restated) Net income (loss) $(48,036)$(11,006)$7,747 Net unrealized gain on marketable securities 41 48 — Reclassification adjustment included in net income — — (48)Cumulative translation adjustment (3) 94 — Comprehensive income (loss) $(47,998)$(10,864)$7,699 December 31, 2008 2009 (Restated) Credit card receivable $4,057 $5,949 Accounts receivable, other 4,637 7,421 8,694 13,370 Less: allowance for doubtful accounts (1,594) (1,730) Accounts receivable, net $7,100 $11,640 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)9. INVENTORIES Inventories consist of the following (in thousands):10. PREPAIDS AND OTHER ASSETS Prepaids and other assets consist of the following (in thousands):11. FIXED ASSETS Fixed assets consist of the following (in thousands): Depreciation and amortization of property and equipment totaled $29.5 million, $23.0 million, and $12.9 million for the years ended December 31,2007, 2008 and 2009, respectively. Fixed assets included assets under capital leases of $19.8 million and $1.7 million at December 31, 2008 and 2009, andaccumulated amortization related to assets under capital leases of $19.3 million and $335,000 at December 31, 2008 and 2009, respectively.F-29 December 31, 2008 2009 (Restated) Product inventory $14,936 $15,357 Inventory in-transit 9,783 8,018 Total inventories $24,719 $23,375 December 31, 2008 2009 (Restated) Prepaid maintenance $5,039 $6,628 Prepaid advertising 1,786 2,255 Prepaid other 2,727 1,392 Total prepaids and other assets $9,552 $10,275 December 31, 2008 2009 (Restated) Computer hardware and software, including internal-usesoftware and website development $109,398 $113,315 Furniture and equipment 12,288 12,389 Leasehold improvements 3,549 3,820 125,235 129,524 Less: accumulated depreciation and amortization (100,511) (108,906) Total fixed assets $24,724 $20,618 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)12. OTHER LONG-TERM ASSETS Other long-term assets consist of the following (in thousands):13. ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands):14. DEFERRED REVENUE Deferred revenue consists of the following (in thousands):F-30 December 31, 2008 2009 Prepaid expenses, long-term portion $515 $577 Deposits and other 23 181 Total other long-term assets $538 $758 December 31, 2008 2009 (Restated) Accrued payroll and other related costs $3,918 $13,094 Allowance for returns 16,233 11,924 Accrued marketing expenses 3,949 3,588 Accounts payable accrual 3,072 3,470 Accrued professional expenses 861 2,768 Accrued freight 881 1,496 Inventory received but not invoiced 1,663 1,173 Accrued taxes 526 1,086 Short term portion of restructuring accrual (Note 4) 415 567 Credit card processing fee accrual 445 539 Other accrued expenses 2,134 3,591 Total accrued liabilities $34,097 $43,296 December 31, 2008 2009 (Restated) Payments owed or received prior to product delivery $14,383 $15,566 Unredeemed gift cards 3,522 4,009 Club O membership fees and other 1,327 1,090 Total deferred revenue $19,232 $20,665 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)15. BORROWINGSWells Fargo Credit Agreement The Company's credit agreement (as amended, the "Credit Agreement") with Wells Fargo Bank, National Association ("Wells Fargo"). The CreditAgreement provided a revolving line of credit to the Company of up to $30.0 million which the Company used primarily to obtain letters of credit to supportinventory purchases. Interest on borrowings was payable monthly and accrued at either (i) 1.0% above LIBOR in effect on the first day of an applicable fixedrate 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 achange in daily LIBOR is announced by the bank. Borrowings and outstanding letters of credit under the Credit Agreement were required to be completely collateralized by cash balances held at WellsFargo Bank, N.A, and therefore the facility did not provide additional liquidity to the Company. On December 23, 2009, the Company terminated its credit facility with Wells Fargo Bank, National Association, subject to provisions relating tooutstanding letters of credit issued by Wells Fargo for its account and other transitional provisions. On December 31, 2009, per the provisions relating to theoutstanding letters of credit, the letters of credit issued by Wells Fargo expired on December 31, 2009, and were replaced by $2.6 million of letters of creditissued by U.S. Bank National Association ("U.S. Bank") on behalf of the Company.Wells Fargo Retail Finance Agreement On January 6, 2009, the Company entered into an Amended and Restated Loan and Security Agreement (the "Agreement") with Wells Fargo RetailFinance, LLC ("WFRF"). The Agreement replaced the Company's Loan and Security Agreement dated December 12, 2005 with WFRF, which had previouslybeen amended and had terminated in accordance with its terms. On August 3, 2009, the Company terminated the WFRF Agreement.Wells Fargo Commercial Purchasing Card Agreement The Company had a commercial purchasing card agreement (the "Purchasing Card") with Wells Fargo Bank, National Association ("Wells Fargo"). TheCompany used the Purchasing Card for business purpose purchasing and was required to pay it in full each month. The Company was required to maintain acash balance of $1.4 million at Wells Fargo Bank, N.A. as collateral for the Purchasing Card, and these amounts are included in Restricted cash in theaccompanying consolidated balance sheets, and therefore the facility did not provide additional liquidity to the Company. At December 31, 2008 and 2009,$436,000 and $1.0 million, respectively, was outstanding. No further amounts were available under the Purchasing Card as of December 31, 2009.U.S. Bank Financing Agreement On December 23, 2009, the Company entered into a Financing and Security Agreement dated December 22, 2009 (the "Financing Agreement") with U.S.Bank. The Financing Agreement replaces the credit agreement with Wells Fargo. The Financing Agreement provides for revolving loans and other financial accommodations to or for the benefit of the Company of (i) up to $10 millionfor cash-collateralized advances, and (ii) up toF-31 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)15. BORROWINGS (Continued)$10 million for advances supported by the Company's non-cash collateral. The maximum credit potentially available under the revolving facility is$20 million. The Company's obligations under the Financing Agreement and all related agreements are secured by all or substantially all of the Company'sassets, excluding its interest in certain litigation. Subject to certain exceptions, the full amount of the revolving facility is expected to be available to theCompany as long as $20 million is maintained on deposit with U.S. Bank. The obligation of U.S. Bank to make advances under the Financing Agreement issubject to the conditions set forth in the Financing Agreement. The Company's failure to keep at least $20 million on deposit in certain accounts with U.S. Bank would constitute a "triggering event" under theFinancing Agreement. If a triggering event occurs, the Company would become subject to financial covenants (i) limiting the Company's capitalexpenditures to $20 million annually, and (ii) requiring the Company to maintain a fixed charges coverage ratio of at least 1.10 to 1.00 as of the end of anyfiscal quarter for the period of the prior four quarters. The occurrence of a triggering event could also result in a decrease in the amount available to theCompany under the non cash-collateralized portion of the facility, as availability would then depend, in part, on the Borrowing Base (as defined in theFinancing Agreement). The Financing Agreement and the credit facility terminate on October 2, 2011. As of December 31, 2009, the Company had$20.0 million in compensating cash balances held at U.S. Bank. Subject to certain interest rate floors and other exceptions, advances under the Financing Agreement bear interest at either (a) Libor plus 1% for cash-collateralized financing, including letters of credit, or (b) Libor plus 2.5% for non cash- collateralized advances. The default rate of interest is 2.0% perannum over the otherwise applicable interest rate. An unused line fee of 0.375% is payable annually on the unused portion of the $10 million portion of thefacility available for non cash-collateralized advances. The Financing Agreement includes affirmative covenants as well as negative covenants that prohibit a variety of actions without the approval of U.S.Bank, including, without limitation, covenants that (subject to certain exceptions) limit the Company's ability to (a) incur or guarantee debt or enter intoindemnity agreements, (b) create or permit liens, (c) enter into any merger or consolidation or purchase or otherwise acquire all or substantially all of theassets of another person or the assets comprising any line of business or business unit of another person, (d) except for permitted acquisitions, purchase thesecurities of, create, invest in, or form any subsidiary or other entity, (e) make loans or advances, (f) purchase, acquire or redeem shares of its capital stock orother securities, (g) change its capital structure or issue any new class of capital stock, (h) change its business objectives, purposes or operations in a mannerwhich could reasonably be expected to have a material adverse effect, (i) change its fiscal year, (j) enter into transactions with affiliates, (k) sell assets exceptfor the sale of inventory in the ordinary course of business, (l) make payments except regularly scheduled interest payments on its convertible debt or, afterthe occurrence of a triggering event, repurchase, redeem, defease, or acquire its convertible debt, (m) permit judgments to be rendered against it in excess ofcertain limits or having specified effects, depending in part on whether a triggering event has occurred or would occur, (n) take certain actions regarding itsreceivables, and (o) take certain actions regarding its inventory. With certain exceptions, a termination fee of up to 1.0% of the non cash-collateralized portion of the facility is payable by the Company if the Companyterminates the facility prior to its stated termination date.F-32 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)15. BORROWINGS (Continued) At December 31, 2009, no amounts were outstanding under the Financing Agreement, and letters of credit totaling $2.6 million were issued on behalf ofthe Company collateralized by compensating cash balances held at U.S. Bank, which are included in Restricted cash in the accompanying consolidatedbalance sheets.U.S. Bank Commercial Purchasing Card Agreement On December 16, 2009, the Company entered into a commercial purchasing card agreement (the "Purchasing Card") with U.S. Bank National Association("U.S. Bank"). The Company uses the Purchasing Card for business purpose purchasing and must pay it in full each month. At December 31, 2009, no amountwas outstanding and $5.0 million was available under the Purchasing Card.3.75% Convertible Senior Notes In November 2004, the Company completed an offering of $120.0 million of 3.75% Convertible Senior Notes due 2011 (the "Senior Notes"). Proceeds tothe Company 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 beingamortized using the straight-line method which approximates the effective interest rate method. For the years ended December 31, 2007, 2008 and 2009,respectively, the Company recorded amortization of discount and debt issuance costs totaling $334,000, $334,000 and $331,000. Interest on the SeniorNotes 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 inright of payment with all existing and future unsecured, unsubordinated debt and senior in right of payment to any existing and future subordinatedindebtedness. The Senior Notes are convertible at any time prior to maturity into the Company's common stock at the option of the note holders at a conversion priceof $76.23 per share or, approximately 787,000 shares in aggregate (subject to adjustment in certain events, including stock splits, dividends and otherdistributions and certain repurchases of the Company's stock, as well as certain fundamental changes in the ownership of the Company). Beginning on orafter December 31, 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 accruedand unpaid interest. Upon the occurrence of a fundamental change (including the acquisition of a majority interest in the Company, certain changes in theCompany's Board of Directors or the termination of trading of the Company's stock) meeting certain conditions, holders of the Senior Notes may require theCompany 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 interestpayments when due, maintaining the Company's corporate existence and properties, and paying taxes and other claims in a timely manner. On January 14, 2008 and February 17, 2009, the Board of Directors approved two debt repurchase programs that authorized the Company to use up to anadditional $20.0 million in cash under each program to repurchase a portion of its Senior Notes. The Company retired $9.5 million of the Senior Notes duringthe 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 associatedunamortized discount. For the year ended December 31, 2009, the Company retired a total of $7.4 million of its Senior Notes for $4.6 million in cash andrecorded a $2.8 million gain, net of amortization of debt discount of $92,000 (see Note 19—F-33 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)15. BORROWINGS (Continued)"Stock and Debt Repurchase Program"). As of December 31, 2009, a face amount of $60.0 million of the Senior Notes remain outstanding with a carryingamount of $59.5 million and $528,000 of debt discount. In May 2008, the FASB issued ASC Topic 470-20, Debt with Conversion and Other Options ("ASC 470-20"), which clarifies the accounting forconvertible debt instruments that may be settled in cash upon conversion, including partial cash settlement. ASC 470-20 specifies that an issuer of suchinstruments should separately account for the liability and equity components of the instruments in a manner that reflect the issuer's non-convertible debtborrowing rate when interest costs are recognized in subsequent periods. ASC 470-20 is effective for financial statements issued for fiscal years beginningafter December 15, 2008 and interim periods within those fiscal years. The adoption of ASC 470-20 did not have a material impact on the consolidatedfinancial statements.Capital leases The Company leased certain software and computer equipment during the year ended December 31, 2009, under non-cancelable leases that expire onvarious dates through 2012. Software and equipment acquired under capital leases totaled $19.8 million and $1.7 million, with accumulated amortization of $19.3 million and$335,000 at December 31, 2008 and 2009. Depreciation expense for assets recorded under capital leases was $3.9 million and $335,000 for the years endedDecember 31, 2008 and 2009, respectively. Future payments of capital lease obligations are as follows (in thousands):F-34Payments due by period 2010 $646 2011 793 2012 116 Total minimum lease payments 1,555 Less: amount representing interest 229 Present value of capital lease obligations 1,326 Less: current portion 520 Capital lease obligations, non-current $806 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)16. COMMITMENTS AND CONTINGENCIESSummary of future minimum lease payments for all operating leases The Company currently leases office and warehouse space and computer equipment. Minimum future payments under all operating leases as ofDecember 31, 2009, are as follows (in thousands): Rental expense for operating leases totaled $11.6 million, $9.1 million and $7.5 million for the years ended December 31, 2007, 2008 and 2009,respectively. Estimated sublease income of $4.6 million is expected over the next five years of which $1.3 million is anticipated to be received in the nexttwelve months. The Company incurred $2.7 million of leasehold improvements related to the build out of a call center at one of its leased facilities in 2008. TheCompany paid cash of $1.0 million and financed the remaining $1.7 million for leasehold improvements through increased rent payments to the landlordwhich it has recorded in other long-term liabilities. Minimum future payments above include amounts required to satisfy this liability.Legal Proceedings From time to time, the Company receives claims of and becomes subject to consumer protection, employment, intellectual property and othercommercial litigation related to the conduct and operation of the Company's business and the sale of products on the Company's Website. In connection withsuch litigation, the Company may be subject to significant damages or equitable remedies. Such litigation could be costly and time consuming and coulddivert its management and key personnel from its business operations. The Company does not currently believe that any of its outstanding litigation willhave a material adverse effect on its financial statements or business. However, due to the uncertainty of litigation and depending on the amount and thetiming, an unfavorable resolution of some or all of these matters could materially affect the Company's business, results of operations, financial position, orcash flows. On August 11, 2005, along with shareholder plaintiffs, the Company filed a complaint against Gradient Analytics, Inc.; Rocker Partners, LP; RockerManagement, LLC; Rocker Offshore Management Company, Inc. and their respective principals in the Superior Court of California, County of Marin.Subsequently, the Company filed amended complaints alleging libel, intentional interference with prospective economic advantage and violations ofCalifornia's unfair business practices act and also adding as defendants Cathy Longinotti, Mark Montgomery, Phillip Renna and Terrence Warzecha, allformer or existing general partners of Copper River Partners, L.P. (formerly known as Rocker Partners, LP). Defendants Longinotti, Renna and Warzechasuccessfully quashed the summons as to them. On November 9, 2007, Copper River Partners, L.P. filed a cross-complaint against the CompanyF-35Payments due by period 2010 $8,534 2011 8,490 2012 7,948 2013 7,305 2014 7,499 Thereafter 7,264 $47,040 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)16. COMMITMENTS AND CONTINGENCIES (Continued)and certain of its current and former directors. The Copper River cross-complaint alleged cross-defendants engaged in violations of California's statesecurities laws, violations of California's unfair business practices act, tortuous interference with contract and prospective business advantage, and deceit. InJanuary 2008, each of the cross-defendants filed various motions in opposition to this cross-complaint. On April 23, 2008, the court dismissed Copper River'scross claims against various former directors of the Company, and dismissed various claims against the Company in the cross-complaint. The court declinedto dismiss Copper River's securities fraud claims and its request for an injunction for unfair business practices against the Company and Patrick Byrne and theclaims for tortuous interference with contract and prospective business advantage against the Company, Patrick Byrne and John Fisher, though later allclaims against John Fisher were dismissed. On October 10, 2008, the Company and Patrick Byrne reached a confidential settlement agreement with GradientAnalytics and its current and former principals. Shortly thereafter, those claims against those Gradient defendants were dismissed. Subsequently, onDecember 8, 2009, the Company entered a settlement with the remaining defendants. Under the settlement Copper River Partners, L.P. and Copper RiverFunds jointly paid the Company $5 million and Copper River Parners L.P. dismissed its claims. Once the Company received payment, the Companydismissed its claims. Following settlement, the court dismissed the case. On February 2, 2007, along with five shareholder plaintiffs, the Company filed a lawsuit in the Superior Court of California, County of San Franciscoagainst 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. InSeptember 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 originalcomplaint. The suit alleged that the defendants, who control over 80% of the prime brokerage market, participated in an illegal stock market manipulationscheme 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 the Company'sstock as well as dramatic declines in the share price of the Company's stock. The suit asserts that a persistent large number of "fails to deliver" createssignificant downward pressure on the price of a company's stock and that the amount of "fails to deliver" has exceeded the Company's entire supply ofoutstanding 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. In April 2007, defendants filed ademurrer and motion to strike the Company's complaint. The Company opposed the demurrer and motion to strike. In July 2007 the court substantiallydenied defendants' demurrer and motion to strike. In November 2007, the defendants filed additional motions to strike. In February 2008, the court denieddefendants' motion to strike the Company's claims under California's Securities Anti-Fraud statute and defendants' motion to strike the Company's commonlaw punitive damages claims, but granted in part the defendants' motion to strike Overstock's claims under California's Unfair Business Practices Act, whileallowing the Company's claims for injunctive relief under California's Unfair Business Practices Act. Lehman Brothers Holdings filed for bankruptcy onSeptember 15, 2008 and Barclays Bank has purchased its investment banking and trading business. The Company elected not to pursue its claims againstLehman Brothers HoldingsF-36 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)16. COMMITMENTS AND CONTINGENCIES (Continued)in the bankruptcy proceedings. Dislocations in the financial markets and economy could result in additional bankruptcies or consolidations that may impactthe litigation or the ability to collect a judgment. On January 12, 2009, Goldman Sachs Group, Inc., Goldman Sachs &Co., Goldman Sachs Execution &Clearing L.P., Citigroup, Inc, Citigroup Global markets, Inc., Credit Suisse (USA) Inc., and Credit Suisse Securities (USA) LLC filed a motion to strikeportions of the Second Amended Complaint regarding certain allegations of conspiracy among defendants and the request for punitive damages. Also, onJanuary 12, 2009, Goldman Sachs Group, Inc., Goldman Sachs &Co., Goldman Sachs Execution & Clearing L.P., Citigroup, Inc, Citigroup Globalmarkets, Inc., Credit Suisse (USA) Inc., and Credit Suisse Securities (USA) LLC filed a demurrer to the first and second causes of action for conversion andtrespass to chattels and a motion to strike various other allegations of the Second Amended Complaint. On March 19, 2009, the Court sustained the demurrerto first and second causes of action but granted leave to amend the complaint. The motion to strike was denied. On April 20, 2009, the Company amended itscomplaint against all the defendants, re-pleading conversion and trespass to chattels causes of action. Defendants again filed demurrer to the amendedcomplaint and, on July 23, 2009, the court sustained the demurrer. Discovery in this case continues. A trial date has been set for September 12, 2011. TheCompany intends to continue to vigorously prosecute this action. On April 15, 2008, the Company received a letter from the Office of the District Attorney of Marin County, California, stating that the District Attorneysof Marin and four other counties in Northern California have begun an investigation into the way the Company advertises products for sale, together with anadministrative subpoena seeking related information and documents. The subpoena requests a range of documents, including documents relating to pricingmethodologies, definitions of core and partner product, as well as other site-defined terms, and the methods of internal and external pricing of products, aswell as documents related to the pricing of a list of product items identified in the subpoena. The Company has responded to the subpoena and has engagedin resolution discussions with these authorities. The Company received correspondence from the Office of the District Attorney of the County of Monterey inwhich the respective offices of the various district attorneys have made a collective proposal to resolve the dispute by the Company's payment of $7,500,000in penalties and reimbursement. The Company disagrees with the proposal and continues to discuss this matter with the authorities involved. The Companybelieves that it follows industry advertising practices and intends to continue 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, itsCommissioner, the State of New York and its governor, alleging that a recently enacted New York state tax law is unconstitutional. The effect of the NewYork 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" otherthan with New York based independent contractors who are Internet advertising affiliates. The complaint asks for the court to declare the lawunconstitutional and enjoin its application to the Company. New York filed a motion to dismiss. The Company responded to the motion and filed a motionfor summary judgment, and both motions were heard simultaneously. On January 12, 2009, the court granted New York's motion to dismiss and denied theCompany's motion for summary judgment. On February 12, 2009, the Company filed notice of appeal, and argued the appeal on October 29, 2009. Theappeal is still pending before the New York Supreme Court, Appellate Division.F-37 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)16. COMMITMENTS AND CONTINGENCIES (Continued) On August 12, 2008, the Company along with seven other defendants, was sued in the United States District Court for the Northern District of California,by Sean Lane, and seventeen other individuals, on their own behalf and for others similarly in a class action suit, alleging violations of the ElectronicCommunications Privacy Act, Computer Fraud and Abuse Act, Video Privacy Protection Act, and California's Consumer legal Remedies Act and ComputerCrime Law. The complaint 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. The parties extended by agreement the timefor defendants' answer, including the Company's answer, and thereafter, the Plaintiff and Facebook proposed a stipulated settlement to the court for approval,which would resolve the case without requirement of financial contribution from the Company. Some parties lodged objections, but the court has acceptedthe proposed settlement. Unless appealed, we expect the court's acceptance and the administrative details of settlement to be finalized in the coming months.The nature of the loss contingencies relating to claims that have been asserted against us are described above. However no estimate of the loss or range of losscan be made. On November 14, 2008, the Company filed suit in Ohio state court against the Ohio Tax Commissioner, the Ohio Attorney General and the Governor ofOhio, alleging the Ohio Commercial Activity Tax is unconstitutional. Enacted in 2005, Ohio's Commercial Activity Tax is based on activities in Ohio thatcontribute 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'scomplaint asked for a judgment declaring the tax unconstitutional and for an injunction preventing any enforcement of the tax. The defendants moved todismiss the case. On July 28, 2009, the trial court ruled that there was no justiciable controversy in the case, as the Company had not yet been assessed a tax,and it granted the defendants' motions to dismiss. The Company has since received a letter of determination from the Ohio Department of Taxation noting theDepartment's determination that the Company is required to register for remitting of the Commercial Activity Tax, and owes $612,784 in taxes, interest, andpenalties. The Company believes the determinations to be wrong and will vigorously contest the determinations. On March 10, 2009, the Company was sued in a class action filed in the United States District Court, Eastern District of New York. Cynthia Hines is thenominative plaintiff. Ms. Hines alleges the Company failed to properly disclose its returns policy to her and that it improperly imposed a "restocking" chargeon her return of a vacuum cleaner. The nominative plaintiff on behalf of herself and others similarly situated, seeks damages under claims for breach ofcontract, common law fraud and New York consumer fraud laws. The Company filed a motion to dismiss based upon assertions that the Company's agreementwith its customers requires all such actions to be arbitrated in Salt Lake City, Utah. Alternatively, the Company asked that the case be transferred to theUnited States District Court for the District of Utah, so that arbitration may be compelled in that district. On September 8, 2009 the motion to dismiss wasdenied, the court stating that the Company's browsewrap agreement was insufficient under New York law to establish an agreement with the customer toarbitrate disputes in Utah. On October 8, 2009, the Company filed a Notice of Appeal of the court's ruling and the appeal is in the briefing stage. The nature ofthe loss contingencies relating to claims that have been asserted against us are described above. However no estimate of the loss or range of loss can be made.The suit is in its early stages, and the Company intends to vigorously defend this action.F-38 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)16. COMMITMENTS AND CONTINGENCIES (Continued) On September 23, 2009 the Company along with 27 other defendants was sued by SpeedTrack, Inc. in the United States District Court in the NorthernDistrict of California. The Company is alleged to have infringed a patent covering search and categorization software. The Company believes that certainthird party vendors of products and services sold to the Company are contractually obligated to indemnify the Company in this action. On November 11,2009, the parties stipulated to stay all proceedings in the case until resolution of a the United States Patent and Trademark Office had concluded and resolveda reexamination of the patent in question, and also until a previously filed infringement action against Wal-Mart Stores, Inc. and other retailers resulted eitherin judgment or dismissal. Subsequently, the parties agreed to extend the time for defendants' complaint answer until 21 days following a court order to lift thestay to which the parties stipulated. The nature of the loss contingencies relating to claims that have been asserted against us are described above. Howeverno estimate of the loss or range of loss can be made. The Company intends to vigorously defend this action and pursue its indemnification rights with itsvendors. On or about September 25, 2009 Alcatel-Lucent USA, Inc. filed suit against the Company and 12 other defendants in the United States District Court inthe Eastern District of Texas. The Company is alleged to have infringed three Internet-related and search software patents. The Company believes that certainthird party vendors of products and services sold to the Company are contractually obligated to indemnify the Company in this action. The Company hasanswered the complaint. The case is in its early stages. The nature of the loss contingencies relating to claims that have been asserted against us are describedabove. However no estimate of the loss or range of loss can be made. The Company intends to vigorously defend this action and pursue its indemnificationrights with its vendors. On or about November 11, 2009 Downunder Wireless, LLC filed suit against the Company and 21 other defendants United States District Court in theEastern District of Texas for infringement of a patent for cell phones with a downward deploying antenna, angled away from the user's face. Other nameddefendants are retailers or manufacturers of cell phones which allegedly infringe this patent. The Company believes that certain third party vendors of cellphone products sold to the Company are contractually obligated to indemnify the Company in this action. The Company has answered the complaint. Thecase is in its early stages. The nature of the loss contingencies relating to claims that have been asserted against us are described above. However no estimateof the loss or range of loss can be made. The Company intends to vigorously defend this action and pursue its indemnification rights with its vendors. On or about December16, 2009 Denmel Holdings, LLC filed suit against the Company and 25 other defendants United States District Court in theCentral District of Utah for infringement of a patent for a device used to house and recharge several electronic devices, such as cell phones and pagers. TheCompany believes that certain third party vendors of such devices sold to the Company are contractually obligated to indemnify the Company in this action.The Company has not yet answered the complaint. The case is in its early stages. The nature of the loss contingencies relating to claims that have beenasserted against us are described above. However no estimate of the loss or range of loss can be made. The Company intends to vigorously defend this actionand pursue its indemnification rights with its vendors. On or about January 15, 2010 the Center for Environmental Health filed suit against the Company and 138 other defendants in Superior Court ofCalifornia, County of Alameda, for selling handbagsF-39 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)16. COMMITMENTS AND CONTINGENCIES (Continued)that allegedly exceed the allowable lead content limits specified in California Proposition 65. Our supplier of the goods specified in the complaint isproviding for our defense in the action pursuant to its contractual indemnification obligations. We have not yet answered the complaint. The parties haveentered into a proposed stipulated settlement to be submitted to the court for approval, which would resolve the case without requirement of financialcontribution from the Company. The nature of the loss contingencies relating to claims that have been asserted against us are described above. However noestimate of the loss or range of loss can be made. The suit is in its early stages, and the Company intends to vigorously defend this action should the court notapprove the settlement proposed. On or about January 15, 2010 Nancy Davis LLC filed suit against the Company in the United States District Court in the Central District of California fortrademark infringement for heart-shaped, peace sign jewelry. The Company believes that certain third party vendors of such products sold to the Companyare contractually obligated to indemnify the Company in this action. The Company has answered the complaint. The case is in its early stages. The nature ofthe loss contingencies relating to claims that have been asserted against us are described above. However no estimate of the loss or range of loss can be made.The Company intends to vigorously defend this action and pursue its indemnification rights with its vendors. The Company has received a notice from the Securities and Exchange Commission ("SEC") stating that the SEC is conducting an investigationconcerning the Company's previously-announced financial restatements of 2006 and 2008 and other matters. The subpoena accompanying the notice coversdocuments related to the restatements and also to the Company's billings to its partners in the fourth quarter of 2008 and related collections, and itsaccounting for and implementation of software relating to its accounting for customer refunds and credits, including offsets to partners, and related matters.The Company has been and will continue cooperating fully with the investigation. We establish liabilities when a particular contingency is probable and estimable. We believe the amounts provided in our consolidated financialstatements are adequate in light of the probable and estimable liabilities. We have certain contingencies which are reasonably possible, with exposures toloss which are in excess of the amount accrued. However, the remaining reasonably possible exposure to loss cannot currently be estimated. The Company recognized a reduction in legal expenses during the year ended December 31, 2009 totaling $7.1 million related to the settlement of legalmatters.17. 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 makepayments in relation to certain transactions, events or contingencies. These indemnities include, but are not limited to, indemnities to various lessors inconnection with facility leases for certain claims arising from such facility or lease, indemnities to directors and officers of the Company to the maximumextent permitted under the laws of the State of Delaware, and various other indemnities undertaken in connection with a variety of service contracts. Theduration 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. Assuch, the Company is unable to estimate with any reasonableness its potential exposure under these items. The Company has not recorded any liability forthese indemnities, commitments, and guaranteesF-40 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)17. INDEMNIFICATIONS AND GUARANTEES (Continued)in the accompanying Consolidated Balance Sheets. The Company does, however, accrue for losses for any known contingent liability, including those thatmay arise from indemnification provisions, when future payment is both probable and reasonably estimable.18. STOCKHOLDERS' EQUITYCommon 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 legallyavailable and when declared by the Board of Directors, subject to prior rights of holders of all classes of stock outstanding having priority rights as todividends. No dividends have been declared or paid on the Company's common stock through December 31, 2009.Redeemable Common Stock In June 2009, the Company discovered that it inadvertently issued 203,737 more shares of the Company's common stock in connection with its 401(k)plan than had been registered with the Securities and Exchange Commission for offer in connection with the 401(k) plan. These shares were contributed to orotherwise acquired by participants in the 401(k) plan between August 16, 2006, and June 17, 2009. As a result, certain participants in the 401(k) plan mayhave or have had rescission rights relating to the unregistered shares, although the Company believes that the federal statute of limitations applicable to anysuch rescission rights would be one year, and that the statute of limitations had already expired at December 31, 2009 with respect to most of the inadvertentissuances. At December 31, 2008 and 2009, approximately 98,000 shares or $1.3 million and 65,000 shares or $744,000 of the Company's common stockplus interest were classified outside stockholders' equity because of the potential rescission rights. On August 31, 2009, the Company entered into a Tolling and Standstill Agreement (the "Agreement") with the Overstock.com, Inc. Employee BenefitsCommittee (the "Committee") relating to the Overstock.com, Inc. 401(k) plan (the "Plan"). The Company entered into the Agreement in order to preservecertain rights, if any, of Plan participants who acquired shares of Overstock.com common stock in the Plan between July 1, 2008 and June 30, 2009. TheCompany intends to make a rescission offer to affected participants in the Plan who acquired shares of Overstock.com common stock between July 1, 2008and June 30, 2009, subject to compliance with applicable regulatory requirements. Based on the closing price of Overstock common stock of $13.56 at December 31, 2009, the Company anticipates that of the $744,000 of affected stockoutstanding as of December 31, 2009, it would be uneconomical for participants to attempt to rescind their acquisitions of more than $169,000 of the stock.19. STOCK AND DEBT REPURCHASE PROGRAM 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 ofits common stock and or its 3.75% Senior Convertible Notes due 2011 ("Senior Notes") through December 31, 2009. Under this repurchase program, theCompany repurchased approximately 1.2 million shares of its common stock in openF-41 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)19. STOCK AND DEBT REPURCHASE PROGRAM (Continued)market purchases for $13.4 million as of December 31, 2008. In addition, during the year ended December 31, 2008, the Company retired $9.5 million of theSenior 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 associatedunamortized discount of $142,000 for the year ended December 31, 2008. The Company fully used this authorized $20.0 million repurchase program byDecember 31, 2008. On February 17, 2009, the Board of Directors approved a debt repurchase program that authorizes the Company to use up to an additional $20.0 millionin cash to repurchase a portion of its Senior Notes. For the year ended December 31, 2009, the Company retired a total of $7.4 million of its Senior Notes for$4.6 million in cash and recorded a $2.8 million gain, net of amortization of debt discount of $92,000. During the year ended December 31, 2009, the Company purchased 36,000 shares of its common stock for $340,000.20. STOCK BASED AWARDSValuation Assumptions During the years ended December 31, 2007 and 2008, total stock options granted to employees were 762,000 and 11,000 respectively, with estimatedtotal grant-date fair values of $8.1 million, and $106,000, respectively. The Company granted no options during the year ended December 31, 2009. Duringthe years ended December 31, 2007, 2008 and 2009, the Company recorded stock-based compensation related to stock options of $4.5 million, $3.3 millionand $2.2 million, respectively. The fair value for each stock option granted during the twelve months ended December 31, 2007 and 2008 was estimated at the date of grant using theBlack Scholes Merton option-pricing model, assuming no dividends and the following assumptions. Expected Volatility: The fair value of stock based payments were valued using a volatility factor based on the Company's historical stock prices overthe expected term. Expected Term: The Company's expected term represents the period that the Company's stock-based awards are expected to be outstanding and wasdetermined 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" as discussed in SAB No. 107 to develop the estimate of the expectedterm. In December 2007, the SEC issued SAB No. 110, Certain Assumptions Used in Valuation Methods—Expected Term ("SAB No. 110"). According to SABNo. 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 anestimate of expected term of "plain vanilla" share options in accordance with SFAS No. 123(R), beyond December 31, 2007. TheF-42 Years endedDecember 31, 2007 2008 Average risk-free interest rate 4.75% 2.91%Average expected life (in years) 6.3 6.3 Volatility 68.5% 70.6% Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)20. STOCK BASED AWARDS (Continued)Company adopted SAB No. 110 effective January 1, 2008 and will continue to use the simplified method in developing the expected term used for itsvaluation 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 issueswith 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 board of directors adopted the 2002 Stock Option Plan and the 2005 Equity Incentive Plan (collectively, the "Plans"), in April 2002, andApril 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 inaccordance with a vesting schedule determined by the Company's Board of Directors, usually over four years from the grant date. As of April 2005 the 2002Stock Option Plan was terminated (except with regard to outstanding options). Future shares will be granted under the 2005 Equity Incentive Plan. As ofDecember 31, 2009, 1.2 million shares of stock based awards are available for future grants under the 2005 Equity Incentive Plan. The Company settles stockoption exercises with newly issued common shares. The following is a summary of stock option activity (in thousands, except per share data):F-43 2007 2008 2009 Shares WeightedAverageExercisePrice Shares WeightedAverageExercisePrice Shares WeightedAverageExercisePrice Outstanding—beginning of year 1,011 $18.97 1,161 $20.48 974 $21.27 Granted at fair value 762 18.14 11 14.14 — — Exercised (354) 8.81 (112) 12.96 (2) 15.82 Expired/forfeited (258) 23.65 (86) 20.45 (251) 24.12 Outstanding—end of year 1,161 20.48 974 21.27 721 20.29 Options exercisable at year-end 408 22.36 609 23.18 543 21.17 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)20. STOCK BASED AWARDS (Continued) The following table summarizes information about stock options as of December 31, 2009 (in thousands, except per share data): Total unrecognized compensation costs related to nonvested awards was approximately $7.3 million, $4.2 million and $1.8 million as of December 31,2007, 2008 and 2009, respectively. These unrecognized compensation costs related to nonvested awards are expected to be recognized over the weightedaverage period of 1 year. The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company's stock price of $13.56 as ofDecember 31, 2009, which would have been received by the option holders had all option holders exercised their options as of that date. There were 3,000 in-the-money options exercisable as of December 31, 2009. The weighted average exercise price of options granted during the years ended December 31, 2007 and 2008 were $18.14 and $14.14 per share,respectively. The Company granted no options during the year ended December 31, 2009. The total intrinsic value of options exercised during the yearsended December 31, 2007, 2008 and 2009 was $4.5 million, $364,000 and $2,000, respectively. The total cash received from employees as a result ofemployee stock option exercises during the years ended December 31, 2007, 2008 and 2009 were approximately $3.2 million, $1.5 million and $29,000,respectively. In connection with these exercises, there was no tax benefit realized by the Company due to the Company's current net operating loss position.Restricted Stock Unit Activity For the years ended December 31, 2008 and 2009, 491,000 and 366,000 restricted stock units were granted. The cost of restricted stock units isdetermined using the fair value of the Company's common stock on the date of the grant and compensation expense is recognized straight-line over the threeyear vesting schedule. The weighted average grant date fair value of restricted stock units granted during the year ended December 31, 2008 and 2009 was$12.64 and $10.15.F-44 Options Outstanding Options Exercisable Range of Exercise Prices Shares WeightedAverageExercisePrice WeightedAverageRemainingContract Life AggregateIntrinsicValue Shares WeightedAverageExercisePrice WeightedAverageRemainingContract Life AggregateIntrinsicValue $ 8.50 - $16.99 16 $13.48 5.91 $19 10 $13.72 5.35 $6 $17.00 - $17.99 548 17.10 7.04 — 394 17.10 7.04 — $18.00 - $29.99 84 22.01 2.88 — 69 22.19 2.41 — $30.00 - $58.30 73 43.76 1.17 — 70 44.19 0.86 — 721 20.29 5.90 19 543 21.17 5.62 6 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)20. STOCK BASED AWARDS (Continued) The following is a summary of restricted stock unit activity (amounts in thousands, except per share data): The restricted stock units vest over three years at 25% at the end of the first year, 25% at the end of the second year and 50% at the end of the third year.During the years ended December 31, 2007, 2008 and 2009, the Company recorded stock based compensation related to restricted stock units of $0,$1.4 million and $2.6 million, respectively. Changes to the forfeiture rate are accounted for as a cumulative effect of change in the period of such change. Inthe fourth quarter of 2009, the Company performed its periodic review of its estimated forfeiture rate and based on lower actual turnover than expected duringthe previous twelve months, the Company adjusted its forfeiture rate from 25% to 21%. This change in estimated forfeiture rate resulted in a $220,000increase in share-based compensation expense in the fourth quarter of 2009. At December 31, 2009, there were 640,000 restricted stock units that remained outstanding. On February 1, 2010, the Company granted 250,000additional restricted stock units.Performance Share Plan In January 2006, the Board of Directors and Compensation Committee adopted the Overstock.com Performance Share Plan (the "Plan") and approvedgrants to executive officers and certain employees of the Company. The Plan provided for a three-year period for the measurement of the Company'sattainment of the performance goal described in the form of grant. The performance goal was measured by growth in economic value, as defined in the Plan. The amount of payments due to participants under the Plan wasa function of the then current market price of a share of the Company's common stock, multiplied by a percentage dependent on the extent to which theperformance goal was attained, which was between 0% and 200%. If the growth in economic value was 10% compounded annually or less, the percentagewould be 0%. If the growth in economic value was 25% compounded annually, the percentage would be 100%. If the growth in economic value was 40%compounded annually or more, the percentage would be 200%. If the percentage growth was between these percentages, the payment percentage would bedetermined on the basis of straight line interpolation. Amounts payable under the Plan were subject to Board discretion. Amounts payable under the Planwere originally payable in cash. The Company recorded compensation expense based upon the period-end stock price (prior to the third quarter of 2007) andestimates regarding the ultimate growth in economic value that was expected to occur. These estimates included assumed future growth rates in revenues,gross margins and other factors.F-45 2008 2009 Units Weighted AverageGrant DateFair Value Units Weighted AverageGrant DateFair Value Outstanding—beginning of year — $— 449 $12.69 Granted at fair value 491 12.64 366 10.15 Vested — — (110) 12.64 Forfeited (42) 12.13 (65) 11.55 Outstanding—end of year 449 12.69 640 11.35 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)20. STOCK BASED AWARDS (Continued) During the year ended December 31, 2007, the Company reduced the estimated compensation expense under the plan by approximately $550,000, basedon changes in its estimate of growth in economic value over the remaining twelve months of the plan. During the year ended December 31, 2008, the Company reversed the $1.0 million cumulative total of compensation expense accrued under the Plan asthe Board determined no payments would be made under the Plan. The Plan expired December 31, 2008.21. 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 arequalified to participate in the plan. The Company matches 50% of the first 6% of each participant's contributions to the plan. Beginning in 2006 throughJanuary 2008, the Company's matching contribution was made in common stock issued from treasury. For the remainder of 2008, the Company's matchingcontribution was made in cash. The Company's matching contribution for 2009 was made in cash and common stock issued from treasury. Participantcontributions are immediately vested. Company contributions vest based on the participant's years of service at 20% per year over five years. The Company'smatching contribution totaled $494,000, $570,000 and $647,000 during 2007, 2008 and 2009, respectively. In addition, the Company made discretionarycontributions of $408,000 for 2007, $0 for 2008 and $885,000 for 2009 to eligible participants as of the end of each respective calendar year. In December 2009, the Company implemented a Non Qualified Deferred Compensation plan for senior management. The plan allows eligible membersof senior management to defer their receipt of compensation from the Company, subject to the restrictions contained in the plan. As of December 31, 2009, noamounts had been deferred into this plan.22. OTHER INCOME (EXPENSE), NET Other income (expense), net consisted of the following (in thousands):F-46 Years ended December 31, 2007 2008 2009 (Restated) Gain from early retirement of 3.75% convertible seniornotes $— $2,849 $2,810 Loss on settlement of notes receivable — (3,929) — Other (92) (366) 467 Other income (expense), net $(92)$(1,446)$3,277 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)23. INCOME TAXES The provision for income taxes consists of the following (in thousands): The components of the Company's deferred tax assets and liabilities as of December 31, 2008 and 2009 are as follows (in thousands): As a result of the Company's history of losses, a valuation allowance has been provided for the full amount of the Company's net deferred tax assets as theCompany believes that it is more likely than not that these benefits will not be realized. The Company recorded a tax provision of $257,000 for the yearended December 31, 2009, for federal alternative minimum taxes and state taxes. At December 31, 2008 and 2009, the Company had federal net operating loss carry-forwards of approximately $166.1 million and $160.4 million andstate net operating loss carry-forwards of approximately $145.8 million and $140.1 million, respectively, which may be used to offset future taxable income.An additional $15.9 million of net operating losses are limited under Internal Revenue Code Section 382 to $799,000 a year, plus any excess over limitationsnot used in prior years. These carry-forwards begin to expire in 2018.F-47 Year endedDecember 31, 2009 Current: Federal $145 State 112 Total current 257 Deferred: Federal — State — Total deferred — Total provision for income taxes $257 December 31, 2008 2009 Deferred tax assets and liabilities: Net operating loss carry-forwards $71,908 $68,755 Temporary differences: Accrued expenses 5,365 4,246 Reserves and other 4,115 5,667 Depreciation 5,055 1,577 86,443 80,245 Valuation allowance (86,443) (80,245) Net asset $— $— Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)23. INCOME TAXES (Continued) 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 thefollowing reasons (in thousands): The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48") on January 1, 2007. As ofthe date of adoption of FIN 48, the Company did not have any material uncertain tax positions, accrued interest or penalties associated with unrecognized taxpositions. The Company is subject to audit by the IRS and various states for periods since inception. The Company does not believe there will be anymaterial changes in its unrecognized tax positions over the next 12 months. The Company's policy is that it recognizes interest and penalties accrued on anyunrecognized tax positions as a component of income tax expense.24. RELATED PARTY TRANSACTIONS On April 1, 2009, Mr. James V. Joyce resigned from his position as a member of the Board of Directors of the Company. Mr. Joyce's resignation was notthe result of a disagreement with the Company on any matter relating to the Company's operations, policies or practices. Mr. Joyce and the Companyconcurrently ended the Company's consulting arrangement with Icent LLC, which is a management consulting company of which Mr. Joyce is the chiefexecutive officer, and through which Mr. Joyce provided consulting services to the Company. In connection with the termination of the consultingarrangement, the Company accrued $1.25 million, which was paid to Mr. Joyce on April 1, 2009. On occasion, Haverford-Valley, L.C. (an entity owned by the Company's Chairman and Chief Executive Officer) and certain affiliated entities maketravel arrangements for Company executives and pay the travel related expenses incurred by its executives on Company business. In 2007, 2008, and 2009the Company reimbursed Haverford-Valley L.C. $93,000, $111,000, and $79,000, respectively, for these expenses.25. BUSINESS SEGMENTS Segments were determined based on products and services provided by each segment. Accounting policies of the segments are the same as thosedescribed in "Note 2—Summary of Significant Accounting Policies." There were no inter-segment sales or transfers during 2007, 2008 or 2009. TheF-48 Year ended December 31, 2007 2008 2009 U.S. federal income tax (provision) benefit at statutoryrate $16,813 $3,880 $(2,762)State income tax benefit (expense), net of federalexpense 949 147 (112)Stock based compensation expense (2,267) (1,491) (781)Other (3,969) (2,009) (64)Change in valuation allowance (11,526) (527) 3,462 Income tax provision $— $— $(257) Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)25. BUSINESS SEGMENTS (Continued)Company evaluates the performance of its segments and allocates resources to them based primarily on gross profit. The table below summarizes informationabout reportable segments (in thousands): The direct segment includes revenues, direct costs, and allocations associated with sales fulfilled from the Company's warehouses. Costs for this segmentinclude product costs and outbound freight, warehousing and fulfillment costs, credit card fees and internal customer service costs. The fulfillment partner segment includes revenues, direct costs and cost allocations associated with the Company's third-party fulfillment partner salesand are earned from selling the merchandise of third parties over the Company's Website. The costs for this segment include product costs and fulfillmentcosts, credit card fees and internal 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 2007 through 2009, over 99% of sales were made to customers in the United States of America. At December 31, 2008 and 2009, all ofthe Company's fixed assets were located in the United States of America.F-49 Years ended December 31, Direct Fulfillmentpartner Total 2007 Revenue, net $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 Net loss from continuing operations $(44,112) 2008 (Restated) Revenue, net $173,687 $656,163 $829,850 Cost of goods sold 153,967 531,647 685,614 Gross profit $19,720 $124,516 $144,236 Operating expenses (153,394)Other income (expense), net (1,848) Net loss from continuing operations $(11,006) 2009 Revenue, net $150,901 $725,868 $876,769 Cost of goods sold 130,890 581,127 712,017 Gross profit $20,011 $144,741 $164,752 Operating expenses (156,725)Other income (expense), net (23)Provision for income taxes (257) Net income from continuing operations $7,747 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)26. DECONSOLIDATION OF VARIABLE INTEREST ENTITY In April 2004, the Company entered into an agreement which allowed the Company to lend up to $10.0 million to an entity for the purpose of buyingdiamonds and other jewelry, primarily to supply a new category within the jewelry department which allowed customers purchasing diamond rings to selectboth 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, theCompany had a ten year option to purchase ("Purchase Option") 50% of the ownership and voting interest of the entity. The exercise price of the PurchaseOption was the sum of (a) one thousand dollars, and (b) $3.0 million, which may have been paid, at the Company's election, in cash or by the forgiveness of$3.0 million of the entity's indebtedness to the Company. The entity was evaluated in accordance with FASB ASC Topic 810-10-65-2, Consolidation of Variable Interest Entities, and it was determined to be avariable interest entity for which the Company was determined to be the primary beneficiary. As such, the financial statements of the entity were consolidatedinto the financial statements of the Company. 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 andpayable 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 theentity. In November 2006, an unrelated third party purchased the Company's interests in the variable interest entity by executing a promissory note to theCompany in exchange for termination of all agreements between the Company and the variable interest entity. The promissory note was equal to the netassets of the entity or $6.7 million and 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 Companyamended the note receivable deferring the final six monthly payments from February 1, 2008 to July 1, 2008. During the years ended December 31, 2007 and2008, the Company received payments on the note totaling $5.2 million and $1.5 million, respectively. The promissory note was completely satisfied as ofDecember 31, 2008.27. QUARTERLY RESULTS OF OPERATIONS (unaudited) As discussed in the Note 3, on January 29, 2010, the Audit Committee of the Board of Directors of the Company concluded, based on therecommendation of management, that the Company would restate its quarterly consolidated financial statements for all interim periods for the year endedDecember 31, 2008 and the interim periods ended March 31, 2009, June 30, 2009 and September 30, 2009 within this Form 10-K to correct the followingerrors:•Accounting for amounts that the Company pays its drop ship fulfillment partners and an amount due from a vendor that went undiscovered fora period of time. Specifically, these errors related to (1) amounts the Company paid to partners or deducted from partner payments related toreturn processing services and product costs and (2) amounts the Company paid to a freight vendor based on incorrect invoices from thevendor. Once discovered, the Company applied "gain contingency" accounting for the recovery of such amounts, which was an inappropriateaccounting treatment.F-50 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)27. QUARTERLY RESULTS OF OPERATIONS (unaudited) (Continued)•Amortization of the expense related to restricted stock units. Previously the expense was based on the actual three year vesting schedule,which incorrectly understated the expense as compared to a three year straight line amortization. The Company also corrected for the use of anoutdated forfeiture rate in calculating share-based compensation expense under the plans.The following additional adjustments were also included in this restatement:•Correction of certain amounts related to customer refunds and credits •Recognition of co-branded credit card bounty revenue and promotion expense over the estimated term of the credit card relationships.Previously the revenue was incorrectly recognized when the card was issued. •Reduction in the restructuring accrual and correction of the related expense due to a 2008 sublease benefit which was previously excludedfrom the accrual calculation and the accretion of interest expense related to the restructuring accrual, which was not previously recorded. •Change in the Company's accounting for external audit fees to the "as incurred" method instead of the "ratable" method. •Other miscellaneous adjustments, none of which were material either individually or in the aggregate. Certain of these adjustments wererelated to a reduction in revenue and cost of goods sold in equal amounts for certain consideration the Company received from vendors, anincrease in inventory, accounts payable and accrued liabilities to record the Company's sales return allowance on a gross basis, an adjustmentto the Company's cash and restricted cash balances due to compensating balance arrangements and an adjustment to record redeemablecommon stock for certain shares previously issued to employees.F-51 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)27. QUARTERLY RESULTS OF OPERATIONS (unaudited) (Continued) The increase (decrease) to net income (loss) attributable to common shares of the above adjustments is as follows (in thousands):F-52 Three Months Ended March 31,2008 June 30,2008 September 30,2008 December 31,2008 March 31,2009 June 30,2009 September 30,2009 The effect of the adjustments related to(1) amounts the Company paid topartners or deducted from payments topartners related to return processingservices and product costs and(2) amounts the Company paid to afreight vendor based on incorrectinvoices from the vendor. $927 $955 $1,248 $(1,394)$(1,606)$297 $(394)The effect of the adjustments related toaccounting for certain of the Company'sshare-based compensation plans. (71) (87) (97) (95) (340) (290) (254)The effect of the adjustments related tocustomer refunds and credits. — — — (186) 9 (3) (9)The effect of the adjustments related to theco-branded credit card bounty revenueand promotion expense. 221 74 51 (48) 48 95 55 The effect of the adjustments related torestructuring expense and interestexpense related to the accretion of therestructuring accrual. — 251 (60) 5 (17) (179) (13)The effect of the adjustments related toexternal audit fees. (316) 104 29 (7) (221) 14 32 The effect of other miscellaneousadjustments 53 14 (2) 6 271 (4) (9) Total impact of the effect of theadjustments $814 $1,311 $1,169 $(1,719)$(1,856)$(70)$(592) Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)27. QUARTERLY RESULTS OF OPERATIONS (unaudited) (Continued) The following tables set forth the Company's unaudited quarterly results of operations data for the eight most recent quarters for the period endedDecember 31, 2009. The Company has prepared this information on the same basis as the consolidated statements of operations and the information includesall adjustments that it considers necessary for a fair statement of its financial position and operating results for the quarters presented.F-53 Three Months Ended March 31,2008 March 31,2008 June 30,2008 June 30,2008 September 30,2008 September 30,2008 December 31,2008 December 31,2008 (Restated) (As Reported) (Restated) (As Reported) (Restated) (As Reported) (Restated) (As Reported) (in thousands, except per share data) ConsolidatedStatement ofOperations Data: Revenue, net Direct $51,655 $51,764 $39,713 $39,832 $34,079 $34,176 $48,240 $48,431 Fulfillment partner 150,145 151,050 148,489 149,004 151,928 152,679 205,601 207,431 Total net revenue 201,800 202,814 188,202 188,836 186,007 186,855 253,841 255,862 Cost of goods sold Direct 44,697 44,803 34,756 34,871 30,541 30,633 43,973 44,194 Fulfillment partner 122,491 124,040 119,212 120,756 122,053 124,103 167,891 168,058 Total cost of goodssold 167,188 168,843 153,968 155,627 152,594 154,736 211,864 212,252 Gross profit 34,612 33,971 34,234 33,209 33,413 32,119 41,977 43,610 Operating expenses: Sales and marketing 15,023 15,019 14,254 14,244 11,944 11,934 16,447 16,437 Technology 14,489 14,516 15,049 15,311 13,784 14,119 13,355 13,869 General andadministrative 9,392 9,563 11,068 10,867 10,691 10,321 8,197 7,622 Restructuring — — (299) — — — — — Total operatingexpenses 38,904 39,098 40,072 40,422 36,419 36,374 37,999 37,928 Operating income (loss) (4,292) (5,127) (5,838) (7,213) (3,006) (4,255) 3,978 5,682 Interest income 1,304 1,304 740 740 664 664 455 455 Interest expense (901) (901) (936) (888) (907) (847) (821) (826)Other income (expense),net — — 2 2 2,849 2,849 (4,297) (4,297) Net income (loss) beforeincome taxes (3,889) (4,724) (6,032) (7,359) (400) (1,589) (685)$1,014 Provision for incometaxes — — — — — — — — Net income (loss) (3,889) (4,724) (6,032) (7,359) (400) (1,589) (685) 1,014 Deemed dividend relatedto redeemablecommon stock (21) — (16) — (20) — (20) — Net income (loss)attributable tocommon shares $(3,910)$(4,724)$(6,048)$(7,359)$(420)$(1,589)$(705)$1,014 Net income (loss) percommon share—basic: Net income (loss) pershare—basic $(0.17)$(0.20)$(0.27)$(0.32)$(0.02)$(0.07)$(0.03)$0.04 Weighted averagecommon sharesoutstanding—basic 23,345 23,345 22,750 22,750 22,768 22,768 22,745 22,745 Net income (loss) percommon share—diluted: Net income (loss) pershare—diluted $(0.17)$(0.20)$(0.27)$(0.32)$(0.02)$(0.07)$(0.03)$0.04 Weighted averagecommon sharesoutstanding—diluted 23,345 23,345 22,750 22,750 22,768 22,768 22,745 22,827 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)27. QUARTERLY RESULTS OF OPERATIONS (unaudited) (Continued) F-54 Three Months Ended March 31,2009 March 31,2009 June 30,2009 June 30,2009 September 30,2009 September 30,2009 December 31,2009 (Restated) (As Reported) (Restated) (As Reported) (Restated) (As Reported) (in thousands, except per share data) Consolidated Statement of OperationsData: Revenue, net Direct $34,882 $35,059 $28,685 $28,788 $32,281 $32,369 $55,053 Fulfillment partner 150,847 152,308 146,213 147,355 161,502 162,712 267,306 Total net revenue 185,729 187,367 174,898 176,143 193,783 195,081 322,359 Cost of goods sold Direct 30,397 30,478 23,532 23,726 28,471 28,453 48,490 Fulfillment partner 119,201 119,198 115,079 116,509 128,000 128,959 218,847 Total cost of goods sold 149,598 149,676 138,611 140,235 156,471 157,412 267,337 Gross profit 36,131 37,691 36,287 35,908 37,312 37,669 55,022 Operating expenses: Sales and marketing 13,587 13,540 11,162 11,122 12,222 12,187 18,578 Technology 13,591 13,789 12,708 12,649 12,499 12,445 13,538 General and administrative 13,834 13,454 12,326 12,204 13,288 13,191 9,458 Restructuring — — (66) (218) — — — Total operating expenses 41,012 40,783 36,130 35,757 38,009 37,823 41,574 Operating income (loss) (4,881) (3,092) 157 151 (697) (154) 13,448 Interest income 123 123 27 27 11 11 9 Interest expense (922) (866) (808) (743) (977) (941) (763)Other income (expense), net 1,736 1,736 954 954 297 297 290 Net income (loss) before income taxes (3,944) (2,099) 330 389 (1,366) (787) 12,984 Provision for income taxes — — — — — — (257) Net income (loss) (3,944) (2,099) 330 389 (1,366) (787) 12,727 Deemed dividend related to redeemablecommon stock (11) — (11) — (13) — (13) Net income (loss) attributable to commonshares $(3,955)$(2,099)$319 $389 $(1,379)$(787)$12,714 Net income (loss) per common share—basic: Net income (loss) per share—basic $(0.17)$(0.09)$0.01 $0.02 $(0.06)$(0.03)$0.56 Weighted average common sharesoutstanding—basic 22,803 22,803 22,817 22,817 22,824 22,824 22,838 Net income (loss) per common share—diluted: Net income (loss) per share—diluted $(0.17)$(0.09)$0.01 $0.02 $(0.06)$(0.03)$0.55 Weighted average common sharesoutstanding—diluted 22,803 22,803 23,049 23,107 22,824 22,824 23,272 Table of Contents Schedule IIValuation and Qualifying Accounts(dollars in thousands) F-55 Balance atBeginning of Year Charged toExpense Deductions Balance atEnd of Year Year ended December 31, 2007 Deferred tax valuation allowance $76,431 $11,526 $2,041 $85,916 Allowance for sales returns(2) 16,929 68,933 61,536 24,326 Allowance for doubtful accounts 2,135 1,197 855 2,477 Year ended December 31, 2008 Deferred tax valuation allowance $85,916 $527 $— $86,443 Allowance for sales returns (Restated)(1) 24,326 66,522 74,615 16,233 Allowance for doubtful accounts 2,477 550 1,433 1,594 Year ended December 31, 2009 Deferred tax valuation allowance $86,443 $— $6,198 $80,245 Allowance for sales returns 16,233 70,994 75,304 11,923 Allowance for doubtful accounts 1,594 265 129 1,730 (1)The amounts herein have been restated for the adjustments described in Note 3 of Notes to the consolidated financial statementsincluded in Item 15(a). (2)For comparative purposes the 2007 beginning balance has been shown on a gross basis as disclosed in Note 3. QuickLinks -- Click here to rapidly navigate through this document Exhibit 10.29 Summary of Unwritten Compensation ArrangementsApplicable to Non-Employee Directors of Overstock.com, Inc. The Company pays its non-employee directors $60,000 annually, at the rate of $15,000 per quarter. The Company also grants restricted stock units todirectors, generally at the first Board meeting after the director first joins the Board, and periodically thereafter. In 2009, the Company granted restrictedstock units to non-employee directors as follows: The Company also reimburses directors for out-of-pocket expenses incurred in connection with attending Board and committee meetings. HaverfordValley, L.C., an affiliate of the Company, and certain affiliated entities which make travel arrangements for the Company's executives, also occasionallymake travel arrangements for directors to attend Board meetings, for which the Company reimburses Haverford Valley at rates not in excess of commerciallyavailable airline rates.Name Grant Date Number ofRestricted StockUnits Granted(1) Allison H. Abraham May 6, 2009 7,500 Barclay F. Corbus May 6, 2009 7,500 Joseph J. Tabacco, Jr. May 6, 2009 7,500 James V. Joyce(2) January 13, 2009 10,000 (1)Each restricted stock unit represents a contingent right to receive one share of Overstock.com, Inc. common stock. Therestricted stock units vest as to 25% at the close of business on the first anniversary of the date of grant, 25% at thesecond anniversary of the date of grant , and the remaining 50% at the third anniversary of the date of grant. Vestedshares are delivered promptly after the restricted stock units vest. (2)Mr. Joyce also served as a consultant to the Company, and also joined the Company's board of directors onJanuary 14, 2008. Mr. Joyce resigned from the Board on April 1, 2009. QuickLinksExhibit 10.29 QuickLinks -- Click here to rapidly navigate through this document Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-162674, 333-160512, 333-124441 and 333-123540) of Overstock.com, Inc. of our report dated February 23, 2009, except for Note 3, for which the date is March 31, 2010, relating to the financialstatements as of December 31, 2008 and for the two years then ended and financial statement schedule for each of the two years in the period endedDecember 31, 2008, which appears in this Form 10-K./s/ PricewaterhouseCoopers LLPSalt Lake City, UtahMarch 31, 2010 QuickLinksExhibit 23.1 QuickLinks -- Click here to rapidly navigate through this document Exhibit 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of DirectorsOverstock.com, Inc.: We consent to the incorporation by reference in the registration statements (No. 333-162674, 333-160512, 333-124441 and 333-123540) on Form S-8 ofOverstock.com, Inc. of our reports dated March 31, 2010, with respect to the consolidated balance sheet of Overstock.com, Inc. as of December 31, 2009, andthe related consolidated statements of operations, stockholders' equity (deficit), comprehensive income (loss) and cash flows for the year ended December 31,2009, and the related financial statement schedule, and the effectiveness of internal control over financial reporting as of December 31, 2009, which reportsappear in the December 31, 2009 annual report on Form 10-K of Overstock.com, Inc. Our report dated March 31, 2010, on the effectiveness of internal control over financial reporting as of December 31, 2009, expresses our opinion thatOverstock.com, Inc. did not maintain effective internal control over financial reporting as of December 31, 2009 because of the effect of material weaknesseson the achievement of the objectives of the control criteria and contains an explanatory paragraph that states that the Company lacked a sufficient number ofaccounting professionals with the necessary knowledge, experience, and training to adequately account for and perform adequate supervisory reviews ofsignificant transactions and the inadequate design of information technology program change and program development controls./s/ KPMG LLPSalt Lake City, UTMarch 31, 2010 QuickLinksExhibit 23.2 QuickLinks -- Click here to rapidly navigate through this document Exhibit 31.1 CERTIFICATIONI, Patrick M. Byrne, certify that:1.I have reviewed this Annual Report on Form 10-K of Overstock.com, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; (b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and 5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting.Date: March 31, 2010 /s/ PATRICK M. BYRNEPatrick M. ByrneChief Executive Officer (principal executive officer) QuickLinksExhibit 31.1 QuickLinks -- Click here to rapidly navigate through this document Exhibit 31.2 CERTIFICATIONI, Stephen J. Chesnut, certify that:1.I have reviewed this Annual Report on Form 10-K of Overstock.com, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; (b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and 5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting.Date: March 31, 2010 /s/ STEPHEN J. CHESNUTStephen J. ChesnutSenior Vice President, Finance and Risk Management(principal financial officer) QuickLinksExhibit 31.2 QuickLinks -- Click here to rapidly navigate through this document EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICERPURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Patrick M. Byrne, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the AnnualReport of Overstock.com, Inc. on Form 10-K for the year ended December 31, 2009 fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934, as applicable, and that information contained in such Report fairly presents in all material respects the financial conditionand results of operations of Overstock.com, Inc.Date: March 31, 2010 /s/ PATRICK M. BYRNE Name: Patrick M. Byrne Title: Chief Executive Officer(principal executive officer) QuickLinksEXHIBIT 32.1 QuickLinks -- Click here to rapidly navigate through this document EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICERPURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Stephen J. Chesnut, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the AnnualReport of Overstock.com, Inc. on Form 10-K for the year ended December 31, 2009 fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934, as applicable, and that information contained in such Report fairly presents in all material respects the financial conditionand results of operations of Overstock.com, Inc.Date: March 31, 2010 /s/ STEPHEN J. CHESNUT Name: Stephen J. Chesnut Title: Senior Vice President, Finance and Risk Management (principal financial officer) QuickLinksEXHIBIT 32.2
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