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PC Connection Inc.Table 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. Employer Identification 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 Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No 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 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements 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 Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorterperiod 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, tothe best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment tothis 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. Seethe 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(Mark One) ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2010ORo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 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 most recently completed second quarter (June 30, 2010), was approximately $150.3 million based upon the last sales price reported by NASDAQ. Forpurposes of this disclosure, shares of Common Stock held by persons who hold more than 5% of the outstanding shares of Common Stock and shares held byofficers 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 February 11, 2011 there were 23,249,437 shares of the registrant's Common Stock outstanding.DOCUMENTS INCORPORATED BY REFERENCE Certain information required by Part III of Form 10-K is incorporated by reference to the Registrant's proxy statement for the 2011 Annual StockholdersMeeting, which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates. OVERSTOCK.COM, INC.ANNUAL REPORT ON FORM 10-KINDEX O, Overstock.com, O.com, Worldstock Fair Trade, and Worldstock are registered trademarks, and Club O, Eziba, O.biz, O.co, Main Street Revolution andWorldstock Fair Trade are trademarks of Overstock.com, Inc. The Overstock.com, O.co and Worldstock.com logos are also trademarks of Overstock.com, Inc.Other service marks, trademarks and trade names referred to in this Form 10-K are property of their respective owners.i Page Special Note Regarding Forward-Looking Statements ii Part I Item 1. Business 1 Item 1A. Risk Factors 9 Item 1B. Unresolved Staff Comments 35 Item 2. Properties 35 Item 3. Legal Proceedings 35 Item 4. Removed and Reserved 35 Part II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities 36 Item 6. Selected Financial Data 41 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 43 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 74 Item 8. Financial Statements and Supplementary Data 74 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 74 Item 9A. Controls and Procedures 75 Item 9B. Other Information 77 Part III Item 10. Directors, Executive Officers and Corporate Governance 78 Item 11. Executive Compensation 78 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 78 Item 13. Certain Relationships and Related Transactions, and Director Independence 78 Item 14. Principal Accounting Fees and Services 78 Part IV Item 15. Exhibits, Financial Statement Schedules 79 Signatures Financial Statements 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, allstatements regarding:•the anticipated benefits and risks of our business and plans; •our ability to attract and retain customers in a cost-efficient manner; •the effectiveness of our marketing; •our future operating and financial results; •the competition we face and will face in our business; •the effects of government regulation; •our future capital requirements and our ability to satisfy our capital needs; •our expectations regarding the adequacy of our liquidity; •our ability to repurchase or retire or refinance our publicly traded debt; •our expansion in international markets; •our plans for changes to our business; •our beliefs regarding current or future litigation or regulatory actions; •our expectations regarding existing and future tax laws and related laws and the application of those laws to our business; •our expectations regarding the adequacy of our insurance coverages; •the adequacy of our infrastructure, including our backup facilities and our disaster planning; •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 expectations regarding the adequacy of our order processing systems and our fulfillment and distribution capabilities; •our beliefs regarding the adequacy of our customer service capabilities; •our expectations regarding the adequacy of our office and warehouse facilities; •our expectations regarding our auctions service, our international sales efforts, our real estate listing service, our car listing service and ourcommunity site, and the anticipated functionality and results of operations of any of them; •our belief that we and our fulfillment partners will be able to maintain inventory levels at appropriate levels despite the seasonal nature of ourbusiness; and •our belief that we can successfully offer and sell a constantly changing mix of products and services.ii Table of Contents 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.iii 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 discount brand name, non-brand name and closeout merchandise, including bed-and-bath goods, home décor,kitchenware, furniture, watches and jewelry, apparel, electronics and computers, sporting goods, and designer accessories, among other products. We also sellhundreds of thousands of best seller and current run books, magazines, CDs, DVDs and video games ("BMMG"). We sell these products through our Internetwebsites located at www.overstock.com and www.o.co ("Website"). We also operate as part of our Website an online auctions business—a marketplace for thebuying and selling of goods and services—and online sites for listing cars and real estate for sale. In October 2009, we also launched O.biz, a website wherecustomers can shop for bulk and business related items. In August 2010, we introduced Eziba.com, a private sale website where members can shop exclusivedeals on the latest home décor products, furniture, jewelry, apparel and accessories from many leading brands. Although our four websites are located atdifferent domain addresses, the technology and equipment and processes supporting the Overstock.com Website and the process of order fulfillmentdescribed herein are the same for all four websites. 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 sell products 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.Our Business We deal primarily in discount, replenishable, and closeout merchandise and we use the Internet to aggregate both supply and demand to create anefficient marketplace for selling these products. We provide manufacturers with a one-stop liquidation channel to sell both large and small quantities ofexcess, closeout and replenishable inventory without disrupting sales through traditional channels, which can result in weaker pricing and decreased brandstrength. The merchandise offered on our Website is from a variety of sources, including well-known, brand-name manufacturers. We have organized ourshopping business (sales of product offered through the Shopping Section of our Website) into two principal segments—a "direct" business and a "fulfillmentpartner" business. We currently offer approximately 197,000 non-BMMG products in 19 major departments, and approximately 763,000 BMMG products.Consumers and businesses are able to access and purchase our products 24 hours a day from the convenience of a computer, Internet-enabled mobiletelephone or other Internet-enabled device. Our team of customer service representatives assists customers by telephone, instant online chat and e-mail.Nearly all of our sales are to customers located in the United States. Less than 1% of our sales are made indirectly to international customers. During the yearsended December 31, 2008, 2009, and 2010, no single customer accounted for more than 1% of our total revenue.1 Table of ContentsDirect business Our direct business includes sales made to individual consumers and businesses, which are fulfilled from our warehouses in Salt Lake City, Utah. Duringthe year ended December 31, 2010, we fulfilled approximately 19% of our order volume through our warehouses. Our warehouses generally ship between8,000 and 10,000 orders per day and up to approximately 25,000 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 relationships with approximately 1,600 third parties who supply approximately 187,000 non-BMMG products, as well as most ofthe BMMG products, on our Website. These third-party fulfillment partners perform essentially the same fulfillment operations as our warehouses, such asorder picking and shipping; however, we handle returns and customer service related to substantially all orders placed through our Website. Revenuegenerated from sales on our Shopping site from both the direct and fulfillment partner businesses is recorded net of returns, coupons and other discounts.International business We began selling products through our Website to customers outside the United States in late August 2008. As of December 31, 2010, we sell tocustomers in over 90 countries. We do not have sales operations outside the United States, and are using a U.S. based third party to provide logistics andfulfillment for all international orders. Revenue generated from our international business is included in either direct or fulfillment partner revenue,depending on whether the product is shipped from our warehouses or from a fulfillment partner.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 our customer. Revenue from our consignment service business isless than 1% of total net revenue and is included in the fulfillment partner segment. 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.Other businesses We operate an online auction service, car listing service, and real estate listing service as part of our Website. Our auction service allows sellers to listitems for sale, buyers to bid on items of interest, and users to browse through listed items online. We record only our listing fees and commissions for itemssold as revenue. From time to time, we also sell items returned from our shopping business through our auction service, and for these sales, we record therevenue on a gross basis. The car listing service allows sellers to list vehicles for sale and allows buyers to review vehicle descriptions, post offers to purchase,and provides the means for purchasers to contact sellers for further information and negotiations on the purchase of an advertised vehicle. The real-estatelisting service allows customers to search active listings across the country. Listing categories include foreclosures, live and on-line auctions, for sale byowner listings, broker/agent listings and numerous aggregated classified ad listings.2 Table of ContentsWe also earn advertisement revenue derived from our cars and real estate listing businesses. Revenue from the auctions, cars and real estate businesses isincluded in the fulfillment partner segment on a net basis. 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, and in August 2010, we introduced Eziba.com, a private salewebsite where members can shop exclusive deals on the latest home décor products, furniture, jewelry, apparel and accessories from many leading brands.Revenue generated from our O.biz and Eziba.com websites is included in either direct or fulfillment partner revenue, depending on whether the product isshipped from our warehouses or from a fulfillment partner. 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). For sales in our fulfillment partner business, we generally receive payments from our customers beforeour payments to our suppliers are due.Manufacturer, Supplier and Distribution Relationships To date, we have not entered into contracts with manufacturers or other suppliers that guarantee the availability of merchandise for a set duration. Ourmanufacturer and supplier relationships are based on historical experience with manufacturers and other suppliers and do not obligate or entitle us to receivemerchandise on a long-term or short-term basis. In our direct business, we purchase the products from manufacturers or other suppliers using standardpurchase 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 19main departments: Home & Garden, Furniture, Bedding & Bath, Clothing & Shoes, Electronics, Jewelry, Watches, Sports and Outdoors, Books MediaMusic & Games, Luggage, Health & Beauty, Baby, Crafts & Sewing, Office, Gifts & Flowers, Toys & Hobbies, Pets, Worldstock Fair Trade, and Main StreetRevolution. Worldstock Fair Trade is our socially-responsible, online marketplace through which artisans in the United States and around the world can selltheir products and gain access to a broader market. Main Street Revolution is our marketplace that enables small and minority-owned businesses to offer theirproducts to a mass audience by selling on our websites.3 Table of Contents For 2010, 2009 and 2008, the percentages of gross sales contributed by similar classes of products were as follows: As the number of products and product categories change throughout the year, we periodically reorganize our departments and/or categories to betterreflect our current product offerings.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, direct mail, viral and social media campaigns, and we are able to monitor and evaluate their results. Weseek to identify and eliminate campaigns that do not meet our expectations. We also do brand advertising through television, radio, and print ads. Wegenerally develop these campaigns internally.Customer Service We are committed to providing superior customer service. We staff our customer service department with dedicated in-house and outsourcedprofessionals who respond to phone, instant online chat and e-mail inquiries on products, ordering, shipping status, returns and other areas of customerinquiry. As a result of this commitment, in each of the last five years we have ranked in the top five companies in customer service rankings among all U.S.retailers, according to rankings published in the NRF Foundation/American Express Customer Service Survey.Technology We use our internally developed Websites and a combination of proprietary technologies and commercially available licensed technologies andsolutions to support our operations. We use the services of multiple telecommunications companies to obtain connectivity to the Internet. Currently, ourprimary computer infrastructure resides at a co-location facility in Salt Lake City. We also have a second data center which we use primarily for backups,redundancy, development, testing, and our corporate systems infrastructure.Competition Internet retail is intensely competitive and has relatively low barriers to entry. We believe that competition in this industry is based predominantly on:•price; •product quality and selection; •shopping convenience; •order processing and fulfillment;4Product Class 2010 2009 2008 Home and garden(1) 55% 53% 50%Jewelry, watches, clothing and accessories 23% 24% 24%BMMG, electronics and computers 11% 14% 18%Other 11% 9% 8% Total 100% 100% 100% (1)Home and garden includes home décor, bedding, bath, furniture, housewares, garden, patio and other related products. Table of Contents•order delivery time; •customer service; and •brand recognition. We compete with other online retailers and traditional retailers and liquidation "brokers", some of which may specifically adopt our methods and targetour 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.; •private sale sites such as Rue La La, Gilt Groupe; •online specialty retailers such as Bluefly, Inc., Blue Nile, Inc. and Backcountry.com; 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 Holding Corporation, Target Corporation, Best Buy Co., Inc. and Barnes and Noble, Inc., all of which also havean online presence. 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 32.0%, 36.8% and 30.6% of our annual revenue during the fourth quarter of 2010, 2009, and 2008, respectively.Financial Information about Geographic Areas See Item 15 of Part IV, "Financial Statements"—Note 23—"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 other countries, some of our trade names may not be eligible to receive registered trademark protection. In addition, effective trademark protectionmay not5 Table of Contentsbe 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. We also prosecute lawsuits to enforce our legal rights. Such litigation could be costlyand time consuming and could divert our management and key personnel from our business operations. The uncertainty of litigation increases these risks. Inconnection with such litigation, we may be subject to significant damages or equitable remedies relating to the operation of our business and the sale ofproducts 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 and significant ways. In addition, litigation could result in interpretations of the law that require us to changeour business practices 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 14—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, advance notice of any changes to our policies and, with limited exceptions,we must give consumers the right to prevent sharing of their non-public personal information with unaffiliated third parties. Furthermore, the growth anddemand 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 instates where we do not now collect state and local taxes, may subject us to the obligation to collect and remit state and local taxes , or subject us to additionalstate and local sales and income taxes, or to requirements intended to assist states with their tax collection efforts. New legislation or regulation, theapplication of laws and regulations from jurisdictions whose laws do not currently apply to our business or the application of existing laws and regulations tothe Internet and commercial online services could result in significant additional taxes on our business. These taxes could have an adverse effect on our cashflows and results of operations. Furthermore, there is a possibility that we may be subject to significant fines or other payments for any past failures to complywith these requirements.6 Table of ContentsEmployees As of December 31, 2010, we had approximately 1,500 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.Executive Officers The following persons were executive officers of Overstock.com as of December 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 Legal, and Senior Vice President, Corporate Affairs and Legal. From May 1999 toSeptember 2002, Mr. Johnson held various positions with TenFold Corporation, a software company, including positions as General Counsel, Executive VicePresident and Chief Financial Officer. From October 1997 to April 1999, Mr. Johnson practiced law in the Los Angeles offices of Milbank, Tweed, Hadley &McCloy and from September 1994 to September 1997, he practiced law in the Los Angeles offices of Graham & James. From February 1994 to August 1994,Mr. Johnson served as a judicial clerk at the Utah Supreme Court for Justice Leonard H. Russon, and prior to that, from August 1993 to January 1994,Mr. Johnson served as a judicial clerk at the Utah Court of Appeals for Judge Leonard H. Russon. Mr. Johnson holds a Bachelor's Degree in Japanese fromBrigham 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. LawSchool at Brigham Young University. Mr. Geoffrey R. Atkinson currently serves as our Senior Vice President, Analytics, Analytics Marketing & Merchandising. Since joining us in 2005,Mr. Atkinson has worked primarily on marketing and customer retention. Mr. Atkinson has previously served as Senior Vice President of Marketing and VicePresident of Tactical Marketing. Before joining Overstock.com, Mr. Atkinson worked in marketing7Executive Officers Age PositionPatrick M. Byrne 48 Chief Executive Officer and Chairman of the Board of DirectorsJonathan E. Johnson III 44 President and Corporate SecretaryGeoffrey R. Atkinson 29 Senior Vice President, Analytics, Analytics Marketing & MerchandisingStephen J. Chesnut 51 Senior Vice President, Finance and Risk ManagementSamuel J. Peterson 35 Senior Vice President, Technology and MerchandisingStormy D. Simon 42 Senior Vice President, Marketing and Customer CareStephen P. Tryon 49 Senior Vice President, Supply Chain and Human Capital Management Table of Contentsand branding at Smith Sport Optics, a manufacturer of sunglasses and goggles for sports and leisure, in Sun Valley, Idaho. Mr. Atkinson holds a Bachelor ofArts Degree in Sociology from Dartmouth College. Mr. Stephen J. Chesnut was appointed Senior Vice President, Finance in January 2009. In February 2010, Mr. Chesnut was appointed Senior VicePresident, Finance and Risk Management. From August 2007 to August 2008, Mr. Chesnut served as Vice President, Strategy/Market Development/Sales forHD Supply, Inc., a privately-held wholesale distribution company based in Atlanta, Georgia. From December 1998 to August 2007, Mr. Chesnut served in avariety of capacities for The Home Depot or its subsidiaries, including Director, Business Development for HD Supply (prior to its sale by Home Depot);Director, Finance and Chief Financial Officer for Home Depot Supply; Director, New Concept Development; and Director, Strategic Planning. Prior to joiningThe Home Depot from 1986 to 1998, Mr. Chesnut served in a variety of operational, planning and financial positions for Target Stores Inc. Mr. Chesnut holdsa Bachelor's of Science Degree in Accounting and Business Management from Southern Utah University and a Master of Business Administration Degree,Finance and Strategic Planning, from Brigham Young University. Mr. 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. Prior to joining Overstock.comin 1999, Mr. Peterson was involved in creating several start-up Internet ventures, including Fitnesoft, Inc. 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, supervision of our warehouse operations, and managing our training and human resources. Prior to joiningOverstock.com, Mr. Tryon was the Legislative Assistant to the Chief of Staff of the United States Army. During his 21 years with the Army, his assignmentsincluded director of plans for the 10th Mountain Division, Congressional Fellow for United States Senator Max Cleland, Assistant Professor of Philosophy atthe United States Military Academy, and commander of a company of paratroopers. Mr. Tryon received a Bachelor's of Science Degree in Applied Sciencesfrom the U.S. Military Academy and a Master's Degree of Arts in Philosophy from Stanford University.Available Information Our Internet Website addresses are www.overstock.com and www.o.co. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, CurrentReports on Form 8-K and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of chargethrough our Internet Website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and ExchangeCommission. Our Internet Website and the information contained therein or connected thereto are not a part of or incorporated into this Annual Report onForm 10-K.8 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, prospects, financial condition andresults of operations 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 OverstockExisting 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 or through other means. Today there arerelatively few laws specifically directed towards conducting business on the Internet. However, due to the increasing popularity and use of the Internet, manylaws and regulations relating to the Internet are being debated at the state and federal levels. These laws and regulations could cover issues such as userprivacy, behavioral advertising, auto-renewability of contract, freedom of expression, pricing, fraud, quality of products and services, taxation, advertising,intellectual property rights and information security. Applicability to the Internet of existing laws governing issues such as property ownership, copyrightsand other intellectual property issues, taxation, libel, obscenity and personal privacy could also harm our business. For example, United States and foreignlaws regulate our ability to use customer information and to develop, buy and sell mailing lists. Many of these laws were adopted prior to the advent of theInternet and do not contemplate or address the unique issues raised thereby. Consequently, laws adopted for the regulation of commerce that is not Internetbased, may present difficult or impossible compliance challenges, may be applied to us in an adverse way, or the judicial interpretation of the application ofthese laws to our Internet-based business may be adverse to our interests. Many of those laws that do reference the Internet are still being interpreted by thecourts and their applicability and reach are therefore uncertain. Moreover, Internet advances and innovations may result in new questions about theapplicability and reach of these laws. Additionally, laws governing the permissible contents of products may adversely affect us, and we are subject to federaland state consumer laws, including those governing advertising, product labeling, product content requirements and product safety. The laws not only applyto future manufacture of consumer product, but also apply to existing inventories and may cause us to incur losses for any non-compliant items in ourinventory, or which we may have sold which may subject us to regulatory or civil actions. Some of the products we sell or manufacture may, under statutoryor common law, from time to time expose us to claims related to personal injury, death, environmental or property damage and may from time to time requireproduct recalls or other actions which may not be covered, in whole or in part, by our liability insurance. These current and future laws and regulations couldharm our business, prospects, financial condition and results of operation.General 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 otherwise9 Table of Contentsadversely affect our operations and operating results. These factors affect not only our operations, but also the operations of suppliers from whom we purchasegoods, a condition 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. The last year we incurred a net loss was for the yearended December 31, 2008 in which the amount was a net loss of $11.0 million. As of December 31, 2010, our accumulated deficit was $242 million. We needto generate significant revenues to maintain profitability, and we may not be able to do so. Although we had net income of $13.8 million and $7.7 million in2010 and 2009, respectively, we may not be able to sustain or increase profitability on a quarterly or annual basis in the future. If our revenues grow moreslowly than we anticipate or decline, or if our expenses exceed our expectations, our financial results would be harmed and our business, prospects, financialcondition and results of operations could fall below the expectations of public market analysts and investors. 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; •expand warehouse and office space; •increase our general and administrative functions to support our operations and activities; 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, financial condition and results of operations. Inaddition, we may find that these efforts are more expensive than we anticipate10 Table of Contentswhich would adversely affect our profitability. Also, the timing of these expenses may contribute to fluctuations in our quarterly results of operations.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, estimating valuation allowances and accrued liabilities(specifically, the allowances for returns, credit card chargebacks, doubtful accounts and obsolete and damaged inventory), internal use software and websitedevelopment (acquired and developed internally), accounting for income taxes, valuation of long-lived and intangible assets and goodwill, stock-basedcompensation, and loss contingencies are highly complex and involve many subjective assumptions, estimates and judgments by our management. Changesin these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change ourreported or expected financial performance.Our cash, cash equivalents, investments in precious metals and short-term investments are subject to a risk of loss based upon the solvency of thefinancial institutions in which they are maintained and movement in the precious metals markets. We maintain the majority of our cash, cash equivalents, investments in precious metals and short-term investments in accounts with major financialinstitutions within the United States, in the form of demand deposits, money market accounts, time deposits, U.S. Treasury Bills and other short-terminvestments. Our deposits in these institutions may generally exceed the amounts of insurance provided, or deposits may not at all be covered by insurance. Ifany of these institutions becomes insolvent, or there is a significant decline in the price of precious metals, it could substantially harm our financial conditionand we may lose some, or all, of such deposits.If we fail to accurately forecast our expenses and revenues, our business, prospects, financial condition and results of operations may suffer and theprice of our securities 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.11 Table of ContentsTherefore, any significant shortfall in the revenues for which we have built and are continuing to build our infrastructure would likely harm our business,prospects, financial condition and results of operations and cause our results of operation to fall below the expectations of public market analysts andinvestors.The 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, 2010, we had relationships with approximately 1,600 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 81% of our net revenuesfor the year ended December 31, 2010. We may expand the number of fulfillment partner relationships and the number of products offered for sale by ourfulfillment 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, though sites like ours, or to us,our business 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, (other than on the return of such products), we are unable to fulfill these traditional retail operations ourselves. Our customers could becomedissatisfied and cancel their orders or decline to make future purchases if these third parties are unable to deliver products on a timely basis. If our customersbecome dissatisfied with the services provided 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 upon short notice.12 Table of ContentsWe 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 not provide for the continuation of particular pricing practices and may be terminated by either party upon short notice. Ourcurrent suppliers may not continue to sell their excess inventory to us on current terms or at all and we may not be able to establish new supply relationships.For example, it is difficult for us to maintain high levels of product quality and selection because none of the manufacturers, suppliers and liquidationwholesalers from whom we purchase products on a purchase order by purchase order basis have a continuing obligation to provide us with merchandise athistorical levels or at all. In most cases, our relationships with our suppliers do not restrict the suppliers from selling their respective inventory to othertraditional or online merchandise liquidators or retailers, which could in turn limit the selection of products available on our Website. If we are unable todevelop and maintain relationships with suppliers that will allow us to obtain sufficient quantities of merchandise on acceptable commercial terms, suchinability could harm our business, prospects, financial condition and results of operation.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 are13 Table of Contentsterminated or impaired or if these third parties are unable to deliver products for us, whether through labor shortage, slow down or stoppage, deterioratingfinancial or business condition, responses to terrorist attacks, natural disasters, or for any other reason, we would be required to use alternative carriers for theshipment of products to our customers. In addition, conditions such as adverse weather or natural disasters can prevent any carriers from performing theirdelivery services, which can have an adverse effect on our customers' satisfaction with us. In any of these circumstances, we may be unable to engagealternative carriers on a timely basis, upon terms we find acceptable, or at all. Changing carriers, or absence of carrier availability, could have a negativeeffect on our business, prospects, financial condition and results of operations. 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 processors and payment card associations. Our customers primarily use credit cards to buy from us. We are dependent upon our credit card processors to process the sales transactions and remit theproceeds to us. The credit card processors have the right to withhold funds otherwise payable to us to establish a reserve based on their assessment of theinherent risks of credit card processing and their assessment of the risks of processing our customers' credit cards, and have done so from time to time in thepast. The credit card processors may establish, increase or decrease the amount of any reserve at any time. Any increase in the amounts of the reservesestablished by the processors would have an adverse effect on our cash flow and liquidity, and any material unexpected increase could have a materialadverse effect on our business, prospects, financial condition and results of operations. We are also subject to payment card associations' 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, could have a material adverse effect on our business, prospects, financial condition and results of operations.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, and 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, prospects, financial condition and results of operations would suffer.14 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, financial condition and results of operations.We face risks relating to our inventory. In our direct business, we sell merchandise that we have purchased and hold in inventory. We assume the risks of inventory damage, theft andobsolescence, as well as risks of price erosion for these products. These risks are especially significant because some of the merchandise we sell ischaracterized by seasonal trends, fashion trends, rapid technological change, obsolescence and price erosion (for example, computer hardware, software andconsumer electronics) and because we sometimes make large purchases of particular types of inventory. In addition, we often do not receive warranties on themerchandise we purchase. Subject to our returns policies, we accept returns of products sold through our fulfillment partners and we have the risk of resellingthe returned products. 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 our cost. To the extent that we rely on purchased inventory, our success will depend on our ability tosell our inventory rapidly, the ability of our buying staff to purchase inventory at attractive prices relative to its resale value and our ability to managecustomer returns and other costs. If we are unsuccessful in any of these areas, we may be forced to sell our inventory at a discount or loss. We purchase some of our inventory from foreign suppliers and pay for inventory with U.S. dollars. If the dollar weakens with respect to foreigncurrencies, foreign suppliers 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 Executive15 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 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 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.Our new O.co domain name may cause customer confusion. We have announced the introduction of the O.co domain name as a shortcut domain designation for Overstock.com to assist us in our efforts to globallybrand Overstock.com. The use of an alternative single letter name designation, with a different top level domain of .co, may cause temporary or prolongedconsumer confusion, potentially reducing customer visits to our site, which could harm our business, prospects, financial condition and results of operations.Additionally, there is no assurance that the use of O.co as a shortcut domain will succeed domestically or internationally.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 may not be able to expand ourbusiness in this manner. Our failure to succeed in these markets or businesses or in other product or service offerings may harm our business, prospects,financial condition and results of operation. We cannot give any assurance that we will be able to expand our operations in a cost-effective or timely manneror that our efforts to expand will be successful. Furthermore, any new business or website we launch that is not favorably received by consumers coulddamage our reputation or the Overstock.com brand. We may expand the number of categories of products we carry on our Website and these and any otherexpansions of our operations would also require significant additional expenses and development and would strain our management, financial andoperational resources. The lack of market acceptance of such efforts or our inability to16 Table of Contentsgenerate satisfactory revenues from such expanded services or products to offset their cost could harm our business, prospects, financial condition and resultsof 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 sell products in international markets, and in the future we may expand into these markets more aggressively. International sales and transactions aresubject to inherent risks and challenges that could adversely affect our profitability, including:•the need to develop new supplier and manufacturer relationships; •the need to comply with additional U.S. and foreign laws and regulations to the extent applicable, 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; •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 U. S. dollars may contribute to fluctuations in our results of operationsand fluctuating exchange rates could cause reduced gross revenues and/or gross profit percentages from non-dollar-denominated international sales.Additionally, penalties for non-compliance with laws applicable to international business and trade, such as the U.S. Foreign Corrupt Practices Act, couldnegatively 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 give any assurance that we will be able to increase our revenues, if at all, in a cost-effective manner. Weperiodically conduct national television and radio branding and advertising campaigns. Such campaigns are expensive and may not result in the cost-effective acquisition of customers. Further, many of the parties with which we may have online-advertising arrangements could provide advertising services for other online or 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 our17 Table of Contentsrelationships with third party Internet advertising affiliates in certain states as a result of efforts by those states to require us to collect sales taxes based on thepresence of those third party Internet advertising affiliates in those states, and we are likely do so again in the future if necessary. Without these relationships,our business, prospects, financial condition and results of operations could suffer.We rely upon paid and natural search engines like Google, Bing, and Yahoo to rank our product offerings and may at times be subject to changes insearch algorithms and ranking penalties if they believe we are not in compliance with their guidelines. We rely on paid and natural search engines to attract consumer interest in our product offerings. Potential and existing customers use search enginesprovided by search engine companies, including Google, Bing, and Yahoo, which use algorithms and other devices to provide users a natural ranked listingof relevant Internet sites matching a user's search criteria and specifications. Generally, Internet sites ranked higher in the paid and natural search results listsfurnished to users attract the largest visitor share among similar Internet sites. Among retail internet sites, those sites achieving the highest natural searchranking often benefit from increased sales. Natural search engine algorithms utilize information available throughout the Internet, including informationavailable on our site. Rules and guidelines of these natural search engine companies govern our participation on their sites and how we share relevantInternet information that may be considered or incorporated into the algorithms utilized by these sites. If we fail to present, or improperly present, our siteinformation for use by natural search engine companies, or if any of these natural search engine companies determine we have violated their rules orguidelines, or if others improperly present our site information to these search engine companies, or if natural search engine companies make changes to theirsearch algorithms, we may fail to achieve an optimum ranking in natural search engine listing results, or we may be penalized in a way that could harm ourbusiness, prospects, financial condition and results of operations.We may not be able to compete successfully against existing or future competitors. The online liquidation services market is rapidly evolving and intensely competitive. Barriers to entry are minimal, and current and new competitors 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.; •private sale sites such as Rue La La, Gilt Groupe; •online specialty retailers such as Bluefly, Inc., Blue Nile, Inc. and Backcountry.com; 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., all of which also havean online presence. We also 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.18 Table of Contents 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, financial condition, and results of operations. 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, financial condition andresults of operations. We use internally developed systems for our Website and certain aspects of transaction processing, including personalization databases used for internalanalytics, recommendations and order verifications. We have experienced periodic systems interruptions due to server failure and power failure, which webelieve 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.19 Table of ContentsIf the facility where substantially all of our computer and communications hardware is located fails, our business, prospects, financial condition andresults of operations could be harmed. If the facility where substantially all of our computer and communications hardware is located fails, or we suffer an interruption of services through thefacility for any reason, our business, prospects, financial condition and results of operations could 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, or any other man-made or natural cause of interruption of service, both our primary and back-upsites could be adversely affected. Although we have designed our back-up system in an effort to minimize service interruptions in the event of a failure of ourmain facility, our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks,acts of war, break-ins, earthquake and similar events. In the event of a failure of our primary facility, the failover to our back-up facility would take at leastseveral hours, during which time our Website would be completely shut down. Our back-up facility is designed to support sales at a level slightly above ouraverage 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 ourWebsite and may process transactions more slowly and may not support all of the functionality of our primary site. These limitations could have an adverseeffect on our conversion rate and sales. Our disaster recovery plan may be inadequate, and we do not carry business interruption insurance sufficient tocompensate us for losses that could occur. Despite the implementation of network security measures, our servers are vulnerable to computer viruses, physicalor electronic break-ins and similar disruptions, the occurrence of any of which could lead to interruptions, delays, loss of critical data or the inability toaccept and fulfill customer orders. The occurrence of any of the foregoing risks could harm our business, prospects, financial condition and results ofoperations.We may be unable to protect our proprietary technology or keep up with that of our competitors. Our success depends to a significant degree upon the protection of our software and other proprietary intellectual property rights. We may be unable 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, prospects, financialcondition and results of operations.We may be accused of infringing intellectual property rights of third parties. Other parties have claimed and may claim that we infringe their intellectual property rights. We have been and are subject to, and expect to continue tobe subject to, legal claims of alleged infringement of the intellectual property rights of third parties. The ready availability of damages, royalties and thepotential for injunctive relief has increased the defense litigation costs of patent infringement claims, especially those asserted by third parties whose sole orprimary business is to assert such claims. Such claims, even if not meritorious, may result in significant expenditure of financial and managerial resources,and the payment of damages or settlement amounts. Additionally,20 Table of Contentswe may become subject to injunctions prohibiting us from using software or business processes we currently use or may need to use in the future, or requiringus to obtain licenses from third parties when such licenses may not be available on financially feasible terms or terms acceptable to us or at all. In addition,we may not be able to obtain on favorable terms, or at all, licenses or other rights with respect to intellectual property we do not own in providing e-commerce services to other businesses and individuals under commercial agreements.If we do not respond to rapid technological changes, our services could become obsolete and we could lose customers. To remain competitive, we must continue to enhance and improve the functionality and features of our e-commerce businesses. We may face 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, prospects, financialcondition and results of operations.We may not be able to enforce protection of our intellectual property rights under the laws of other countries. We sell products internationally and consequently we are subject to risks of doing business internationally as related to our intellectual property,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.21 Table of ContentsUse of social media may adversely impact our reputation. There has been a marked increase in use of social media platforms and similar devices, including weblogs (blogs), social media websites, and other formsof Internet-based communications which allow individuals access to a broad audience of consumers and other interested persons. Consumers value readilyavailable information concerning retailers, manufacturers, and their goods and services and often act on such information without further investigation,authentication and without regard to its accuracy. The availability of information on social media platforms and devices is virtually immediate as is itsimpact. Social media platforms and devices immediately publish the content their subscribers and participants post, often without filters or checks onaccuracy of the content posted. The opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readilyavailable. Information concerning the Company may be posted on such platforms and devices at any time. Information posted may be adverse to ourinterests, it may be inaccurate, and may harm our performance, prospects or business. The harm may be immediate without affording us an opportunity forredress or correction. Such platforms also could be used for dissemination of trade secret information, compromise of valuable company assets all of whichcould harm our business, prospects, financial condition and results of operations.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 business, prospects, financial condition and results ofoperations. 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 business,22 Table of Contentsprospects, financial condition or results of operations. However, due to the uncertainty of litigation and depending on the amount and the timing, anunfavorable resolution of some or all of these matters could materially affect our business, prospects, financial condition and results of operations.Our prime broker litigation may have an adverse effect on our business and financial condition. We remain involved in substantial litigation against Goldman Sachs Group, Inc., Goldman Sachs & Co., Goldman Sachs Execution & Clearing L.P.;Merrill Lynch, Pierce, Fenner & Smith, Inc., Merrill Lynch Professional Clearing Corporation, and Bank of America Securities LLC, and the use ofmanagement's time and attention in connection with the litigation and related matters may reduce the time management is able to spend on other aspects ofour business, which may have adverse effects on other aspects of our business. To the extent that any such adverse effects exceed any benefits we may realizefrom the litigation, it could harm our business, prospects, financial condition and results of operation.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 business, prospects, financial condition and results of operations. A party who is able to circumvent our security measures could misappropriateproprietary information or cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against suchsecurity breaches or to alleviate problems caused by such breaches. We cannot give any assurance that our security measures will prevent security breaches orthat 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.23 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, 2010, a face amount of $34.6 million of the Senior Notes remained outstanding. The degree to which we are indebtedcould 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. On February 7, 2011, we retired an additional $10.1 million of our outstanding Senior Notes, reducing the balance outstanding to a face amount of$24.5 million. This principal obligation is a significant amount, and we will have to refinance any portion of the amount due December 1, 2011 that we areunable to repay with proceeds from operations. If we fail to comply with our debt covenants, we will be in default. Our ability to generate cash flow from operations to make interest and principal payments on our debt obligations will depend on our future performance,which will be affected by a range of economic, competitive and business factors. We cannot control many of these factors, including general economicconditions and the health of the Internet retail industry. If our operations do not generate sufficient cash flow from operations to satisfy our indebtedness, wemay need to borrow additional funds to make these payments or undertake alternative financing plans, such as refinancing our debt, or reducing or delayingcapital investments and acquisitions. Additional funds or alternative financing may not be available to us on acceptable terms, or at all. Our inability togenerate sufficient cash flow from operations or obtain additional funds or alternative financing on acceptable terms could have a material adverse affect onour 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 stating that the SEC is conducting an investigationconcerning our previously-announced financial restatements of 2006 and 2008 and other matters. The subpoena accompanying the notice covers documentsrelated to the restatements and also to our billings to our partners in the fourth quarter of 2008 and related collections, and our accounting for andimplementation of software relating to our accounting for customer refunds and credits, including offsets to partners, and related matters. We have beencooperating and intend to continue to cooperate fully with the investigation. However, an unfavorable resolution of this matter could materially affect ourbusiness, prospects, financial condition and results of operations.California District Attorneys have sued us for alleged violations of California law. In April 2008, we received a letter from the Office of the District Attorney of Marin County, California, stating that the District Attorneys of Marin andfour other counties in Northern California had begun an investigation into the way we advertise products for sale. In November 2010, District24 Table of ContentsAttorneys for the California Counties of Alameda, Marin, Monterey, Napa, Santa Clara, Shasta and Sonoma filed a lawsuit seeking damages and aninjunction, alleging violations of California consumer protection laws, alleging we made untrue or misleading statements concerning our pricing, pricereductions, sources of products and shipping charges. The complaint asks for damages in the amount of not less than $15 million. We dispute the allegationsand intend to defend ourselves vigorously. However, an unfavorable resolution of this matter could materially affect our business, prospects, financialcondition and results of operations.Risks Relating to our Auctions ServiceOur auctions service is a developing business. Our auctions service began operation in September 2004. Our auctions service remains in development, and we cannot ensure that it will succeed. Ourauctions business exposes us to additional risks, including legal and regulatory risks, and requires us to compete with established businesses havingsubstantially 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 we are located, have regulations governing the conduct of traditional "auctions" and theliability 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 service, we will incur costs in complying with these laws, and we may from time to time be required to make changes in our business that mayincrease our costs, reduce our revenues, cause us to prohibit the listing of certain items in certain locations, or make other changes that may adversely affectour auctions business.Current and future laws could affect our auctions business. Like our shopping site business, our auction site service 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 service 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 items on our auction site, or to the extent these laws discriminate against Internet auctions or apply in adiscriminatory fashion, they could harm our business.25 Table of ContentsOur 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.26 Table of ContentsRisks Relating to our Cars Site and Real Estate ServicesOur cars site and real estate services are relatively new businesses that may not succeed. Our car listing site and real estate listing services began operation in December 2006 and August 2008, respectively. The listing sites are listing servicesfor automobile and real estate sellers. The online car listing service and real estate listing service are relatively new businesses for us. We cannot ensure thatour expansion into these businesses will succeed. Our entry into these businesses will require us to devote substantial financial, technical, managerial andother resources to this car listing and real estate listing sites. It also exposes us to additional risks, including legal and regulatory risks, and it requires us tocompete with established businesses having substantially greater experience in the online car listing and real estate listing service businesses andsubstantially greater resources than we have.Our car listing and real estate listing services 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 services, we will incur costs in complyingwith these laws, and we may from time to time be required to make changes in our services that may increase our costs, reduce our revenues, cause us toprohibit certain listing or advertising practices, or make other changes that may adversely affect our car and real estate listing services.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.27 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 services, which may harm our business or reputation among consumers.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; •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. Though e-commerce iswidely accepted as a means of purchasing consumer goods and services, we cannot give any assurance that it will continue to be widely accepted. Thedemand for and acceptance of products sold over the Internet are still uncertain and most e-commerce businesses have a short track record. If consumers areunwilling to use the Internet to conduct business, it would materially adversely impact our business, prospects, financial condition and results of operations.28 Table of ContentsThe 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 continue to develop successfully, we and other market participants must be able to transmit confidentialinformation securely over public networks. Third parties may have the technology or know-how to breach the security of customer transaction data. Anybreach of our e-commerce security systems could cause customers to lose confidence in the security of our Website and choose not to purchase from ourWebsite. Likewise, if there is a breach of e-commerce security systems operated by another large e-commerce retailer, whether or not the breach affected thesystems we operate such a breach could cause could also cause our customers to lose confidence in the security of our site as well. If someone is able tocircumvent our security measures, he or she could destroy or steal valuable information or disrupt our operations. Concerns about the security and privacy oftransactions over the Internet could inhibit the use of the Internet and e-commerce. Our security measures may not effectively prohibit others from obtainingimproper access to our information. Third parties may target our customers directly with fraudulent identity theft schemes designed to appear as legitimatecommunications from us. Any security breach or fraud perpetrated on our customers could expose us to increased costs and to risks of loss, litigation andliability and could seriously disrupt our operations. Similar activities targeting other large e-commerce sites, if successful, could similarly cause seriousdisruption to our operations and business.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, prospects, financial condition and results of operation. Further, to the extent that our efforts to prevent fraudulentorders result in our inadvertent refusal to fill legitimate orders, we would lose the benefit of legitimate potential sales and risk the alienation of legitimatecustomers.If one or more states successfully assert that we should collect sales or other taxes on the sale of our merchandise or the merchandise of third 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 where we do not have a physical presence or "nexus".One or more local, state or foreign jurisdictions may seek to impose sales tax collection obligations on us because we are engaged in online commerce, eventhough we have no physical presence in those jurisdictions. The future location of our fulfillment centers and customer service center networks, or any otheroperation 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 the constitutionality of a New York state law which requires Internet retailers to collect and remit New York sales taxes on their New Yorksales who have no physical presence or "tax nexus" in New York, if the retailer uses the services of New York based Internet advertisers. The trial courtdismissed our challenge, and on appeal, the appellate court has partially affirmed the trial court. We continue to appeal those decisions. As a result of theenactment of the New York law, we terminated our relationship with New York based advertising affiliates. Other states have passed similar Internet affiliateadvertising statutes, and in those states we have terminated our use of locally based Internet advertisers. Moreover, there are other states that currently havesimilar tax29 Table of Contentsproposals under consideration. If such laws survive constitutional challenge, we may have to elect to discontinue in those states valuable marketing throughthe use of affiliates based in those states, or begin in those states the collection of the taxes. In either event, our business could be harmed and our businesscould be adversely affected if one or more states or any foreign country successfully asserts that we should collect sales or other taxes on the sale of ourmerchandise in compliance with these or any other state law. At least one state, Ohio, asserts that we should pay a commercial activity tax because we sellmerchandise in Ohio, even though we have no physical presence there. We challenged in Ohio state court the constitutionality of the commercial activitytax; however, the court declined the case for the reason that it was not a ripe controversy. The State of Ohio has since assessed us $612,784 in taxes, interest,and penalties as of June 30, 2009, which assessment we are now contesting through administrative procedures. The Ohio Department of Taxation issuedadditional estimated assessments of estimated tax, interest and penalties totaling $24,545 for the period July 1, 2009 through December 31, 2009 inSeptember, 2010.We believe the assessment to be wrong and are contesting the assessment. If Ohio is successful and its assessment withstands constitutionalchallenge in both administratively and in court appeals, the enforcement of the assessment could harm our business. If other states similarly enact and aresuccessful in enforcing similar commercial activity tax laws, these also could harm our business. The States of Colorado and Oklahoma have enacted laws requiring remote vendors to notify resident purchasers in those states of their obligation to paya use tax on their purchases. In Colorado, the law requires vendors to notify Colorado purchasers annually by U.S. mail of all their annual purchases, andprovide to the State of Colorado the same information in the first quarter of the year for previous year's purchases. On January 26, 2011, a federal court inColorado, citing constitutional concerns and noting that a party challenging the constitutionality of the Colorado law would have a likelihood of success attrial, granted a preliminary injunction preventing the Colorado Department of Revenue from enforcing the provisions of the Colorado law. Notwithstanding,other states may enact legislation similar to these laws. Such laws could harm our business by imposing unreasonable notice burdens upon us, or by suchdetailed notices, or the threat of invasion of privacy, 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 use to balance their budgets. To the extent that states pass additional revenue measures, or significantly increase theirenforcement efforts of existing laws, these activities could directly or indirectly harm our business.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 our business. In addition, manyjurisdictions have laws that limit the uses of30 Table of Contentspersonal user information gathered online or offline or require companies to establish privacy policies. For example, Federal Trade Commission regulationsrestrict the collection and use of personal identifying information obtained from children under 13. Laws affecting privacy, security, retention, transfer anduse of personal user information have been passed by several jurisdictions, both domestic and foreign, including laws that require us to establish proceduresto notify users of privacy and security policies, obtain consent from users for collection and use of personal information, and/or provide users with the abilityto access, correct and delete personal information stored by us. Compliance with new and existing privacy and security laws is difficult and costly, asinterpretation and application of these laws evolves over time. Additional restrictions and requirements regarding data security and privacy are under nearlycontinuous consideration by foreign countries, Congress and various states. These data protection statutes, regulations and interpretations may further restrictour ability to collect demographic and personal information from users, which could be costly or harm our marketing efforts, and could require us toimplement new and potentially costly processes, procedures and/or protective measures.Risks 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 our31 Table of Contentsstock price. Investors should be aware that they could experience significant short-term volatility in our stock if such stockholders decide to sell all or aportion of their holdings of our common stock at once or within a short period of time. In addition, the transfer of ownership of 50% or more of ouroutstanding shares within a three year period could adversely affect our ability to use 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; •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 fulfillment partners that extend beyond the amount of time necessary to collect proceeds from our customers. As a result of holidaysales, at December 31 of each year, our cash, cash equivalents, and marketable32 Table of Contentssecurities balances typically reach their highest level (other than as a result of cash flows provided by or used in investing and financing activities). Thisoperating cycle results in a corresponding increase in accounts payable at December 31. Our accounts payable balance generally declines during the firstthree 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.Our 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 filed an unfair business practice lawsuit against Morgan Stanley & Co. Incorporated, Goldman Sachs & Co., Bear Stearns Companies, Inc., Bank ofAmerica 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., and have settled the case with respect to all defendants except Goldman Sachs Group, Inc., GoldmanSachs & Co., Goldman Sachs Execution & Clearing L.P.; Merrill Lynch, Pierce, Fenner & Smith, Inc., Merrill Lynch Professional Clearing Corporation, andBank of America Securities LLC. We believe these remaining defendants engaged in unlawful actions and have caused substantial harm to Overstock, and that certain of the defendantshave made efforts to drive the market price of Overstock's common stock down. To the extent that the defendants or other persons engage in any such actionsor take any other actions to interfere with or destroy or harm Overstock's existing and/or prospective business relationships with its suppliers, bankers,customers, lenders, investors, prospective investors or others, our business, prospects, financial condition and results of operation could be33 Table of Contentsharmed, and the price of our common stock may be more volatile than it might otherwise be and/or may trade at prices below those that might prevail in theabsence of any such efforts. The practice of "abusive naked short selling" continues to place our stock at risk for manipulative attacks by large investmentpools and prime brokers. Abusive naked short selling is the practice by which short sellers place large short sell orders for shares without first borrowing the shares to be sold, orwithout having first adequately located such shares and arranged for a firm contract to borrow such shares prior 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, and while purchasing broker-dealers are obligatedby rule to purchase the sold quantity of shares when they are not delivered to close the sale, these rules are often ignored. Abusive naked short selling has adepressive effect on share prices when it is allowed to persist because the economic effect of abusive naked short selling is the oversupply of counterfeit stockto the market. We believe the regulations designed to address this abusive practice are both inadequately structured and inadequately enforced.Consequently, we believe that without the enactment of adequate regulations and the enforcement necessary to curb these abuses, the manipulationsachieved through abusive naked short selling are likely to continue. We believe that our stock has been subject to these abusive practices by thoseattempting to manipulate its price downward. To the extent that our stock is subject to these practices in the future, our stock may be more volatile than itmight otherwise be and/or may trade at prices below those that might prevail in the absence of such abuses.In the past, our stock has consistently been on the Regulation SHO threshold list. Regulation SHO requires the stock exchanges to publish daily a list of companies whose stock has failures-to-deliver above a certain threshold. It 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 andcontinuous 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 more tradingdays 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.34 Table of Contents ITEM 1B. UNRESOLVED STAFF COMMENTS On June 11, 2010 we received a comment letter from the staff of the SEC issued with respect to the staff's review of, among other filings, our Form 10-Kfor the year ended December 31, 2009. In addition to other comments, the staff's June 11, 2010 letter included comments requesting additional informationand disclosures regarding our allowance for sales returns. We responded to the staff's comments, and after additional correspondence, the staff informed us byletter dated August 23, 2010 that the staff had no further comments at that time. On December 13, 2010 we received a comment letter from the staff issued with respect to the staff's review of our Form 10-Q for the quarter endedSeptember 30, 2010. In addition to other comments, the staff's December 13, 2010 letter included comments requesting additional information regarding ourallowance for sales returns and referenced one of our responses to their letter dated June 11, 2010 about sales returns. We have responded to the staff'sDecember 13, 2010 comments, but the staff's comments about our sales returns allowance remain unresolved at the date of this filing. We continue to workwith the staff to address their open comments. ITEM 2. PROPERTIES Corporate office space We lease approximately 128,000 square feet in the Old Mill Corporate Center III in Salt Lake City, Utah for a term expiring in 2015. We lease approximately 12,000 square feet in Provo, Utah for a term expiring in 2016.Warehouse and customer service space We lease a combined 1,041,000 square feet for our warehouse and customer service operations in two facilities in Salt Lake City, Utah for terms expiringin August 2012 and February 2016. We lease approximately 15,000 square feet for customer service operations in Tooele, Utah for a term expiring in May 2015. We lease approximately 400 square feet of space for our procurement staff in Shanghai, China for a term expiring in October 2012.Co-location data center We lease approximately 4,000 square feet of space at Old Mill Corporate Center I for an IT data center in Salt Lake City, Utah for a term expiring in May2017. We lease an additional 2,864 square feet for an offsite IT data center located in Salt Lake City, Utah for a term expiring in June 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 14—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. (REMOVED AND RESERVED) 35 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.36 Common Stock Price High Low Year Ended December 31, 2010 First Quarter 16.23 11.10 Second Quarter 23.92 16.90 Third Quarter 20.82 13.53 Fourth Quarter 17.30 12.69 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 ContentsSTOCK 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, 2005 through December 31, 2010 for Overstock.com, Inc., NASDAQ Market Index—U.S. ("NASDAQ Market Index"), the Hemscott InternetSoftware and Services Index ("Hemscott Group Index") and the Morningstar Online Retail Industry Group Index ("Morningstar Group Index"). We have beeninformed that the Hemscott Group Index is being phased out, and we will replace it with the Morningstar Group Index because it is composed of companiesin businesses similar in many ways to our business. The graph assumes that $100 was invested in our common stock and the above indices at the closingprices on December 31. Historic stock price performance is not necessarily indicative of future stock price performance.COMPARISON OF CUMULATIVE TOTAL RETURNHolders As of February 11, 2011, there were 325 holders of record of our common stock. Because many of our shares of common stock are held by brokers andother institutions on behalf of shareholders, we are unable to estimate the number of beneficial shareholders.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 any37 Table of Contentsfailure by us to keep $30 million in certain accounts with U.S. Bank, as well as any Event of Default under the Financing Agreement.Recent 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. On August 31, 2009, we entered into a Tolling and Standstill Agreement (the "Tolling Agreement") with the Overstock.com, Inc. Employee BenefitsCommittee (the "Committee") relating to the 401(k) plan. We entered into the Tolling Agreement in order to preserve certain rights, if any, of planparticipants who acquired shares of Overstock common stock in the plan between July 1, 2008 and June 30, 2009. In August 2010, we made a registeredrescission offer to affected participants in the plan who acquired shares of Overstock common stock during the Purchase Period. The rescission offer appliedto shares purchased during the Purchase Period at prices ranging from $6.77 per share to $21.17 per share. On October 6, 2010, our rescission offer expired. Asa result of the offer, we repurchased 1,202 shares of common stock for $26,000. On October 14, 2010 we terminated the Tolling Agreement. We reclassified17,763 shares or $260,000 of common stock from temporary to permanent equity due to the expiration of potential rescission rights. The remainingredeemable shares will be reclassified into permanent equity upon the expiration of potential rescission rights associated with those common shares. AtDecember 31, 2010 and 2009, approximately 46,000 shares or $570,000 and 65,000 shares or $744,000 of our common stock plus interest were classifiedoutside stockholders' equity, respectively. 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 2010, 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 or38 Table of Contentsprograms. Column (d) sets forth the maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs.Stock based compensationStock options Our board of directors adopted the 2005 Equity Incentive Plan (the "Plan"), in April 2005. Under this Plan, the Board of Directors may issue incentivestock options to our employees and directors and non-qualified stock options to our consultants, as well as other types of awards under the 2005 EquityIncentive Plan. Options granted under these Plans generally expire at the end of ten years and vest on a straight line basis in accordance with a vestingschedule determined by our Board of Directors, usually over four years from the grant date. As of December 31, 2010, 1.1 million shares of stock based awardswere available for future grants under the 2005 Equity Incentive 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, 2010, 2009 and2008, we recorded stock based compensation related to stock options of $1.6 million, $2.2 million and $3.3 million, respectively.Restricted stock units activity During the years ended December 31, 2010, 2009 and 2008, we granted 302,000, 366,000 and 491,000 restricted stock units, respectively. The cost ofrestricted stock units is determined using the39Period (a)Total Number of Shares(or Units) Purchased (b)Average Price Paidper Share or Unit (c)Total Number of Shares(or Units) Purchased asPart of PubliclyAnnounced Plansor Programs (d)Maximum Number (orApproximate Dollar Value)of Shares (or Units) thatMay Yet Be PurchasedUnder the Plansor Programs October 1, 2010 to October 31,2010 1,496 $16.80 — $— November 1, 2010 toNovember 30, 2010 — — — — December 1, 2010 toDecember 31, 2010 — — — — Total 1,496(1) — $— (1)Represents 294 shares withheld for minimum tax withholding purposes upon the vesting of a portion of certain restricted stock unitgrants and 1,202 shares repurchased as part of our Rescission Offer. 2010 2009 2008 Shares Weighted AverageExercisePrice Shares Weighted AverageExercisePrice Shares Weighted AverageExercisePrice Outstanding—beginning of year 721 $20.29 974 $21.27 1,161 $20.48 Granted at fair value — — — — 11 14.14 Exercised (90) 17.05 (2) 15.82 (112) 12.96 Expired/Forfeited (135) 30.41 (251) 24.12 (86) 20.45 Outstanding—end of year 496 $18.09 721 $20.29 974 $21.27 Options exercisable at year-end 472 $18.08 543 $21.17 609 $23.18 Table of Contentsfair value of our common stock on the date of the grant and compensation expense is recognized on a straight line basis over the three year vesting schedule.The weighted average grant date fair value of restricted stock units granted during the years ended December 31, 2010, 2009 and 2008 was $13.17, $10.15and $12.64, 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, 2010, 2009 and 2008, we recorded stock based compensation related to restricted stock units of $3.5 million,$2.6 million and $1.4 million, respectively. At December 31, 2010, approximately 685,000 restricted stock units were outstanding. On January 22, 2011, we granted 225,000 additional restrictedstock units.40 2010 2009 2008 Units Weighted AverageGrant DateFair Value Units Weighted AverageGrant DateFair Value Units Weighted AverageGrant DateFair Value Outstanding—beginning of year 640 $11.35 449 $12.69 — $— Granted at fair value 302 13.17 366 10.15 491 12.64 Vested (185) 11.52 (110) 12.64 — — Forfeited (72) 11.50 (65) 11.55 (42) 12.13 Outstanding—end of year 685 $12.08 640 $11.35 449 $12.69 Table of Contents ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data presented below should be read in conjunction with the consolidated financial statements ofOverstock.com, Inc. and subsidiaries and related footnotes included elsewhere in this annual report on Form 10-K and the discussion under Item 7—"Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected consolidated financial data has been derivedfrom our audited consolidated financial statements included elsewhere in this Form 10-K. The historical financial and operating information may not beindicative of our future performance.41 Year ended December 31, 2010 2009 2008 2007 2006 (in thousands, except per share data) Consolidated Statement of Operations Data: Revenue, net Direct $209,646 $150,901 $173,687 $197,088 $301,509 Fulfillment partner 880,227 725,868 656,163 568,814 478,628 Total net revenue 1,089,873 876,769 829,850 765,902 780,137 Cost of goods sold Direct 187,124 130,890 153,967 168,008 284,774 Fulfillment partner 713,109 581,127 531,647 473,344 405,559 Total cost of goods sold 900,233 712,017 685,614 641,352 690,333 Gross profit 189,640 164,752 144,236 124,550 89,804 Operating expenses: Sales and marketing 61,334 55,549 57,668 55,458 70,897 Technology 58,260 52,336 56,677 59,453 65,158 General and administrative 55,650 48,906 39,348 41,976 46,837 Restructuring(1) (569) (66) (299) 12,283 5,674 Total operating expenses 174,675 156,725 153,394 169,170 188,566 Operating income (loss) 14,965 8,027 (9,158) (44,620) (98,762) Interest income 157 170 3,163 4,788 3,566 Interest expense (2,962) (3,470) (3,565) (4,188) (4,765) Other income (expense), net 2,088 3,277 (1,446) (92) 81 Income (loss) from continuing operations before incometaxes 14,248 8,004 (11,006) (44,112) (99,880) Provision for income taxes (359) (257) — — — Income (loss) from continuing operations 13,889 7,747 (11,006) (44,112) (99,880) Loss from discontinued operations(2) — — — (3,924) (6,882) Net income (loss) 13,889 7,747 (11,006) (48,036) (106,762) Deemed dividend related to redeemable common stock (112) (48) (77) — (99) Net income (loss) attributable to common shares $13,777 $7,699 $(11,083)$(48,036)$(106,861) Net income (loss) per common share—basic: Income (loss) from continuing operations after dividendrelated to redeemable common stock $0.60 $0.34 $(0.48)$(1.86)$(4.91) Loss from discontinued operations $— $— $— $(0.17)$(0.34) Net income (loss) attributable to common share—basic $0.60 $0.34 $(0.48)$(2.03)$(5.25) Weighted average common shares outstanding—basic 23,019 22,821 22,901 23,704 20,332 Table of Contents42 Year ended December 31, 2010 2009 2008 2007 2006 (in thousands, except per share data) Net income (loss) per common share—diluted: Income (loss) from continuing operations after dividendrelated to redeemable common stock $0.59 $0.33 $(0.48)$(1.86)$(4.91) Loss from discontinued operations $— $— $— $(0.17)$(0.34) Net income (loss) attributable to common shares—diluted $0.59 $0.33 $(0.48)$(2.03)$(5.25) Weighted average common shares outstanding—diluted 23,366 23,067 22,901 23,704 20,332 Balance Sheet Data: Cash and cash equivalents $124,021 $139,757 $96,457 $92,809 $114,695 Restricted cash 2,542 4,414 4,262 8,634 12,270 Marketable securities — — 8,989 46,000 — Working capital 14,746 51,236 41,780 62,621 59,475 Total assets 217,959 216,500 181,136 231,143 264,453 Total indebtedness 52,845 61,687 67,821 78,418 84,336 Redeemable common stock 570 744 1,263 — — Stockholders' equity (deficit) 30,658 10,800 (2,246) 18,212 56,367 (1)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 3—"Restructuring Expense"). (2)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 $6.9 million for theyear ended December 31, 2006 (including a goodwill impairment charge of $4.5 million) and $3.9 million for the year endedDecember 31, 2007 (including a goodwill impairment charge of $3.8 million). Table of Contents ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, allstatements regarding:•the anticipated benefits and risks of our business and plans; •our ability to attract and retain customers in a cost-efficient manner; •the effectiveness of our marketing; •our future operating and financial results; •the competition we face and will face in our business; •the effects of government regulation; •our future capital requirements and our ability to satisfy our capital needs; •our expectations regarding the adequacy of our liquidity; •our ability to repurchase or retire or refinance our publicly traded debt; •our expansion in international markets; •our plans for changes to our business; •our beliefs regarding current or future litigation or regulatory actions; •our expectations regarding existing and future tax laws and related laws and the application of those laws to our business; •our expectations regarding the adequacy of our insurance coverages; •the adequacy of our infrastructure, including our backup facilities and our disaster planning; •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 expectations regarding the adequacy of our order processing systems and our fulfillment and distribution capabilities; •our beliefs regarding the adequacy of our customer service capabilities; •our expectations regarding the adequacy of our office and warehouse facilities; •our expectations regarding our auctions service, our international sales efforts, our real estate listing service, our car listing service and ourcommunity site, and the anticipated functionality and results of operations of any of them; •our belief that we and our fulfillment partners will be able to maintain inventory levels at appropriate levels despite the seasonal nature of ourbusiness; and •our belief that we can successfully offer and sell a constantly changing mix of products and services;43 Table of Contents 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.Introduction We are an online retailer offering discount brand, non-brand name and closeout merchandise, including bed-and-bath goods, home décor, kitchenware,furniture, watches and jewelry, apparel, electronics and computers, sporting goods, and designer accessories, among other products. We also sell hundreds ofthousands of best seller and current run books, magazines, CDs, DVDs and video games ("BMMG"). We sell these products through our Internet websiteslocated at www.overstock.com and www.o.co ("Website"). We also operate as part of our Website an online auctions business—a marketplace for the buyingand selling of goods and services—and online sites for listing cars and real estate for sale. In October 2009, we also launched O.biz, a website wherecustomers can shop for bulk and business related items. In August 2010, we introduced Eziba.com, a private sale website where members can shop exclusivedeals on the latest home décor products, furniture, jewelry, apparel and accessories from many leading brands. Although our four websites are located atdifferent domain addresses, the technology and equipment and processes supporting the Overstock.com Website and the process of order fulfillmentdescribed herein are the same for all four websites. 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 sell products primarily in the United States, with a small amount of products (less than 1% of sales) sold internationally.Our Business We deal primarily in discount, replenishable, and closeout merchandise and we use the Internet to aggregate both supply and demand to create anefficient marketplace for selling these products. We provide manufacturers with a one-stop liquidation channel to sell both large and small quantities ofexcess, closeout and replenishable inventory without disrupting sales through traditional channels, which can result in weaker pricing and decreased brandstrength. The merchandise offered on our Website is from a variety of sources including well-known, brand-name manufacturers. We have organized ourshopping business (sales of product offered through the Shopping Section of our Website) into two principal segments—a "direct" business and a "fulfillmentpartner" business. We currently offer approximately 197,000 non-BMMG products in 19 major departments, and approximately 763,000 BMMG products.Consumers and businesses are able to access and purchase our products 24 hours a day from the convenience of a computer, Internet-enabled mobiletelephone or other Internet-enabled devices. Our team of customer service representatives assists customers by telephone, instant online chat and e-mail.Nearly all of our sales are to customers located in the United States. Less than 1% of44 Table of Contentsour sales are made indirectly to international customers. During the years ended December 31, 2010, 2009, and 2008, no single customer accounted for morethan 1% of our total revenue.Direct business Our direct business includes sales made to individual consumers and businesses, which are fulfilled from our warehouses in Salt Lake City, Utah. Duringthe year ended December 31, 2010, we fulfilled approximately 19% of our order volume through our warehouses. Our warehouses generally ship between8,000 and 10,000 orders per day and up to approximately 25,000 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 relationships with approximately 1,600 third parties who supply approximately 187,000 non-BMMG products, as well as most ofthe BMMG products, on our Website. These third-party fulfillment partners perform essentially the same fulfillment operations as our warehouse such asorder picking and shipping; however, we handle returns and customer service related to substantially all orders placed through our Website. Revenuegenerated from sales on our Shopping site from both the direct and fulfillment partner businesses is recorded net of returns, coupons and other discounts.International business We began selling products through our Website to customers outside the United States in late August 2008. As of December 31, 2010, we sell tocustomers in over 90 countries. We do not have sales operations outside the United States, and are using a U.S. based third party to provide logistics andfulfillment for all international orders. Revenue generated from our international business is included in either direct or fulfillment partner revenue,depending on whether the product is shipped from our warehouses or from a fulfillment partner.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 our customer. Revenue from our consignment service business isless than 1% of total net revenue and is included in the fulfillment partner segment. 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.Other businesses We operate an online auction service, car listing service, and real estate listing service as part of our Website. Our auction service allows sellers to listitems for sale, buyers to bid on items of interest, and users to browse through listed items online. We record only our listing fees and commissions for itemssold as revenue. From time to time, we also sell items returned from our shopping business through our auction service, and for these sales, we record therevenue on a gross basis. The car listing service allows sellers to list vehicles for sale and allows buyers to review vehicle descriptions, post offers to purchase,and provides the means for purchasers to contact sellers for further information and45 Table of Contentsnegotiations on the purchase of an advertised vehicle. The real-estate listing service allows customers to search active listings across the country. Listingcategories include foreclosures, live and on-line auctions, for sale by owner listings, broker/agent listings and numerous aggregated classified ad listings. Wealso earn advertisement revenue derived from our cars and real estate listing businesses. Revenue from the auctions, cars and real estate businesses is includedin the fulfillment partner segment on a net basis. 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, and in August 2010, we introduced Eziba.com, a private salewebsite where members can shop exclusive deals on the latest home décor products, jewelry, apparel and accessories from many leading brands. Revenuegenerated from our O.biz and Eziba.com websites is included in either direct or fulfillment partner revenue, depending on whether the product is shippedfrom our warehouses or from a fulfillment partner. 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). For most sales in our fulfillment partner business, we generally receive payments from our customersbefore our payments to our suppliers are due.Critical Accounting Policies and Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires estimates and assumptionsthat affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidatedfinancial statements and accompanying notes. The Securities and Exchange Commission ("SEC") has defined a company's critical accounting policies as theones that are most important to the portrayal of the company's financial condition and results of operations, and which require the company to make its mostdifficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we haveidentified the critical accounting policies, estimates and judgments addressed below. We also have other key accounting policies, which involve the use ofestimates, judgments, and assumptions that are significant to understanding our results. For additional information, see Item 1 of Part I, "FinancialStatements"—Note 2—"Accounting Policies." Although we believe that our estimates, assumptions, and judgments are reasonable, they are based uponinformation presently available. Actual results may differ significantly from these estimates. 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; 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 the46 Table of ContentsAuctions tab of our Website, advertisement revenue derived from our cars and real estate listing business, and from advertising on our shopping pages. Wehave organized our operations into two principal segments based on the primary source of revenue: direct revenue and fulfillment partner revenue. 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 our customers. As we ship high volumes of packages throughmultiple carriers, it is not practical for us to track the actual delivery date of each shipment. Therefore, we use estimates to determine which shipments aredelivered and, therefore, recognized as revenue at the end of the period. Our delivery date estimates are based on average shipping transit times, which arecalculated using the following factors: (i) the type of shipping carrier (as carriers have different in-transit times); (ii) the fulfillment source (either ourwarehouses or those of our fulfillment partners); (iii) the delivery destination; and (iv) actual transit time experience, which shows that delivery date istypically one to eight business days from the date of shipment. We review and update our estimates on a quarterly basis based on our actual transit time experience. However, actual shipping times may differ from ourestimates. The following table shows the effect that hypothetical changes in the estimate of average shipping transit times would have had on the reported amountof revenue and net income for the year ended December 31, 2010 (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.47 Year ended December 31, 2010 Change in the Estimate of Average Transit Times (Days) Increase(Decrease)Revenue Increase(Decrease)Net Income 2 $(5,453)$(828)1 $(4,345)$(679)As reported As reported As reported -1 $4,176 $667 -2 $7,150 $1,157 Table of ContentsFulfillment partner revenue Fulfillment partner revenue is derived from merchandise sales through our Website which fulfillment partners ship directly to consumers and businessesfrom warehouses maintained by our fulfillment partners. We operate an online auction service as a part of our Website. The Auctions business allows sellers to list items for sale, buyers to bid on items of interest,and users to browse through listed items online. With limited exceptions, we are not considered the seller of the items sold on the auction site and have nocontrol over the pricing of those items. Therefore, for these sales, only the listing fees for items listed and commissions for items sold are recorded as revenueduring the period items are listed or items are sold. Revenue from the auctions business is included in the fulfillment partner segment. We operate an online site for listing cars for sale as a part of our Website. The cars listing service allows dealers to list vehicles for sale and allows 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 included in the fulfillment partner segment. 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. Revenue from the real estate listing business is included in the fulfillment partner segment.International business We began selling products through our website to customers outside the United States in August 2008. As of December 31, 2010, we sell to customers inover 90 countries. We do not have sales operations outside the United States, and are using a U.S.-based third party to provide logistics and fulfillment for allinternational orders. Revenue generated from our international business is included in either direct or fulfillment partner revenue, depending on whether theproduct is shipped from our leased warehouses or from a fulfillment partner.Club O loyalty program We have a customer loyalty program called Club O for which we sell annual memberships. We record membership fees as deferred revenue and werecognize revenue ratably over the membership period. The Club O program allows members to earn reward dollars for qualifying purchases made on ourWebsite. We also have a co-branded credit card program (see "Co-branded credit card program" below for more information). Co-branded cardholders are alsoClub O members and earn additional reward dollars for purchases made on our Website, and from other merchants. Reward dollars earned may be redeemedon future purchases made through our Website. Club O reward dollars expire 90 days after the customers Club O membership expires. We account for thesetransactions as multiple element arrangements and allocate value to the elements using their relative fair values. We include the value of reward dollarsearned in deferred revenue and we record it as a reduction of revenue at the time the reward dollars are earned. We recognize revenue for Club O reward dollars when: (i) customers redeem their reward dollars as part of a purchase at our Website, (ii) reward dollarsexpire or (iii) the likelihood of reward dollars being redeemed by a customer is remote ("reward dollar breakage"). Due to the loyalty program's short history,currently no reward dollar breakage is recognized until the reward dollars expire. However, in the future we plan to recognize such breakage based uponhistorical redemption patterns.48 Table of ContentsCo-branded credit card revenue During the year ended December 31, 2009, we had a co-branded credit card agreement with a commercial bank, for the issuance of credit cards bearingthe Overstock brand, under which the bank paid us fees for new accounts, renewed accounts and card usage. New and renewed account fees were recognizedas revenues on a straight-line basis over the estimated life of the credit card relationship. Credit card usage fees were recognized as revenues as actual creditcard usage occurred. Our co-branded credit card agreement with this bank terminated effective August 30, 2009. In March 2010, we entered into a co-branded credit card agreement with a different commercial bank for the issuance of credit cards bearing theOverstock.com brand, under which the bank pays us fees for new accounts and for customer usage of the cards. The agreement also provides for a customerloyalty program offering reward points that customers will accrue from card usage and can use to make purchases on our Website (See "Club O loyaltyprogram" above for more information). We launched this co-branded card in September 2010. New account fees are recognized as revenue on a straight-linebasis over the estimated life of the credit card relationship. Credit card usage fees are recognized as revenues as actual credit card usage occurs.Deferred revenue Customer orders are recorded as deferred revenue prior to delivery of products or services ordered. We record amounts received for Club O membershipfees as deferred revenue and we recognize it ratably over the membership period. We record Club O reward dollars as deferred revenue at the time they areearned and we recognize it as revenue upon redemption. If reward dollars are not redeemed, we recognize revenue upon expiration. In addition, we sell giftcards and record related deferred revenue at the time of the sale. We sell gift cards without expiration dates and we recognize revenue from a gift card uponredemption of the gift card. If a gift card is not redeemed, we recognize income when the likelihood of its redemption becomes remote based on our historicalredemption experience. We consider the likelihood of redemption to be remote after 36 months.Sales returns allowance We inspect all returned items when they arrive at our processing facility. We refund the full cost of the merchandise returned and all original shippingcharges if the returned item is defective or we or our fulfillment partners have made an error, such as shipping the wrong product. If the return is not a result of a product defect or our or our fulfillment partners' error and our customer initiates a return of an unopened item within30 days of delivery, except for computers and electronics, we refund the full cost of the merchandise minus the original shipping charge and return shippingfees. However, we reduce refunds for returns initiated more than 30 days after delivery or that are received at our returns processing facility more than 45 daysafter initial delivery. If our customer returns an item that has been opened or shows signs of wear, we issue a partial refund minus the original shipping charge and returnshipping fees. Revenue is recorded net of estimated returns. We record an allowance for returns based on current period revenues and historical returns experience. Weanalyze historical returns, current economic trends and changes in order volume and acceptance of our products when evaluating the adequacy of the salesreturns allowance in any accounting period. Our actual product returns have not differed materially from our estimates. The average actual returns aspercentage of revenues for the years ended, December 31, 2010, 2009, and 2008 were 8.2%, 8.6% and 9.0%, respectively. The decline in actual returns as apercentage of revenues from 2008 to 2009 was largely the result of procedures implemented in 2009 including entering into a new master supplier agreementwith our fulfillment partners in the fall of 2009. We do not expect future returns experience to differ significantly from the49 Table of Contentsrates experienced in 2010. The allowance for returns was $11.5 million and $11.9 million at December 31, 2010 and 2009, respectively.Credit card chargeback allowance Revenue is recorded net of estimated credit card chargebacks. We maintain an allowance for credit card chargebacks based on current period revenuesand historical chargeback experience. The allowance for chargebacks was $125,000 and $139,000 at December 31, 2010 and 2009, respectively.Allowance 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 accounts receivable. The allowance for doubtful accounts receivable was $2.0 million and $1.7 million atDecember 31, 2010 and December 31, 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.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.Accounting for income taxes We are subject to taxation from federal and state jurisdictions. A significant amount of judgment is involved in preparing our annual provision forincome taxes and the calculation of resulting deferred tax assets and liabilities. As of December 31, 2010, we were not under audit by United States incometaxing authorities. Tax periods within the statutory period of limitations not previously audited are potentially open for examination by the taxingauthorities. Potential liabilities associated with these years will be resolved when an event occurs to warrant closure, primarily through the completion ofaudits by the taxing jurisdictions and/or the expiration of the statutes of limitation. To the extent audits or other events result in a material adjustment to theaccrued estimates, the effect would be recognized during the period of the event. We follow the asset and liability method of accounting for income taxes. Under this method, deferred taxes are determined based on the temporarydifferences between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to be in effect during the years in which thebases differences reverse. A valuation allowance is recorded to reduce deferred tax assets when it is more likely than not that some portion, or all of thedeferred tax assets may not be realized. Since inception, we determined that it was more likely than not that our historic and current year income tax benefits may not be realized and a fullvaluation allowance should be recorded against our deferred tax assets in excess of our deferred tax liabilities. As of December 31, 2010 and 2009, we have50 Table of Contentsrecorded a full valuation allowance of $77.1 million and $80.2 million, respectively, against our net deferred tax assets consisting primarily of net operatingloss carryforwards. In assessing the realizability of our deferred tax assets, we considered the four sources of taxable income. Because we have no carrybackability and have not identified any viable tax planning strategies, two of the sources are not available. Reversing taxable temporary differences have beenproperly considered as the deferred tax liabilities reverse in the same period as existing deferred tax assets. However, reversing the deferred tax liabilities isinsufficient to fully recover existing deferred tax assets. Our valuation allowance is net of deferred tax liabilities and there are no deferred tax assets orliabilities that have an indefinite reversal period. Therefore, future taxable income, the most subjective of the four sources, is the remaining source availablefor realization of our net deferred tax assets. We consider future taxable income and evaluate the need for a valuation allowance on a regular basis. The determination of recording or releasing taxvaluation allowances is made, in part, pursuant to an assessment regarding the likelihood that we will generate future taxable income against which benefitsof our deferred tax assets may be realized. This assessment requires us to exercise significant judgment and make estimates with respect to our ability togenerate revenues, gross profits, operating income and taxable income in future periods. Among other factors, we must make assumptions regarding overallbusiness and retail industry conditions, operating efficiencies, the competitive environment and changes in regulatory requirements which may impact ourability to generate taxable income and, in turn, realize the value of our deferred tax assets. Operating losses in some prior periods and significant economicuncertainties in the market have made the projection of future taxable income uncertain. Accordingly, we have a valuation allowance recorded against ourdeferred tax assets as it is not "more likely than not" that the assets will be realized. A change in our assessment of the likelihood that we will generate futuretaxable income may result in a full or partial release of the valuation allowance against our deferred tax assets in future periods.Impairment of long-lived assets We review property and equipment and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable. Recoverability is measured by comparison of the assets' carrying amount to future undiscounted net cash flowsthe assets are expected to generate. Cash flow forecasts are based on trends of historical performance and management's estimate of future performance, givingconsideration to existing and anticipated competitive and economic conditions. If such assets are considered to be impaired, the impairment to be recognizedis measured by the amount by which the carrying amount of the assets exceeds their fair values. There were no impairments to long-lived assets recordedduring the years ended December 31, 2010, 2009, and 2008.Valuation of goodwill Goodwill is not amortized, but must be tested for impairment at least annually. In accordance with this guidance, we test for impairment of goodwill inthe fourth quarter or when we deem that a triggering event has occurred. Goodwill totaled $2.8 million at December 31, 2010 and 2009.There were noimpairments to goodwill recorded during the years ended December 31, 2010, 2009, and 2008.Loss contingencies In the normal course of business, we are involved in legal proceedings and other potential loss contingencies. We accrue a liability for such matters whenit is probable that a loss has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be estimated, the mostprobable amount 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 inthe range is accrued. We expense legal fees as incurred.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."51 Table of ContentsComparison of Years Ended December 31, 2010 and 2009Executive 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 or incorporated in this report. This executive commentary includes forward-looking statements, andinvestors are cautioned to read the "Special Note Regarding Forward-Looking Statements" at the beginning of Item 2, "Management's Discussion andAnalysis of Financial Condition and Results of Operations." During the recessionary cycle, inflation has been very low or almost non-existent due to many factors, including central bank actions, globalcompetition, the balance between supply and demand and the ability of the supply chain to pass along cost increases. We believe inflation is starting toincrease and may be higher over the next several months as market economics rebalance. We also believe rising political turmoil in oil-producing countriesmay lead to increased energy costs near term. To protect against increased inflation, we are managing our finances conservatively and limiting investments tocritical and growth areas, such as systems development and supply chain efficiencies. On February 22, 2011, Google Inc. notified us that it was penalizing us in our natural search results for noncompliance with some of Google's naturalsearch guidelines. As a result, we have dropped significantly in some Google natural search result rankings. We believe this incident stemmed in part fromour practice of enabling university webmasters to provide discount links to faculty and students. Google has now made clear to us that it believes these linksshould not factor into the Google search algorithm. We understand Google's position and have made the appropriate changes to remain within Google'sguidelines. In fact, on February 10, 2011, we discontinued this program by notifying university webmasters and are working aggressively to get them eitherto pull-down links or make links no-follow links. Unfortunately, we cannot control how quickly university webmasters work. We believe that the Googlepenalty period may last between two to four weeks. We estimate that the lower Google natural search rankings may have as much as a 5% negative impact onour revenue during the penalty period. The key factors that affected financial results for the year ended December 31, 2010, were revenue growth, lower gross margin resulting from pricing andmarketing initiatives, expense management, and general improvement in Internet commerce. Revenues in 2010 increased by 24% compared to 2009. Our pricing and marketing initiatives drove improvement in several key components of revenuegrowth, including new customer growth, visits to our Website, conversion and average order size. Growth was broadly distributed across most of our majorproduct categories, and in both our direct and fulfillment partner business. Our direct business increased by 39%, and our fulfillment partner businessincreased by 21%. The direct business was 19% of total revenue in 2010 compared to 17% in 2009, while our fulfillment partner business generated 81% ofour total revenue compared to 83% in 2009. Revenue growth slowed over 2010 from 42% in Q1 to 8% in Q4. While this is partly explained by an increasing revenue growth pattern in 2009, we alsoexperienced softness during the holiday selling season that we believe was due in part to our decision to focus on contribution growth rather than revenuegrowth, (see discussion of the non-GAAP financial measure "contribution" below), particularly by not heavily promoting our BMMG and consumerelectronics categories, both of which are popular holiday categories that typically have lower gross margin.52 Table of Contents Gross margin fell by 140 basis points in 2010, although gross profit growth in 2010 was 15% compared to 14% in 2009. While we believe that pricinginitiatives had a positive effect on our revenue growth, they had the opposite effect on gross margin. This was offset somewhat by supply chain efficienciesresulting from initiatives focused on returns and fulfillment, and from a favorable sales mix shift this year away from BMMG and consumer electronics intohome and garden products. Sales and marketing expense as a percentage of revenue in 2010 fell 70 basis points to 5.6%. We believe that we used relatively effective advertisingcampaigns and maintained a disciplined approach to marketing expenditures, and that our pricing and other promotional activities were also effective ingenerating revenues. We believe that our primary focus of increasing contribution has been an important factor in improving our marketing efficiency. Although we made significant investments in 2010 through increases in IT, marketing and merchandising related personnel and through increasedcapital expenditures, technology and G&A expenses increased at a slower rate than contribution. Contribution growth was 17% in 2010, while combinedtechnology and G&A expenses increased by 13%. We intend to continue managing the business by focusing on contribution growth while controllingexpenses. Net income improved by $6.1 million in 2010 to $13.8 million, or $0.59 per fully diluted share, compared to $0.33 per diluted share in 2009. We retired $25.4 million face amount of our Senior Notes throughout the year, using $24.9 million of cash. As of December 31, 2010, $34.6 million faceamount of the Senior Notes remained outstanding and are a current liability at year-end. As a result, working capital decreased to $14.7 million at year-end. On February 1, 2011 our Board of Directors approved a $10 million increase to our previously-announced debt repurchase program. With this increasewe may repurchase up to $15 million of our outstanding Senior Notes. On February 7, 2011, we retired an additional $10.1 million of our outstanding SeniorNotes, reducing the balance outstanding to a face amount of $24.5 million. We experienced a $43.0 million year over year decrease in free cash flow (See "Non-GAAP Financial Measures" below for a reconciliation of Free CashFlow to net cash provided by operating activities), from $38.8 million in 2009 to ($4.2) million in 2010. This was due primarily to $13.2 million ofincremental capital expenditures in 2010 over 2009 and a $29.8 million decrease in operating cash flow due primarily to changes and timing differences ininventory, accounts payable and accrued liabilities that were partially offset by changes in net income, depreciation and amortization, and gains on the earlyretirement of our Senior Notes. 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.53 Table of ContentsResults of Operations The following table sets forth our results of operations expressed as a percentage of total revenue for 2010, 2009 and 2008:Revenue Total net revenue increased 24% to $1,090 million for the year ended December 31, 2010, from $877 million for the year ended December 31, 2009. Direct revenue increased 39% to $210 million in 2010 from $151 million in 2009, and fulfillment partner revenue increased 21% million to$880 million from $726 million. Total net revenue increased 8% to $349 million for the three months ended December 31, 2010, from $322 million for the three months endedDecember 31, 2009. Direct revenue increased 26% to $69.2 million for the three months ended December 31, 2010, from $55.1 million for the three monthsended December 31, 2009. Fulfillment partner revenue increased 5% to $280 million for the three months ended December 31, 2010, from $267 million forthe three months ended December 31, 2009. The shift of business between direct to fulfillment partner (or vice versa) is an economic decision based on the economics of each particular productoffering at the time and we do not have particular goals for "appropriate" mix or percentages for the size of either. We believe that the mix of the businessbetween direct and fulfillment partner is consistent with our strategic objectives for our54 Year ended December 31 2010 2009 2008 (as a percentageof total revenue) Revenue, net Direct 19.2% 17.2% 20.9% Fulfillment partner 80.8 82.8 79.1 Total net revenue 100.0 100.0 100.0 Cost of goods sold Direct 17.2 14.9 18.5 Fulfillment partner 65.4 66.3 64.1 Total cost of goods sold 82.6 81.2 82.6 Gross profit 17.4 18.8 17.4 Operating expenses: Sales and marketing 5.6 6.3 6.9 Technology 5.4 6.0 6.9 General and administrative 5.1 5.6 4.7 Restructuring (0.1) — — Total operating expenses 16.0 17.9 18.5 Operating income (loss) 1.4 0.9 (1.1)Interest income — — 0.4 Interest expense (0.3) (0.4) (0.4)Other income (expense), net 0.2 0.4 (0.2) Net income (loss) before income taxes 1.3 0.9 (1.3) Provision for income taxes — — — Net income (loss) 1.3% 0.9% (1.3)% Table of Contentsbusiness model in the current economic environment and we do not currently foresee any material shifts in mix. Total revenues from Auctions, Cars and Real Estate businesses were $2.9 million and $2.1 million for the years ended December 31, 2010 and 2009,respectively. Total revenues from International sales were $9.4 million and $5.1 million for the years ended December 31, 2010 and 2009, respectively. See "Executive Commentary" above for additional discussion regarding revenue and revenue growth.Gross profit Our overall gross margins fluctuate based on our sales volume mix between our direct business and fulfillment partner business; changes in vendor and /or customer pricing, including competitive pricing, and inventory management decisions within the direct business; sales coupons and promotions; productmix of sales; and operational and fulfillment costs. Gross margins for the past eight quarterly periods and years ending December 31, 2010 and 2009 were: Direct Gross Profit and Gross Margin—Gross profit for our direct business increased 12.5% to $22.5 million for the year ended December 31, 2010, from$20.0 million for 2009. Gross margin for the direct business decreased to 10.7% for the year ended December 31, 2010, from 13.3% 2009. The decrease ingross margin for the year ended December 31, 2010 is primarily due to pricing initiatives that were implemented beginning in the third quarter of 2009 andan increase in returns related costs, partially offset by leverage gained on fixed warehousing costs due to increased revenues. Gross profit for our directbusiness was essentially unchanged at $6.3 million for the three months December 31, 2010, and $6.6 million for the same period in 2009. Gross margin forthe direct business decreased to 9.0% for the three months ended December 31, 2010, from 11.9% for the same period in 2009. The decrease in gross marginfor three months ended December 31, 2010 is primarily due to pricing initiatives including holiday promotions and mark-downs of slow-moving inventory(primarily on apparel and shoes), partially offset by a shift in sales mix to higher margin products along with leverage gained on fixed warehousing costs dueto increased revenues. Fulfillment Partner Gross Profit and Gross Margin—Gross profit for our fulfillment partner business increased 15.5% to $167.1 million for the year endedDecember 31, 2010, from $144.7 million for 2009. Gross margin for the fulfillment partner business decreased to 19.0% for the year ended December 31,2010, from 19.9% for 2009. The decrease in gross margin for the year ended December 31, 2010 is primarily due to pricing initiatives that were implementedbeginning in the third quarter of 2009, partially offset by a shift in sales mix to higher margin products as well as lower returns-related costs. Gross profit forour fulfillment partner business increased 9.7% to $53.2 million for the three months ended December 31, 2010, compared to $48.5 million for the sameperiod in 2009. Gross margin for the fulfillment partner business increased to 19.0% for the three months ended December 31, 2010 compared to 18.1% forthe same period in 2009. The increase in gross margin was primarily due to a reduction in product costs, including reductions from suppliers participating inpromotions, along with a shift in sales mix to higher margin products, partially offset by pricing initiatives. During reviews of our partner billing system for returns, we discovered that we had underbilled our fulfillment partners for certain fees and chargesrelated to returns of approximately $819,000 and55 Q1 2010 Q2 2010 Q3 2010 Q4 2010 FY 2010 Q1 2009 Q2 2009 Q3 2009 Q4 2009 FY 2009 Direct 13.8% 11.7% 9.1% 9.0% 10.7% 12.9% 18.0% 11.8% 11.9% 13.3%Fulfillment Partner 18.8% 19.4% 18.7% 19.0% 19.0% 21.0% 21.3% 20.7% 18.1% 19.9%Combined 17.9% 18.0% 16.9% 17.0% 17.4% 19.5% 20.7% 19.3% 17.1% 18.8% Table of Contents$1.6 million for the years ended December 31, 2010 and 2009, respectively. Since our business model is reliant on our relationships with our fulfillmentpartners and the problem related to an internal record keeping issue on our part, we have made the determination to not seek recovery of these amounts fromour fulfillment partners and consequently have not recognized any related recoveries in our consolidated financial statements. The other factors described above, did not have a significant effect on the change in gross profit. Cost of goods sold includes stock-based compensation expense of $212,000 and $167,000 for the years ended December 31, 2010 and 2009,respectively. 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. 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, 2010. See "Gross profit" above for additional discussion.Operating expensesSales and marketing expenses We advertise through a number of targeted online marketing channels, such as sponsored search, affiliate marketing, portal advertising, e-mailcampaigns, and other initiatives. We also use nationwide television, print and radio advertising campaigns to promote sales. Sales and marketing expenses totaled $61.3 million and $55.5 million for the years ended December 31, 2010 and 2009, respectively, representing 5.6%and 6.3% of total net revenue for those56 Year ended December 31, 2010 2009 Total net revenue $1,089,873 100%$876,769 100% Cost of goods sold Product costs and other cost of goods sold 842,064 78% 664,537 76% Fulfillment and related costs 58,169 5% 47,480 5% Total cost of goods sold 900,233 83% 712,017 81% Gross profit $189,640 17%$164,752 19% Table of Contentsrespective periods. The decrease in sales and marketing costs as a percentage of total net revenue was primarily due to more efficient marketing spending. Sales and marketing expenses also include stock-based compensation expense of $608,000 and $634,000 for the years ended December 31, 2010 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 technology, including web services, customer support solutions, website search, and expansion of new and existingproduct categories, as well as continuing to enhance the customer experience, improving our process efficiency and supporting our logistics infrastructure. Technology expenses totaled $58.3 million and $52.3 million for the years ended December 31, 2010 and 2009, respectively, representing 5.4% and6.0% of total net revenue for those respective periods. The $5.9 million increase is primarily due to a $6.5 million increase in salaries and benefits expense(primarily due to increases in staffing), and a $1.5 million increase in depreciation expense as result of investments in information technology assets in 2010,partially offset by a $1.4 million decrease in bonus expense in 2010 as a result of lower than expected financial performance for the year ended December 31,2010. Technology expenses include stock-based compensation expense of $1.1 million and $961,000 for the years ended December 31, 2010 and 2009,respectivelyGeneral and administrative expenses General and administrative ("G&A") expenses totaled $55.7 million and $48.9 million for the years ended December 31, 2010 and 2009, respectively,representing approximately 5.1% and 5.6% of total net revenue for those respective periods. The $6.7 million increase is due to a $5.1 million increase insalaries and benefits expense (primarily due to increases in staffing), a $2.3 million increase in professional service fees for our external auditors and a$2.0 million increase in legal fees, partially offset by a $3.2 million decrease in bonus expense in 2010 as a result of lower than expected financialperformance for the year ended December 31, 2010. The increase in legal fees primarily resulted from a $2.6 million reduction in payments received from thesettlement of legal matters during 2010 compared to 2009. We recognized a reduction in G&A expenses of $4.5 million and $7.1 million during the yearsended December 31, 2010 and 2009, respectively, related to the settlement of legal matters. General and administrative expenses include stock-based compensation expense of approximately $3.2 million and $3.0 million for the years endedDecember 31, 2010 and 2009, respectively.Restructuring There were no restructuring charges during the years ended December 31, 2010 and 2009. We reversed $569,000 of lease termination costs liabilityduring the year ended December 31, 2010 due to changes in our estimate of sublease income, primarily as a result of our entering into agreements with asublessee to terminate the subleases and have us re-occupy a portion of the space previously abandoned, due to our growth and need for additional space.During the year ended December 31, 2009, we reversed $66,000 of lease termination costs liability due to changes in our estimate of sublease income,primarily as a result of entering into a sublease agreement for previously vacant space (see Item 15 of Part IV, "Financial Statements"—Note 3—"Restructuring Expense").57 Table of ContentsOperating Expenses Overall, our total operating expenses increased 11.5% to $174.7 million for the year ended December 31, 2010 from $156.7 million for the year endedDecember 31, 2009, while total net revenues increased 24.3% and gross profit increased 15.1%.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 Interest income is primarily derived from the investment of our cash in cash equivalents and short-term investments. Interest income for the years endedDecember 31, 2010 and 2009 totaled $157,000 and $170,000, respectively.Interest expense Interest expense is related to interest incurred on our Senior Notes, our finance obligations and our capital leases. Interest expense for the year endedDecember 31, 2010 and 2009 totaled $3.0 million and $3.5 million, respectively. The decrease in interest expense is primarily a result of extinguishments oflong-term debt.Other income, net Other income, net for the years ended December 31, 2010 and 2009 totaled $2.1 million and $3.3 million, respectively. The decrease was primarily dueto lower gains on extinguishment of long-term debt, partially offset by an increase in gift card breakage income for the year ended December 31, 2010.Income taxes Our provision for income taxes for the years ended December 31, 2010 and 2009 of $359,000 and $257,000 is for federal alternative minimum tax andcertain income tax uncertainties, including interest and penalties. As of December 31, 2010 and December 31, 2009 we had federal net operating loss carryforwards of approximately $166.7 million and $180.9 million, respectively, and state net operating loss carry forwards of approximately $150.7 million and$165.0 million, respectively, which may be used to offset future taxable income. We may have experienced ownership changes under Internal Revenue CodeSection 382 that may limit our ability to fully use our net operating losses. Our net operating loss carryforwards will begin to expire in 2018.58 Year ended December 31, 2010 2009 Cost of goods sold—direct $1,179 $1,264 Technology 12,489 10,943 General and administrative 912 676 Total depreciation and amortization, including internal-usesoftware and website development $14,580 $12,883 Table of ContentsSeasonality 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 affect our results of operations in the future. The followingtable reflects our total net revenues for each of the quarters in 2010 and 2009 (in thousands):Comparison of Years Ended December 31, 2009 and 2008Executive 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 or incorporated in this report. This executive commentary includes forward-looking statements, andinvestors are cautioned to read the "Special Note Regarding Forward-Looking Statements" at the beginning of Item 2, "Management's Discussion andAnalysis of Financial Condition and Results of Operations." 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 continued 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 generated over 80% of our revenue. Our direct business, which accounted for over 40% oftotal 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 by only 2%. This operating leverage helped result in our firstprofitable 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.59 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter 2010 $264,330 $231,253 $245,420 $348,870 2009 185,729 174,898 193,783 322,359 Table of Contents 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.Revenue Total net revenue increased 6% to $876.8 million for the year ended December 31, 2009, from $829.9 million for the year ended December 31, 2008. Direct revenue decreased 13% to $150.9 million in 2009 from $173.7 million in 2008, and fulfillment partner revenue increased 11% to $725.9 millionfrom $656.2 million. Total net revenue increased 27% to $322.4 million for the three month period ended December 31, 2009, from $253.8 million for the three month periodended December 31, 2008. Direct revenue increased 14% to $55.1 million from $48.2 million. Fulfillment partner revenue increased 30% to $267.3 millionfor the three month period ended December 31, 2009 from $205.6 million for the three month period ended December 31, 2008. Total revenues from Auctions, Cars and Real Estate businesses were $2.1 million and $1.0 million for the years ended December 31, 2009 and 2008,respectively. Total revenues from International sales were $5.1 million and $1.3 million for the years ended December 31, 2009 and 2008, 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 to 18.8% in 2009 from 17.4% in 2008, and gross profit was $164.8 million and $144.2 million, respectively, a14% increase. For the three month periods ended December 31, gross margin increased to 17.1% in 2009 from 16.5% in 2008, an increase of 60 basis points,and gross profit increased to $55.0 million from $42.0 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 years ending December 31, 2009 and 2008 were:60 Q1 2009 Q2 2009 Q3 2009 Q4 2009 FY 2009 Q1 2008 Q2 2008 Q3 2008 Q4 2008 FY 2008 Direct 12.9% 18.0% 11.8% 11.9% 13.3% 13.5% 12.5% 10.4% 8.8% 11.4%Fulfillment Partner 21.0% 21.3% 20.7% 18.1% 19.9% 18.4% 19.7% 19.7% 18.3% 19.0%Combined 19.5% 20.7% 19.3% 17.1% 18.8% 17.2% 18.2% 18.0% 16.5% 17.4% Table of Contents 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. 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 $1.6 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 $167,000 and $198,000 for the years ended December 31, 2009 and 2008,respectively. Direct Gross Profit—Gross profit for our direct business increased 2% to $20.0 million for the year ended December 31, 2009, from $19.7 million for theyear ended December 31, 2008, and gross margin increased to 13.3% from 11.4%. For the three month periods ended December 31, gross profit increased53% to $6.6 million in 2009 from $4.3 million in 2008, and gross margin increased to 11.9% from 8.8%. Fulfillment Partner Gross Profit—Our fulfillment partner business generated gross profit of $144.7 million and $124.5 million for the years endedDecember 31, 2009 and 2008, respectively, an increase of 16%, and gross margin increased to 19.9% from 19.0%. For the three month periods endedDecember 31, gross profit increased 29% to gross profit of $48.5 million in 2009 from $37.7 million in 2008, and gross margin decreased to 18.1% from18.3%. 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.61 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 expensesSales and marketing expenses We direct customers to our Website primarily through a number of targeted online marketing channels, such as sponsored search, affiliate marketing,portal advertising, e-mail campaigns, and other initiatives. We also use nationwide television, print and radio advertising campaigns to promote sales. Sales and marketing expenses totaled $55.5 million and $57.7 million for the years ended December 31, 2009 and 2008, respectively, representing 6.3%and 6.9% 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 $634,000 and $347,000 for the years ended December 31, 2009 and2008, 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, and expansion of new and existingproduct categories, as well as continuing to enhance the customer experience, improving our process efficiency and supporting our logistics infrastructure. Technology expenses totaled $52.3 million and $56.7 million for the years ended December 31, 2009 and 2008, representing 6.0% and 6.9% of revenuefor those periods, respectively. Technology expenses decreased 8% primarily due to decreased depreciation expense of approximately $10.2 million62 Year ended December 31, 2009 2008 Total net revenue $876,769 100%$829,850 100% Cost of goods sold Product costs and other cost of goods sold 664,537 76% 638,368 77% Fulfillment and related costs 47,480 5% 47,246 6% Total cost of goods sold 712,017 81% 685,614 83% Gross profit $164,752 19%$144,236 17% Table of Contentsfor related technology equipment and software development as more items were fully depreciated. This decrease was partially offset by an increase incompensation of approximately $7.2 million related to an increase in technology staff and an increase in annual bonus expense of $1.4 million for the yearended December 31, 2009 due to improved company financial performance. Technology expenses include stock-based compensation expense of $961,000 and $870,000 for the years ended December 31, 2009 and 2008,respectively.General and administrative expenses For the years ended December 31, 2009 and 2008, general and administrative ("G&A") expenses totaled $48.9 million and $39.3 million, representing5.6% and 4.7% of total revenue for those periods, respectively. The $9.6 million or 24% increase in G&A expenses, is primarily due to an increase incompensation expense of approximately $6.0 million related to an increase in general and administrative staff, an increase 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's chief 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&A expenses is also related to additionalfacilities 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 endedDecember 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 thesettlement of legal matters. General and administrative expenses include stock-based compensation expense of approximately $3.0 million and $2.2 million for the years endedDecember 31, 2009 and 2008, respectively.Restructuring Under the restructuring program, we recorded $12.3 million of restructuring charges for the year ended December 31, 2007. There were no restructuringcharges during the years ended December 31, 2009 and 2008 and we reversed approximately $66,000 and $299,000 of the lease termination costs liabilityduring the years ended December 31, 2009 and 2008, respectively, due to changes in the estimate of sublease income. (see Item 15 of Part IV, "FinancialStatements"—Note 3—"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 interest income to $170,000 for the year endedDecember 31, 2009 from $3.2 million for63 Year ended December 31, 2009 2008 Cost of goods sold—direct $1,264 $1,674 Technology 10,943 21,140 General and administrative 676 154 Total depreciation and amortization, including internal-usesoftware and website development $12,883 $22,968 Table of Contentsthe year ended December 31, 2008, is due to a decrease in total cash, lower interest rates and the settlement of notes receivable related to our travel. Interestexpense is largely related to interest incurred on our Senior Notes, and to a lesser extent our capital lease obligations. Interest expense for the years endedDecember 31, 2009 and 2008 totaled $3.5 million and $3.6 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 early extinguishment of a portion of our3.75% Convertible Senior Notes ("Senior Notes"). For the year ended December 31, 2009, 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. 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 17—"Stockand Debt Repurchase Program"), a $3.9 million loss on the settlement of notes receivable and a $300,000 other-than-temporary impairment of marketablesecurities.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. We agreed to the reduced amount for the notesdue to concern regarding the financial viability of the entity holding the notes, as a result of the impact of the economic downturn on the travel industry thatbegan during the 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, 2009 and 2008, we had net operating loss carry forwards of approximately $180.9 million and $182.0 million and state net operating losscarry-forwards of approximately $150.7 million and $145.8 million, respectively, which may be used to offset future taxable income. We may haveexperienced ownership changes under Internal Revenue Code Section 382 that may limit our ability to fully use our net operating losses.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 affect our results of operations in the future. The followingtable reflects our total net revenues for each of the quarters for 2009 and 2008 (in thousands):64 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter 2009 $185,729 $174,898 $193,783 $322,359 2008 201,800 188,202 186,007 253,841 Table of ContentsComparison of Years Ended December 31, 2010 and 2009Historical 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 our convertible senior notes in a transaction exempt from registration under the Securities Act. During 2006, we received$64.4 million from two stock offerings in 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. At December 31, 2010, our cash andcash equivalents balance was $124.0 million. Cash flow information is as follows:Free Cash Flow "Free Cash Flow" (a non-GAAP measure) for the years ended December 31, 2010, 2009 and 2008, was $(4.2) million, $38.8 million and $(12.3) 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, 2010 and 2009, our operating activities resulted in net cash inflows of $16.3 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 and accounts payable balances typically reach their highest level (other than as a result of cash flows provided by or used in investing65 Year ended December 31 2010 2009 2008 Cash provided by (used in): Operating activities $16,322 $46,117 $6,444 Investing activities (22,700) 2,868 19,533 Financing activities (9,358) (5,685) (22,327) Table of Contentsand financing activities). However, our accounts payable balance normally declines during the first three months following year-end, which normally resultsin a decline in our cash and cash equivalents balances from the year-end balance. The seasonality of our business causes payables and accruals to growsignificantly in the fourth quarter, and then decrease in the first quarter when they are paid. The $16.3 million of net cash provided by operating activities during the year ended December 31, 2010 was primarily due to positive net income of$13.9 million for the year ended December 31, 2010. Net cash was also provided by increases of deferred revenue of $3.4 million primarily due to our launchof our Club O loyalty program. The cash inflows were offset by cash outflows of $8.7 million due to an increase in inventory and $9.3 million due to adecrease in accounts payable. The increase in inventory was a result of increased purchases of inventory to meet holiday sales demand and support growth inthe business. The decrease in accounts payable balance is due to increased and earlier sales and holiday shipments resulting in increased payments tosuppliers prior to year-end when compared to the same period in 2009. 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. The 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 at that time.Cash (used in) provided by investing activities Cash provided by investing activities corresponds with purchases, sales, and maturities of marketable securities and cash expenditures for fixed assets,including internal-use software and website development costs. For the years ended December 31, 2010 and 2009, investing activities resulted in net cashoutflows of $22.7 million and net cash inflows of $2.9 million, respectively. The $22.7 million used in investing activities during the year ended December 31, 2010 resulted primarily from expenditures for fixed assets of$20.5 million, which largely consisted of software and hardware purchases for our data warehouse and other data storage infrastructure in order to support ourgrowth, and a $1.7 million investment in precious metals in an effort to diversify our investments. 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,partially offset by capital expenditures of $7.3 million.Cash used in financing activities For the years ended December 31, 2010 and 2009, financing activities resulted in net cash outflows of $9.4 million and $5.7 million, respectively.66 Table of Contents Financing activities for the year ended December 31, 2010 resulted in net cash outflows of $9.4 million primarily from $24.9 million used for retirementof long-term debt, partially offset by $16.4 million in proceeds from finance obligations (which were primarily used for retirement of long-term debt) and$1.5 million in proceeds from the exercise of stock options. Financing activities for the year ended December 31, 2009 resulted in cash outflows of $5.7 million primarily for the retirement of long-term debt.Redeemable 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. On August 31, 2009, we entered into a Tolling and Standstill Agreement (the "Tolling Agreement") with the Overstock.com, Inc. Employee BenefitsCommittee (the "Committee") relating to the 401(k) plan. We entered into the Tolling Agreement in order to preserve certain rights, if any, of planparticipants who acquired shares of Overstock common stock in the plan between July 1, 2008 and June 30, 2009. In August 2010, we made a registeredrescission offer to affected participants in the plan who acquired shares of Overstock common stock during the Purchase Period. The rescission offer appliedto shares purchased during the Purchase Period at prices ranging from $6.77 per share to $21.17 per share. On October 6, 2010, our rescission offer expired. Asa result of the offer, we repurchased 1,202 shares of common stock for $26,000. On October 14, 2010 we terminated the Tolling Agreement. As a result of thetermination of the Tolling Agreement, we reclassified 17,763 shares or $260,000 of common stock from temporary to permanent equity due to the expirationof potential rescission rights. The remaining redeemable shares will be reclassified into permanent equity upon the expiration of potential rescission rightsassociated with those common shares. At December 31, 2010 and 2009 approximately 46,000 shares or $570,000 and 65,000 shares or $744,000 of ourcommon stock plus interest were classified outside stockholders' equity, respectively.Stock and Debt Repurchase Program On February 17, 2009, the Board of Directors approved a debt repurchase program that authorized us to use up to $20.0 million in cash to repurchase aportion of our 3.75% Senior Convertible Notes due 2011 ("Senior Notes"). On September 21, 2010, the Board of Directors approved a $15.0 million increaseto our existing debt repurchase program. Under this repurchase program, we retired $25.4 million of the Senior Notes during the year ended December 31,2010 for $24.9 million in cash, resulting in a gain of $346,000 on early extinguishment of debt, net of $158,000 of associated unamortized discount at anapproximate 5% yield to maturity. (see Item 1 of Part I, "Financial Statements"—Note 17—"Stock and Debt Repurchase Program"). We retired $7.4 million ofthe Senior Notes during the year ended December 31, 2009 for $4.6 million in cash, resulting in a gain of $2.8 million on early extinguishment of debt, net of$92,000 of associated unamortized discount at an approximate 23% yield to maturity. As of December 31, 2010 and December 31, 2009, $34.5 million and$59.5 million of the Senior Notes, net of debt discount remained outstanding, respectively. On February 1, 2011 our Board of Directors approved a $10 million increase to our previously-announced debt repurchase program. With this increasewe may repurchase up to $15 million of our67 Table of Contentsoutstanding Senior Notes. On February 7, 2011, we retired an additional $10.1 million of our outstanding Senior Notes reducing the balance outstanding to aface amount of $24.5 million. During the years ended December 31, 2010 and 2009, we withheld from vesting restricted stock awards a total of 63,404 and 36,081 shares of ourcommon stock for $825,000 and $340,000, respectively. The shares withheld represented the minimum tax withholdings upon the vesting of those restrictedstock award grants to satisfy the minimum tax withholdings owed by the grantee of the restricted stock award grant. None of these shares were repurchased inthe open market.Contractual obligations and commitments The following table summarizes our contractual obligations as of December 31, 2010 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 of purchase orders we hadoutstanding at December 31, 2010. Under different assumptions regarding our rights to cancel our purchase orders or different assumptions regarding theenforceability of the purchase orders under applicable law, the amount of purchase obligations shown in the table above would be less.Tax Contingencies Our contractual obligations presented above exclude unrecognized tax contingencies, including interest and penalties, of $244,000 for which we cannotmake a reasonably reliable estimate of the amount and period of payment. For further information regarding the application of ASC 740-10-5, see theinformation set forth under Item 15 of Part IV, "Financial Statements—Note 21—Income Taxes," contained in the "Notes to Consolidated FinancialStatements" of this Annual Report on Form 10-K.68 Payments Due by Period Contractual Obligations 2011 2012 2013 2014 2015 Thereafter Total Senior Notes $34,625 $— $— $— $— $— $34,625 Interest on Senior Notes 1,298 — — — — — 1,298 Finance obligations 3,922 4,163 4,431 3,625 — — 16,141 Interest on finance obligations 873 621 353 79 — — 1,926 Capital lease obligations 798 116 4 — — — 918 Operating leases 8,743 8,221 7,552 7,750 6,164 1,346 39,776 Purchase obligations 13,921 27 — — — — 13,948 Line of credit — — — — — — — Total contractual cash obligations $64,180 $13,148 $12,340 $11,454 $6,164 $1,346 $108,632 Amounts of Commitment Expiration Per Period Other Commercial Commitments 2011 2012 2013 2014 2015 Thereafter Total Letters of credit $2,435 $— $— $— $— $— $2,435 Table of ContentsBorrowingsWells Fargo Credit Agreement. Prior to December 23, 2009, we had a credit agreement (the "Wells Fargo Credit Agreement") with Wells Fargo Bank, National Association ("WellsFargo"). The Wells Fargo Credit Agreement provided a revolving line of credit to us of up to $30.0 million which we used primarily to obtain letters of creditto support inventory purchases. On December 23, 2009, we terminated the Wells Fargo Credit Agreement, subject to provisions relating to outstanding letters of credit issued by WellsFargo for our account and other transitional provisions. On December 31, 2009, per the provisions relating to the outstanding letters of credit, the letters ofcredit issued by Wells Fargo expired on December 31, 2009, and were replaced by letters of credit issued by U.S. Bank National Association ("U.S. Bank") onbehalf 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 WellsFargo Retail Finance, LLC ("WFRF"). On August 3, 2009, we terminated the WFRF Agreement.Wells Fargo Commercial Purchasing Card Agreement Prior to January 1, 2010, we had a commercial purchasing card agreement (the "WF Purchasing Card") with Wells Fargo. The WF Purchasing Cardexpired on January 1, 2010.U.S. Bank Financing Agreements We entered into (i) a Financing Agreement dated December 22, 2009 (the "Financing Agreement") with U.S. Bank, and (ii) a Security Agreement datedDecember 22, 2009 with U.S. Bank (the "Security Agreement") and related agreements described in the Financing Agreement and/or Security Agreement. TheFinancing Agreement replaced the former credit agreement with Wells Fargo. The Financing Agreement provides for revolving loans and other financial accommodations to or for our benefit of (i) up to $10 million for cash-collateralized advances, and (ii) up to $10 million for advances supported by the Company's non-cash collateral. The maximum credit potentially availableunder the revolving facility is $20 million. Our obligations under the Financing Agreement and all related agreements are secured by all or substantially allof our assets, excluding our interest in certain litigation. Subject to certain exceptions, the full amount of the revolving facility is expected to be available tous 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 is subjectto 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 Financing Agreement defined fixed charges coverage ratio of at least 1.10 to 1.00 as of the end of any fiscal quarter for theperiod 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, as availability would then depend, in part, on the Borrowing Base (as defined in the Financing Agreement). TheFinancing Agreement and the credit facility terminate on October 2, 2011. 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 letters69 Table of Contentsof credit, or (b) Libor plus 2.5% for non cash- collateralized advances. The default rate of interest is 2.0% per annum over the otherwise applicable interestrate. An unused line fee of 0.375% is payable monthly on the unused portion of the $10 million facility available for non cash-collateralized advances. The Financing Agreement includes affirmative covenants and 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 0.75% of the non cash-collateralized portion of the facility is payable by us if we terminate the facilityprior to its stated termination date. No amounts were outstanding under the Financing Agreement at December 31, 2010 and 2009, and letters of credit totaling $2.4 million and$2.6 million, respectively, were issued on our behalf and collateralized by compensating cash balances held at U.S. Bank, which are included in Restrictedcash in the accompanying consolidated balance sheets. On September 17, 2010 we entered into a Master Lease Agreement and a Financial Covenants Rider (collectively, the "Master Lease Agreement") withU.S. Bancorp Equipment Finance, Inc.-Technology Finance Group ("Lessor"), an affiliate of U.S. Bank. Under the Master Lease Agreement we entered intofour separate leases, pursuant to which we sold certain information technology hardware (the "IT Assets") to Lessor, which were simultaneously leased backfor a period of 48 months and financed certain software licenses for a period of 48 months for proceeds totaling approximately $16.4 million. We also enteredinto two additional leases; whereby we leased $599,000 in IT Assets and financed certain software licenses for a period of 48 months directly from the Lessor.We have the right to repurchase the IT Assets at the end of the 48-month term for $1.00. In addition, we have the right to repurchase the IT Assets andterminate the Master lease Agreement twelve months following the initial term, or under certain situations where there is a change in control where the Lessorsells substantially all of its assets, or another entity acquires more than 25% of the ownership interests of Lessor or Lessor's parent. Payments on the MasterLease Agreement are due monthly. The weighted average effective interest rate under the Master Lease Agreement is 6.25%. We have accounted for theMaster Lease Agreement as a financing transaction and amounts owed are included in Finance Obligations, current and non-current in the consolidatedbalance sheets. We recorded no gain or loss as a result of this transaction. The Master Lease Agreement requires us to maintain a minimum Total Fixed Charge Coverage annualized ratio of at least 1.20:1.00, based on operatingresults, measured at the end of each fiscal quarter. "Total Fixed Charge Coverage" is defined as our EBITDAR (which is defined to mean earnings beforeinterest expense, tax expense or benefit, depreciation expense, amortization expense and rent (defined as payments for real property leases and otheroperating leases)) less the aggregate70 Table of Contentsamount of federal, state, local and/or foreign income taxes accrued less declared dividends less 50% of depreciation expense divided by our (rental expenseplus interest expense plus required principal payments including capitalized leases on a trailing twelve-month basis). The Master Lease Agreement, in connection with the US Bank Financing Agreement, also requires us to maintain minimum liquidity (defined as cashplus marketable securities) of $30.0 million in the aggregate (which amount includes any minimum liquidity required under the Financing) at all times ondeposit with U.S. Bank until all amounts owed under the Master Lease Agreement are paid in full, but provides that we are permitted to withdraw the funds ondeposit with U.S. Bank at the our discretion, although our failure to maintain minimum liquidity of $30.0 million would be an Event of Default under theMaster Lease Agreement. As of December 31, 2010, we had $30.0 million in compensating cash balances held at U.S. Bank.U.S. Bank Purchasing Card Agreement We have a commercial purchasing card agreement (the "Purchasing Card") with U.S. Bank. We use the Purchasing Card for business purpose purchasingand must pay it in full each month. At December 31, 2010 and December 31, 2009, $2.7 million and $0 was outstanding and $2.3 million and $5.0 millionwas available under the Purchasing Card, respectively.3.75% Convertible Senior Notes 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 debt issuance costs are being amortized using thestraight-line method which approximates the interest method. We recorded amortization of discount and debt issuance costs related to this offering totaling$228,000, $331,000 and $334,000 during the years ended December 31, 2010, 2009 and 2008, respectively. Interest on the Senior Notes is payable semi-annually on June 1 and December 1 of each year. The Senior Notes mature on December 1, 2011 and are unsecured and rank equally in right of payment withall existing and future unsecured, unsubordinated debt and senior in right of payment to any existing and future subordinated indebtedness. The Senior Notes are convertible at any time prior to maturity into our common stock at the option of the note holders at a conversion price of $76.23 pershare or approximately 454,000 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 the occurrence of a fundamentalchange (including the acquisition of a majority interest in us, certain changes in our board of directors or the termination of trading of our stock) meetingcertain conditions, holders of the Senior Notes may require us to repurchase for cash all or part of their notes at 100% of the principal amount plus accruedand unpaid interest. At present we do not have any plan to redeem the outstanding Senior Notes in accordance with their redemption provisions but we may acquireadditional Senior Notes in future open market or privately negotiated purchases. To the extent the Senior Notes remain outstanding at maturity, we intend topay them at maturity either with proceeds from operations or from financing activities. 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.71 Table of Contents Under the repurchase program discussed above, we retired $25.4 million of the Senior Notes during year ended December 31, 2010 for $24.9 million incash, resulting in a gain of $346,000 on early extinguishment of debt, net of $158,000 of associated unamortized discount. We retired a total $7.4 million ofour Senior Notes during the year ended December 31, 2009 for $4.6 million in cash, resulting in a gain of $2.8 million, net of $92,000 amortization of debtdiscount (see Item 15 of Part IV, "Financial Statements"—Note 17—"Stock and Debt Repurchase Program"). As of December 31, 2010 and 2009, a faceamount of $34.6 million and $60.0 million of the Senior Notes remain outstanding with a carrying amount of $34.5 million and $59.5 million and $141,000and $528,000 of debt discount, respectively. On February 1, 2011 our Board of Directors approved a $10 million increase to our previously-announced debt repurchase program. With this increasewe may repurchase up to $15 million of our outstanding Senior Notes. On February 7, 2011, we retired an additional $10.1 million of our outstanding SeniorNotes, reducing the balance outstanding to a face amount of $24.5 million.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 of operations) consists of gross profit less sales andmarketing expense and reflects an additional way of viewing our results. Contribution Margin is Contribution as a percentage of revenues. When viewed withour GAAP gross profit less sales and marketing expenses, we believe Contribution and Contribution margin provides management and users of the financialstatements information about our ability to cover our fixed operating costs, such as technology and general and administrative expenses. Contribution andContribution Margin are used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to theexclusion of GAAP financial measures. You should review our financial statements and publicly-filed reports in their entirety and not rely on any singlefinancial measure. The material limitation associated with the use of Contribution is that it is an incomplete measure of profitability as it does not include alloperating expenses or non-operating income and expenses. Management compensates for these limitations when using this measure by looking at otherGAAP measures, such as operating income (loss) and net income (loss).72 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 viewed with our GAAPresults, provides a more complete understanding of factors and trends affecting our cash flows and liquidity. Free cash flow, which we reconcile to "Net cashprovided by (used in) operating activities", is cash flows from operations reduced by "Expenditures for fixed assets, including internal-use software andwebsite development." We believe that cash flows from operating activities is an important measure, since it includes both the cash impact of the continuingoperations of the business and changes in the balance sheet that impact cash. However, we believe free cash flow is a useful measure to evaluate our businesssince purchases of fixed assets are a necessary component of ongoing operations and free cash flow measures the amount of cash we have available for futureinvestment, debt retirement or other changes to our capital structure after we have paid all of our expenses. Therefore, we believe it is important to view freecash flow as a complement to our entire consolidated statements of cash flows as calculated below (in thousands):73 Year ended December 31, 2010 2009 2008 Total revenue $1,089,873 $876,769 $829,850 Cost of goods sold 900,233 712,017 685,614 Gross profit 189,640 164,752 144,236 Less: Sales and marketing expense 61,334 55,549 57,668 Contribution $128,306 $109,203 $86,568 Contribution margin 11.8% 12.5% 10.4% Year ended December 31, 2010 2009 2008 Net cash provided by operating activities $16,322 $46,117 $6,444 Expenditures for fixed assets, including internal-usesoftware and website development (20,511) (7,275) (18,707) Free cash flow $(4,189)$38,842 $(12,263) 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, 2010, we had $124.0 million in cash and cash equivalents. Hypothetically, an increase or decrease in interest rates of one hundred basispoints would have an estimated impact of $1.3 million on our earnings or loss, or the fair market value or cash flows of these instruments. At December 31, 2010, we had approximately a face amount of $34.6 million of convertible senior notes outstanding which bear interest at a fixed rate of3.75%. At December 31, 2010, there were no borrowings outstanding under our lines of credit and letters of credit totaling $2.4 million were outstandingunder our credit facilities. On February 1, 2011 our Board of Directors approved a $10 million increase to our previously-announced debt repurchase program. With this increasewe may repurchase up to $15 million of our outstanding Senior Notes. On February 7, 2011, we retired an additional $10.1 million of our outstanding SeniorNotes, reducing the balance outstanding to a face amount of $24.5 million. 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, 2010 was $33.2 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 None.74 Table of Contents ITEM 9A. CONTROLS AND PROCEDURES (a) 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"Act" or "Exchange Act"). The term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure thatinformation required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78a et seq.) is recorded, processed,summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under theAct is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performingsimilar functions, as appropriate to allow timely decisions regarding required disclosure. 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, 2010. 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 effective as of December 31, 2010, the end of the period covered by this Annual Report on Form 10-K.(b) 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. 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, 2010. 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"). Based on this assessment, management has concluded that, as ofDecember 31, 2010, our internal control over financial reporting was effective. The effectiveness of our internal control over financial reporting as of December 31, 2010 has been audited by KPMG LLP, an independent registeredpublic accounting firm, as stated in their report which is in Item 9A(c).75 Table of Contents(c) Independent Registered Public Accounting Firm's Report on Internal Control Over Financial ReportingReport of Independent Registered Public Accounting FirmThe Board of Directors and StockholdersOverstock.com, Inc.: We have audited Overstock.com, Inc.'s internal control over financial reporting as of December 31, 2010, 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(b)). Our responsibilityis to 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 over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performingsuch other procedures as we considered necessary in the circumstances. We believe that our audit 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. In our opinion, Overstock.com, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, basedon criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balancesheets of Overstock.com, Inc and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders' equityand comprehensive income , and cash flows for each of the years in the two-year period ended December 31, 2010, and our report dated February 28, 2011expressed an unqualified opinion on those consolidated financial statements./s/ KPMG LLPSalt Lake City, UtahFebruary 28, 201176 Table of Contents(d) Changes in Internal Control Over Financial Reporting During the quarter ended December 31, 2010, we implemented the following changes in our internal control over financial reporting that have materiallyaffected, or are reasonably likely to materially affect, our internal control over financial reporting:•Additional improvements to our information systems recommended by a consulting firm we engaged during the second quarter of 2010, asfollows, 1) implementing a post-deployment review process of information system changes, and 2) enhanced the review process to assess andapprove projects with financial impact. •Additional improvements to our systems and controls to provide assurance that they appropriately capture amounts to be paid to fulfillmentpartners or deducted from partner payments. This included automating two manual processes. ITEM 9B. OTHER INFORMATION None.77 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 will be included in our definitive proxy statement for our 2011 annual meeting of stockholders, and is incorporated herein by reference.Information relating to compliance with Section 16(a) of the 1934 Act will be set forth in our definitive proxy statement for our 2011 annual meeting ofstockholders and is incorporated herein by reference. We have adopted a Code of Business Conduct and Ethics ("Code"), which is applicable to all employees of the Company, including the principalexecutive officer, principal financial officer, and principal accounting officer. The Code includes provisions that are specifically applicable to our seniorfinancial officers. We intend to disclose any amendments to these provisions and any waivers from any of these provisions granted to our principal executiveofficer, principal financial officer or principal accounting officer on our Website, www.overstock.com. We will provide a copy of the relevant portion to anyperson without any charge upon request in writing addressed to Overstock.com. Attn: Investor Relations, 6350 South 3000 East, Salt Lake City, UT 84121. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to our definitive proxy statement for the 2011 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 2011 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 2011 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 2011 annual meeting of stockholders.78 Table of Contents PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 1. Financial Statements INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 2. Financial Statement Schedule Schedule II Valuation and Qualifying Accounts listed in (1) above is included herein. Schedules other than those listed above have been omitted as theyare 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.79Report 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-9Schedule II Valuation and Qualifying Accounts S-1 ExhibitNumber 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 (FileNo. 000-49799) filed on February 5, 2009). 4.1(b) Form of specimen common stock certificate. 4.2(b) Investor Right 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 agreement 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 Contents80 ExhibitNumber 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 (File No. 000-49799)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 (File No. 000-49799)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 (FileNo. 000-49799) filed on 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 (File No. 000-49799) filed onNovember 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 (File No. 000-49799) filed onNovember 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 (FileNo. 000-49799) filed on March 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 (File No. 000-49799) filed onNovember 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 (File No. 000-49799) 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-K(File No. 000-49799) filed May 7, 2004) 10.18 2005 Equity Incentive Plan (incorporated by reference to Appendix A to Overstock.com, Inc.'s definitiveproxy statement (File No. 000-49799) 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 (File No. 000-49799)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 (File No. 000-49799) 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 (File No. 000-49799) filed on December 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 (File No. 000-49799) dated January 5, 2009). Table of Contents81 ExhibitNumber Description of Document 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 (File No. 000-49799) 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 our Form 8-K (File No. 000-49799) filed August 3, 2009). 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 (File No. 000-49799) 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 (File No. 000-49799) 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 (File No. 000-49799) datedDecember 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 (File No. 000-49799) dated December 23, 2009). *10.29(c) Summary of unwritten compensation arrangements with Directors. 10.30 Master Lease Agreement and Financial Covenants Rider with U.S. Bancorp Equipment Finance, Inc.—Technology Finance Group dated as of September 17, 2010 (incorporated by reference to exhibit 10.1 to ourReport on Form 8-K (File No. 000-49799) dated September 31, 2010). 10.31 Consent and Waiver with U.S. Bank National Association dates as of September 17, 2010 (incorporated byreference to exhibit 10.2 to our Report on Form 8-K (File No. 000-49799) dated September 21, 2010). *21 Subsidiaries of the Registrant. *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 February 28, 2011. 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.82 OVERSTOCK.COM, INC. By: /s/ PATRICK M. BYRNEPatrick M. ByrneChief Executive OfficerSignature Title Date /s/ PATRICK M. BYRNEPatrick M. Byrne Chief Executive Officer (Principal ExecutiveOfficer), Chairman of the Board February 28, 2011/s/ STEPHEN J. CHESNUTStephen J. Chesnut Senior Vice President, Finance and RiskManagement (Principal Financial Officerand Principal Accounting Officer) February 28, 2011/s/ ALLISON H. ABRAHAMAllison H. Abraham Director February 28, 2011/s/ BARCLAY F. CORBUSBarclay F. Corbus Director February 28, 2011/s/ JOSEPH J. TABACCO, JR.Joseph J. Tabacco, Jr. Director February 28, 2011/s/ JOHN J. BYRNEJohn J. Byrne Director February 28, 2011/s/ SAMUEL A. MITCHELLSamuel A. Mitchell Director February 28, 2011 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-9Schedule II Valuation and Qualifying Accounts S-1 Table of ContentsReport of Independent Registered Public Accounting FirmThe Board of Directors and StockholdersOverstock.com, Inc.: We have audited the accompanying consolidated balance sheets of Overstock.com, Inc. and subsidiaries as of December 31, 2010 and 2009, and therelated consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the two-year periodended December 31, 2010. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II. Theseconsolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express anopinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits 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 auditsprovide 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, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the two-year period endedDecember 31, 2010, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, whenconsidered in relation to the basic consolidated 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, 2010, based on criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2011 expressed an unqualified opinion onthe effectiveness of the Company's internal control over financial reporting./s/ KPMG LLPSalt Lake City, UtahFebruary 28, 2011F-2 Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders of Overstock.com, Inc.: In our opinion, the consolidated statements of operations, stockholders' equity (deficit) and comprehensive income (loss) and cash flows for the yearended December 31, 2008 present fairly, in all material respects, the results of operations of Overstock.com, Inc. and its cash flows for the year endedDecember 31, 2008, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financialstatement schedule for the year ended December 31, 2008 presents fairly, in all material respects, the information set forth therein when read in conjunctionwith the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company'smanagement. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conductedour audit of these statements 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, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basisfor our opinion. As described in Note 3 to the consolidated financial statements included in the annual report on Form 10-K for the year ended December 31, 2009, thefinancial statements for 2008 have been restated for the correction of errors./s/ PricewaterhouseCoopers LLPSalt Lake City, UtahFebruary 3, 2009, except for Note 3 included in the Form 10-K for the year ended December 31, 2009, 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 31,2010 December 31,2009 Assets Current assets: Cash and cash equivalents $124,021 $139,757 Restricted cash 2,542 4,414 Accounts receivable, net 13,560 11,640 Inventories, net 32,114 23,375 Prepaid inventories, net 2,082 2,879 Prepaids and other assets 11,651 10,275 Total current assets 185,970 192,340 Fixed assets, net 27,800 20,618 Goodwill 2,784 2,784 Other long-term assets, net 1,405 758 Total assets $217,959 $216,500 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $67,311 $76,623 Accrued liabilities 40,751 43,296 Deferred revenue 24,027 20,665 Convertible senior notes, net of debt discount—$141 and $— 34,484 — Finance obligations, current 3,922 — Capital lease obligations, current 729 520 Total current liabilities 171,224 141,104 Capital lease obligations, non-current 113 806 Finance obligations, non-current 12,219 — Other long-term liabilities 3,175 3,580 Convertible senior notes, net of debt discount—$—and $528 — 59,466 Total liabilities 186,731 204,956 Commitments and contingencies (Note 14) Redeemable common stock, $0.0001 par value: Outstanding—46 and 65 570 744 Stockholders' equity: Preferred stock, $0.0001 par value: Authorized shares—5,000 Issued and outstanding shares—none — — Common stock, $0.0001 par value Authorized shares—100,000 Issued shares—25,877 and 25,583 Outstanding shares—23,015 and 22,776 2 2 Additional paid-in capital 349,747 343,040 Accumulated deficit (242,327) (256,056) Treasury stock: Shares at cost—2,862 and 2,807 (76,764) (76,186) Total stockholders' equity 30,658 10,800 Total liabilities and stockholders' equity $217,959 $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 2010 2009 2008 Revenue, net Direct $209,646 $150,901 $173,687 Fulfillment partner 880,227 725,868 656,163 Total net revenue 1,089,873 876,769 829,850 Cost of goods sold Direct(1) 187,124 130,890 153,967 Fulfillment partner 713,109 581,127 531,647 Total cost of goods sold 900,233 712,017 685,614 Gross profit 189,640 164,752 144,236 Operating expenses: Sales and marketing(1) 61,334 55,549 57,668 Technology(1) 58,260 52,336 56,677 General and administrative(1) 55,650 48,906 39,348 Restructuring (569) (66) (299) Total operating expenses 174,675 156,725 153,394 Operating income (loss) 14,965 8,027 (9,158)Interest income 157 170 3,163 Interest expense (2,962) (3,470) (3,565)Other income (expense), net 2,088 3,277 (1,446) Income (loss) before income taxes 14,248 8,004 (11,006) Provision for income taxes (359) (257) — Net income (loss) 13,889 7,747 (11,006) Deemed dividend related to redeemable common stock (112) (48) (77) Net income (loss) attributable to common shares $13,777 $7,699 $(11,083) Net income (loss) per common share—basic: Net income (loss) attributable to common shares—basic $0.60 $0.34 $(0.48)Weighted average common shares outstanding—basic 23,019 22,821 22,901 Net income (loss) per common share—diluted: Net income (loss) attributable to common shares—diluted $0.59 $0.33 $(0.48)Weighted average common shares outstanding—diluted 23,366 23,067 22,901 (1)Includes stock-based compensation as follows (Note 18):Cost of goods sold—direct $212 $167 $198 Sales and marketing 608 634 347 Technology 1,071 961 870 General and administrative 3,165 3,023 2,216 Total $5,056 $4,785 $3,631 Table of Contents Overstock.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 AccumulatedOtherComprehensiveIncome (loss) AdditionalPaid-inCapital AccumulatedDeficit Shares Amount Shares Amount Total 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 — — 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) matchingcontributions — — (41) — (2) 60 — 19 Issuance of redeemable common stock (Note 16) (155) — (2,386) — — — — (2,386)Lapse of rescission rights of redeemable stock(Note 16) 57 — 1,200 — — — — 1,200 Deemed dividend related to redeemable commonstock (Note 16) — — (77) — — — — (77)Comprehensive loss : Net loss — — — (11,006) — — — (11,006) Unrealized gain on marketable securities — — — — — — 48 48 Cumulative translation adjustment — — — — — — 94 94 Total comprehensive loss — — — — — — — (10,864) Balances at December 31, 2008 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) matchingcontributions — — — (470) (22) 824 — 354 Issuance of redeemable common stock (Note 16) (39) — (400) — — — — (400)Lapse of rescission rights of redeemable stock(Note 16) 72 — 967 — — — — 967 Deemed dividend related to redeemable commonstock (Note 16) — (48) — — — — (48)Comprehensive income : Net income — — — 7,747 — — — 7,747 Reclassification adjustment included in net income — — — — — — (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 Exercise of stock options 90 — 1,503 — — — 1,503 Stock-based compensation to employees anddirectors — — 5,056 — — — — 5,056 Common stock issued upon vesting of restrictedstock 185 — — — — — — — Purchase of treasury stock — — — — 63 (825) — (825)Treasury stock issued for 401(k) matchingcontributions — — — (160) (7) 247 — 87 Redeemable common stock repurchased underrescission offer 1 — — — (1) — — — Lapse of rescission rights of redeemable commonstock (Note 16) 18 — 260 — — — — 260 Deemed dividend related to redeemable commonstock (Note 16) — — (112) — — — — (112)Comprehensive income: Net income — — — 13,889 — — — 13,889 Total comprehensive income — — — — — — — 13,889 Balance at December 31, 2010 25,877 $2 $349,747 $(242,327) 2,862 $(76,764)$— $30,658 Table of Contents Overstock.com, Inc. Consolidated Statements of Cash Flows (in thousands) F-7 Year ended December 31 2010 2009 2008 Cash flows from operating activities: Net income (loss) $13,889 $7,747 $(11,006) Adjustments to reconcile net income (loss) to net cash provided by operatingactivities: Depreciation and amortization 14,580 12,883 22,968 Realized loss on marketable securities — 48 334 Loss on settlement of notes receivable — — 3,929 Loss on disposition of fixed assets — 183 140 Stock-based compensation to employees and directors 5,056 4,775 4,372 Stock-based compensation to consultants for services — 10 259 Stock-based compensation relating to performance share plan — — (1,000) Amortization of debt discount 391 331 334 Gain from early extinguishment of debt (346) (2,810) (2,849) Restructuring reversals (569) (66) (299) Notes receivable accretion — — (545) Changes in operating assets and liabilities: Restricted cash 1,872 (152) 4,372 Accounts receivable, net (1,920) (4,540) 4,654 Inventories, net (8,739) 1,344 3,790 Prepaid inventories, net 797 (2,118) 2,177 Prepaids and other assets 368 (604) (2,027) Other long-term assets, net (215) (120) (516) Accounts payable (9,315) 18,642 (10,774) Accrued liabilities (2,575) 9,131 (7,636) Deferred revenue 3,362 1,433 (3,733) Other long-term liabilities (314) — (500) Net cash provided by operating activities 16,322 46,117 6,444 Cash flows from investing activities: Purchases of marketable securities (136) — (35,548) Purchases of intangible assets (396) — — Maturities of marketable securities — — 64,542 Sale of marketable securities prior to maturity — 8,893 7,740 Investment in precious metals (1,657) — — Expenditures for fixed assets, including internal-use software and websitedevelopment (20,511) (7,275) (18,707) Collection of note receivable — 1,250 1,506 Net cash provided by (used in) investing activities (22,700) 2,868 19,533 Table of ContentsOverstock.com, Inc.Consolidated Statements of Cash Flows (Continued)(in thousands)See accompanying notes to consolidated financial statements.F-8 Year ended December 31 2010 2009 2008 Cash flows from financing activities: Payments on capital lease obligations (490) (348) (3,796) Drawdowns on line of credit — 1,612 12,963 Payments on line of credit — (1,612) (12,963) Capitalized financing costs — (245) — Proceeds from finance obligations 16,383 — — Payments on finance obligations (841) — — Paydown on direct financing arrangement (197) (218) — Payments to retire convertible senior notes (24,865) (4,563) (6,550) Purchase of redeemable stock (26) — — Purchase of treasury stock (825) (340) (13,452) Exercise of stock options 1,503 29 1,471 Net cash used in financing activities (9,358) (5,685) (22,327) Net increase (decrease) in cash and cash equivalents (15,736) 43,300 3,650 Cash and cash equivalents, beginning of period 139,757 96,457 92,807 Cash and cash equivalents, end of period $124,021 $139,757 $96,457 Supplemental disclosures of cash flow information: Cash paid during the year: Interest paid $2,534 $3,006 $3,390 Taxes paid 187 — $— Non-cash investing and financing activities: Fixed assets, including internal-use software and website development, costs financedthrough accounts payable and accrued liabilities $795 $— $— Equipment acquired under finance obligations 599 — — Equipment and software acquired under capital lease obligations 6 1,632 — Tenant improvements acquired under other obligation — — 1,864 Issuance of redeemable common stock — 400 2,386 Lapse of rescission rights of redeemable stock 260 967 1,200 Issuance of common stock from treasury for 401(k) matching contribution 87 354 19 Table of Contents Overstock.com, Inc.Notes to Consolidated Financial Statements 1. BUSINESS AND ORGANIZATION As used herein, "Overstock.com," "we," "our" and similar terms include Overstock.com, Inc. and its subsidiaries, unless the context indicates otherwise. We are an online retailer offering discount brand name, non-brand name and closeout merchandise, including bed-and-bath goods, home décor,kitchenware, furniture, watches, jewelry, electronics and computers, sporting goods, apparel, and designer accessories, among other products. We also sellhundreds of thousands of best seller and current run books, magazines, CDs, DVDs and video games ("BMMG"). We sell these products through our Internetwebsites located at www.overstock.com and www.o.co ("Website"). We also operate as part of our Website an online auctions business—a marketplace for thebuying and selling of goods and services—and online sites for listing cars and real estate for sale. In October 2009, we also launched O.biz, a website wherecustomers can shop for bulk and business related items. In August 2010, we introduced Eziba.com, a private sale website where members can shop exclusivedeals on the latest home décor products, furniture, jewelry, apparel and accessories from many leading brands. Although our four websites are located atdifferent domain addresses, the technology and equipment and processes supporting the Overstock.com Website and the process of order fulfillmentdescribed herein are the same for all four websites. We were formed on May 5, 1997 as D2-Discounts Direct, a limited liability company. On December 30, 1998, we were reorganized as a C Corporation inthe State of Utah and reincorporated in Delaware in May 2002. On October 25, 1999, we changed our name to Overstock.com, Inc. On July 23, 2003, weformed Overstock Mexico, S. de R. L. de C.V., a wholly owned subsidiary, to distribute products in Mexico. We ceased operations of our Mexico Operationson October 24, 2008.2. ACCOUNTING POLICIESPrinciples of consolidation The accompanying consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. The consolidatedfinancial statements include the accounts of our Overstock Mexico, S. de R. L. de C.V. subsidiary through October 24, 2008. All intercompany accountbalances and transactions have been eliminated in consolidation.Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires estimates and assumptions that affect thereported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated financial statements andaccompanying notes. Estimates are used for, but not limited to, investment valuation, receivables valuation, revenue recognition, sales returns, incentivediscount offers, inventory valuation, depreciable lives of fixed assets and internally-developed software, goodwill valuation, intangible valuation, incometaxes, stock-based compensation, performance-based compensation, restructuring liabilities and contingencies. Actual results could differ materially fromthose estimates.Cash equivalents We classify all highly liquid instruments, including money market funds with a remaining maturity of three months or less at the time of purchase, ascash equivalents. Cash equivalents as of December 31, 2010 and December 31, 2009 were $121.8 million and $129.2 million, respectively.F-9 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)Restricted cash We consider cash that is legally restricted and cash that is held as a compensating balance for letter of credit arrangements as restricted cash. AtDecember 31, 2010 and 2009, restricted cash was $2.5 million and $4.4 million and was held primarily in money market accounts.Fair value of financial instruments Our financial instruments, including cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities are carried at cost, whichapproximates their fair value because of the short-term maturity of these instruments. We account for our assets and liabilities using a hierarchy of valuation techniques based on whether the inputs to those valuation techniques areobservable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our 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 us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. The fair value of these financial instruments was determined using the following levels of inputs as of December 31, 2010 (in thousands):F-10 Fair Value Measurements at December 31, 2010: Total Level 1 Level 2 Level 3 Assets: Cash equivalents and restricted cash—Money market mutual funds $124,313 $124,313 $— $— Trading securities held in a "rabbi trust"(1) 148 148 Total assets $124,461 $124,461 $— $— Liabilities: Restructuring accrual(2) $1,797 $— $— $1,797 Deferred compensation accrual "rabbi trust"(3) 154 154 — — Total liabilities $1,951 $154 $— $1,797 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, 2009 (in thousands): The estimated fair value of our 3.75% Convertible Senior Notes due 2011 ("Senior Notes") outstanding at December 31, 2010 and 2009 was$33.2 million on a carrying value of $34.5 million and $53.6 million on a carrying value of $59.5 million, respectively. The fair value of the Senior Notes is aLevel 2 fair value estimate as it was derived using a convertible debt pricing model with observable market inputs, which include stock price, dividendpayments, borrowing costs, equity volatility, interest rates and interest spread.Restricted investments In December 2009, we implemented a Non Qualified Deferred Compensation Plan (the "NQDC Plan") for senior management (Note 19). Deferredcompensation amounts are invested in mutual funds held in a "rabbi trust" and are restricted for payment to the participants of the NQDC Plan. We accountfor our investments held in the trust in accordance with Accounting Standards Codification ("ASC") No. 320 "Investments—Debt and Equity Securities". Theinvestments held in the trust are classified as trading securities. The fair value of the investments held in the trust totaled $148,000 at December 31, 2010 andare included in Other long-term assets in the consolidated balance sheets. Our gains and losses on these investments were immaterial for the years endedDecember 31, 2010.Accounts receivable Accounts receivable consist primarily 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.F-11 Fair Value Measurements at December 31, 2009: Total Level 1 Level 2 Level 3 Assets: Cash equivalents and restricted cash—Money market mutualfunds $133,583 $133,583 $— $— Liabilities: Restructuring accrual(2) $2,685 $— $— $2,685 (1)—Trading securities held in a rabbi trust are included in Other long-term assets in the consolidated balance sheets (Note 19—Employee Retirement Plan). (2)—The fair value was determined based on the income approach, in which we used internal cash flow projections over the life of theunderlying lease agreements discounted based on a credit adjusted risk-free rate of return. See the roll forward related to therestructuring accrual at Note 3—Restructuring Expense. (3)—Non Qualified deferred compensation for rabbi trust is included in Other long-term liabilities in the consolidated balances sheets(Note 19—Employee Retirement Plan). Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)Allowance for doubtful accounts From time to time, we grant credit to some 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 accounts receivable. The allowance for doubtful accounts receivable was $2.0 million and $1.7 million atDecember 31, 2010 and 2009, respectively.Concentration of credit risk Cash equivalents include short-term, highly liquid instruments with maturities at date of purchase of three months or less. At December 31, 2010and2009, two banks held our cash and cash equivalents. We do not believe that, as a result of this concentration, we are subject to any unusual financial riskbeyond the normal risk associated with commercial banking relationships. Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash equivalents, and receivables. Weinvest our cash primarily in money market securities which are uninsured. Our accounts receivable are derived primarily from revenue earned from customers located in the United States. We maintain an allowance for doubtfulaccounts based upon the expected collectability of accounts receivable.Valuation of 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. We write down our inventory for estimated obsolescence and to lower of cost ormarket value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected bymanagement, additional inventory write-downs may be required. Once established, the original cost of the inventory less the related inventory allowancerepresents the new cost basis of such products. Reversal of the allowance is recognized only when the related inventory has been sold or scrapped.Prepaid inventories, net Prepaid inventories represents inventories paid for in advance of receipt. Prepaid inventories at December 31, 2010 and 2009 was $2.1 million and$2.9 million respectively.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, as well as investments in precious metals. Total prepaids and other assets at December 31, 2010 and 2009 were$11.7 million and $10.3 million, respectively.F-12 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)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 using the straight-line method over the estimated useful lives of the related assets or the term of the related capital lease, whichever isshorter, as follows: Leasehold improvements are amortized over the shorter of the term of the related leases or estimated useful lives. Depreciation and amortization expense is classified within the corresponding operating expense categories on the consolidated statements of operationsas 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 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 years ended December 31, 2010 and 2009, we capitalized $8.2 million and $5.4 million, respectively, of costs associated with internal-usesoftware and website development, both developed internally and acquired externally. Amortization of costs associated with internal-use software andwebsite development was $6.7 million and $6.0 million for those respective periods.Leases We account for lease agreements as either operating or capital leases depending on certain defined criteria. In certain of our lease agreements, we receiverent holidays and other incentives. We recognize lease costs on a straight-line basis without regard to deferred payment terms, such as rent holidays thatF-13 Life (years) Computer software 2-3 Computer hardware 3 Furniture and equipment 3-5 Year ended December 31, 2010 2009 2008 Cost of goods sold—direct $1,179 $1,264 $1,674 Technology 12,489 10,943 21,140 General and administrative 912 676 154 Total depreciation and amortization, includinginternal-use software and website development $14,580 $12,883 $22,968 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)defer the commencement date of required payments. Additionally, tenant improvement allowances are amortized as a reduction in rent expense over the termof the lease. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the life of the lease, withoutassuming renewal features, if any, are exercised.Treasury stock We account for treasury stock under the cost method and include 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 We review property and equipment and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable. Recoverability is measured by comparison of the assets' carrying amount to future undiscounted net cash flowsthe assets are expected to generate. Cash flow forecasts are based on trends of historical performance and management's estimate of future performance, givingconsideration to existing and anticipated competitive and economic conditions. If such assets are considered to be impaired, the impairment to be recognizedis measured by the amount by which the carrying amount of the assets exceeds their fair values. We did not record any impairment of long-lived assets during2010, 2009 and 2008.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 is tested for impairment at least annually. When evaluating whether goodwill is impaired, we compare the fair value of thereporting unit to which the goodwill is assigned to its carrying amount. If the carrying amount exceeds its fair value, then the amount of the impairment lossmust be measured. The impairment loss, if any, is calculated by comparing the implied fair value of the goodwill to its carrying amount. In calculating theimplied fair value of goodwill, the fair value of the reporting unit is allocated to the other assets and liabilities within the reporting unit based on fair value.The excess of the fair value of a reporting unit over the amount allocated to its other assets and liabilities is the implied fair value of goodwill. An impairmentloss is recognized when the carrying amount of goodwill exceeds its implied fair value. We performed an evaluation of the goodwill associated with the reporting unit as of December 31, 2010, 2009 and 2008 and determined that noimpairment charge should be recorded.Revenue recognition We derive 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, advertisement revenue derived from our cars and real estate listingF-14 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)businesses, and from advertising on our shopping pages. We have organized our operations into two principal segments based on the primary source ofrevenue: direct revenue and fulfillment partner revenue (see Note 23 "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 our customers. As we ship high volumes of packages throughmultiple carriers, it is not practical for us to track the actual delivery date of each shipment. Therefore, we use estimates to determine which shipments aredelivered and therefore recognized as revenue at the end of the period. The delivery date estimates are based on average shipping transit times, which arecalculated using the following factors: (i) the type of shipping carrier (as carriers have different in-transit times); (ii) the fulfillment source (either ourwarehouses or those of our fulfillment partners); (iii) the delivery destination; and (iv) actual transit time experience, which shows that delivery date istypically one to eight business days from the date of shipment. We evaluate the criteria outlined in ASC Topic 605-45, Principal Agent Considerations, in determining whether it is appropriate to record the grossamount of product sales and related costs or the net amount earned as commissions. When we are the primary obligor in a transaction, are subject to inventoryrisk, have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators, revenue is recorded gross. If we are not theprimary obligor in the transaction and amounts earned are determined using a fixed percentage, revenue is recorded on a net basis. Currently, the majority ofboth direct revenue and fulfillment partner revenue is recorded on a gross basis, as we are the primary obligor. We present revenue net of sales taxes. We periodically provide incentive offers to our customers to encourage purchases. Such offers include current discount offers, such as percentagediscounts off current purchases, and other similar offers. Current discount offers, when used by customers, are treated as a reduction of revenue. Based upon our historical experience, revenue typically increases during the fourth quarter because of the holiday retail season.Direct revenue Direct revenue consists of merchandise sold through our Website to individual consumers and businesses that is fulfilled from our leased warehouses.Fulfillment partner revenue Fulfillment partner revenue consists of merchandise sold through our Website and shipped by fulfillment partners directly to consumers and businessesfrom warehouses maintained by the fulfillment partners. We operate an online auction service on our Website. The Auctions tab allows sellers to list items for sale, buyers to bid on items of interest, and users tobrowse through listed items online. Except in limited circumstances where our auction site lists returned merchandise, we are not the seller of auction-listeditems 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 during theperiod these items are listed or soldF-15 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)on a net basis. The revenue for the returned merchandise that we sell at auction is recorded on a gross basis. Revenue from the auctions business is included inthe fulfillment partner segment. We operate an online site for listing cars for sale as a part of our Website. The cars listing service allows dealers to list vehicles for sale and allows 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 included in the fulfillment partner segment on a net basis. 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. Revenue from the real estate business is included in the fulfillment partner segment on a net basis. Total revenues from our Auctions, Cars and Real Estate businesses were $2.9 million $2.1 million and $1.0 million for the years ended December 31,2010, 2009 and 2008, respectively. 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. In October 2009, we 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. In August 2010, we introduced Eziba.com, a private sale website where members can shop exclusive deals on the latest home décor products, jewelry,apparel and accessories from many leading brands.International business We began selling products through our website to customers outside the United States in August 2008. As of December 31, 2010, we sell to customers inover 90 countries. We do not have sales operations outside the United States, and are using a U.S.-based third party to provide logistics and fulfillment for allinternational orders. Revenue generated from the international business is included in either direct or fulfillment partner revenue, depending on whether theproduct is shipped from our leased warehouses or from a fulfillment partner. Total revenues from International sales were $9.4 million $5.1 million and $1.3 million for the years ended December 31, 2010, 2009 and 2008respectively.F-16 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)Club O loyalty program We have a customer loyalty program called Club O for which we sell annual memberships. We record membership fees as deferred revenue and werecognize revenue ratably over the membership period. The Club O program allows members to earn reward dollars for qualifying purchases made on ourWebsite. We also have a co-branded credit card program (see "Co-branded credit card program" below for more information). Co-branded cardholders are alsoClub O members and earn additional reward dollars for purchases made on our Website, and from other merchants. Reward dollars earned may be redeemedon future purchases made through our Website. Club O reward dollars expire 90 days after the customer's Club O membership expires. We account for thesetransactions as multiple element arrangements and allocate value to the elements using their relative fair values. We include the value of reward dollarsearned in deferred revenue and we record it as a reduction of revenue at the time the reward dollars are earned. We recognize revenue for Club O reward dollars when: (i) customers redeem their reward dollars as part of a purchase at our Website, (ii) reward dollarsexpire or (iii) the likelihood of reward dollars being redeemed by a customer is remote ("reward dollar breakage"). Due to the loyalty program's short history,currently no reward dollar breakage is recognized until the reward dollars expire. However, in the future we plan to recognize such breakage based uponhistorical redemption patterns.Co-branded credit card revenue During the year ended December 31, 2009, we had a co-branded credit card agreement with a commercial bank, for the issuance of credit cards bearingthe Overstock brand, under which the bank paid us fees for new accounts, renewed accounts and card usage. New and renewed account fees were recognizedas revenues on a straight-line basis over the estimated life of the credit card relationship. Credit card usage fees were recognized as revenues as actual creditcard usage occurred. Our co-branded credit card agreement with this bank terminated effective August 30, 2009. In March 2010, we entered into a co-branded credit card agreement with a different commercial bank for the issuance of credit cards bearing theOverstock.com brand, under which the bank pays us fees for new accounts and for customer usage of the cards. The agreement also provides for a customerloyalty program offering reward dollars that customers will accrue from card usage and can use to make purchases on our Website (see "Club O loyaltyprogram" above for more information). We launched this co-branded card in September 2010. New account fees are recognized as revenue on a straight-linebasis over the estimated life of the credit card relationship. Credit card usage fees are recognized as revenues as actual credit card usage occurs.Deferred revenue Customer orders are recorded as deferred revenue prior to estimated delivery of products or services. We record amounts received for Club O membershipfees as deferred revenue and we recognize it ratably over the membership period. We record Club O reward dollars as deferred revenue at the time they areearned and we recognize it as revenue upon redemption. If reward dollars are not redeemed, we recognize revenue upon expiration. In addition, we also sellgift cards and record related deferred revenue at the time of the sale. We sell gift cards without expiration dates and we recognize revenue upon redemption. Ifa gift card is not redeemed, we recognize revenue when the likelihood ofF-17 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)its redemption becomes remote based on our historical redemption experience. We consider the likelihood of redemption to be remote after 36 months.Sales returns allowance We inspect all returned items when they arrive at our processing facility. We refund the full cost of the merchandise returned and all original shippingcharges if the returned item is defective or we or our fulfillment partners have made an error, such as shipping the wrong product. If the return is not a result of a product defect or our or our fulfillment partners error and the customer initiates a return of an unopened item within30 days of delivery, except for computers and electronics, we refund the full cost of the merchandise minus the original shipping charge and return shippingfees. However, we reduce refunds for returns initiated more than 30 days after delivery or that are received at our returns processing facility more than 45 daysafter initial delivery. If our customer returns an item that has been opened or shows signs of wear, we issue a partial refund minus the original shipping charge and returnshipping fees. Revenue is recorded net of estimated returns. We record an allowance for returns based on current period revenues and historical returns experience. Weanalyze actual historical returns, current economic trends and changes in order volume and acceptance of our products when evaluating the adequacy of thesales returns allowance in any accounting period. Our actual product returns have not differed materially from our estimates. The average actual returns aspercentage of revenues for the years ended, December 31, 2010, 2009, and 2008 were 8.2%, 8.6% and 9.0%, respectively. The allowance for returns was$11.5 million and $11.9 million at December 31, 2010 and 2009, respectively.Credit card chargeback allowance Revenue is recorded net of estimated credit card chargebacks. We maintain an allowance for credit card chargebacks based on current period revenuesand historical chargeback experience. The allowance for chargebacks was $125,000 and $139,000 at December 31, 2010 and 2009, respectively.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. Cost of goods sold, including product cost and other costs andfulfillment and related costs are as follows (in thousands):F-18 Year ended December 31, 2010 2009 2008 Total net revenue $1,089,873 100%$876,769 100%$829,850 100% Cost of goods sold Product costs and other cost of goods sold 842,064 78% 664,537 76% 638,368 77% Fulfillment and related costs 58,169 5% 47,480 5% 47,246 6% Total cost of goods sold 900,233 83% 712,017 81% 685,614 83% Gross profit $189,640 17%$164,752 19%$144,236 17% Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)Advertising expense We expense the cost of producing advertisements the first time the advertising takes place and expense the cost of communicating advertising in theperiod during which the advertising space or airtime is used. Internet advertising expenses are recognized as incurred based on the terms of the individualagreements, which are generally: 1) a commission for traffic driven to the Website that generates a sale or 2) a referral fee based on the number of clicks onkeywords or links to our Website generated during a given period. Advertising expense is included in sales and marketing expenses and totaled$53.2 million, $48.9 million and $52.8 million during the years ended December 31, 2010, 2009 and 2008, respectively. Prepaid advertising, which consistsprimarily of prepaid advertising airtime, (included in Prepaids and other assets in the accompanying consolidated balance sheets) was $2.9 million and$1.6 million at December 31, 2010 and 2009, respectively.Stock-based compensation We measure compensation expense for all outstanding unvested share-based awards at fair value on date of grant and recognize compensation expenseover the service period for awards expected to vest on a straight line basis. The estimation of stock awards that will ultimately vest requires judgment, and tothe extent actual results differ from estimates, such amounts will be recorded as an adjustment in the period estimates are revised. We consider many factorswhen estimating expected forfeitures, including types of awards, recipients of awards and historical experience. Actual results may differ substantially fromthese estimates (see Note 18 "Stock-Based Awards").Loss contingencies In the normal course of business, we are involved in legal proceedings and other potential loss contingencies. We accrue a liability for such matters whenit is probable that a loss has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be estimated, the mostprobable amount 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 inthe range is accrued. We expense legal fees as incurred.Restructuring Restructuring expenses are primarily comprised of lease termination costs. ASC Topic 420, Accounting for Costs Associated with Exit or DisposalActivities, requires that when an entity ceases using a property that is leased under an operating lease before the end of the contractual term, the terminationcosts should be recognized and measured at fair value when the entity ceases using the facility. Key assumptions in determining the restructuring expensesand related liability include the terms that may be negotiated to exit certain contractual obligations (see Note 3 "Restructuring Expense").Income taxes Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future 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.F-19 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)The effect on deferred tax assets and liabilities related to a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are evaluated for future realization and are reduced by a valuation allowance to the extent that it is more likely than not that thedeferred tax asset will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred assets includingexpectations of future taxable income, the carry-forward periods available for tax reporting purposes, the reversals of our deferred tax liabilities and otherrelevant factors. At December 31, 2010 and 2009, we established a full valuation allowance against our deferred tax assets, net of expected reversals ofexisting deferred tax liabilities. Significant judgment is required in making this assessment, and it is very difficult to predict when, if ever, our assessmentmay conclude that the remaining portion of the deferred tax assets are realizable.Foreign currency translation For our former 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 subsidiary located in Mexico 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 awards and convertible senior notes are included in the calculation of dilutedearnings (loss) per common share to the extent such shares are dilutive.F-20 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 January 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2010-06, Improving DisclosuresAbout Fair Value Measurements, which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurementsincluding significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements ona gross basis in the reconciliation of Level 3 fair-value measurements. ASU 2010-06 is effective for annual reporting periods beginning after December 15,2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. We do not expect theremaining adoption of ASU 2010-06 related to the reconciliation of Level 3 fair value measurements to have a material impact on our consolidated financialstatements. In October 2009, the FASB issued ASU 2009-13, which amends ASC Topic 605, Revenue Recognition, to require companies to allocate revenue inmultiple-element arrangements based on an element's estimated selling price if vendor-specific or other third-party evidence of value is not available. ASU2009-13 is effective for annual reporting periods beginning after December 15, 2010. We do not expect the adoption of ASU 2009-13 to have a materialimpact on our consolidated financial statements.F-21 Year ended December 31 2010 2009 2008 Net income (loss) $13,889 $7,747 $(11,006) Deemed dividend related to redeemable common stock (112) (48) (77) Net income (loss) attributable to common shares $13,777 $7,699 $(11,083) Net income (loss) per common share—basic: Net income (loss) attributable to common shares—basic $0.60 $0.34 $(0.48)Weighted average common shares outstanding—basic 23,019 22,821 22,901 Effect of dilutive securities: Stock options and restricted stock awards 347 246 — Convertible senior notes — — — Weighted average common shares outstanding—diluted 23,366 23,067 22,901 Net income (loss) attributable to common shares—diluted $0.59 $0.33 $(0.48) Year ended December 31, 2010 2009 2008 Stock options and restricted stock units 551 740 1,423 Convertible senior notes 454 787 885 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)3. RESTRUCTURING EXPENSE During the fourth quarter of 2006, we began a facilities consolidation and restructuring program designed to reduce the overall expense structure in aneffort to improve future operating performance. The facilities consolidation and restructuring program was substantially completed by the end of the secondquarter of 2007. Restructuring liabilities along with charges (credits) to expense associated with the facilities consolidation and restructuring program are as follows as ofDecember 31, 2010 (in thousands): We reversed $569,000 of lease termination costs liability during the year ended December 31, 2010 due to changes in the estimate of sublease income,primarily as a result of our entering into agreements with a sublessee to terminate their subleases and re-occupy a portion of the space previously ceased to beused by us, due to our growth and need for additional space. During the year ended December 31, 2009, we reversed $66,000 of lease termination costsliability due to changes in our estimate of sublease income, primarily as a result of entering into a sublease agreement for previously vacant space.4. MARKETABLE SECURITIES Our marketable securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income(loss), a component of stockholders' equity (deficit), net of any tax effect. Realized gains or losses on the sale of marketable securities are determined usingthe specific-identification method and recognized in the statement of operations. We evaluate our investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time and extent towhich fair value has been below cost basis, the financial condition of the issuer and our ability and intent to hold the investment for a period of time whichmay be sufficient for anticipated recovery of market value. We record an impairment charge to the extent that the carrying value of our available-for-salesecurities exceeds the estimated fair market value of the securities and the decline in value is determined to be other-than-temporary. We recorded an "otherthan temporary" impairment of marketable securities of $300,000 and realized losses of $34,000 during the year ended December 31, 2008. We had nomarketable securities at December 31, 2010 and 2009. The components of realized losses on sales and impairment of marketable securities for the years ended December 31, 2010, 2009 and 2008 were (inthousands):F-22 Balance12/31/2008 AccretionExpense Net CashPayments Adjustments Balance12/31/2009 AccretionExpense Net CashPayments Adjustments Balance12/31/2010 Lease and contracttermination costs $2,988 $285 $(522)$(66)$2,685 $240 $(559)$(569)$1,797 December 31, 2010 2009 2008 Net loss on sales of marketable securities $— $(48)$(334) Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)5. COMPREHENSIVE INCOME (LOSS) Our comprehensive income (loss) is as follows (in thousands):6. ACCOUNTS RECEIVABLE Accounts receivable consist of the following (in thousands):7. INVENTORIES Inventories consist of the following (in thousands):F-23 Year ended December 31, 2010 2009 2008 Net income (loss) $13,889 $7,747 $(11,006)Net unrealized gain on marketable securities — — 48 Reclassification adjustment included in net income(loss) — (48) — Cumulative translation adjustment — — 94 Comprehensive income (loss) $13,889 $7,699 $(10,864) December 31, 2010 2009 Credit card receivables $7,679 $5,949 Accounts receivable, other 7,929 7,421 15,608 13,370 Less: allowance for doubtful accounts (2,048) (1,730) Accounts receivable, net $13,560 $11,640 December 31, 2010 2009 Product Inventory $24,900 $15,357 Inventory in-transit 7,214 8,018 Total inventories $32,114 $23,375 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)8. PREPAIDS AND OTHER ASSETS Prepaids and other assets consist of the following (in thousands):9. FIXED ASSETS Fixed assets consist of the following (in thousands): Depreciation and amortization of property and equipment totaled $14.6 million, $12.9 million, and $23.0 million for the years ended December 31,2010, 2009 and 2008, respectively. Fixed assets included assets under capital leases and finance obligations of $17.7 million and $1.7 million, andaccumulated amortization related to assets under capital leases and finance obligations of $4.6 million and $335,000 at December 31, 2010 and 2009,respectively.10. OTHER LONG-TERM ASSETS Other long-term assets consist of the following (in thousands):F-24 December 31, 2010 2009 Prepaid maintenance $5,446 $6,628 Prepaid marketing 2,722 2,255 Prepaid other 1,826 1,392 Investment in precious metals 1,657 — Total prepaids and other assets $11,651 $10,275 December 31, 2010 2009 Computer hardware and software, including internal-usesoftware and website development $129,953 $113,315 Furniture and equipment 13,204 12,389 Leasehold improvements 5,206 3,820 148,363 129,524 Less: accumulated depreciation and amortization (120,563) (108,906) Total fixed assets $27,800 $20,618 December 31, 2010 2009 Prepaid expenses, long-term portion $807 $577 Prepaid other 598 181 Total other long-term assets $1,405 $758 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)11. ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands):12. DEFERRED REVENUE Deferred revenue consists of the following (in thousands):13. BORROWINGSWells Fargo Credit Agreement. We had a credit agreement (as amended to date, the "Credit Agreement") with Wells Fargo Bank, National Association ("Wells Fargo"). The CreditAgreement provided a revolving line of credit to us of up to $30.0 million which we used primarily to obtain letters of credit to support inventory 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 fixed rate term, or (ii) at afluctuating rate per annum determined by the bank to be one half a percent (0.5%) above daily LIBOR in effect on each business day a change in dailyLIBOR 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, and therefore the facility did not provide additional liquidity to us.F-25 December 31, 2010 2009 Allowance for returns $11,525 $11,923 Accrued compensation and other related costs 8,279 13,094 Accounts payable accrual 7,626 4,893 Accrued freight 2,491 1,496 Accrued marketing expenses 2,484 3,588 Accrued professional expenses 1,877 903 Facility lease accruals 1,811 1,569 Accrued taxes 1,400 1,087 Credit card processing fee accrual 625 539 Inventory received but not invoiced 452 1,172 Short term portion of restructuring accrual (Note 3) 447 567 Other accrued expenses 1,734 2,465 Total accrued liabilities $40,751 $43,296 December 31, 2010 2009 Payments owed or received prior to product delivery $16,938 $15,566 Unredeemed gift cards 3,899 4,009 Club O membership fees and reward points 2,428 450 Other 762 640 Total deferred revenue $24,027 $20,665 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)13. BORROWINGS (Continued) On December 23, 2009, we terminated our credit facility with Wells Fargo, subject to provisions relating to outstanding letters of credit issued by WellsFargo for our account and other transitional provisions. On December 31, 2009, per the provisions relating to the outstanding letters of credit, the letters ofcredit issued by Wells Fargo expired and were replaced by $2.6 million of letters of credit issued by U.S. Bank National Association ("U.S. Bank") on behalfof 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 WellsFargo Retail Finance, LLC ("WFRF"). The WFRF Agreement replaced our Loan and Security Agreement dated December 12, 2005 with WFRF, which hadpreviously 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 "Prior Purchasing Card") with Wells Fargo that expired on January 1, 2010. We used the PriorPurchasing Card for business purpose purchasing and were required to pay it in full each month. We were required to maintain a cash balance of $1.4 millionat Wells Fargo. as collateral for the Prior Purchasing Card, and these amounts are included in Restricted cash in the accompanying consolidated balancesheets, and therefore the facility did not provide additional liquidity to us. At December 31, 2009, $1.0 million was outstanding. No further amounts wereavailable to the Purchasing Card as of December 31, 2009.U.S. Bank Financing Agreements We entered into a Financing and Security Agreement dated December 22, 2009 (the "Financing Agreement") with U.S. Bank. The Financing Agreementreplaced the former credit agreement with Wells Fargo. The Financing Agreement provides for revolving loans and other financial accommodations to or for our benefit of (i) up to $10 million for cash-collateralized advances, and (ii) up to $10 million for advances supported by our non-cash collateral. The maximum credit potentially available under therevolving facility is $20 million. Our obligations under the Financing Agreement and all related agreements are secured by all or substantially all of ourassets, excluding our interest in certain litigation. Subject to certain exceptions, the full amount of the revolving facility is expected to be available to us aslong as $20 million is maintained on deposit with U.S. Bank. The obligation of U.S. Bank to make advances under the Financing Agreement is subject to theconditions 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 Financing Agreement defined fixed charges coverage ratio of at least 1.10 to 1.00 as of the end of any fiscal quarter for theperiod 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, as availability would then depend, in part, on the BorrowingF-26 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)13. BORROWINGS (Continued)Base (as defined in the Financing Agreement). The Financing Agreement and the credit facility terminate on October 2, 2011. 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% per annumover the otherwise applicable interest rate. An unused line fee of 0.375% is payable monthly on the unused portion of the $10 million facility available fornon cash-collateralized advances. The Financing Agreement includes affirmative covenants and 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 0.75% of the non cash-collateralized portion of the facility is payable by us if we terminate the facilityprior to its stated termination date. No amounts were outstanding under the Financing Agreement at December 31, 2010 and 2009, and letters of credit totaling $2.4 million and$2.6 million, respectively, were issued on our behalf collateralized by compensating cash balances held at U.S. Bank, which are included in Restricted cashin the accompanying consolidated balance sheets. On September 17, 2010 we entered into a Master Lease Agreement and a Financial Covenants Rider (collectively, the "Master Lease Agreement") withU.S. Bancorp Equipment Finance, Inc.—Technology Finance Group ("Lessor"), an affiliate of U.S. Bank. Under the Master Lease Agreement we entered intofour separate leases, pursuant to which we sold certain information technology hardware (the "IT Assets") to Lessor, which were simultaneously leased backfor a period of 48 months and financed certain software licenses for a period of 48 months for proceeds totaling approximately $16.4 million. We also enteredinto two additional leases; whereby we leased $599,000 in IT Assets and financed certain software licenses for a period of 48 months directly from the Lessor.We have the right to repurchase the IT Assets at the end of the 48-month term for $1.00. In addition, we have the right to repurchase the IT Assets andterminate the Master lease Agreement twelve months following the initial term, or under certain situations where there is a change in control where the Lessorsells substantially all of its assets, or another entity acquires more than 25% of the ownership interests of Lessor or Lessor's parent. Payments on the MasterLease Agreement are due monthly. TheF-27 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)13. BORROWINGS (Continued)weighted average effective interest rate under the Master Lease Agreement is 6.25%. We have accounted for the Master Lease Agreement as a financingtransaction and amounts owed are included in Finance Obligations, current and non-current in the consolidated balance sheets. We recorded no gain or lossas a result of this transaction. The Master Lease Agreement requires us to maintain a minimum Total Fixed Charge Coverage annualized ratio of at least 1.20:1.00, based on operatingresults, measured at the end of each fiscal quarter. "Total Fixed Charge Coverage" is defined as our EBITDAR (which is defined to mean earnings beforeinterest expense, tax expense or benefit, depreciation expense, amortization expense and rent (defined as payments for real property leases and otheroperating leases)) less the aggregate amount of federal, state, local and/or foreign income taxes accrued less declared dividends less 50% of depreciationexpense divided by our (rental expense plus interest expense plus required principal payments including capitalized leases on a trailing twelve-month basis). The Master Lease Agreement, in connection with the US Bank Financing Agreement, also requires us to maintain minimum liquidity (defined as cashplus marketable securities) of $30.0 million in the aggregate (which amount includes any minimum liquidity required under the Financing Agreement) at alltimes on deposit with U.S. Bank until all amounts owed under the Master Lease Agreement are paid in full, but provides that we are permitted to withdraw thefunds on deposit with U.S. Bank at our discretion, although our failure to maintain minimum liquidity of $30.0 million would be an Event of Default underthe Master Lease Agreement. As of December 31, 2010, we had $30.0 million in compensating cash balances held at U.S. Bank. Future principal payments of finance obligations are as follows (in thousands):U.S. Bank Commercial Purchasing Card Agreement On December 16, 2009, we entered into a commercial purchasing card agreement (the "Purchasing Card") with U.S. Bank. We use the Purchasing Card forbusiness purpose purchasing and must pay it in full each month. At December 31, 2010, $2.7 million was outstanding and $2.3 million was available underthe Purchasing Card. At December 31, 2009, no amount was outstanding and $5.0 million was available under the Purchasing Card.F-28Payments due by period 2011 $3,922 2012 4,163 2013 4,431 2014 3,625 2015 — $16,141 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)13. BORROWINGS (Continued)Capital leases We have leased certain software and computer equipment, under non-cancelable leases that expire on various dates through 2013. Software and equipment relating to the capital leases totaled $1.7 million at December 31, 2010 and 2009, with accumulated depreciation of $902,000and $335,000, respectively. Depreciation expense of assets recorded under capital leases was $567,000 and $335,000 for the years ended December 31, 2010and 2009, respectively. Future payments of capital lease obligations are as follows (in thousands):3.75% Convertible Senior Notes In November 2004, we completed an offering of $120.0 million of 3.75% Convertible Senior Notes due 2011 (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 debt issuance costs are being amortized using thestraight-line method which approximates the effective interest method. We recorded amortization of discount and debt issuance costs related to this offeringtotaling $228,000, $331,000 and $334,000 during the years ended December 31, 2010, 2009 and 2008, respectively. Interest on the Senior Notes is payablesemi-annually on June 1 and December 1 of each year. The Senior Notes mature on December 1, 2011 and are unsecured and rank equally in right of paymentwith all existing and future unsecured, unsubordinated debt and senior in right of payment to any existing and future subordinated indebtedness. The Senior Notes are convertible at any time prior to maturity into our common stock at the option of the note holders at a conversion price of $76.23 pershare or, approximately 454,000 shares in aggregate (subject to adjustment in certain events, including stock splits, dividends and other distributions andcertain repurchases of our stock, and certain fundamental changes in our ownership). We have the right to redeem the Senior Notes, in whole or in part, forcash at 100% of the principal amount plus accrued and unpaid interest. Upon the occurrence of a fundamental change (including the acquisition of a majorityinterest in us, certain changes in our board of directors or the termination of trading of our stock) meeting certain conditions, holders of the Senior Notes mayrequire us to repurchase, for cash, all or part of their notes at 100% of the principal amount plus accrued and unpaid interest.F-29Payments due by period 2011 $798 2012 116 2013 4 Total minimum lease payments 918 Less: amount representing interest 76 Present value of capital lease obligations 842 Less: current portion 729 Capital lease obligations, non-current $113 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)13. BORROWINGS (Continued) At present we do not have any plan to redeem the outstanding Senior Notes in accordance with their redemption provisions but we may acquireadditional Senior Notes in future open market purchases. To the extent the Senior Notes remain outstanding at maturity, we intend to pay them at maturityeither with proceeds from operations or from financing activities. 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 our repurchase program discussed below, we retired $25.4 million of the Senior Notes during year ended December 31, 2010 for $24.9 million incash, resulting in a gain of $346,000 on early extinguishment of debt, net of $158,000 of associated unamortized discount. We retired a total $7.4 million ofour Senior Notes during the year ended December 31, 2009 for $4.6 million in cash, resulting in a gain of $2.8 million, net of $92,000 amortization of debtdiscount (see Note 17—"Stock and Debt Repurchase Program"). As of December 31, 2010 and 2009, a face amount of $34.6 million and $60.0 million of theSenior Notes remain outstanding with a carrying amount of $34.5 million and $59.5 million and $141,000 and $528,000 of debt discount, respectively. On February 1, 2011 our Board of Directors approved a $10 million increase to our previously-announced debt repurchase program. With this increasewe may repurchase up to $15 million of our outstanding Senior Notes. On February 7, 2011, we retired an additional $10.1 million of our outstanding SeniorNotes reducing the balance outstanding to a face amount of $24.5 million.14. COMMITMENTS AND CONTINGENCIESSummary of future minimum lease payments for all operating leases Minimum future payments under all operating leases as of December 31, 2010, are as follows (in thousands): Rental expense for operating leases totaled $8.0 million, $7.5 million and $9.1 million for the years ended December 31, 2010, 2009 and 2008,respectively. Estimated sublease income of $1.5 million is expected over the next five years of which $885,000 is anticipated to be received in the next12 months.Legal Proceedings From time to time, we are involved in litigation concerning consumer protection, employment, intellectual property and other commercial mattersrelated to the conduct and operation of ourF-30Payments due by period 2011 $8,743 2012 8,221 2013 7,552 2014 7,750 2015 6,164 Thereafter 1,346 $39,776 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)14. COMMITMENTS AND CONTINGENCIES (Continued)business and the sale of products on our Website. In connection with such litigation, we may be subject to significant damages. We may also be subject toequitable remedies and penalties. Such litigation could be costly and time consuming and could divert or distract our management and key personnel fromour business operations. Due to the uncertainty of litigation and depending on the amount and the timing, an unfavorable resolution of some or all of thesematters could materially affect our business, results of operations, financial position, or cash flows. On February 2, 2007, along with five shareholder plaintiffs, we filed a lawsuit in the Superior Court of California, County of San Francisco againstMorgan 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, we filed an amended complaint adding two plaintiff shareholders, naming Lehman Brothers Holdings Inc. as a defendant, eliminating theprevious claim of intentional interference with prospective economic advantage and clarifying various points of other claims in the original complaint. Thesuit alleged that the defendants, who control over 80% of the prime brokerage market, participated in an illegal stock market manipulation scheme and thatthe defendants had no intention of covering short sell orders with borrowed stock, as they are required to do, causing what are referred to as "fails to deliver"and that the defendants' actions caused and continue to cause dramatic distortions within the nature and amount of trading in our stock as well as dramaticdeclines in the share price of our stock. The suit asserts that a persistent large number of "fails to deliver" creates significant downward pressure on the price ofa company's stock and that the amount of "fails to deliver" has exceeded our entire supply of outstanding shares. The suit accused the defendants ofviolations of California securities laws and common law, specifically, conversion, trespass to chattels, intentional interference with prospective economicadvantage, and violations of California's Unfair Business Practices Act. In April 2007, defendants filed a demurrer and motion to strike our complaint. Weopposed the demurrer and motion to strike. In July 2007 the court substantially denied defendants' demurrer and motion to strike. In November 2007, thedefendants filed additional motions to strike. In February 2008, the court denied defendants' motion to strike our claims under California's Securities Anti-Fraud statute and defendants' motion to strike our common law punitive damages claims, but granted in part the defendants' motion to strike our claims underCalifornia's Unfair Business Practices Act, while allowing our claims for injunctive relief under California's Unfair Business Practices Act. Lehman BrothersHoldings filed for bankruptcy on September 15, 2008 and Barclays Bank has purchased its investment banking and trading business. We elected not topursue our claims against Lehman Brothers Holdings in the bankruptcy proceedings. Dislocations in the financial markets and economy could result inadditional bankruptcies or consolidations that may impact the litigation or the ability to collect a judgment. On January 12, 2009, Goldman SachsGroup, Inc., Goldman Sachs & Co., Goldman Sachs Execution & Clearing L.P., Citigroup, Inc, Citigroup Global markets, Inc., Credit Suisse (USA) Inc., andCredit Suisse Securities (USA) LLC filed a motion to strike portions of the Second Amended Complaint regarding certain allegations of conspiracy amongdefendants and the request for punitive damages. Also, 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 demurrer to the first andsecond causes of action for conversion and trespass to chattels and a motion to strike various other allegations of the Second Amended Complaint. OnMarch 19, 2009, the Court sustained the demurrer to first and second causes of action but granted leave to amend the complaint. The motion to strike wasdenied. On April 20, 2009, we amended ourF-31 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)14. COMMITMENTS AND CONTINGENCIES (Continued)complaint 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. On December 15, 2010, we and the other plaintiffs in the case entered into a settlementagreement with certain of the defendants requiring the defendants to pay in the aggregate $4.5 million to plaintiffs. The other terms of settlement areconfidential. Remaining defendants in the suit are Goldman Sachs Group, Inc., Goldman Sachs & Co., Goldman Sachs Execution & Clearing L.P., ("GoldmanDefendants") Merrill Lynch, Pierce, Fenner & Smith, Inc., Merrill Lynch Professional Clearing Corporation ("Merrill Lynch Defendants), and Bank ofAmerica Securities LLC. On December 15, 2010, we filed a motion to amend our complaint against the Goldman and Merrill Lynch Defendants to add acause of action based on the New Jersey Racketeer Influenced and Corrupt Organization (RICO) Act. The court has allowed the amendment, subject to laterchallenge. The New Jersey RICO statute allows for trebling of RICO-related actual damages proved at trial. Discovery in this case continues. A trial date hasbeen set for December 5, 2011. We intend to continue to vigorously prosecute this action. On November 17, 2010 we were sued in the Superior Court of California, County of Alameda, by District Attorneys for the California Counties ofAlameda, Marin, Monterey, Napa, Santa Clara, Shasta and Sonoma County. These district attorneys seek damages and an injunction under claims forviolations of California consumer protection laws, alleging we made untrue or misleading statements concerning our pricing, price reductions, sources ofproducts and shipping charges. The complaint asks for damages in the amount of not less than $15 million. The nature of the loss contingencies relating toclaims that have been asserted against us are described above. The suit is in its early stages, and we intend to vigorously defend this action. On May 30, 2008 we filed a complaint in New York state court against the New York State Department of Taxation and Finance, its Commissioner, theState of New York and its governor, alleging that a recently enacted New York state tax law is unconstitutional. The effect of the New York law is to requireInternet sellers to collect and remit New York sales taxes on their New York sales even if the seller has no New York tax "nexus" other than with New Yorkbased independent contractors who are Internet advertising affiliates. The complaint asks for the court to declare the law unconstitutional and enjoin itsapplication to us. New York filed a motion to dismiss. We responded to the motion and filed a motion for summary judgment, and both motions were heardsimultaneously. On January 12, 2009, the court granted New York's motion to dismiss and denied our motion for summary judgment. We appealed thedecision and on November 4, 2010 the Appellate Division of the New York Supreme Court upheld part of the lower court's ruling rejecting our claims that thelaw is unconstitutional on its face, but remanded our claims that the law is unconstitutional as applied, for further discovery and proceedings in the lowercourt. We have filed with the New York State Court of Appeals a motion of leave to appeal the portions of the decision upholding the lower court's ruling.The court has not yet ruled on the motion. On August 12, 2008, we along with seven other defendants, were sued in the United States District Court for the Northern District of California, by SeanLane, 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 our use of a product known as Facebook Beacon, created and provided to us by Facebook, Inc. Facebook Beaconprovided the means for Facebook users to share purchasing data among their Facebook friends.F-32 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)14. COMMITMENTS AND CONTINGENCIES (Continued)The parties extended by agreement the time for defendants' answer, including our answer, and thereafter, the Plaintiff and Facebook proposed a stipulatedsettlement to the court for approval, which would resolve the case without requirement of financial contribution from us. On March 17, 2010, over objectionslodged by some parties, the court accepted the proposed settlement. Various parties objecting to the settlement have appealed and their appeal is nowpending. The nature of the loss contingencies relating to claims that have been asserted against us are described above. However, no estimate of the loss orrange of loss can be made. On November 14, 2008, we filed suit in Ohio state court against the Ohio Tax Commissioner, the Ohio Attorney General and the Governor of Ohio,alleging the Ohio Commercial Activity Tax is unconstitutional. Enacted in 2005, Ohio's Commercial Activity Tax is based on activities in Ohio thatcontribute to production or gross income for a company whether or not the company has a physical presence in or nexus within the state. Our complaintasked for a judgment declaring the tax unconstitutional and for an injunction preventing any enforcement of the tax. The defendants moved to dismiss thecase. On July 28, 2009, the trial court ruled that there was no justiciable controversy in the case, as we had not yet been assessed a tax, and it granted thedefendants' motions to dismiss. In September 2009, we received a letter of determination from the Ohio Department of Taxation noting the Department'sdetermination that we are required to register for remitting of the Commercial Activity Tax, and owe $612,784 in taxes, interest, and penalties as of June 30,2009. The Ohio Department of Taxation issued additional estimated assessments of estimated tax, interest and penalties totaling $24,545 for the periodJuly 1, 2009 through December 31, 2009 in September, 2010. We have filed protests to challenge the Department's Assessments on constitutional groundsand the matter is currently pending before the Ohio Department of Taxation's Legal Division for administrative review and determination. The nature of theloss contingencies relating to claims that have been asserted against us are described above. We believe the determinations to be unlawful, erroneous and arevigorously contesting the determination. On March 10, 2009, we were sued in a class action filed in the United States District Court, Eastern District of New York. Cynthia Hines, the nominativeplaintiff on behalf of herself and others similarly situated, seeks damages under claims for breach of contract, common law fraud and New York consumerfraud laws. The Plaintiff alleges we failed to properly disclose our returns policy to her and that we improperly imposed a "restocking" charge on her return ofa vacuum cleaner. We filed a motion to dismiss based upon assertions that our agreement with our customers requires all such actions to be arbitrated in SaltLake City, Utah. Alternatively, we asked that the case be transferred to the United States District Court for the District of Utah, so that arbitration may becompelled in that district. On September 8, 2009 the motion to dismiss or transfer was denied, the court stating that our browsewrap agreement wasinsufficient under New York law to establish an agreement with the customer to arbitrate disputes in Utah. On October 8, 2009, we filed a Notice of Appeal ofthe court's ruling. The appeal was denied. On December 31, 2010 Hines filed an amended complaint. The amended complaint eliminated common law fraudclaims and breach of contract claims and added claims for breach of Utah's consumer protection statute and various other state consumer protection statutes.The amended complaint also asks for an injunction. 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 suit is in discovery, and we intend to vigorously defend this action.F-33 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)14. COMMITMENTS AND CONTINGENCIES (Continued) On September 23, 2009 SpeedTrack, Inc. sued us along with 27 other defendants in the United States District Court in the Northern District of California.We are alleged to have infringed a patent covering search and categorization software. We believe that certain third party vendors of products and servicessold to us are contractually obligated to indemnify us in this action. On November 11, 2009, the parties stipulated to stay all proceedings in the case untilresolution of a the United States Patent and Trademark Office had concluded and resolved a reexamination of the patent in question, and also until apreviously filed infringement action against Wal-Mart Stores, Inc. and other retailers resulted either in judgment or dismissal. Subsequently, the partiesagreed to extend the time for defendants' complaint answer until 21 days following a court order to lift the stay to which the parties stipulated. 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.We intend to vigorously defend this action and pursue our indemnification rights with our vendors. On or about September 25, 2009 Alcatel-Lucent USA, Inc. filed suit against us and 12 other defendants in the United States District Court in the EasternDistrict of Texas. We are alleged to have infringed three Internet-related and search software patents. We believe that certain third party vendors of productsand services sold to us are contractually obligated to indemnify us in this action. We have answered the complaint. The case is in its discovery stages. Thenature 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 loss canbe made. We intend to vigorously defend this action and pursue our indemnification rights with our vendors. On or about January 15, 2010 Nancy Davis LLC filed suit against us in the United States District Court in the Central District of California for trademarkinfringement for heart-shaped, peace sign jewelry. Certain third party vendors of such products sold to us we contractually obligated to indemnify us in thisaction. On November 3, 2010 we settled the action for a nominal amount. The case has been dismissed. On May 11, 2010 Site Update Solutions, LLC filed suit against us and 34 other defendants in the United States District Court in the Eastern District ofTexas for infringement of a patent claiming "a process for maintaining ongoing registration for pages on a given search engine . . . a method to actively causean updating of a specific Internet search engine database regarding a particular WWW resource." We have answered the complaint. The case is in its earlystages. The nature of the loss contingencies relating to claims that have been asserted against us are described above. However, no estimate of the loss orrange of loss can be made. We intend to vigorously defend this action and pursue our indemnification rights with our vendors. On July 2, 2010 AdjustaCam LLC filed suit against us and 59 other defendants in the United States District Court in the Eastern District of Texas forinfringement of a patent covering hinged apparatuses for supporting cameras. We believe that if called upon to defend the action, certain third party vendorsof such devices sold to us are contractually obligated to indemnify us in this action. We have answered the complaint and counterclaimed. The case is in itsearly stages. The nature of the loss contingencies relating to claims that have been asserted against us are described above. However, no estimate of the loss orrange of loss can be made. We intend to vigorously defend the action and pursue our indemnification rights with our vendors. On August 4, 2010 EON Corp. IP Holdings, LLC filed suit against us and 16 other defendants in the United States District Court in the Eastern District ofTexas for infringement of a patent covering aF-34 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)14. COMMITMENTS AND CONTINGENCIES (Continued)system and method for communicating between local subscriber units and a local base station repeater cell in a two-way communication interactive videonetwork. The complaint alleges that we participate in joint infringement, contribute to infringement or induce others to infringe the patent because we sellmobile devices which devices are enabled with infringing components or which perform processes which infringe the patent. We believe that if called uponto defend the action, certain third party vendors of such devices sold to us are contractually obligated to indemnify us in this action. We have answered thecomplaint. The case 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 estimate of the loss or range of loss can be made. We intend to vigorously defend this action and pursue our indemnification rights with ourvendors. On September 10, 2010 Guildersleeve Holdings AG, LLC filed suit against us and 19 other defendants in the United States District Court in the CentralDistrict of California for infringement of a patent covering a system and method for updating "a database of metadata defining a predetermined plurality ofviewer states in the manner claimed" in the patent suit. We resolved this matter by acquiring a license for a nominal payment and the case has been dismissed. On September 29, 2010, a trustee in bankruptcy filed against us an adversary proceeding in the matter of In re: Petters Company, Inc., a case filed inUnited States Bankruptcy Court, in the District of Minnesota. The complaint alleges principal causes of action against us under various Bankruptcy Codesections and the Minnesota Fraudulent Transfer Act, to recover damages for alleged transfers of property from the Petters Company occurring prior to thefiling of the case initially as a civil receivership in October 2008. The trustee's complaint alleges such transfers occurred in at least one note transactionwhereby we transferred at least $2,300,000 and received in return transfers totaling at least $2,547,406. The trustee does not specify a date for thetransactions; however we believe that any alleged transaction with the Petters Company would have taken place in excess of seven years from the date of thefiling of the adversary proceeding. The case is in its early stages. The nature of the loss contingencies relating to claims that have been asserted against us aredescribed above. However, no estimate of the loss or range of loss can be made. We intend to vigorously defend this action. We have received a notice from the Securities and Exchange Commission ("SEC") stating that the SEC is conducting an investigation concerning ourpreviously-announced financial restatements of 2006 and 2008 and other matters. The subpoena accompanying the notice covers documents related to therestatements and also to our billings to our partners in the fourth quarter of 2008 and related collections, and our accounting for and implementation ofsoftware relating to our accounting for customer refunds and credits, including offsets to partners, and related matters. We have been and will continue tocooperate fully with the investigation. We establish liabilities when a particular contingency is probable and estimable. We believe the $1.3 million accrued at December 31, 2010 in ourconsolidated financial statements is adequate in light of the probable and estimable liabilities. It is reasonably possible that the potential losses may exceedour accrued liabilities. We have other contingencies which are reasonably possible; however, the reasonably possible exposure to losses cannot currently be estimated. We recognized a reduction in legal expenses of $4.5 million and $7.1 million during the years ended December 31, 2010 and 2009, respectively, relatedto the settlement of legal matters.F-35 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)15. INDEMNIFICATIONS AND GUARANTEES During our normal course of business, we have made certain indemnities, commitments, and guarantees under which we may be required to makepayments in relation to certain transactions. These indemnities include, but are not limited to, indemnities to various lessors in connection with facility leasesfor certain claims arising from such facility or lease, and indemnities to our directors and officers to the maximum extent permitted under the laws of the Stateof Delaware. The duration of these indemnities, commitments, and guarantees varies, and in certain cases, is indefinite. In addition, the majority of theseindemnities, commitments, and guarantees do not provide for any limitation of the maximum potential future payments we could be obligated to make. Assuch, we are unable to estimate with any reasonableness our potential exposure under these items. We have not recorded any liability for these indemnities,commitments, and guarantees in the accompanying consolidated balance sheets. We do, however, accrue for losses for any known contingent liability,including those that may arise from indemnification provisions, when future payment is both probable and reasonably estimable.16. 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 our common stock through December 31, 2010.Redeemable 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. On August 31, 2009, we entered into a Tolling and Standstill Agreement (the "Tolling Agreement") with the Overstock.com, Inc. Employee BenefitsCommittee (the "Committee") relating to the 401(k) plan. We entered into the Tolling Agreement in order to preserve certain rights, if any, of planparticipants who acquired shares of Overstock common stock in the plan between July 1, 2008 and June 30, 2009. In August 2010, we made a registeredrescission offer to affected participants in the plan who acquired shares of Overstock common stock during the Purchase Period. The rescission offer appliedto shares purchased during the Purchase Period at prices ranging from $6.77 per share to $21.17 per share. On October 6, 2010, our rescission offer expired. Asa result of the offer, we repurchased 1,202 shares of common stock for $26,000. On October 14, 2010 we terminated the Tolling Agreement. We reclassified17,763 shares or $260,000 of common stock from temporary to permanent equity due to the expiration of potential rescission rights. The remainingredeemable shares will be reclassified into permanent equity upon the expiration of potential rescission rights associated with those common shares. AtDecember 31, 2010 and 2009, approximately 46,000 shares or $570,000 andF-36 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)16. STOCKHOLDERS' EQUITY (Continued)65,000 shares or $744,000 of our common stock plus interest were classified outside stockholders' equity, respectively.17. STOCK AND DEBT REPURCHASE PROGRAM On February 17, 2009, the Board of Directors approved a debt repurchase program that authorized us to use up to $20.0 million in cash to repurchase aportion of our Senior Notes. On September 21, 2010, the Board of Directors approved a $15.0 million increase to our existing debt repurchase program. Underthis repurchase program, we retired $25.4 million of the Senior Notes during the year ended December 31, 2010 for $24.9 million in cash, resulting in a gainof $346,000 on early extinguishment of debt, net of $158,000 of associated unamortized discount. A portion of the Senior Notes retired during 2010, werepurchased from a related party (See Note 22 "Related Party Transactions"). We retired $7.4 million of the Senior Notes during the year ended December 31,2009 for $4.6 million in cash, resulting in a gain of $2.8 million on early extinguishment of debt, net of $92,000 of associated unamortized discount. As ofDecember 31, 2010 and December 31, 2009, $34.5 million and $59.5 million of the Senior Notes, net of debt discount, remained outstanding, respectively. During the years ended December 31, 2010 and 2009, we withheld from vesting restricted stock awards a total of 63,404 and 36,081 shares of ourcommon stock for $825,000 and $340,000 respectively. The shares withheld represented the minimum tax withholdings upon the vesting of those restrictedstock award grants to satisfy the minimum tax withholdings owed by the grantee of the restricted stock award grant. None of these shares were repurchased inthe open market. On February 1, 2011 our Board of Directors approved a $10 million increase to our previously-announced debt repurchase program. With this increasewe may repurchase up to $15 million of our outstanding Senior Notes. On February 7, 2011, we retired an additional $10.1 million of our outstanding SeniorNotes from a related party (See Note 22 "Related Party Transactions") reducing the balance outstanding to a face amount of $24.5 million.18. STOCK-BASED AWARDSValuation Assumptions During the year ended December 31, 2008, total stock options granted to employees were 11,000 with estimated total grant-date fair values of $106,000.We did not grant any options during the years ended December 31, 2010 and 2009. During the years ended December 31, 2010, 2009 and 2008, we recordedstock-based compensation related to stock options of $1.6 million, $2.2 million and $3.3 million, respectively. The fair value for each stock option granted during the year ended December 31, 2008 was estimated at the date of grant using the Black Scholes Mertonoption-pricing model, assuming no dividends and the following assumptions.F-37 December 31,2008 Average risk-free interest rate 2.91%Average expected life (in years) 6.3 Volatility 70.6% Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)18. STOCK-BASED AWARDS (Continued) Expected Volatility: The fair value of stock based payments were valued using a volatility factor based on historical stock prices over the expectedterm. Expected Term: For 2008 option grants, we elected to use the "simplified method" as discussed in Staff Accounting Bulletin ("SAB") No. 107, ShareBased Payment ("SAB No. 107"), to develop an estimate of expected term. In December 2007, the SEC issued SAB No. 110, Certain Assumptions Used inValuation Methods—Expected Term ("SAB No. 110"). According to SAB No. 110, under certain circumstances the SEC staff will continue to accept the useof the simplified method as discussed in SAB No. 107, in developing an estimate of expected term of "plain vanilla" share options in accordance with ASCTopic 718, beyond December 31, 2007. We had no stock option grants in 2009 and 2010. 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 on the implied yield currently available on U.S. Treasury zero-coupon issues with remainingterm equivalent to the expected term of the options. Estimated Pre-vesting Forfeitures: When estimating forfeitures, we consider voluntary and involuntary termination behavior.Stock Option Activity Our board of directors adopted the 2005 Equity Incentive Plan (the "Plan"), in April 2005. Under this Plan, the Board of Directors may issue incentivestock options to employees and directors of the Company and non-qualified stock options to consultants of the Company. Options granted under this Plangenerally expire at the end of ten years and vest in accordance with a vesting schedule determined by our Board of Directors, usually over four years from thegrant date. As of December 31, 2010, 1.1 million shares of stock based awards are available for future grants under the 2005 Equity Incentive Plan. We settlestock option exercises with newly issued common shares. The following is a summary of stock option activity (in thousands, except per share data):F-38 2010 2009 2008 Shares Weighted AverageExercisePrice Shares Weighted AverageExercisePrice Shares Weighted AverageExercisePrice Outstanding—beginning of year 721 $20.29 974 $21.27 1,161 $20.48 Granted at fair value — — — — 11 14.14 Exercised (90) 17.05 (2) 15.82 (112) 12.96 Expired/Forfeited (135) 30.41 (251) 24.12 (86) 20.45 Outstanding—end of year 496 $18.09 721 $20.29 974 $21.27 Options exercisable at year-end 472 $18.08 543 $21.17 609 $23.18 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)18. STOCK-BASED AWARDS (Continued) The following table summarizes information about stock options as of December 31, 2010 (in thousands, except per share data): Total unrecognized compensation costs related to nonvested stock option awards was approximately $239,000, $1.8 million and $4.2 million as ofDecember 31, 2010, 2009 and 2008, respectively. These unrecognized compensation costs related to nonvested awards are expected to be recognized overthe weighted average period of one year. The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our stock price of $16.48 as of December 31, 2010,which would have been received by the option holders had all option holders exercised their options as of that date. There were 4,000 in-the-money optionsexercisable as of December 31, 2010. The weighted average exercise price of options granted during the year ended December 31, 2008 was $14.14 per share. We did not grant any optionsduring the years ended December 31, 2010 and 2009. The total intrinsic value of options exercised during the years ended December 31, 2010, 2009 and2008 was $381,000, $2,000 and $364,000, respectively. The total cash received from employees as a result of employee stock option exercises during theyears ended December 31, 2010, 2009 and 2008 were approximately $1.5 million, $29,000 and $1.5 million, respectively. In connection with these exercises,there was no tax benefit realized due to our current net operating loss position.Restricted Stock Unit Activity For the years ended December 31, 2010, 2009 and 2008, 302,000, 366,000 and 491,000 restricted stock units were granted, respectively. The cost ofrestricted stock units is determined using the fair value of our common stock on the date of the grant and compensation expense is recognized straight-lineover the three year vesting schedule. The weighted average grant date fair value of restricted stock units granted during the years ended December 31, 2010,2009 and 2008 was $13.17, $10.15 and $12.64, respectively.F-39 Options Outstanding Options Exercisable Range of Exercise Prices Shares Weighted AverageExercise Price AverageRemainingContract Life AggregateIntrinsic Value Shares Weighted AverageExercise Price AverageRemainingContract Life AggregateIntrinsicValue $10.80 - $16.99 6 $13.56 6.74 $20 4 $14.43 6.64 $9 $17.08 - $17.58 406 17.11 6.00 — 389 17.11 5.99 — $20.00 - $27.40 76 22.02 2.03 — 72 22.11 1.78 — $34.65 - $35.85 8 34.81 6.82 — 7 34.81 6.82 — 496 $18.09 5.41 $20 472 $18.08 5.36 $9 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)18. 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, 2010, 2009 and 2008, we recorded stock based compensation related to restricted stock units of $3.5 million,$2.6 million and $1.4 million, respectively. Changes to the forfeiture rate are accounted for as a cumulative effect of change in the period of such change. At December 31, 2010, there were 685,000 restricted stock units that remained outstanding. On January 22, 2011, we granted 225,000 additionalrestricted 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. The Plan provided for a three-year period for the measurement of our attainment of the performance goaldescribed in the form of grant. During the year ended December 31, 2008, we reversed the $1.0 million cumulative total of compensation expense accrued under the Plan as the Boarddetermined no payments would be made under the Plan. The Plan expired December 31, 2008.19. EMPLOYEE RETIREMENT PLAN We have a 401(k) defined contribution plan which permits participating employees to defer up to a maximum of 25% of their compensation, subject tolimitations established by the Internal Revenue Code. Employees who have completed a half-year of service and are 21 years of age or older are qualified toparticipate in the plan. We match 50% of the first 6% of each participant's contributions to the plan. Beginning in 2006 through January 2008, our matchingcontributions were made in common stock issued from treasury. For the remainder of 2008, the matching contributions were made in cash. Our matchingcontributions for 2010 and 2009 were made in cash and common stock issued from treasury. Participant contributions are immediately vested. Ourcontributions vest based on the participant's years of service at 20% per year over five years. Our matching contribution totaled $770,000, $647,000 and$570,000 for the years ended December 31, 2010, 2009 and 2008, respectively. In addition, discretionary contributions of $471,000 for 2010, $885,000 for2009 and zero for 2008 were made to eligible participants as of the end of each respective calendar year.F-40 2010 2009 2008 Units Weighted AverageGrant DateFair Value Units Weighted AverageGrant DateFair Value Units Weighted AverageGrant DateFair Value Outstanding—beginning of year 640 $11.35 449 $12.69 — $— Granted at fair value 302 13.17 366 10.15 491 12.64 Vested (185) 11.52 (110) 12.64 — — Forfeited (72) 11.50 (65) 11.55 (42) 12.13 Outstanding—end of year 685 $12.08 640 $11.35 449 $12.69 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)19. EMPLOYEE RETIREMENT PLAN (Continued) 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, subject to the restrictions contained in the plan. Participants are 100% vested in their deferredcompensation amounts and the associated gains or losses. For our contributions, if any, and the associated gains or losses, the participants shall vest in thosedeferred compensation amounts according to a vesting schedule that we shall determine at the time our contribution is made. As of December 31, 2010, wehave not made any contributions into the NQDC Plan. Participants are generally eligible to receive distributions from the plan two plan years subsequent tothe plan year their initial deferral contribution is made. Deferred compensation amounts are held in a "rabbi trust," which invests primarily in mutual funds.The trust assets, which consist primarily of mutual funds, are recorded in our consolidated balance sheets because they are subject to the claims of ourcreditors. The corresponding deferred compensation liability represents the amounts deferred by the plan participants plus or minus any earnings or losses onthe trust assets. The trust's assets totaled $148,000 while the NQDC Plan's liabilities totaled $154,000 at December 31, 2010. The assets and liabilities of theNQDC Plan were included in Other long-term assets and Other long-term liabilities in the consolidated balance sheets. The gains and losses on the NQDCPlan's assets were immaterial for the year ended December 31, 2010.20. OTHER INCOME (EXPENSE), NET Other income (expense), net consisted of the following (in thousands):F-41 Years ended December 31, 2010 2009 2008 Gain from early retirement of 3.75% convertible senior notes $346 $2,810 $2,849 Loss on settlement of notes receivable — — (3,929)Gift card breakage 909 343 — Other 833 124 (366) Total other income (expense), net $2,088 $3,277 $(1,446) Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)21. INCOME TAXES The provision for income taxes consists of the following (in thousands): The components of our deferred tax assets and liabilities as of December 31, 2010 and 2009 are as follows (in thousands): As a result of our history of losses, a valuation allowance has been provided for the full amount of our net deferred tax assets as we believe that it is morelikely than not that these benefits will not be realized. We recorded a tax provision of $359,000 for the year ended December 31, 2010, for federal alternativeminimum taxes and state taxes. At December 31, 2010 and 2009, we had U.S. federal net operating loss carry-forwards of approximately $166.7 million and $180.9 million and state netoperating loss carry-forwards of approximately $150.7 million and $165.0 million, respectively, which may be used to offset future taxable income. We arecurrently reviewing whether we had any ownership changes during the period we operated as a loss company before 2009. The result of having ownershipchanges under IRS Code Section 382 would limit the amount of net operating losses that could be used in any annual period. Our carry-forwards begin toexpire in 2018.F-42 Years endedDecember 31, 2010 2009 Current: Federal $226 $145 State 133 112 Total current 359 257 Deferred: Federal $— $— State — — Total deferred — — Total provision for income taxes $359 $257 December 31, 2010 2009 Deferred tax assets and liabilities: Net operating loss carry-forwards $66,241 $68,755 Temporary differences: Accrued expenses 5,536 4,246 Reserves and other 6,369 5,667 Depreciation and amortization (1,095) 1,577 77,051 80,245 Valuation allowance (77,051) (80,245) Net asset $— $— Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)21. INCOME TAXES (Continued) The income tax provision 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): We are subject to audit by the IRS and various states for periods since inception. We do not believe there will be any material changes in ourunrecognized tax positions over the next 12 months. Our policy is to recognize interest and penalties accrued on any unrecognized tax positions as acomponent of income tax expense. A reconciliation of the beginning and ending tax contingencies, excluding interest and penalties, is as follows (in thousands): The interest and penalties accrued on tax contingencies as of December 31, 2010 and 2009 were $53,000 and $34,000, respectively. Tax years beginningin 2006 are subject to examination by taxing authorities, although net operating loss and credit carryforwards from all years are subject to examinations andadjustments for at least three years following the year in which the attributes are used.22. 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 us on any matter relating to our operations, policies or practices. Mr. Joyce and the Company concurrently ended ourconsulting arrangement with Icent LLC, which is a management consulting company of which Mr. Joyce is the chief executive officer, and through whichMr. Joyce provided consulting services to us. In connection with the termination of the consulting arrangement, we accrued $1.25 million, which was paid toMr. Joyce on April 1, 2009. On occasion, Haverford-Valley, L.C. (an entity owned by our Chairman and Chief Executive Officer) and certain affiliated entities make travelarrangements for our executives and pay the travelF-43 Year ended December 31, 2010 2009 2008 U.S. federal income tax (provision) benefit at statutory rate $(4,940)$(2,762)$3,880 State income tax benefit (expense), net of federal expense (86) (112) 147 Stock based compensation expense (484) (781) (1,491)Other (73) (64) (2,009)Change in valuation allowance 5,224 3,462 (527) Income tax provision $(359)$(257)$— Year ended December 31, 2010 2009 2008 Beginning balance $112 $— $— Additions for tax positions related to the current year — 112 — Additions for tax positions taken in prior years 79 — — Ending balance $191 $112 $— Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)22. RELATED PARTY TRANSACTIONS (Continued)related expenses incurred by our executives on company business. In 2010, 2009 and 2008 we reimbursed Haverford-Valley L.C. $139,000, $79,000, and$111,000, respectively, for these expenses. During 2010, we repurchased a portion of our Senior Notes held by Fairfax Financial Holdings Limited ("Fairfax") or an affiliate of Fairfax having anaggregate principal amount of $15.2 million for $15.0 million in cash. After the repurchase, Fairfax held Senior Notes having an aggregate principal amountof $21.7 million. Fairfax has beneficial ownership of more than 5% of our common stock. Subsequent to our repurchase of the Senior Notes from Fairfax, weappointed Mr. Samuel A. Mitchell to our Board. Mr. Mitchell is a Managing Director of Hamblin Watsa Investment Counsel, a wholly-owned subsidiary ofFairfax. On February 1, 2011, we repurchased a portion of our Senior Notes held by Chou Associates Management Inc. ("Chou") or an affiliate of Chou having anaggregate principal amount of $10.1 million for $10.1 million in cash. The repurchase was for 100% of Senior Notes that were held by Chou. Chou hasbeneficial ownership of more than 5% of our common stock.23. BUSINESS SEGMENTS Segment information has been prepared in accordance with ASC Topic 280 Segment Reporting. Segments were determined based on how we manage thebusiness. There were no inter-segment sales or transfers during the years ended December 31, 2010, 2009 and 2008. We evaluate the performance of oursegments and allocate resources to them based primarily on gross profit. The table below summarizes information about reportable segments for the yearsended December 31, 2010, 2009 and 2008 (in thousands):F-44 Year ended December 31, Direct Fulfillmentpartner Total 2010 Revenue, net $209,646 $880,227 $1,089,873 Cost of goods sold 187,124 713,109 900,233 Gross profit $22,522 $167,118 $189,640 Operating expenses (174,675)Other income (expense), net (717)Provision for income taxes (359) Net income $13,889 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 $7,747 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)23. BUSINESS SEGMENTS (Continued) The direct segment includes revenues, direct costs, and cost allocations associated with sales fulfilled from our warehouses. Costs for this segmentinclude product costs and outbound freight, warehousing and fulfillment costs, credit card fees and customer service costs. The fulfillment partner segment includes revenues, direct costs and cost allocations associated with our third-party fulfillment partner sales and areearned from selling the merchandise of third parties over our Website. Costs for this segment include product costs, outbound freight and fulfillment costs,credit card fees and customer service costs. Assets have not been allocated between the segments for our internal management purposes and, as such, they are not presented here. For the years ended December 31, 2010, 2009 and 2008, over 99% of sales were made to customers in the United States of America. At December 31,2010 and December 31, 2009, all of our fixed assets were located in the United States of America.F-45 Year ended December 31, Direct Fulfillmentpartner Total 2008 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 $(11,006) Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)24. QUARTERLY RESULTS OF OPERATIONS (unaudited) The following tables set forth our unaudited quarterly results of operations data for the eight most recent quarters for the period ended December 31,2010. We have prepared this information on the same basis as the consolidated statements of operations and the information includes all adjustments that weconsider necessary for a fair statement of its financial position and operating results for the quarters presented.F-46 Three Months Ended March 31,2010 June 30,2010 September 30,2010 December 31,2010 March 31,2009 June 30,2009 September 30,2009 December 31,2009 (in thousands, except per share data) Consolidated Statement ofOperations Data: Revenue, net Direct $50,568 $42,382 $47,508 $69,188 $34,882 $28,685 $32,281 $55,053 Fulfillment partner 213,762 188,871 197,912 279,682 150,847 146,213 161,502 267,306 Total net revenue 264,330 231,253 245,420 348,870 185,729 174,898 193,783 322,359 Cost of goods sold Direct 43,584 37,434 43,174 62,932 30,397 23,532 28,471 48,490 Fulfillment partner 173,475 152,240 160,868 226,526 119,201 115,079 128,000 218,847 Total cost of goods sold 217,059 189,674 204,042 289,458 149,598 138,611 156,471 267,337 Gross profit 47,271 41,579 41,378 59,412 36,131 36,287 37,312 55,022 Operating expenses: Sales and marketing 14,279 14,179 15,626 17,250 13,587 11,162 12,222 18,578 Technology 13,948 14,178 14,186 15,948 13,591 12,708 12,499 13,538 General and administrative 14,906 14,503 14,742 11,499 13,834 12,326 13,288 9,458 Restructuring (136) — — (433) — (66) — — Total operating expenses 42,997 42,860 44,554 44,264 41,012 36,130 38,009 41,574 Operating income (loss) 4,274 (1,281) (3,176) 15,148 (4,881) 157 (697) 13,448 Interest income 16 40 55 46 123 27 11 9 Interest expense (802) (760) (668) (732) (922) (808) (977) (763)Other income (expense), net 371 652 387 678 1,736 954 297 290 Net income (loss) before income taxes 3,859 (1,349) (3,402) 15,140 (3,944) 330 (1,366) 12,984 (Provision) benefit for income taxes (129) 7 44 (281) — — — (257) Net income (loss) $3,730 $(1,342)$(3,358)$14,859 $(3,944)$330 $(1,366)$12,727 Deemed dividend related toredeemable common stock (14) (63) (23) (12) (11) (11) (13) (13)Net income (loss) attributable tocommon shares $3,716 $(1,405)$(3,381)$14,847 $(3,955)$319 $(1,379)$12,714 Net income (loss) per common share—basic: Net income (loss) per share—basic $0.16 $(0.06)$(0.15)$0.64 $(0.17)$0.01 $(0.06)$0.56 Weighted average common sharesoutstanding—basic 22,941 23,013 23,060 23,060 22,803 22,817 22,824 22,838 Net income (loss) per common share—diluted: Net income (loss) per share—diluted $0.16 $(0.06)$(0.15)$0.63 $(0.17)$0.01 $(0.06)$0.55 Weighted average common sharesoutstanding—diluted 23,243 23,013 23,060 23,466 22,803 23,049 22,824 23,272 Table of Contents Schedule IIValuation and Qualifying Accounts(dollars in thousands) S-1 Balance atBeginning ofYear Charged toExpense Deductions Balance atEnd of Year Year ended December 31, 2010 Deferred tax valuation allowance $80,245 $— $3,194 $77,051 Allowance for sales returns 11,923 88,473 88,871 11,525 Allowance for doubtful accounts 1,730 780 462 2,048 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 Year ended December 31, 2008 Deferred tax valuation allowance $85,916 $527 $— $86,443 Allowance for sales returns 24,326 66,522 74,615 16,233 Allowance for doubtful accounts 2,477 550 1,433 1,594 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 2010, 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 Stock UnitsGranted(1) Allison H. Abraham May 11, 2010 10,000 Barclay F. Corbus May 11, 2010 10,000 Joseph J. Tabacco, Jr. May 11, 2010 10,000 John J. Byrne May 11, 2010 10,000 Samuel A. Mitchell October 26, 2010 10,000 (1)Each restricted stock unit represents a contingent right to receive one share of Overstock.com, Inc. common stock. The restricted stockunits vest as to 25% at the close of business on the first anniversary of the date of grant, 25% at the second anniversary of the date ofgrant, and the remaining 50% at the third anniversary of the date of grant. Vested shares are delivered promptly after the restrictedstock units vest. QuickLinksExhibit 10.29 QuickLinks -- Click here to rapidly navigate through this document Exhibit 21 SUBSIDIARIES OF THE REGISTRANT Name Jurisdiction of Formation Trade NamesOverstock.com Real Estate LLC Utah Overstock.com Real EstateOverstock.com Services, Inc. Utah Overstock.com Services QuickLinksExhibit 21SUBSIDIARIES OF THE REGISTRANT 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 for the year ended December 31, 2008 and financial statement schedule for the year ended December 31, 2008, which appears in this Form 10-K./s/ PricewaterhouseCoopersSalt Lake City, UtahFebruary 28, 2011 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-8of Overstock.com, Inc. of our reports dated February 28, 2011, with respect to the consolidated balance sheets of Overstock.com, Inc. as of December 31, 2010and 2009, and the related consolidated statements of operations, stockholders' equity, cash flows, and comprehensive income for each of the years in the two-year period ended December 31, 2010, and the related financial statement schedule, and the effectiveness of internal control over financial reporting as ofDecember 31, 2010, which reports appear in the December 31, 2010 annual report on Form 10-K of Overstock.com, Inc./s/ KPMG LLPSalt Lake City, UTFebruary 28, 2011 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: February 28, 2011 /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: February 28, 2011 /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, 2010 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: February 28, 2011 /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 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, 2010 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: February 28, 2011 /s/ STEPHEN J. CHESNUT Name: Stephen J. Chesnut Title: Senior Vice President, Finance andRisk Management (principal financial officer) QuickLinksExhibit 32.2
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