Edgar Filing: OVERSTOCK.COM, INC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-49799

OVERSTOCK.COM, INC.

(Exact name of registrant as specified in its charter)

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

6350 South 3000 East

Salt Lake City, Utah 84121

(Address, including zip code, of Registrant’s principal executive offices)

Registrant’s telephone number, including area code: (801) 947-3100

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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

Large accelerated filer o		Accelerated filer x

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

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

There were 23,276,043 shares of the Registrant’s common stock, par value $0.0001, outstanding on October 14, 2011.

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TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION	3

Item 1. Financial Statements (Unaudited)	3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3. Quantitative and Qualitative Disclosures about Market Risk	45

Item 4. Controls and Procedures	45

PART II. OTHER INFORMATION	46

Item 1. Legal Proceedings	46

Item 1A. Risk Factors	46

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 3. Defaults upon Senior Securities	50

Item 4. (Removed and Reserved)	50

Item 5. Other Information	50

Item 6. Exhibits	50

Signature	51

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PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

Overstock.com, Inc.

Consolidated Balance Sheets (Unaudited)

(in thousands)

	September 30,			December 31,
	2011			2010
Assets
Current assets:
Cash and cash equivalents	$	79,138		$	124,021
Restricted cash	2,383			2,542
Accounts receivable, net	8,445			13,560
Inventories, net	19,210			32,114
Prepaid inventories, net	1,415			2,082
Prepaids and other assets	15,254			11,651
Total current assets	125,845			185,970
Fixed assets, net	27,085			27,800
Goodwill	2,784			2,784
Other long-term assets, net	2,261			1,405
Total assets	$	157,975		$	217,959

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	42,552		$	67,311
Accrued liabilities	37,684			40,751
Deferred revenue	21,180			24,027
Convertible senior notes, net of debt discount - $0 and $141	—			34,484
Finance obligations, current	5,844			3,922
Capital lease obligations, current	185			729
Total current liabilities	107,445			171,224
Capital lease obligations, non-current	3			113
Finance obligations, non-current	14,485			12,219
Long-term debt	17,000			—
Other long-term liabilities	3,034			3,175
Total liabilities	141,967			186,731

Commitments and contingencies (Note 5)
Redeemable common stock, $0.0001 par value:
Outstanding - 0 and 46	—			570
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 - 26,237 and 25,877 Outstanding shares - 23,277 and 23,015	2			2
Additional paid-in capital	352,728			349,747
Accumulated deficit	(258,356		)	(242,327		)
Treasury stock:
Shares at cost - 2,960 and 2,862	(78,366		)	(76,764		)
Total stockholders’ equity	16,008			30,658
Total liabilities and stockholders’ equity	$	157,975		$	217,959

See accompanying notes to consolidated financial statements.

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Overstock.com, Inc.

Consolidated Statements of Operations (Unaudited)

(in thousands, except per share data)

	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
Revenue, net
Direct	$	34,749		$	47,508		$	116,353		$	140,458
Fulfillment partner	204,989			197,912			623,847			600,545
Total net revenue	239,738			245,420			740,200			741,003
Cost of goods sold
Direct(1)	32,472			43,174			105,733			124,192
Fulfillment partner	168,893			160,868			506,240			486,583
Total cost of goods sold	201,365			204,042			611,973			610,775
Gross profit	38,373			41,378			128,227			130,228
Operating expenses:
Sales and marketing(1)	13,822			15,626			42,902			44,084
Technology(1)	17,171			14,186			50,639			42,312
General and administrative(1)	15,321			14,742			50,032			44,151
Restructuring	—			—			—			(136		)
Total operating expenses	46,314			44,554			143,573			130,411
Operating loss	(7,941		)	(3,176		)	(15,346		)	(183		)
Interest income	23			55			121			111
Interest expense	(662		)	(668		)	(1,968		)	(2,230		)
Other income, net	553			387			962			1,410
Loss before income taxes	(8,027		)	(3,402		)	(16,231		)	(892		)
Provision (benefit) for income taxes	(240		)	(44		)	(202		)	78
Net loss	$	(7,787	)	$	(3,358	)	$	(16,029	)	$	(970	)
Deemed dividend related to redeemable common stock	—			(23		)	(12		)	(99		)
Net loss attributable to common shares	$	(7,787	)	$	(3,381	)	$	(16,041	)	$	(1,069	)
Net loss per common share—basic:
Net loss attributable to common shares—basic	$	(0.33	)	$	(0.15	)	$	(0.69	)	$	(0.05	)
Weighted average common shares outstanding—basic	23,276			23,060			23,253			23,006
Net loss per common share—diluted:
Net loss attributable to common shares—diluted	$	(0.33	)	$	(0.15	)	$	(0.69	)	$	(0.05	)
Weighted average common shares outstanding—diluted	23,276			23,060			23,253			23,006

(1) Includes stock-based compensation as follows (Note 8):
Cost of goods sold — direct	$	47	$	55	$	134	$	157
Sales and marketing	80		152		289		454
Technology	171		272		534		794
General and administrative	403		807		1,454		2,365
Total	$	701	$	1,286	$	2,411	$	3,770

See accompanying notes to consolidated financial statements.

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Overstock.com, Inc.

Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands)

				Additional
	Common stock			Paid-in			Accumulated			Treasury stock
	Shares	Amount		Capital			Deficit			Shares	Amount			Total
Balances at December 31, 2010	25,877	$	2	$	349,747		$	(242,327	)	2,862	$	(76,764	)	$	30,658
Stock-based compensation to employees and directors	—	—		2,411			—			—	—			2,411
Common stock issued upon vesting of restricted stock	314	—		—			—			—	—			—
Purchase of treasury stock	—	—		—			—			98	(1,602		)	(1,602		)
Lapse of rescission rights of redeemable common stock (Note 9)	46	—		582			—			—	—			582
Deemed dividend related to redeemable common stock (Note 9)	—	—		(12		)	—			—	—			(12		)
Net loss	—	—		—			(16,029		)	—	—			(16,029		)
Balance at September 30, 2011	26,237	$	2	$	352,728		$	(258,356	)	2,960	$	(78,366	)	$	16,008

See accompanying notes to consolidated financial statements.

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Overstock.com, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

	Nine months ended September 30,						Twelve months ended September 30,
	2011			2010			2011			2010
Cash flows from operating activities:
Net income (loss)	$	(16,029	)	$	(970	)	$	(1,170	)	$	11,757
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	12,472			10,471			16,581			13,312
Realized loss on marketable securities	—			—			—			9
(Gain) Loss on disposition of fixed asset	—			14			(14		)	13
Stock-based compensation to employees and directors	2,411			3,770			3,697			5,092
Amortization of debt discount	77			306			162			367
(Gain) loss from early extinguishment of debt	54			(346		)	54			(346		)
Restructuring reversals	—			(136		)	(433		)	(136		)
Changes in operating assets and liabilities:
Restricted cash	159			1,872			159			1,743
Accounts receivable, net	5,115			3,252			(57		)	1,012
Inventories, net	12,904			(11,018		)	15,183			(12,358		)
Prepaid inventories, net	667			168			1,296			905
Prepaids and other assets	(3,218		)	(1,176		)	(1,674		)	(852		)
Other long-term assets, net	12			(474		)	271			(514		)
Accounts payable	(24,775		)	(30,837		)	(3,253		)	12,056
Accrued liabilities	(3,507		)	(6,649		)	567			1,098
Deferred revenue	(2,847		)	85			430			1,550
Other long-term liabilities	205			(54		)	(55		)	(54		)
Net cash provided by (used in) operating activities	(16,300		)	(31,722		)	31,744			34,654
Cash flows from investing activities:
Purchases of marketable securities	(119		)	(100		)	(155		)	(100		)
Purchases of intangible assets	(7		)	(380		)	(23		)	(380		)
Sale of marketable securities prior to maturity	—			—			—			(9		)
Investment in precious metals	—			(1,657		)	—			(1,657		)
Expenditures for fixed assets, including internal-use software and website development	(6,344		)	(19,317		)	(7,538		)	(20,583		)
Net cash used in investing activities	(6,470		)	(21,454		)	(7,716		)	(22,729		)
Cash flows from financing activities:
Payments on capital lease obligations	(654		)	(422		)	(722		)	(472		)
Capitalized financing costs	(121		)	—			(121		)	(245		)
Proceeds from finance obligations	1,429			14,577			3,235			14,577
Payments on finance obligations	(3,390		)	—			(4,231		)	—
Paydown on direct financing arrangement	(160		)	(146		)	(211		)	(205		)
Proceeds from long-term debt	17,000			—			17,000			—
Payments to retire convertible senior notes	(34,615		)	(24,865		)	(34,615		)	(24,865		)
Purchase of redeemable stock	—			—			(26		)	—
Purchase of treasury stock	(1,602		)	(821		)	(1,606		)	(828		)
Exercise of stock options	—			1,504			(1		)	1,530
Net cash used in financing activities	(22,113		)	(10,173		)	(21,298		)	(10,508		)
Net increase (decrease) in cash and cash equivalents	(44,883		)	(63,349		)	2,730			1,417
Cash and cash equivalents, beginning of period	124,021			139,757			76,408			74,991
Cash and cash equivalents, end of period	$	79,138		$	76,408		$	79,138		$	76,408
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest paid	$	1,814		$	1,598		$	2,750		$	2,898
Taxes paid	260			187			260			187
Non-cash investing and financing activities:
Fixed assets, including internal-use software and website development, costs financed through accounts payable and accrued liabilities	$	270		$	910		$	155		$	910
Equipment acquired under finance obligations	5,077						5,676			—
Equipment and software acquired under capital lease obligations	—			6			—			—
Lapse of rescission rights of redeemable stock	582			—			842			—
Issuance of common stock from treasury for 401(k) matching contribution	—			87			—			256

See accompanying notes to consolidated financial statements.

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Overstock.com, Inc.

Notes to Unaudited Consolidated Financial Statements

1. BASIS OF PRESENTATION

As used herein, “Overstock.com,” “O.co,” “we,” “our” and similar terms include Overstock.com, Inc. and its subsidiaries, unless the context indicates otherwise. The accompanying unaudited consolidated financial statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our audited annual consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2010. The accompanying unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which are, in our opinion, necessary for a fair presentation of results for the interim periods presented. Preparing financial statements requires us to make estimates and assumptions that affect the amounts that are reported in the consolidated financial statements and accompanying disclosures. Although these estimates are based on our best knowledge of current events and actions that we may undertake in the future, actual results may be different from the estimates. The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of the results to be expected for any future period or the full fiscal year.

2. ACCOUNTING POLICIES

Principles of consolidation

The accompanying consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany account balances and transactions have been eliminated in consolidation.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, investment valuation, receivables valuation, revenue recognition, sales returns, incentive discount offers, inventory valuation, depreciable lives of fixed assets and internally-developed software, goodwill valuation, intangible valuation, income taxes, stock-based compensation, performance-based compensation, restructuring liabilities and contingencies. Actual results could differ materially from those 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, as cash equivalents. Cash equivalents as of September 30, 2011 and December 31, 2010 were $51.2 million and $121.8 million, respectively.

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. At September 30, 2011 and December 31, 2010, restricted cash was $2.4 million and $2.5 million, respectively, 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, which approximates their fair value because of the short-term maturity of these instruments. We are party to a Financing and Security Agreement with U.S. Bank dated December 22, 2009 (as amended on August 19, 2011, the “Financing Agreement”). Our Financing Agreement is also carried at face value, which approximates its fair value due to its variable interest rate.

We account for our assets and liabilities using a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs have created the following fair-value hierarchy:

· Level 1—Quoted prices for identical instruments in active markets;

· Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

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· 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 September 30, 2011 (in thousands):

	Fair Value Measurements at September 30, 2011:
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents and restricted cash - Money market mutual funds	$	53,543	$	53,543	$	—	$	—
Trading securities held in a “rabbi trust” (1)	246		246
Total assets	$	53,789	$	53,789	$	—	$	—
Liabilities:
Deferred compensation accrual “rabbi trust” (3)	249		249		—		—
Total liabilities	$	249	$	249	$	—	$	—

The fair value of these financial instruments was determined using the following levels of inputs as of December 31, 2010 (in thousands):

	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

(1) — Trading securities held in a rabbi trust are included in Other current and long-term assets in the consolidated balance sheets (Note 11—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 the underlying lease agreements discounted based on a credit adjusted risk-free rate of return. See the Level 3 roll forward related to the restructuring accrual at (Note 3—Restructuring Expense).

(3) — Non qualified deferred compensation for rabbi trust is included in Accrued liabilities and Other long-term liabilities in the consolidated balance sheets (Note 11—Employee Retirement Plan).

The estimated fair value of our 3.75% Convertible Senior Notes due 2011 (“Senior Notes”) outstanding at December 31, 2010 was $33.2 million on a carrying value of $34.5 million. The fair value of the Senior Notes was derived using a convertible debt pricing model with observable market inputs, which include stock price, dividend payments, borrowing costs, equity volatility, interest rates and interest spread. On September 21, 2011 we retired all of the outstanding Senior Notes (Note 4— Borrowings).

Restricted investments

In December 2009, we implemented a Non Qualified Deferred Compensation Plan (the “NQDC Plan”) for senior management (Note 11—Employee Retirement Plan). Deferred compensation amounts are invested in mutual funds held in a “rabbi trust” and are restricted for payment to the participants of the NQDC Plan. We account for our investments held in the trust in accordance with Accounting Standards Codification (“ASC”) No. 320 “Investments — Debt and Equity Securities”. The investments held in the trust are classified as trading securities. The fair value of the investments held in the trust totaled $246,000 at September 30, 2011 and are included in Other current and long-term assets in the consolidated balance sheets. Our gains and losses on these investments were immaterial for the three and nine months ended September 30, 2011 and 2010.

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Accounts receivable

Accounts receivable consist primarily of trade amounts due from customers and from uncleared credit card transactions at period end. Accounts receivable are recorded at invoiced amounts and do not bear interest.

Allowance for doubtful accounts

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 our business customers’ financial condition and payment history and maintain an allowance for doubtful accounts receivable based upon our historical collection experience and expected collectability of accounts receivable. The allowance for doubtful accounts receivable was $657,000 and $2.0 million at September 30, 2011 and December 31, 2010, respectively. The decrease in the allowance for doubtful accounts was primarily due to write-offs of accounts receivable during the nine months ended September 30, 2011, which had no significant effect on results of operations for the period as most of the items had been previously reserved.

Concentration of credit risk

Cash equivalents include short-term, highly liquid instruments with maturities at date of purchase of three months or less. At September 30, 2011 and December 31, 2010, two banks held the majority of our cash and cash equivalents. We do not believe that, as a result of this concentration, we are subject to any unusual financial risk beyond 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. We invest 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 doubtful accounts 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 or market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Once established, the original cost of the inventory less the related inventory allowance represents 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 represent inventories paid for in advance of receipt. Prepaid inventories at September 30, 2011 and December 31, 2010 were $1.4 million and $2.1 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 September 30, 2011 and December 31, 2010 were $15.3 million and $11.7 million, respectively.

Fixed assets

Fixed assets, which include assets such as technology infrastructure, internal-use software, website development, furniture and fixtures and leasehold improvements, are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets or the term of the related capital lease, whichever is shorter, as follows:

		Life (years)
Computer software		2-3
Computer hardware		3
Furniture and equipment		3-5

Leasehold improvements are amortized over the shorter of the term of the related leases or estimated useful lives.

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Depreciation and amortization expense is classified within the corresponding operating expense categories on the consolidated statements of operations as follows (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2011		2010		2011		2010
Cost of goods sold - direct	$	137	$	277	$	583	$	912
Technology	3,766		3,296		11,009		8,930
General and administrative	307		253		880		629
Total depreciation and amortization, including internal-use software and website development	$	4,210	$	3,826	$	12,472	$	10,471

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 our Website and processes supporting our business. We capitalize costs incurred during the application development stage of internal-use software and amortize these costs over the estimated useful life of two to three years. Costs incurred related to design or maintenance of internal-use software are expensed as incurred.

During the three months ended September 30, 2011 and 2010, we capitalized $2.3 million and $2.4 million, respectively, of costs associated with internal-use software and website development, both developed internally and acquired externally. Amortization of costs associated with internal-use software and website development was $2.1 million and $1.6 million for those respective periods. During the nine months ended September 30, 2011 and 2010, we capitalized $7.8 million and $7.5 million, respectively, of such costs and had amortization of $6.1 million and $4.7 million for those respective periods.

Revenue recognition

We derive revenue primarily from two sources: direct revenue and fulfillment partner revenue, including listing fees and commissions collected from products being listed and sold through the Auctions tab, which we removed from our site in July 2011, advertisement revenue derived from our real estate listing business, which we removed from our site on June 30, 2011, from our cars listing business, and from advertising on our shopping, vacations and insurance pages. We have organized our operations into two principal segments based on the primary source of revenue: direct revenue and fulfillment partner revenue (see Note 10—Business Segments).

Revenue is recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or the service has been provided; (3) the selling price or fee revenue earned is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. Revenue related to merchandise sales is recognized upon delivery to our customers. As we ship high volumes of packages through multiple carriers, it is not practical for us to track the actual delivery date of each shipment. Therefore, we use estimates to determine which shipments are delivered and therefore recognized as revenue at the end of the period. The delivery date estimates are based on average shipping transit times, which are calculated using the following factors: (i) the type of shipping carrier (as carriers have different in-transit times); (ii) the fulfillment source (either our warehouses or those of our fulfillment partners); (iii) the delivery destination; and (iv) actual transit time experience, which shows that delivery date is typically one to eight business days from the date of shipment.

We evaluate the criteria outlined in ASC Topic 605-45, Principal Agent Considerations, in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. When we are the primary obligor in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators, revenue is recorded gross. If we are not the primary obligor in the transaction and amounts earned are determined using a fixed percentage, revenue is recorded on a net basis. Currently, the majority of both direct revenue and fulfillment partner revenue is recorded on a gross basis, as we are the primary obligor. We 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 percentage discounts off future purchases, and other similar offers. Current discount offers, when used by customers, are treated as a reduction of revenue.

Direct revenue

Direct revenue consists of merchandise sold through our Website to individual consumers and businesses that is fulfilled from our leased warehouses.

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Fulfillment partner revenue

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

We operate an online site for listing cars for sale as a part of our Website. The cars listing service allows dealers to list vehicles for sale and allows buyers to review vehicle descriptions, post offers to purchase, and provides the means for purchasers to contact sellers for further information and negotiations on the purchase of an advertised vehicle. Revenue from the cars listing business is included in the fulfillment partner segment on a net basis.

We offer a consignment service to suppliers where the suppliers’ merchandise is stored in and shipped from our leased warehouses. We pay the consignment supplier upon sale of the consigned merchandise to the consumer. Revenue from consignment service to suppliers is included in fulfillment partner segment on a gross basis.

In April 2011, we began operating a vacations shopping site as part of our website where customers can purchase discount vacation packages. We also earn advertisement revenue from our vacations business. Revenue from the vacations businesses is included in the fulfillment partner segment on a net basis.

In July 2011, we began an insurance shopping service as part of our website where customers can shop for auto and home insurance and compare quotes from various insurance providers. Revenue generated from our insurance shopping site is included in the fulfillment partner segment on a net basis.

We operated an online auction service on our Website. In July 2011, we removed our Marketplace tab from our Website and no longer provide auction services. The financial results and related assets of the online auction service were not significant to our business. The Marketplace tab allowed sellers to list items for sale, buyers to bid on items of interest, and users to browse through listed items online. Except in limited circumstances where our auction site listed returned merchandise, we were not the seller of auction-listed items and had no control over the pricing of those items. Therefore, the listing fees for items sold at auction by sellers were recorded as revenue during the period these items were listed or sold on a net basis. The revenue for the returned merchandise that we sold at auction was recorded on a gross basis. Revenue from the auctions business is included in the fulfillment partner segment.

We operated an online site for listing real estate for sale as a part of our Website. On June 30, 2011, we removed our online site for listing real estate for sale from our Website and no longer provide these real estate listing services. The financial results and related assets of the online site for listing real estate for sale were not significant to our business. The real estate listing service allowed customers to search active listings across the country. Listing categories included foreclosures, live and on-line auctions, for sale by owner listings, broker/agent listings and numerous aggregated classified ad listings. Revenue from the real estate business is included in the fulfillment partner segment on a net basis.

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. On June 30, 2011, we turned off the Eziba.com website; however, we continue to sell the type of products that were listed on Eziba.com through our websites, O.co and Overstock.com.

International business

We began selling products through our website to customers outside the United States in August 2008. As of September 30, 2011, we were offering products to customers in over 90 countries. We do not have operations outside the United States, and are using a U.S. based third party to provide logistics and fulfillment for all international orders. Revenue generated from the international business is included in either direct or fulfillment partner revenue, depending on whether the product is shipped from our leased warehouses or from a fulfillment partner.

Total revenues from International sales were $2.2 million and $2.1 million for the three months ended September 30, 2011 and 2010, respectively and $6.2 million and $6.6 million for the nine months ended September 30, 2011 and 2010, respectively.

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 we recognize revenue ratably over the membership period. The Club O loyalty program allows members to earn reward dollars for qualifying purchases made on our Website. We also have a co-branded credit card program (see “Co-branded credit card program” below for more information). Co-branded cardholders are also Club O members and earn additional reward dollars for purchases made on our Website, and from other merchants. Reward dollars earned may be redeemed on future purchases made through our Website. Club O reward dollars expire 90 days after the customer’s Club O membership expires. We account for these transactions as multiple element arrangements and allocate value to the elements using their relative fair values. We include the value of reward dollars earned in deferred revenue and we record it as a reduction of revenue at the time the reward dollars are earned.

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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 dollars expire 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 upon historical redemption patterns.

In instances where customers receive free Club O reward dollars not associated with any purchases, we account for these transactions as sales incentives such as coupons and record a reduction of revenue at the time the reward dollars are redeemed.

Co-branded credit card program

In September 2010, we launched a co-branded credit card program with a commercial bank for the issuance of credit cards bearing the Overstock.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 customer loyalty program offering reward dollars that customers will accrue from card usage and can use to make purchases on our Website (see “Club O loyalty program” for more information). New account fees are recognized as revenue on a straight-line basis 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 in advance for Club O membership fees as deferred revenue and we recognize it ratably over the membership period. We record Club O reward dollars earned from purchases as deferred revenue at the time they are earned and we recognize it as revenue upon redemption. If reward dollars are not redeemed, we recognize revenue upon expiration. In addition, we also sell gift 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. If a gift card is not redeemed, we recognize revenue when the likelihood of 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 returned items when they arrive at our processing facility. We refund the full cost of the merchandise returned and all original shipping charges 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, our error or our fulfillment partners’ error and the customer initiates a return of an unopened item within 30 days of delivery, for most products we refund the full cost of the merchandise minus the original shipping charge and actual return shipping fees. 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 days after 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 actual return shipping fees.

Revenue is recorded net of estimated returns. We record an allowance for returns based on current period revenues and historical returns experience. We analyze actual historical returns, current economic trends and changes in order volume and acceptance of our products when evaluating the adequacy of the sales returns allowance in any accounting period.

During the three months ended December 31, 2009, we had a change in estimate for our sales returns allowance that reduced the allowance by approximately $3.0 million from the prior quarter-end balance and $3.2 million from the prior year-end balance that was recorded in accordance with ASC 250 “Accounting Changes and Error Corrections” on a prospective basis. The change in estimate for our sales returns allowance had the following impact on our financial results for the three and twelve months ended December 31, 2009 (amounts in thousands, except per share data):

	Three months ended		Twelve months ended
	December 31, 2009		December 31, 2009
	($ Change)		($ Change)
Revenue, net	$	2,995	$	3,208
Gross profit	752		805
Income from continuing operations before income taxes	752		805
Net income	752		805
Net income attributable to common shares - basic	$	0.04	$	0.04
Net income attributable to common shares - diluted	$	0.04	$	0.03

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The reasons for the change in estimate in the fourth quarter of 2009 were as follows. We made improvements to our information systems during 2008 and 2009 that enabled enhanced reporting and analysis of our returns data used in the estimation process. In early 2009, we implemented initiatives to reduce overall return rates in several of our product categories. In September 2009, we entered into a new master supplier agreement with our fulfillment partners that provided financial incentives for suppliers to reduce returns. These initiatives resulted in a sustained decrease in our product return trends resulting in the change in estimate of sales returns allowance during the three months ended December 31, 2009.

Although we believe that our estimates, assumptions, and judgments are reasonable, actual results have historically differed from our estimates. Based on our actual returns experience through September 30, 2011, had our estimated returns equaled our actual returns, our net loss would have decreased approximately $1.5 million for the year ended December 31, 2007, our net loss would have increased approximately $725,000 for the year ended December 31, 2008, and our net income would have decreased approximately $805,000 for the year ended December 31, 2009. Based on the improvements and initiatives discussed above, we believe that our estimates, assumptions and judgments have improved and our actual product returns have not differed materially from our estimates at December 31, 2010 and June 30, 2011.

The allowance for returns was $5.6 million and $11.5 million at September 30, 2011 and December 31, 2010, respectively. The decrease in the sales returns reserve at September 30, 2011 compared to December 31, 2010 is primarily due to decreased revenues mostly due to seasonality.

Credit card chargeback allowance

Revenue is recorded net of credit card chargebacks. We maintain an allowance for credit card chargebacks based on current period revenues and historical chargeback experience. The allowance for chargebacks was $129,000 and $125,000 at September 30, 2011 and December 31, 2010, 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 credit card 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 and fulfillment and related costs are as follows (in thousands):

	Three months ended September 30,								Nine months ended September 30,
	2011				2010				2011				2010
Total revenue, net	$	239,738	100	%	$	245,420	100	%	$	740,200	100	%	$	741,003	100	%
Cost of goods sold
Product costs and other cost of goods sold	189,074		79	%	190,326		77	%	573,204		78	%	570,353		77	%
Fulfillment and related costs	12,291		5	%	13,716		6	%	38,769		5	%	40,422		5	%
Total cost of goods sold	201,365		84	%	204,042		83	%	611,973		83	%	610,775		82	%
Gross profit	$	38,373	16	%	$	41,378	17	%	$	128,227	17	%	$	130,228	18	%

Advertising expense

We expense the costs of producing advertisements the first time the advertising takes place and expense the cost of communicating advertising in the period during which the advertising space or airtime is used. Internet advertising expenses are recognized as incurred based on the terms of the individual agreements, which are generally: 1) a commission for traffic driven to the Website that generates a sale or 2) a referral fee based on the number of clicks on keywords or links to our Website generated during a given period. Advertising expense is included in sales and marketing expenses and totaled $11.7 million and $13.7 million during the three months ended September 30, 2011 and 2010, respectively. For the nine months ended September 30, 2011 and 2010, advertising expenses totaled $35.9 million and $38.0 million, respectively. Prepaid advertising, which consists primarily of prepaid advertising airtime, (included in Prepaids and other assets in the accompanying consolidated balance sheets) was $2.2 million and $2.9 million at September 30, 2011 and December 31, 2010, 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 expense over 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 to the extent actual results differ from estimates, such amounts will be recorded as an adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, and historical experience. Actual results may differ substantially from these estimates (see Note 8—Stock-Based Awards).

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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 when it is probable that a loss has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be estimated, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the 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 Disposal Activities, requires that when an entity ceases using a property that is leased under an operating lease before the end of the contractual term, the termination costs should be recognized and measured at fair value when the entity ceases using the facility. Key assumptions in determining the restructuring expenses include the terms that may be negotiated to exit certain contractual obligations (see Note 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 tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. 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 the deferred tax asset will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred assets including expectations of future taxable income, the carry-forward periods available for tax reporting purposes, the reversals of our deferred tax liabilities and other relevant factors. At September 30, 2011 and December 31, 2010, we have a full valuation allowance against our deferred tax assets, net of expected reversals of existing deferred tax liabilities, as we believe it is more likely than not that these benefits will not be realized. Significant judgment is required in making this assessment, and it is very difficult to predict when, if ever, our assessment may conclude that the remaining portion of the deferred tax assets are realizable.

Comprehensive income (loss)

We had no items of comprehensive income or loss for the three or nine months ended September 30, 2011 and 2010. Accordingly, net income or loss for these periods is the same as comprehensive income or loss.

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 common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) attributable to common shares for the period by the weighted average number of common and potential common shares outstanding during the period. Potential common shares, comprising incremental common shares issuable upon the exercise of stock options, restricted stock awards and convertible senior notes are included in the calculation of diluted earnings (loss) per common share to the extent such shares are dilutive.

The following table sets forth the computation of basic and diluted net income (loss) per common share for the periods indicated (in thousands, except per share data):

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	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
Net loss	$	(7,787	)	$	(3,358	)	$	(16,029	)	$	(970	)
Deemed dividend related to redeemable common stock	—			(23		)	(12		)	(99		)
Net loss attributable to common shares	$	(7,787	)	$	(3,381	)	$	(16,041	)	$	(1,069	)
Net loss per common share—basic:
Net loss attributable to common shares—basic	$	(0.33	)	$	(0.15	)	$	(0.69	)	$	(0.05	)
Weighted average common shares outstanding—basic	23,276			23,060			23,253			23,006
Effect of dilutive securities:
Stock options and restricted stock awards	—			—			—			—
Convertible senior notes	—			—			—			—
Weighted average common shares outstanding—diluted	23,276			23,060			23,253			23,006
Net loss attributable to common shares—diluted	$	(0.33	)	$	(0.15	)	$	(0.69	)	$	(0.05	)

The following shares were excluded from the calculation of diluted shares outstanding as their effect would have been anti-dilutive (in thousands):

	Three months ended September 30,		Nine months ended September 30,
	2011	2010	2011	2010
Stock options and restricted stock awards	985	1,242	985	1,242
Convertible senior notes	—	454	—	454

Accounting pronouncements issued not yet adopted

In September 2011, the FASB issued accounting pronouncement No. 2011-08, Intangibles—Goodwill and Other (FASB ASC Topic 350) that will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The provisions for this pronouncement are effective for fiscal years, and interim periods beginning after December 15, 2011, with early adoption permitted. We will adopt this pronouncement for our fiscal year beginning January 1, 2012. We do not expect this pronouncement to have a material effect on our consolidated financial statements.

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 an effort to improve future operating performance. The facilities consolidation and restructuring program was substantially completed by the end of the second quarter of 2007.

Restructuring liabilities along with charges (credits) to expense and payments associated with the facilities consolidation and restructuring program are as follows as of September 30, 2011 (in thousands):

	Balance 12/31/2010		Accretion Expense		Net Cash Payments			Balance 9/30/2011
Lease and contract termination	$	1,797	$	128	$	(353	)	$	1,572

There were no restructuring charges or reversals during the three and nine months ended September 30, 2011. During the three and nine months ended September 30, 2010, there were no restructuring charges. During the nine months ended September 30, 2010 we reversed $136,000 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.

4. BORROWINGS

U.S. Bank Financing Agreements

We are a party to a Financing and Security Agreement with U.S. Bank dated December 22, 2009 (as amended on August 19,

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2011, the “Financing Agreement”). The maximum credit potentially available under the revolving facility is $20 million. Our obligations under the Financing Agreement and all related agreements are secured by all or substantially all of our assets, excluding our interest in certain litigation. Subject to certain exceptions, the full amount of the revolving facility is expected to be available to us as long as $30 million in the aggregate (which amount includes any minimum liquidity required under the Master Lease Agreement) is maintained on deposit with U.S. Bank. The obligation of U.S. Bank to make advances under the Financing Agreement is subject to the conditions set forth in the Financing Agreement. Concurrent to signing the amendment to the Financing Agreement, we also obtained a waiver from U.S. Bank, which prohibited us from forming any subsidiaries, in regards to our formed subsidiary Overstock.com Services, Inc.

The stated termination date of the Financing Agreement is December 31, 2012. The maximum amount potentially available under the Financing Agreement is $20 million, limited to $3 million for cash-collateralized revolving loans and other financial accommodations, and $17 million for advances supported by our non-cash collateral. As permitted by the Financing Agreement, during the quarter ended September 30, 2011, we used the entire $17 million available for advances supported by our non-cash collateral to fund the redemption of our then-outstanding Senior Convertible Notes due December 1, 2011. Our obligations under the Financing Agreement and all related agreements are secured by all or substantially all of our assets, excluding our interest in certain litigations.

Advances under the amended Financing Agreement bear interest at one-month LIBOR plus 2.5%. The interest rate for borrowings under the amended Financing Agreement was 2.75% at September 30, 2011. We have also entered into an interest rate cap agreement with U.S. Bank with an effective date of October 1, 2011 limiting our exposure for one-month LIBOR at 0.5% for the term of the Financing Agreement.

In addition to the Financing Agreement, we are a party to a Master Lease Agreement and a Financial Covenants Rider and related documents (collectively, the “Master Lease Agreement”) with U.S. Bancorp Equipment Finance, Inc. — Technology Finance Group (“Lessor”), an affiliate of U.S. Bank National Association, which requires us to maintain a minimum liquidity (defined as cash plus marketable securities) of $30 million in the aggregate (which amount includes any minimum liquidity required under the Financing Agreement) at all times on deposit with U.S. Bank National Association until all amounts owed under the Master Lease Agreement are paid in full. The Master Lease Agreement provides that we are permitted to withdraw the funds on deposit with U.S. Bank National Association at our discretion, although our failure to maintain a minimum liquidity of $30 million would be an Event of Default under the Master Lease Agreement, and an Event of Default under the Master Lease Agreement would cause an Event of Default under the Financing Agreement. Consequently, our failure to keep at least $30 million on deposit in certain accounts with U.S. Bank would constitute a “triggering event” under the Financing Agreement. 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 the period of the prior four quarters. The occurrence of a triggering event could also result in a decrease in the amount available to us under the non cash-collateralized portion of the facility, as availability would then depend, in part, on the Borrowing Base (as defined in the Financing Agreement). At September 30, 2011, we had $30.0 million in compensating cash balances held at U.S. Bank.

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 indemnity agreements, (b) create or permit liens, (c) enter into any merger or consolidation or purchase or otherwise acquire all or substantially all of the assets of another person or the assets comprising any line of business or business unit of another person, (d) except for permitted acquisitions, purchase the securities of, 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 other securities, (g) change our capital structure or issue any new class of capital stock, (h) change our business objectives, purposes or operations in a manner which could reasonably be expected to have a material adverse effect, (i) change our fiscal year, (j) enter into transactions with affiliates, (k) sell assets except for the sale of inventory in the ordinary course of business, (l) permit judgments to be rendered against us in excess of certain limits or having specified effects, depending in part on whether a triggering event has occurred or would occur, (m) take certain actions regarding our receivables, and (n) 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 facility prior to its stated termination date.

The obligation of U.S. Bank to make advances under the Financing Agreement is subject to the conditions set forth in the Financing Agreement. In addition to the transactions contemplated by the Amendments and the Financing Agreement, we are a party to the Master Lease Agreement described herein, and use or intend to utilize other commercial banking services from U.S. Bank or its affiliates, including treasury management services, investment management services, and purchase card services.

Amounts outstanding under the Financing Agreement at September 30, 2011 and December 31, 2010 were $17.0 million and zero, respectively. Letters of credit totaling $2.4 million and $2.4 million, respectively, were issued on our behalf collateralized by compensating cash balances held at U.S. Bank, which are included in Restricted cash in the accompanying consolidated balance sheets.

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the Master Lease Agreement we entered into four separate leases, pursuant to which we sold certain information technology hardware (the “IT Assets”) to Lessor, which were simultaneously leased back for a period of 48 months and financed certain software licenses for a period of 48 months for proceeds totaling approximately $16.4 million. Subsequently, we entered into eleven additional leases; whereby we leased $8.2 million 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 and terminate the Master lease Agreement twelve months following the initial term, or under certain situations where there is a change in control of the Lessor, defined as a circumstance where the Lessor merges, or sells 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 Master Lease Agreement are due monthly. The weighted average effective interest rate under the Master Lease Agreement is 6.29%. We have accounted for the Master Lease Agreement as a financing transaction and amounts owed are included in Finance Obligations, current and non-current in the consolidated balance sheets. We recorded no gain or loss on these leasing transactions.

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 operating results, measured at the end of each fiscal quarter. “Total Fixed Charge Coverage” is defined as our EBITDAR (which is defined to mean earnings before interest expense, tax expense or benefit, depreciation expense, amortization expense and rent (defined as payments for real property leases and other operating leases)) less the aggregate amount of federal, state, local and/or foreign income taxes accrued less declared dividends less 50% of depreciation expense divided by our (rental expense plus interest expense plus required principal payments including capitalized leases, excluding principal payments made for retirements of Senior Notes, on a trailing twelve-month basis). The “annualized ratio” shall be based on a four-quarter, rolling average of the current fiscal quarter and the immediately preceeding three fiscal quarters.

U.S. Bank has the contractual right to demand payment of all amounts outstanding under the Financing Agreement and Master Lease Agreement if we fail to comply with certain loan covenants. At September 30, 2011 our Total Fixed Charge Coverage annualized ratio was in excess of the required 1.20:1.00. However, based on the results for the first three quarters of 2011, it is likely that we will be out of compliance with the Total Fixed Charge Coverage ratio at December 31, 2011 unless current trends improve substantially. We have held initial and collegial discussions with U.S. Bank regarding this potential non-compliance.

Fixed assets included assets under finance obligations of $21.6 million and $16.0 million and accumulated depreciation of $8.4 million and $3.7 million at September 30, 2011 and December 31, 2010, respectively. Depreciation expense of assets recorded under finance obligations was $1.7 million and $952,000 for the three months ended September 30, 2011 and 2010, respectively and $4.6 million and $2.3 for the nine months ended September 30, 2011 and 2010, respectively.

Future principal payments of finance obligations as of September 30, 2011 are as follows (in thousands):

Payments due by period
2011 (remainder)	$	1,428
2012	5,942
2013	6,327
2014	5,646
2015	986
	$	20,329

U.S. Bank Commercial Purchasing Card Agreement

We have a commercial purchasing card (the “Purchasing Card”) agreement with U.S. Bank. We use the Purchasing Card for business purpose purchasing and must pay it in full each month. At September 30, 2011, $1.9 million was outstanding and $3.1 million was available under the Purchasing Card. At December 31, 2010, $2.7 million was outstanding and $2.3 million was available under the Purchasing Card.

Capital leases

We have leased certain software and computer equipment, under non-cancelable leases that expire on various dates through 2013.

Fixed assets included assets under capital leases of $1.7 million and accumulated depreciation of $1.2 million and $902,000, at September 30, 2011 and December 31, 2010, respectively. Depreciation expense of assets recorded under capital leases was $135,000 and $145,000 for the three months ended September 30, 2011 and 2010, respectively and $425,000 and $435,000 for the nine months ended September 30, 2011 and 2010, respectively.

Future payments of capital lease obligations as of September 30, 2011 are as follows (in thousands):

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Payments due by period
2011 (remainder)	$	82
2012	115
2013	3
Total minimum lease payments	200
Less: amount representing interest	12
Present value of capital lease obligations	188
Less: current portion	185
Capital lease obligations, non-current	$	3

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 were being amortized using the straight-line method which approximates the effective interest method. We recorded amortization of discount and debt issuance costs related to this offering totaling $44,000 and $56,000 during the three months ended September 30, 2011 and 2010, respectively and $104,000 and $190,000 during the nine months ended September 30, 2011 and 2010, respectively. Interest on the Senior Notes was payable semi-annually on June 1 and December 1 of each year. The Senior Notes were scheduled to mature on December 1, 2011 and were unsecured and ranked equally in right of payment with all existing and future unsecured, unsubordinated debt and senior in right of payment to any existing and future subordinated indebtedness.

We retired all of the Senior Notes that remained outstanding on September 21, 2011 for $24.5 million in cash, resulting in a loss of $26,000 on early extinguishment of debt, net of $26,000 of associated unamortized discount. We retired $34.6 million of the Senior Notes during the nine months ended September 30, 2011, for $34.6 million in cash, resulting in a loss of $54,000 on early extinguishment of debt, net of $77,000 of associated unamortized discount. Of the $34.6 million in Senior Notes retired during the nine months ended September 30, 2011, $10.1 million were held by Chou Associates Management Inc. (“Chou”) or an affiliate of Chou and $21.7 million were held by Fairfax Financial Holdings Limited (“Fairfax”) or an affiliate of Fairfax. Chou and Fairfax are beneficial owners of more than 5% of our common stock. We retired $16.1 million of the Senior Notes during the three months ended September 30, 2010 for $15.8 million in cash, resulting in a gain of $141,000 on early extinguishment of debt, net of $92,000 of associated unamortized discount. We retired $25.4 million of the Senior Notes during the nine months ended September 30, 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.

As of September 30, 2011 and December 31, 2010, zero and $34.5 million of the Senior Notes, net of debt discount remained outstanding, respectively.

5. COMMITMENTS AND CONTINGENCIES

Summary of future minimum lease payments for all operating leases

Minimum future payments under all operating leases as of September 30, 2011, are as follows (in thousands):

Payments due by period
2011 (remainder)	$	2,333
2012	8,916
2013	8,206
2014	8,404
2015	6,818
Thereafter	1,564
	$	36,241

Rental expense for operating leases totaled $2.0 million and $2.0 million for the three months ended September 30, 2011 and 2010, respectively and $6.1 million and $6.0 million for the nine months ended September 30, 2011 and 2010, respectively. Estimated sublease income of $624,000 is expected over the next four years of which $161,000 is anticipated to be received in the next 12 months.

Legal Proceedings

From time to time, we are involved in litigation concerning consumer protection, employment, intellectual property and other commercial matters related 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 to significant damages. In some instances other parties may have contractual indemnification obligations to

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us. However, such contractual obligations may prove unenforceable or non-collectible, and in the event we cannot enforce or collect on indemnification obligations, we may bear the full responsibility for damages, fees and costs resulting from such litigation. We may also be subject to equitable remedies and penalties. Such litigation could be costly and time consuming and could divert or distract our management and key personnel from our business operations. Due to the uncertainty of litigation and depending on the amount and the timing, an unfavorable resolution of some or all of these matters 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 against Morgan Stanley & Co. Incorporated, Goldman Sachs & Co., Bear Stearns Companies, Inc., Bank of America Securities LLC, Bank of New York, Citigroup Inc., Credit Suisse (USA) Inc., Deutsche Bank Securities, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., and UBS Financial Services, Inc. In September 2007, we filed an amended complaint adding two plaintiff shareholders, naming Lehman Brothers Holdings Inc. as a defendant, eliminating the previous claim of intentional interference with prospective economic advantage and clarifying various points of other claims in the original complaint. The suit alleged that the defendants, who control over 80% of the prime brokerage market, participated in an illegal stock market manipulation scheme and that the defendants had no intention of covering short sell orders with borrowed stock, as they are required to do, causing what are referred to as “fails to deliver” and that the defendants’ actions caused and continue to cause dramatic distortions within the nature and amount of trading in our stock as well as dramatic declines in the share price of our stock. The suit asserts that a persistent large number of “fails to deliver” creates significant downward pressure on the price of a company’s stock and that the amount of “fails to deliver” has exceeded our entire supply of outstanding shares. The suit accused the defendants of violations of California securities laws and common law, specifically, conversion, trespass to chattels, intentional interference with prospective economic advantage, and violations of California’s Unfair Business Practices Act. In April 2007, defendants filed a demurrer and motion to strike our complaint. We opposed the demurrer and motion to strike. In July 2007 the court substantially denied defendants’ demurrer and motion to strike. In November 2007, the defendants filed additional motions to strike. In February 2008, 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 under California’s Unfair Business Practices Act, while allowing our claims for injunctive relief under California’s Unfair Business Practices Act. Lehman Brothers Holdings filed for bankruptcy on September 15, 2008 and Barclays Bank purchased its investment banking and trading business. We elected not to pursue our claims against Lehman Brothers Holdings in the bankruptcy proceedings. Dislocations in the financial markets and economy could result in additional bankruptcies or consolidations that may impact the litigation or the ability to collect a judgment. On January 12, 2009, Goldman Sachs Group, Inc., Goldman Sachs & Co., Goldman Sachs Execution & Clearing L.P., Citigroup, Inc, Citigroup Global markets, Inc., Credit Suisse (USA) Inc., and Credit Suisse Securities (USA) LLC filed a motion to strike portions of the Second Amended Complaint regarding certain allegations of conspiracy among defendants and the request for punitive damages. Also, on January 12, 2009, Goldman Sachs Group, Inc., Goldman Sachs & Co., Goldman Sachs Execution & Clearing L.P., Citigroup, Inc, Citigroup Global markets, Inc., Credit Suisse (USA) Inc., and Credit Suisse Securities (USA) LLC filed a demurrer to the first and second causes of action for conversion and trespass to chattels and a motion to strike various other allegations of the Second Amended Complaint. On March 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 was denied. On April 20, 2009, we amended our complaint against all the defendants, re-pleading conversion and trespass to chattels causes of action. Defendants again filed demurrer to the amended complaint 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 settlement agreement with certain of the defendants requiring the defendants to pay in the aggregate $4.5 million to plaintiffs. The other terms of settlement are confidential. At that time, remaining defendants in the suit were Goldman Sachs Group, Inc., Goldman Sachs & Co., Goldman Sachs Execution & Clearing L.P., (“Goldman Defendants”) Merrill Lynch, Pierce, Fenner & Smith, Inc., Merrill Lynch Professional Clearing Corporation (“Merrill Lynch Defendants), and Bank of America Securities LLC. On December 15, 2010, we filed a motion to amend our complaint against the Goldman and Merrill Lynch Defendants to add a cause of action based on the New Jersey Racketeer Influenced and Corrupt Organization (RICO) Act. The court allowed the amendment, and defendants challenged the claim by demurrer. The court sustained the defendants’ demurrer. We thereafter submitted a proposed fifth amended complaint, which the court declined to allow. We recently entered a settlement agreement with Bank of America Securities LLC, the terms of which are confidential, and have dismissed the action as to that defendant. A trial date has been set for March 5, 2012. 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 of Alameda, Marin, Monterey, Napa, Santa Clara, Shasta and Sonoma County, and the County of Santa Cruz recently joined the suit. These district attorneys seek damages and an injunction under claims for violations of California consumer protection laws, alleging we made untrue or misleading statements concerning our pricing, price reductions, sources of products and shipping charges. The complaint asks for damages in the amount of not less than $15 million. The nature of the loss contingencies relating to claims that have been asserted against us are described above. The suit is in the discovery stage. 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, the State of New York and its governor, alleging that a New York state tax law is unconstitutional. The effect of the New York law is to require Internet sellers to collect and remit New York sales taxes on their New York sales even if the seller has no New York tax “nexus” other than with New York based independent contractors who are Internet advertising affiliates. The complaint asks for the court to declare the law unconstitutional and enjoin its application to us. New York filed a motion to dismiss. We responded

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to the motion and filed a motion for summary judgment, and both motions were heard simultaneously. On January 12, 2009, the court granted New York’s motion to dismiss and denied our motion for summary judgment. We appealed the decision and on November 4, 2010 the New York Appellate Division upheld part of the lower court’s ruling rejecting our claims that the law is unconstitutional on its face, but remanded our claims that the law is unconstitutional as applied, for further discovery and proceedings in the lower court. We 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. On March 15, 2011, the Appellate Division of the New York State Court of Appeals denied our motion for leave to appeal to the New York State Court of Appeals. We have determined not to pursue our claims that the law is unconstitutional as applied. We are proceeding with an appeal of the Appellate Divisions ruling on our claim that the statute is unconstitutional on its face.

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 Sean Lane, and seventeen other individuals, on their own behalf and for others similarly in a class action suit, alleging violations of the Electronic Communications Privacy Act, Computer Fraud and Abuse Act, Video Privacy Protection Act, and California’s Consumer Legal Remedies Act and Computer Crime Law. The complaint relates to our use of a product known as Facebook Beacon, created and provided to us by Facebook, Inc. Facebook Beacon provided the means for Facebook users to share purchasing data among their Facebook friends. The parties extended by agreement the time for defendants’ answer, including our answer, and thereafter, the Plaintiff and Facebook proposed a stipulated settlement to the court for approval, which would resolve the case without requirement of financial contribution from us. On March 17, 2010, over objections lodged by some parties, the court accepted the proposed settlement. Various parties objecting to the settlement have appealed and their appeal is now pending. 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.

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 that contribute to production or gross income for a company whether or not the company has a physical presence in or nexus within the state. Our complaint asked for a judgment declaring the tax unconstitutional and for an injunction preventing any enforcement of the tax. The defendants moved to dismiss the case. 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 the defendants’ motions to dismiss. In September 2009, we received a letter of determination from the Ohio Department of Taxation noting the Department’s determination 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 $73,489 as of September 30, 2011.We have filed protests to challenge the Department’s Assessments on constitutional grounds and the matter is currently pending before the Ohio Department of Taxation’s Legal Division for administrative review and determination. The nature of the loss contingencies relating to claims that have been asserted against us are described above. We believe the determinations to be unlawful and erroneous and are vigorously 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 nominative plaintiff on behalf of herself and others similarly situated, seeks damages under claims for breach of contract, common law fraud and New York consumer fraud 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 of a 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 Salt Lake 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 be compelled in that district. On September 8, 2009 the motion to dismiss or transfer was denied, the court stating that our browsewrap agreement was insufficient 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 of the court’s ruling. The appeal was denied. On December 31, 2010 Hines filed an amended complaint. The amended complaint eliminated common law fraud claims 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 described above. However, no estimate of the loss or range of loss can be made. The suit is in final discovery stages. We filed motions to dismiss and to decertify the class. The court has not ruled on these motions. We intend to vigorously defend this action.

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 services sold 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 until resolution of a the United States Patent and Trademark Office had concluded and resolved a reexamination of the patent in question, and also until a previously filed infringement action against Wal-Mart Stores, Inc. and other retailers resulted either in judgment or dismissal. Subsequently, the parties agreed 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 United States Patent and Trademark Office resolved the reexamination of the patent in question in favor of SpeedTrack, Inc. The case remains stayed, pending the outcome of the infringement action against Wal-Mart Stores, Inc. and other retailers. 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 our vendors.

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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 Eastern District of Texas. We are alleged to have infringed three patents purportedly related to a communications protocol between a user and server terminals, text input functionalities and search processes. We believe a third party vendor of search products and services sold to us is contractually obligated to indemnify us in this action as it pertains to the search patent. On October 14, 2011, a jury returned a verdict in our favor, finding non-infringement on all asserted claims, on all patents, and finding of invalidity of the Alcatel-Lucent patent, having to do with a communications protocol. Alcatel-Lucent may decide to challenge the jury’s verdict by appeal or otherwise.

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 of Texas (now transferred to the Northern District of California) for infringement of a patent claiming “a process for maintaining ongoing registration for pages on a given search engine . . . a method to actively cause an updating of a specific Internet search engine database regarding a particular WWW resource.” We, along with other defendants, filed a motion to transfer venue. The court granted the motion, and the case is now transferred to the Northern District of California. We have answered the complaint. The case is in its early stages. The nature of the loss contingencies relating to claims that have been asserted against us are 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, if any.

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 for infringement of a patent covering hinged apparatuses for supporting cameras. The case has been settled for an immaterial amount, on terms that are confidential and the case is now dismissed.

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 of Texas for infringement of a patent covering a system and method for communicating between local subscriber units and a local base station repeater cell in a two-way communication interactive video network. The complaint alleges that we participate in joint infringement, contribute to infringement or induce others to infringe the patent because we sell mobile devices which devices are enabled with infringing components or which perform processes which infringe the patent. We believe that certain third party vendors of such devices sold to us are contractually obligated to indemnify us in this action. We have answered the complaint. The case is in its discovery stage. 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 our vendors.

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 in United States Bankruptcy Court, in the District of Minnesota. The complaint alleges principal causes of action against us under various Bankruptcy Code sections and the Minnesota Fraudulent Transfer Act, to recover damages for alleged transfers of property from the Petters Company occurring prior to the filing of the case initially as a civil receivership in October 2008. The trustee’s complaint alleges such transfers occurred in at least one note transaction whereby 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 the transactions; however we believe that any alleged transaction with the Petters Company would have taken place in excess of seven years from the date of the filing of the adversary proceeding. The case is in its early stages. We filed a motion to dismiss on statute of limitations and other grounds. The court has not ruled upon the motion to dismiss. 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.

On April 4, 2011, Walker Digital, LLC filed suit against us and 24 other defendants in the United States District Court for the District of Delaware infringement of a patent covering a system of providing to purchasers a substitution recommendation for goods offered for purchase on a website. We believe that certain third party vendors are contractually obligated to indemnify us in this action. We answered the complaint. The case is in its early stages. The nature of the loss contingencies relating to claims that have been asserted against us are 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 September 11, 2011, Droplets, Inc. filed suit against us and eight other defendants in the United States District Court in the Eastern District of Texas for infringement of a patent covering strings of programming code downloaded from a server to a client computer. We are in the process of answering the complaint. The case is in its early stages. The nature of the loss contingencies relating to claims that have been asserted against us are 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 September 13, 2011, Select Retrieval LLC filed suit against us and 79 other defendants in the United States District Court for the District of Delaware for infringement of a patent covering the hierarchical display of interactive links on a webpage. We have not been served with the complaint, but intend to vigorously defend the case if served.

On September 15, 2009, we received a notice from the Securities and Exchange Commission (“SEC”) stating that the SEC is conducting an investigation concerning our previously-announced financial restatements of 2006 and 2008 and other matters. The subpoena accompanying the notice covers documents related to the restatements and also to our billings to our partners in the fourth

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quarter of 2008 and related collections, and our accounting for and implementation of software relating to our accounting for customer refunds and credits, including offsets to partners, and related matters. We have cooperated and intend to continue to cooperate fully with the investigation.

We establish liabilities when a particular contingency is probable and estimable. As of September 30, 2011, we have accrued $1.3 million in light of these probable and estimable liabilities. It is reasonably possible that the actual losses may exceed our accrued liabilities.

We have other contingencies which are reasonably possible; however, the reasonably possible exposure to losses cannot currently be estimated.

6. INDEMNIFICATIONS AND GUARANTEES

During our normal course of business, we have made certain indemnities, commitments, and guarantees under which we may be required to make payments in relation to certain transactions. These indemnities include, but are not limited to, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, and indemnities to our directors and officers to the maximum extent permitted under the laws of the State of Delaware. The duration of these indemnities, commitments, and guarantees varies, and in certain cases, is indefinite. In addition, the majority of these indemnities, commitments, and guarantees do not provide for any limitation of the maximum potential future payments we could be obligated to make. As such, 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.

7. STOCK AND DEBT REPURCHASE PROGRAM

We retired all of the Senior Notes that remained outstanding on September 21, 2011 for $24.5 million in cash, resulting in a loss of $26,000 on early extinguishment of debt, net of $26,000 of associated unamortized discount. We retired $34.6 million of the Senior Notes during the nine months ended September 30, 2011, for $34.6 million in cash, resulting in a loss of $54,000 on early extinguishment of debt, net of $77,000 of associated unamortized discount. Of the $34.6 million in Senior Notes retired during the nine months ended September 30, 2011, $10.1 million were held by Chou or an affiliate of Chou and $21.7 million were held by Fairfax or an affiliate of Fairfax. Chou and Fairfax are beneficial owners of more than 5% of our common stock. We retired $16.1 million of the Senior Notes during the three months ended September 30, 2010 for $15.8 million in cash, resulting in a gain of $141,000 on early extinguishment of debt, net of $92,000 of associated unamortized discount. We retired $25.4 million of the Senior Notes during the nine months ended September 30, 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.

As of September 30, 2011 and December 31, 2010, zero and $34.5 million of the Senior Notes, net of debt discount remained outstanding, respectively.

During the three months ended September 30, 2011 and 2010, we withheld from vesting restricted stock awards a total of 180 and 150 shares of our common stock for $2,000 and $3,000 respectively. For the nine months ended September 30, 2011 and 2010, we withheld from vesting restricted stock awards a total of 98,000 and 63,000 shares of our common stock for $1.6 million and $821,000 respectively. The shares withheld represented the minimum tax withholdings upon the vesting of those restricted stock award grants to satisfy the minimum tax withholdings owed by the grantee of the restricted stock award grant. None of these shares were repurchased in the open market.

8. STOCK-BASED AWARDS

We have equity incentive plans that provide for the grant to employees of stock-based awards, including stock options and restricted stock.

Stock-based compensation expense was as follows (in thousands):

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	Three months ended September 30,				Nine months ended September 30,
	2011		2010		2011		2010
Stock options	$	13	$	364	$	194	$	1,237
Restricted stock awards	688		922		2,217		2,533
Total stock-based compensation expense	$	701	$	1,286	$	2,411	$	3,770

Restricted stock awards

During the three and nine months ended September 30, 2011, the Compensation Committee of the Board of Directors approved grants of zero and 265,000 restricted stock awards to our officers, board members and employees, respectively. The restricted stock awards 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 and are subject to the employee’s continuing service to us. At September 30, 2011, there were 578,000 unvested restricted stock awards that remained outstanding.

The cost of restricted stock awards is determined using the fair value of our common stock on the date of the grant, and compensation expense is recognized on a straight line basis over the three-year vesting schedule. The weighted average grant date fair value of restricted stock awards granted during the three and nine months ended September 30, 2011 was zero and $15.53, respectively.

The following table summarizes restricted stock award activity during the nine months ended September 30, 2011 (in thousands):

	Nine months ended September, 30 2011
	Units		Weighted Average Grant Date Fair Value
Outstanding—beginning of year	685		$	12.08
Granted at fair value	265		15.53
Vested	(314	)	12.16
Forfeited	(58	)	14.31
Outstanding—end of period	578		$	13.43

9. 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 had been registered with the Securities and Exchange Commission for offer in connection with the 401(k) plan. These shares were contributed to or otherwise acquired by participants in the 401(k) plan between August 16, 2006, and June 17, 2009. As a result, certain participants in the 401(k) plan may have had rescission rights relating to the unregistered shares, although we believe that the federal statute of limitations applicable to any such rescission rights would 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 Benefits Committee (the “Committee”) relating to the 401(k) plan. We entered into the Tolling Agreement in order to preserve certain rights, if any, of plan participants who acquired shares of Overstock common stock in the plan between July 1, 2008 and June 30, 2009 (the “Purchase Period”). In August 2010, we made a registered rescission offer to affected participants in the plan who acquired shares of Overstock common stock during the Purchase Period. The rescission offer applied to 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. As a result of the offer, we repurchased 1,202 shares of common stock for $26,000. On October 14, 2010 we terminated the Tolling Agreement.

During the nine months ended September 30, 2011, we reclassified 46,000 shares or $582,000 of common stock from temporary to permanent equity due to the expiration of potential rescission rights. At September 30, 2011, none of our shares were classified outside stockholder’s equity due to the expiration of potential rescission rights associated with those common shares. At December 31, 2010, approximately 46,000 shares or $570,000 of our common stock including interest were classified outside stockholders’ equity.

10. BUSINESS SEGMENTS

Segment information has been prepared in accordance with ASC Topic 280 Segment Reporting. Segments were determined based on products and services provided by each segment. There were no inter-segment sales or transfers during the three months ended September 30, 2011 and 2010. We evaluate the performance of our segments and allocate resources to them based primarily on gross

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profit. The table below summarizes information about reportable segments for the three and nine months ended September 30, 2011 and 2010 (in thousands):

	Three months ended September 30,							Nine months ended September 30,
			Fulfillment							Fulfillment
	Direct		partner		Total			Direct		partner		Total
2011
Revenue, net	$	34,749	$	204,989	$	239,738		$	116,353	$	623,847	$	740,200
Cost of goods sold	32,472		168,893		201,365			105,733		506,240		611,973
Gross profit	$	2,277	$	36,096	$	38,373		$	10,620	$	117,607	$	128,227
Operating expenses					46,314							143,573
Other income (expense), net					(86		)					(885		)
Benefit for income taxes					(240		)					(202		)
Net loss					$	(7,787	)					$	(16,029	)

2010
Revenue, net	$	47,508	$	197,912	$	245,420		$	140,458	$	600,545	$	741,003
Cost of goods sold	43,174		160,868		204,042			124,192		486,583		610,775
Gross profit	$	4,334	$	37,044	$	41,378		$	16,266	$	113,962	$	130,228
Operating expenses					44,554							130,411
Other income (expense), net					(226		)					(709		)
Provision (benefit) for income taxes					(44		)					78
Net loss					$	(3,358	)					$	(970	)

The direct segment includes revenues, direct costs, and cost allocations associated with sales fulfilled from our leased warehouses. Costs for this segment include 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 are earned 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 three and nine months ended September 30, 2011 and 2010, over 99% of sales were made to customers in the United States of America. At September 30, 2011 and December 31, 2010, all of our fixed assets were located in the United States of America.

11. EMPLOYEE RETIREMENT PLAN

In December 2009, we implemented a Non Qualified Deferred Compensation plan for senior management. The plan allows eligible members of senior management to defer their receipt of compensation from us, subject to the restrictions contained in the plan. Participants are 100% vested in their deferred compensation amounts and the associated gains or losses. For Company contributions, if any, and the associated gains or losses, the participants shall vest in those deferred compensation amounts according to a vesting schedule that we shall determine at the time the Company contribution is made. As of September 30, 2011, no Company contributions have been made into the NQDC Plan. Participants are generally eligible to receive distributions from the plan two plan years subsequent to the 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 our creditors. The corresponding deferred compensation liability represents the amounts deferred by the plan participants plus or minus any earnings or losses on the trust assets. The trust’s assets totaled $246,000, while the NQDC Plan’s liabilities totaled $249,000 at September 30, 2011. The assets and liabilities of the NQDC Plan were included in Other current and long-term assets, Accrued liabilities and Other long-term liabilities in the consolidated balance sheets. The gains and losses on the NQDC Plan’s assets were immaterial for the three and nine months ended September 30, 2011 and 2010.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are therefore entitled to the protection of the safe harbor provisions of these laws. These forward-looking statements involve risks and uncertainties, and relate to future events or our future financial or operating performance. The forward-looking statements include all statements other than statements of historical fact, including, without limitation, all statements 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 retire or refinance our finance obligations and 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 coverage;

· 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 vacation shopping service, our insurance shopping service, our international sales efforts, our car listing service and our community 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 our business; and

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

Furthermore, in some cases, you can identify forward-looking statements by terminology such as may, will, could, should, expect, plan, intend, anticipate, believe, estimate, predict, potential or continue, the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider the risks outlined in our Annual Report on Form 10-K for the year ended December 31, 2010, including those described in Item 1A under the caption “Risk Factors.” These factors may cause our actual results to differ materially from those contemplated by any forward-looking statement. Except as otherwise required by law, we expressly disclaim any obligation to release publicly any update or revisions to any forward-looking statements to reflect any changes in our expectations or any change in events, conditions or circumstances on which any of our forward-looking statements are based. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

These forward-looking statements speak only as of the date of this report and, except as required by law, we undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report.

Overview

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 sell hundreds of thousands of best seller and current run books, magazines, CDs, DVDs and video games (“BMMG”). We sell these products through our Internet websites located at www.overstock.com, www.o.co and O.biz (“Website”). Although our three websites are located at different domain addresses, the technology and equipment and processes supporting the Website and the process of order fulfillment described herein are the same for all three websites.

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Our company, based in Salt Lake City, Utah, was founded in 1997. We launched our initial website in March 1999. Our Website offers our customers an opportunity to shop for bargains conveniently, while offering our suppliers an alternative inventory liquidation or sales channel. We continually add new, sometimes limited, inventory products to our Website in order to create an atmosphere that encourages customers to visit frequently and purchase products before our inventory sells out. We sell products primarily in the United States, with a small amount of products (less than 1% of sales) sold internationally.

As used herein, “Overstock,” “Overstock.com,” “O.co,” “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 an efficient marketplace for selling these products. We provide manufacturers with a one-stop liquidation channel to sell both large and small quantities of excess, closeout and replenishable inventory without disrupting sales through traditional channels, which can result in weaker pricing and decreased brand strength. The merchandise offered on our Website is from a variety of sources including well-known, brand-name manufacturers. We have organized our shopping business (sales of product offered through the Shopping Section of our Website) into two principal segments—a “direct” business and a “fulfillment partner” business. We currently offer approximately 245,000 non-BMMG products in 19 major departments, and approximately 706,000 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 mobile telephone 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% of our sales are made to international customers. During the nine months ended September 30, 2011 and 2010 no single customer accounted for more than 1% of our total revenue.

Direct business

Our direct business includes sales made to individual consumers and businesses, which are fulfilled from our leased warehouses in Salt Lake City, Utah.

Fulfillment partner business

For our fulfillment partner business, we sell merchandise of other retailers, cataloguers or manufacturers (“fulfillment partners”) through our Website. We are considered to be the primary obligor for the majority of these sales transactions and we record revenue from the majority of these sales transactions on a gross basis. Our use of the term “partner” or “fulfillment partner” does not mean that we have formed any legal partnerships with any of our fulfillment partners. We currently have relationships with approximately 1,900 third parties who supply approximately 236,000 non-BMMG products, as well as most of the BMMG products, on our Website. These third-party fulfillment partners perform essentially the same fulfillment operations as our warehouses, such as order picking and shipping; however, we handle returns and customer service related to substantially all orders placed through our Website. Revenue generated from sales on our Shopping site from both the direct and fulfillment partner businesses is recorded net of returns, coupons and other discounts.

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

Generally, we require verification of receipt of payment, or authorization from credit card or other payment vendors whose services we offer to our customers (such as PayPal and BillMeLater), before we ship products to consumers or business purchasers. From time to time we grant credit to our business purchasers with normal credit terms (typically 30 days). For sales in our fulfillment partner business, we generally receive payments from our customers before our payments to our suppliers are due.

International business

We began selling products through our Website to customers outside the United States in late August 2008. As of September 30, 2011, we were offering products to customers 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 and fulfillment for all international orders. Revenue generated from our international business is included in either direct or fulfillment partner revenue, depending on whether the product is shipped from our warehouses or from a fulfillment partner.

Consignment

In September 2009, we began offering a consignment service to suppliers where the suppliers’ merchandise is stored in and shipped from our leased warehouses. We pay the consignment supplier upon sale of the consigned merchandise to our customer.

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Revenue from our consignment service business is less than 1% of total net revenue and is included in the fulfillment partner segment.

Other businesses

We operate an online car listing service as part of our Website. The car listing service allows sellers to list vehicles for sale and allows buyers to review vehicle descriptions, post offers to purchase, and provides the means for purchasers to contact sellers for further information and negotiations on the purchase of an advertised vehicle. We also earn advertisement revenue derived from our cars business. Revenue from the cars businesses is included in the fulfillment partner segment on a net basis.

We operate an online site, O.biz, a website where customers and businesses can shop for bulk and business related items, while offering manufacturers, distributors and other retailers an alternative sales channel for liquidating their inventory. Revenue generated from our O.biz is included in either direct or fulfillment partner revenue, depending on whether the product is shipped from our warehouses or from a fulfillment partner.

In July 2011, we began operating an insurance shopping service as part of our website where customers can shop for auto and home insurance and compare quotes from various insurance providers. We also earn advertisement revenue from our insurance business. Revenue generated from our insurance shopping site is included in fulfillment partner segment on a net basis.

We operated an online auction service as part of our Website. In July 2011, we removed our Marketplace tab for auctions from our Website and no longer provide auction services. The financial results and related assets of the online auction service were not significant to our business. Our Marketplace tab allowed sellers to list items for sale, buyers to bid on items of interest, and users to browse through listed items online. We recorded only our listing fees and commissions for items sold as revenue. From time to time, we also sold items returned from our shopping business through our auction service, and for these sales, we recorded the revenue on a gross basis. Revenue from the auctions is included in the fulfillment partner segment.

We operated an online site for listing real estate for sale as part of our Website. On June 30, 2011, we removed our online site for listing real estate for sale from our Website and no longer provide these real estate listing services. The financial results and related assets of the online site for listing real estate for sale were not significant to our business. The real-estate listing service allowed customers to search active listings across the country. Listing categories included foreclosures, live and on-line auctions, for sale by owner listings, broker/agent listings and numerous aggregated classified ad listings. Revenue from the real estate business is included in the fulfillment partner segment on a net basis.

Rebranding and the use of O.co

In our efforts to extend our international reach, we have commenced a re-branding effort, starting with the use of a single letter domain, O.co. We believe that O.co is a domain designation more easily understood and used internationally. In April 2011, we acquired naming rights to the Oakland-Alameda County Coliseum, and in June 2011, we announced the name of the facility as the “O.co Coliseum.” We have begun the process of prominently featuring the O.co name in our public announcements and other branding and marketing efforts. We are monitoring customer and user use and acceptance of this single letter domain name.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The Securities and Exchange Commission (“SEC”) has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies, estimates and judgments addressed below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see Item 1 of Part I, “Financial Statements”—Note 2—“Accounting Policies.” Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates. Our critical accounting policies are as follows:

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· 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 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 from products being listed and sold through the Auctions tab, which we removed from our site in July 2011, advertisement revenue derived from our real estate listing business, which we removed from our site on June 30, 2011, from our cars listing business, and from advertising on our shopping, vacations and insurance pages. We have 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 has occurred or the service has been provided; (3) the selling price or fee revenue earned is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. Revenue related to merchandise sales is recognized upon delivery to our customers. As we ship high volumes of packages through multiple carriers, it is not practical for us to track the actual delivery date of each shipment. Therefore, we use estimates to determine which shipments are delivered and, therefore, recognized as revenue at the end of the period. Our delivery date estimates are based on average shipping transit times, which are calculated using the following factors: (i) the type of shipping carrier (as carriers have different in-transit times); (ii) the fulfillment source (either our warehouses or those of our fulfillment partners); (iii) the delivery destination; and (iv) actual transit time experience, which shows that delivery date is typically one to eight business days from the date of shipment.

We review and update our estimates on a quarterly basis based on our actual transit time experience. However, actual shipping times may differ from our estimates.

The following table shows the effect that hypothetical changes in the estimate of average shipping transit times would have had on the reported amount of revenue and net loss for the three months ended September 30, 2011 (in thousands):

	Three months ended September 30, 2011
Change in the Estimate of Average Transit Times (Days)	Increase (Decrease) Revenue			(Increase) Decrease Net Loss
2	$	(8,883	)	$	(1,376	)
1	$	(3,830	)	$	(586	)
As reported	As reported			As reported
-1	$	2,656		$	410
-2	$	5,011		$	772

When we are the primary obligor in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators, revenue is recorded gross. If we are not the primary obligor in the transaction and amounts earned are determined using a fixed percentage, revenue is recorded on a net basis. Currently, the majority of both direct revenue and fulfillment partner revenue is recorded on a gross basis, as we are the primary obligor. 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 off current 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 revenue comes from sales that occur primarily through our Website, but may also occur through offline channels.

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Fulfillment partner revenue

Fulfillment partner revenue is derived from merchandise sales through our Website which fulfillment partners ship directly to consumers and businesses from warehouses maintained by our fulfillment partners.

We operated an online site for listing real estate for sale as a part of our Website. On June 30, 2011, we removed our online site for listing real estate for sale from our Website and no longer provide these real estate listing services. The financial results and related assets of the online site for real estate for sale were not significant to our business. The real estate listing service allowed customers to search active listings across the country. Listing categories included foreclosures, live and on-line auctions, for sale by owner listings, broker/agent listings and numerous aggregated classified ad listings. Revenue from the real estate listing business is 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 September 30, 2011, we were offering products to customers 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 and fulfillment for all international orders. Revenue generated from our international business is included in either direct or fulfillment partner revenue, depending on whether the product is shipped from our 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 we recognize revenue ratably over the membership period. The Club O loyalty program allows members to earn reward dollars for qualifying purchases made on our Website. We also have a co-branded credit card program (see “Co-branded credit card program” below for more information). Co-branded cardholders are also Club O members and earn additional reward dollars for purchases made on our Website, and from other merchants. Reward dollars earned may be redeemed on future purchases made through our Website. Club O reward dollars expire 90 days after the customers Club O membership expires. We account for these transactions as multiple element arrangements and allocate value to the elements using their relative fair values. We include the value of reward dollars earned in deferred revenue and we record it as a reduction of revenue at the time the reward dollars are earned.

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Co-branded credit card program

In September 2010, we launched a co-branded credit card program with a commercial bank for the issuance of credit cards bearing the Overstock.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 customer loyalty program offering reward points that customers will accrue from card usage and can use to make purchases on our Website (see “Club O loyalty program” above for more information). New account fees are recognized as revenue on a straight-line basis 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 membership fees as deferred revenue and we recognize it ratably over the membership period. We record Club O reward dollars earned from purchases as deferred revenue at the time they are earned and we recognize it as revenue upon redemption. If reward dollars are not redeemed, we recognize revenue upon expiration. In addition, we sell gift cards 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 upon redemption 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 historical redemption experience. We consider the likelihood of redemption to be remote after 36 months.

Sales returns allowance

If the return is not a result of a product defect or our fulfillment partners’ error and the customer initiates a return of an unopened item within 30 days of delivery, for most products we refund the full cost of the merchandise minus the original shipping charge and actual return shipping fees. 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 days after 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 actual return shipping fees.

	Three months ended		Twelve months ended
	December 31, 2009		December 31, 2009
	($ Change)		($ Change)
Revenue, net	$	2,995	$	3,208
Gross profit	752		805
Income from continuing operations before income taxes	752		805
Net income	752		805
Net income attributable to common shares - basic	$	0.04	$	0.04
Net income attributable to common shares - diluted	$	0.04	$	0.03

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a new master supplier agreement with our fulfillment partners that provided financial incentives for suppliers to reduce returns. These initiatives resulted in a sustained decrease in our product return trends resulting in the change in estimate of sales returns allowance during the three months ended December 31, 2009.

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 revenues and historical chargeback experience. The allowance for chargebacks was $129,000 and $125,000 at September 30, 2011 and December 31, 2010, 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 our business customers’ financial condition and payment history and maintain an allowance for doubtful accounts receivable based upon our historical collection experience and expected collectability of accounts receivable. The allowance for doubtful accounts receivable was $657,000 and $2.0 million at September 30, 2011 and December 31, 2010, respectively. The decrease in the allowance for doubtful accounts was primarily due to write-offs of accounts receivable during the nine months ended September 30, 2011, which had no significant effect on results of operations for the period as most of the items had been previously reserved.

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 market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Once established, the original cost of the inventory less the related inventory allowance represents the new cost basis of such products. Reversal of the allowance is recognized only when the related inventory has been sold or scrapped.

Internal-use software and website development

Accounting for income taxes

We are subject to taxation from federal and state jurisdictions. Significant judgment is required in evaluating and estimating our tax positions and determining our provision and accruals for these taxes. As of September 30, 2011, we were not under audit by United States income taxing authorities. Tax periods within the statutory period of limitations not previously audited are potentially open for examination by the taxing authorities. Potential liabilities associated with these years will be resolved when an event occurs to warrant closure, primarily through the completion of audits 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 the accrued 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 temporary differences 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 the bases 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 the deferred tax assets may not be realized.

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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 full valuation allowance should be recorded against our deferred tax assets in excess of our deferred tax liabilities. As of September 30, 2011 and December 31, 2010, we have recorded a full valuation allowance of $83.5 million and $77.1 million, respectively, against our net deferred tax assets consisting primarily of net operating loss carry forwards. In assessing the realizability of our deferred tax assets, we considered the four sources of taxable income. Because we have no carryback ability and have not identified any viable tax planning strategies, two of the sources are not available. Reversing taxable temporary differences have been properly considered as the deferred tax liabilities reverse in the same period as existing deferred tax assets. However, reversing the deferred tax liabilities is insufficient to fully recover existing deferred tax assets. Our valuation allowance is net of deferred tax liabilities and there are no deferred tax assets or liabilities that have an indefinite reversal period. Therefore, future taxable income, the most subjective of the four sources, is the remaining source available for 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 tax valuation allowances is made, in part, pursuant to an assessment regarding the likelihood that we will generate future taxable income against which benefits of our deferred tax assets may be realized. This assessment requires us to exercise significant judgment and make estimates with respect to our ability to generate revenues, gross profits, operating income and taxable income in future periods. Among other factors, we must make assumptions regarding overall business and retail industry conditions, operating efficiencies, the competitive environment and changes in regulatory requirements which may impact our ability to generate taxable income and, in turn, realize the value of our deferred tax assets. Operating losses in some prior periods and significant economic uncertainties in the market have made the projection of future taxable income uncertain. Accordingly, we have a valuation allowance recorded against our deferred 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 future taxable 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 carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the assets’ carrying amount to future undiscounted net cash flows the assets are expected to generate. Cash flow forecasts are based on trends of historical performance and management’s estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair values. There were no impairments to long-lived assets recorded during the nine months ended September 30, 2011, and the year ended December 31, 2010.

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 in the fourth quarter or when we deem that a triggering event has occurred. Goodwill totaled $2.8 million at September 30, 2011 and December 31, 2010.

There were no impairments to goodwill recorded during the nine months ended September 30, 2011, and the year ended December 31, 2010.

Loss contingencies

Accounting pronouncements issued not yet adopted

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Executive Commentary

This executive commentary is intended to provide investors with a view of our business through the eyes of our management. As an executive commentary, it necessarily focuses on selected aspects of our business. This executive commentary is intended as a supplement to, but not a substitute for, the more detailed discussion of our business included elsewhere herein. Investors are cautioned to read our entire “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as our interim and audited financial statements, and the discussion of our business and risk factors and other information included elsewhere or incorporated in this report. This executive commentary includes forward-looking statements, and investors are cautioned to read the “Special Note Regarding Forward-Looking Statements” at the beginning of Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The key factors that affected financial results for the quarter ended September 30, 2011 were slightly lower revenues, lower gross margin, lower marketing expenditures and higher technology and G&A expenses.

Revenue for the quarter ended September 30, 2011 decreased by $5.7 million, or down 2% compared to quarter ending September 30, 2010. While visits to our website were up slightly year over year, conversion rates were lower, resulting in fewer orders. New customer growth fell approximately 8% for the quarter ended September 30, 2011 compared to last year. We believe that the decline in revenue is partially the result of a decrease in site wide promotions and email and affiliate channel couponing we did to shift resources to promoting our Club O loyalty program. In late Q3 2011, we increased the amount of email and affiliate coupons. We also believe that our current efforts to rebrand ourselves from Overstock.com to O.co may have contributed to the decline in revenue.

Revenue from our direct business fell by 27% while our fulfillment partner business increased by approximately 4%. The direct business accounted for 14% of total revenue this quarter compared to 19% for last year, and our fulfillment partner business increased from 81% to 86% of our total revenue. The primary reason for the decrease in direct revenue was a shift in sales mix, particularly in clothing and shoes, from a direct inventory-based model to a fulfillment partner-based model to reduce exposure from seasonal inventory and mark downs.

Gross profit declined by 7% compared to last year. This decline was the result of a decline in revenue and competitive pricing initiatives. In addition, warehousing costs and freight costs have increased relative to last year as a percentage of revenue in our direct business primarily as a result of declining direct sales volumes and a shift in sales mix away from the direct inventory-based model. All of these factors contributed to a 47% decline in our direct gross profit. Fulfillment partner gross profit declined by 3% compared to last year. Fulfillment partner gross profit accounted for over 94% of total gross profit, while direct gross profit fell to 6% compared to 10% last year.

Sales and marketing expense as a percentage of revenue decreased by 60 basis points to 5.8%. This decrease primarily results from our shift in marketing spending away from traditional advertising campaigns into Club O loyalty program promotions during the quarter.

Technology expenses increased 21% compared to last year primarily as a result of hiring of information technology related personnel. Headcount related expenses in G&A declined this quarter, but this was more than offset by an increase in legal expenses. Combined technology and G&A expenses increased by 12%.

Negative revenue and contribution growth and rising technology and G&A expenses resulted in a net loss of $7.8 million for the quarter, an increased loss of $4.4 million compared to Q3 2010.

We redeemed 100% of the outstanding Senior Convertible Notes on September 21, 2011. We funded this through a $17.0 million borrowing from US Bank and approximately $7.5 million of cash. We ended the quarter with $79.1 million in cash and cash equivalents and $18.4 million of working capital.

On a trailing twelve month basis, we experienced a $10.1 million year-over-year increase in free cash flow (See “Non-GAAP Financial Measures” below for a reconciliation of Free Cash Flow to net cash provided by operating activities), from $14.1 million in Q3 2010 to $24.2 million this quarter. This was due primarily to $13.0 million less of incremental capital expenditures during the last twelve months compared to the twelve month period ending Q3 2010.

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

Results of Operations

The following table sets forth our results of operations expressed as a percentage of total net revenue:

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	Three months ended September 30,				Nine months ended September 30,
	2011		2010		2011		2010
	(as a percentage of total revenue)				(as a percentage of total revenue)
Revenue, net
Direct	14.5	%	19.4	%	15.7	%	19.0	%
Fulfillment partner	85.5		80.6		84.3		81.0
Total net revenue	100.0		100.0		100.0		100.0
Cost of goods sold
Direct	13.5		17.6		14.3		16.7
Fulfillment partner	70.5		65.5		68.4		65.7
Total cost of goods sold	84.0		83.1		82.7		82.4
Gross profit	16.0		16.9		17.3		17.6
Operating expenses:
Sales and marketing	5.8		6.4		5.8		5.9
Technology	7.2		5.8		6.8		5.7
General and administrative	6.4		6.0		6.8		6.0
Restructuring	—		—		—		—
Total operating expenses	19.4		18.2		19.4		17.6
Operating loss	(3.4	)	(1.3	)	(2.1	)	—
Interest income	—		—		—		—
Interest expense	(0.3	)	(0.3	)	(0.3	)	(0.3	)
Other income, net	0.2		0.2		0.1		0.2
Net loss before income taxes	(3.5	)	(1.4	)	(2.3	)	(0.1	)
Provision (benefit) for income taxes	(0.1	)	—		—		—
Net loss	(3.4	)%	(1.4	)%	(2.3	)%	(0.1	)%

Comparisons of Three and Nine Months Ended September 30, 2011 to Three and Nine Months Ended September 30, 2010

Revenue

The following table reflects our net revenues for the three and nine months ended September 30, 2011 and 2010 (in thousands):

	Three months ended September 30,									Nine months ended September 30,
	2011		2010		$ Change			% Change		2011		2010		$ Change			% Change
Revenue, net
Direct	$	34,749	$	47,508	$	(12,759	)	(26.9	)%	$	116,353	$	140,458	$	(24,105	)	(17.2	)%
Fulfillment partner	204,989		197,912		7,077			3.6	%	623,847		600,545		23,302			3.9	%
Total revenue, net	$	239,738	$	245,420	$	(5,682	)	(2.3	)%	$	740,200	$	741,003	$	(803	)	(0.1	)%

The primary reasons for shrinking revenue for the three months ended September 30, 2011 were visits to our website were up slightly, conversion rates were lower resulting in fewer orders, and an 8% decrease in new customers compared to last year. We believe that the decline in revenue is partially the result of a decrease in site wide promotions and email and affiliate channel couponing we did to shift resources to promoting our Club O loyalty program. We also believe that our current efforts to rebrand ourselves from Overstock.com to O.co may have contributed to the decline in revenue. The primary reasons for flat revenue for the nine months ended September 30, 2011 were largely the same as those noted above. We also believe that the Google penalty described below that occurred during the first half of 2011 was another reason for flat revenue.

As previously disclosed, 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 natural search guidelines. As a result, we dropped significantly in some Google natural search result rankings. We made changes to conform to Google’s guidelines and on April 21, 2011 Google ended its penalization of our natural search results. We believe the Google penalty hurt our revenue by approximately 5% during the Google penalty period.

The primary reason for the decrease in direct revenue for the three and nine months ended September 30, 2011 was a shift in sales mix, particularly in clothing and shoes, from a direct inventory-based model to a fulfillment partner-based model to reduce exposure from seasonal inventory and mark downs.

The primary reason for the increase in fulfillment partner revenue for the three and nine months ended September 30, 2011 was primarily due to an increase in sales of home and garden products, and the shift in sales mix, particularly in clothing and shoes, from a

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direct inventory-based model to a fulfillment partner-based model.

The shift of business from direct to fulfillment partner (or vice versa) is an economic decision based on the economics of each particular product offering at the time and we do not have particular goals for “appropriate” mix or percentages for the size of either.

See “Executive Commentary” above for additional discussion regarding revenue.

Gross profit and gross margin

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; inventory management decisions within the direct business; sales coupons and promotions; product mix of sales; and operational and fulfillment costs.

The following table reflects our net revenues, cost of goods sold and gross profit for the three and nine months ended September 30, 2011 and 2010 (in thousands):

	Three months ended September 30,									Nine months ended September 30,
	2011		2010		$ Change			% Change		2011		2010		$ Change			% Change
Revenue, net
Direct	$	34,749	$	47,508	$	(12,759	)	(26.9	)%	$	116,353	$	140,458	$	(24,105	)	(17.2	)%
Fulfillment partner	204,989		197,912		7,077			3.6	%	623,847		600,545		23,302			3.9	%
Total net revenues	$	239,738	$	245,420	$	(5,682	)	(2.3	)%	$	740,200	$	741,003	$	(803	)	(0.1	)%
Cost of goods sold
Direct	$	32,472	$	43,174	$	(10,702	)	(24.8	)%	$	105,733	$	124,192	$	(18,459	)	(14.9	)%
Fulfillment partner	168,893		160,868		8,025			5.0	%	506,240		486,583		19,657			4.0	%
Total cost of goods sold	$	201,365	$	204,042	$	(2,677	)	(1.3	)%	$	611,973	$	610,775	$	1,198		0.2	%
Gross Profit
Direct	$	2,277	$	4,334	$	(2,057	)	(47.5	)%	$	10,620	$	16,266	$	(5,646	)	(34.7	)%
Fulfillment partner	36,096		37,044		(948		)	(2.6	)%	117,607		113,962		3,645			3.2	%
Total gross profit	$	38,373	$	41,378	$	(3,005	)	(7.3	)%	$	128,227	$	130,228	$	(2,001	)	(1.5	)%

Gross margins for the past seven quarterly periods and fiscal year ending 2010 were:

	Q1 2010		Q2 2010		Q3 2010		Q4 2010		FY 2010		Q1 2011		Q2 2011		Q3 2011
Direct	13.8	%	11.7	%	9.1	%	9.0	%	10.7	%	10.7	%	9.6	%	6.6	%
Fulfillment Partner	18.8	%	19.4	%	18.7	%	19.0	%	19.0	%	20.7	%	18.1	%	17.6	%
Combined	17.9	%	18.0	%	16.9	%	17.0	%	17.4	%	18.9	%	16.9	%	16.0	%

The decrease in direct gross margin for the three months ended September 30, 2011 is primarily due to competitive pricing initiatives as well as higher freight and warehouse costs as a percentage of revenue. The decrease in direct gross margin for the nine months ended September 30, 2011 is primarily due to competitive pricing initiatives, and higher freight and warehouse related costs as a percentage of revenue, offset in part by a favorable sales mix shift into higher margin categories such as Home & Garden.

The decrease in fulfillment partner gross margin for the three and nine months ended September 30, 2011 is primarily due to competitive pricing initiatives.

During reviews of our partner billing system for returns, we discovered that we had underbilled our fulfillment partners for certain fees and charges related to returns of approximately $816,000 for the year ended December 31, 2010 (of which $136,000 and $724,000 related to the three and nine months ended September 30, 2010, respectively) and $14,000 and $70,000 for the three and nine months ended September 30, 2011, respectively. Since our business model is reliant on our relationships with our fulfillment partners 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 from our fulfillment partners and consequently have not recognized any related recoveries in our consolidated financial statements.

The other factors described above, such as operational and fulfillment costs did not have a significant impact on the change in gross profit.

Cost of goods sold includes stock-based compensation expense of $47,000 and $55,000 for the three months ended September 30,

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2011 and 2010, respectively and $134,000 and $157,000 for the nine months ended September 30, 2011 and 2010, 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 card fees and customer service costs, all of which we include as costs in calculating gross margin. We believe that some companies in our industry, including some of our competitors, account for fulfillment costs within operating expenses, and therefore exclude fulfillment costs from gross margin. As a result, our gross margin 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 and margin, thus enabling investors to better compare our gross margin with others in our industry (in thousands):

	Three months ended September 30,								Nine months ended September 30,
	2011				2010				2011				2010
Total revenue, net	$	239,738	100	%	$	245,420	100	%	$	740,200	100	%	$	741,003	100	%
Cost of goods sold
Product costs and other cost of goods sold	189,074		79	%	190,326		77	%	573,204		78	%	570,353		77	%
Fulfillment and related costs	12,291		5	%	13,716		6	%	38,769		5	%	40,422		5	%
Total cost of goods sold	201,365		84	%	204,042		83	%	611,973		83	%	610,775		82	%
Gross profit	$	38,373	16	%	$	41,378	17	%	$	128,227	17	%	$	130,228	18	%

Fulfillment costs as a percentage of sales may vary due to several factors, such as our ability to manage costs at our warehouses, significant changes in the number of units received and fulfilled, the extent to which we use third party fulfillment services and warehouses, and our ability to effectively manage customer service costs and credit card fees. There have been no significant changes in our fulfillment and related costs as a percentage of revenue during the three or nine months ended September 30, 2011.

See “Gross profit and gross margin” above for additional discussion.

Operating expenses

Sales and marketing expenses

We advertise 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. The following table reflects our sales and marketing expenses for the three and nine months ended September 30, 2011 and 2010 (in thousands):

	Three months ended September 30,											Nine months ended September 30,
	2011			2010			$ Change			% Change		2011			2010			$ Change			% Change
Sales and marketing expenses	$	13,822		$	15,626		$	(1,804	)	(11.5	)%	$	42,902		$	44,084		$	(1,182	)	(2.7	)%
Sales and marketing expenses as a percent of net revenues	5.8		%	6.4		%						5.8		%	5.9		%

Sales and marketing expenses as a percentage of revenue decreased by 60 and 10 basis points for the three and nine months ended September 30, 2011, respectively. This is primarily related to the shift away from traditional advertising campaigns, into Club O loyalty program promotions (that are accounted for as a reduction of revenue) during the quarter.

Sales and marketing expenses include stock-based compensation expense of $80,000 and $152,000 for the three months ended September 30, 2011 and 2010, respectively and $289,000 and $454,000 for the nine months ended September 30, 2011 and 2010, respectively.

Costs associated with our Club O loyalty program, discounted shipping and other promotions, such as coupons, are not included in marketing expense. Rather they are accounted for as a reduction of revenue and therefore affect sales growth and gross margin. We consider our Club O loyalty program, discounted shipping and other promotions to be effective marketing tools, and intend to continue to offer them as we deem appropriate as part of our overall marketing plan.

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Technology expenses

The following table reflects our technology expenses for the three and nine months ended September 30, 2011 and 2010 (in thousands):

	Three months ended September 30,										Nine months ended September 30,
	2011			2010			$ Change		% Change		2011			2010			$ Change		% Change
Technology expenses	$	17,171		$	14,186		$	2,985	21.0	%	$	50,639		$	42,312		$	8,327	19.7	%
Technology expenses as a percent of net revenues	7.2		%	5.8		%					6.8		%	5.7		%

The $3.0 million increase for the three months ended September 30, 2011 is primarily due to a $1.3 million increase in compensation expense (primarily due to increases in staffing) and approximately $470,000 in increased depreciation expense due to higher technology capital spending last year.

The $8.3 million increase for the nine months ended September 30, 2011 is primarily due to a $4.4 million increase in compensation expense (primarily due to increases in staffing), and a $2.1 million increase in depreciation expense.

Technology expenses include stock-based compensation expense of $171,000 and $272,000 for the three months ended September 30, 2011 and 2010, respectively and $534,000 and $794,000 for the nine months ended September 30, 2011 and 2010, respectively

General and administrative expenses

The following table reflects our general and administrative expenses for the three and nine months ended September 30, 2011 and 2010 (in thousands):

	Three months ended September 30,										Nine months ended September 30,
	2011			2010			$ Change		% Change		2011			2010			$ Change		% Change
General and administrative expenses	$	15,321		$	14,742		$	579	3.9	%	$	50,032		$	44,151		$	5,881	13.3	%
General and administrative expenses as a percent of net revenues	6.4		%	6.0		%					6.8		%	6.0		%

The $579,000 increase in general and administrative expenses (“G&A”) for the three months ended September 30, 2011 is primarily due to an increase of $870,000 in legal fees, partially offset by a reduction of $455,000 in compensation expense (primarily due to decreases in staffing).

The $5.9 million increase in general and administrative expenses for the nine months ended September 30, 2011 is primarily due to a $4.4 million increase in legal fees, a $1.1 million increase in compensation expense (primarily due to increases in staffing) and $863,000 in new facilities expense from the expansion of our facilities.

G&A expenses include stock-based compensation expense of approximately $403,000 and $807,000 for the three months ended September 30, 2011 and 2010, respectively and $1.5 million and $2.4 million for the nine months ended September 30, 2011 and 2010.

Restructuring

Depreciation expense

Depreciation expense is classified within the corresponding operating expense categories on the consolidated statements of operations as follows (in thousands):

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	Three months ended				Nine months ended
	September 30,				September 30,
	2011		2010		2011		2010
Cost of goods sold - direct	$	137	$	277	$	583	$	912
Technology	3,766		3,296		11,009		8,930
General and administrative	307		253		880		629
Total depreciation and amortization, including internal-use software and website development	$	4,210	$	3,826	$	12,472	$	10,471

Non-operating income (expense)

Interest income

Interest income is primarily derived from the investment of our cash in short-term investments. Interest income for the three months ended September 30, 2011 and 2010 totaled $23,000 and $55,000, respectively and $121,000 and $111,000 for the nine months ended September 30, 2011 and 2010, respectively.

Interest expense

Interest expense is largely related to interest incurred on our Senior Notes, our finance obligations and our capital leases. Interest expense for the three months ended September 30, 2011 and 2010 totaled $662,000 and $668,000, respectively and $2.0 million and $2.2 million for the nine months ended September 30, 2011 and 2010, respectively.

Other income, net

Other income, net for the three months ended September 30, 2011 and 2010 totaled $553,000 and $387,000, respectively and $962,000 and $1.4 million for the nine months ended September 30, 2011 and 2010, respectively. The increases in other income, net during the three and nine months are primarily due to increased gift card breakage, offset in part by no extinguishments of Senior Notes with accompanying gains on the buyback during the three and nine months ended September 30, 2011 when compared to the same period in 2010.

Income taxes

Our provisions (benefit) for income taxes for the three months ended September 30, 2011 and 2010 totaled ($240,000) and ($44,000), respectively and ($202,000) and $78,000 for the nine months ended September 30, 2011 and 2010, respectively. The overall benefit for three and nine months ended September 30, 2011 was from a change in accounting method for tax, primarily related to internally capitalized software. As of September 30, 2011 and December 31, 2010 we had federal net operating loss carry forwards of approximately $190.5 million and $174.3 million, respectively, and state net operating loss carry forwards of approximately $174.3 million and $158.1 million, respectively, which may be used to offset future taxable income. However, we may have experienced ownership changes under Internal Revenue Code Section 382 that would 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 quarterly results for each quarter could differ materially depending upon consumer preferences, availability of product and competition, among other risks and uncertainties. Accordingly, there can be no assurances that seasonal variations will not materially affect our results of operations in the future. The following table reflects our total net revenues for each of the quarters since 2010 (in thousands):

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
2011	$	265,470	234,992		239,738		N/A
2010	264,330		$	231,253	$	245,420	$	348,870

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Liquidity and Capital Resources

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

Our principal sources of liquidity are cash flows generated from operations, and our existing cash and cash equivalents. At September 30, 2011, our cash and cash equivalents balance was $79.1 million.

Cash flow information is as follows:

	Nine months ended September 30,						Twelve months ended September 30,
	2011			2010			2011			2010
Cash provided by (used in):
Operating activities	$	(16,300	)	$	(31,722	)	$	31,744		$	34,654
Investing activities	(6,470		)	(21,454		)	(7,716		)	(22,729		)
Financing activities	(22,113		)	(10,173		)	(21,298		)	(10,508		)

Free Cash Flow.

“Free Cash Flow” (a non-GAAP measure) for the nine months ended September 30, 2011 and 2010, was ($22.6) million and ($51.0) million, respectively and $24.2 million and $14.1 million for the twelve months ended September 30, 2011 and 2010, respectively. See “Non-GAAP Financial Measures” below for a reconciliation of Free Cash Flow to net cash provided by (used in) operating activities.

Cash flows from operating activities.

For the nine months ended September 30, 2011 and 2010, our operating activities resulted in net cash outflows of $16.3 million and $31.8 million, respectively.

Cash received from customers generally corresponds to our net sales as our customers primarily use credit cards to buy from us causing our receivables from these sales transactions to settle quickly. We have payment terms with our fulfillment partners that generally extend beyond the amount of time necessary to collect proceeds from our customers. As a result, following our typically seasonally strong fourth quarter sales, at December 31 of each year, our cash, cash equivalents and accounts payable balances normally reach their highest level (other than as a result of cash flows provided by or used in investing and financing activities). However, our accounts payable balance normally declines during the first three months following year-end, which normally results in a decline in our cash and cash equivalents balances from the year-end balance. The seasonality of our business causes payables and accruals to grow significantly in the fourth quarter, and then decrease in the first quarter when they are paid.

The $16.3 million of net cash used in operating activities during the nine months ended September 30, 2011 was primarily for payments of accounts payable of $24.8 million following the holiday season and a decrease in accrued liabilities of $3.5 million, an increase of $3.2 million in prepaid and other assets, partially offset by a decrease of $12.9 million in inventories and a reduction in accounts receivable of $5.1 million.

The $31.7 million of net cash used in operating activities during the nine months ended September 30, 2010 was primarily for payments of accounts payable of $30.8 million following the holiday season and a decrease in accrued liabilities of $6.6 million, an increase of $11.0 million in inventories in preparation for the holiday shopping season, partially offset by a reduction in accounts receivable of $3.3 million.

During the nine months ended September 30, 2010, one of our credit card processors refunded the full $1 million reserve that it previously held at December 31, 2009. The credit card processor may re-impose a reserve at any time based on its assessment of the inherent risks of credit card processing and its assessment of the risks of processing our customers’ credit cards. Any establishment of or increase in the amount of the reserve established by the processor could have an adverse effect on our cash flow, and any material unexpected increase could have a material adverse effect on our liquidity, business, prospects, results of operations and financial condition. At September 30, 2011 our credit card processors held a reserve of $216,000.

Cash flows from investing activities.

For the nine months ended September 30, 2011 and 2010, investing activities resulted in net cash outflows of $6.5 million and

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$21.5 million, respectively, resulting primarily from expenditures for fixed assets.

Cash flows from financing activities.

For the nine months ended September 30, 2011 and 2010, financing activities resulted in net cash outflows of $22.1 million and $10.2 million, respectively.

The $22.1 million used in financing activities during the nine months ended September 30, 2011 resulted primarily from $34.6 million used for retirement of long-term debt, $3.4 million in payments on finance obligations and $1.6 million for the purchase of shares of our common stock withheld for minimum tax withholdings upon the vesting of a portion of certain restricted stock award grants, partially offset by $17.0 million in proceeds from long-term debt.

The $10.2 million used in financing activities during the nine months ended September 30, 2010 resulted primarily from $24.9 million used for retirement of long-term debt, partially offset by $14.6 million in proceeds from finance obligations and $1.5 million in proceeds from the exercise of stock options.

Stock and Debt Repurchase Program

We retired all of the Senior Notes that remained outstanding on September 21, 2011 for $24.5 million in cash, resulting in a loss of $26,000 on early extinguishment of debt, net of $26,000 of associated unamortized discount. We retired $34.6 million of the Senior Notes during the nine months ended September 30, 2011, for $34.6 million in cash, resulting in a loss of $54,000 on early extinguishment of debt, net of $77,000 of associated unamortized discount. Of the $34.6 million in Senior Notes retired during the nine months ended September 30, 2011, $10.1 million were held by Chou or an affiliate of Chou and $21.7 million were held by Fairfax or an affiliate of Fairfax. Chou and Fairfax are beneficial owners of more than 5% of our common stock. We retired $16.1 million of the Senior Notes during the three months ended September 30, 2010 for $15.8 million in cash, resulting in a gain of $141,000 on early extinguishment of debt, net of $92,000 of associated unamortized discount. We retired $25.4 million of the Senior Notes during the nine months ended September 30, 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.

As of September 30, 2011 and December 31, 2010, zero and $34.5 million of the Senior Notes, net of debt discount remained outstanding, respectively.

Redeemable Common Stock

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of September 30, 2011 and the effect such obligations and commitments are expected to have on our liquidity and cash flow in future periods (in thousands):

	Payments Due by Period
Contractual Obligations	2011		2012		2013		2014		2015		Thereafter		Total
Finance obligations	1,428		5,942		6,327		5,646		986		—		20,329
Interest on finance obligations	303		984		599		201		14		—		2,101
Capital lease obligations	82		115		3		—		—		—		200
Long-term debt	—		17,000		—		—		—		—		17,000
Interest on long-term debt (1)	117		468		—		—		—		—		585
Operating leases	2,333		8,916		8,206		8,404		6,818		1,564		36,241
Naming rights	—		1,236		1,273		1,311		1,351		1,391		6,562
Purchase obligations	15,726		574		—		—		—		—		16,300
Total contractual cash obligations	$	19,989	$	35,235	$	16,408	$	15,562	$	9,169	$	2,955	$	99,318

	Amounts of Commitment Expiration Per Period
Other Commercial Commitments	2011		2012		2013		2014		2015		Thereafter		Total
Letters of credit	$	2,374	$	—	$	—	$	—	$	—	$	—	$	2,374

(1) Interest on long-term debt is variable based on one-month LIBOR plus 2.50%. At September 30, 2011, the interest rate was 2.75%.

Naming rights

During the nine months ended September 30, 2011, we entered into a six-year agreement with the Oakland-Alameda County Coliseum Authority (“OACCA”) for the right to name the Oakland Alameda County Coliseum. Amounts represent annual payments due OACCA for the naming rights.

Purchase obligations

The amount of purchase obligations shown above is based on assumptions regarding the legal enforceability against us of purchase orders we had outstanding at September 30, 2011. Under different assumptions regarding our rights to cancel our purchase orders or different assumptions regarding the enforceability of the purchase orders under applicable law, the amount of purchase obligations shown in the table above would be less.

Tax Contingencies

Our contractual obligations presented above exclude unrecognized tax contingencies, including interest and penalties, of $297,000 for which we cannot make a reasonably reliable estimate of the amount and period of payment.

Recommendation Algorithm Development Contest

During the nine months ended September 30, 2011, we announced two contests offering cash prizes of up to $1.3 million for each contest period to the researcher or research team who can design and develop a recommendation algorithm which provides a minimum of 1% increase in sales as compared to our existing algorithm. The contest periods end March 31, 2012 and September 30, 2012 and the cash prizes, if any, would be awarded at those times.

Borrowings

U.S. Bank Financing Agreements

We are a party to a Financing and Security Agreement with U.S. Bank dated December 22, 2009 (as amended on August 19, 2011, the “Financing Agreement”). The maximum credit potentially available under the revolving facility is $20 million. Our obligations under the Financing Agreement and all related agreements are secured by all or substantially all of our assets, excluding our interest in certain litigation. Subject to certain exceptions, the full amount of the revolving facility is expected to be available to us as long as $30 million in the aggregate (which amount includes any minimum liquidity required under the Master Lease Agreement) is maintained on deposit with U.S. Bank. The obligation of U.S. Bank to make advances under the Financing Agreement is subject to the conditions set forth in the Financing Agreement. Concurrent to signing the amendment to the Financing Agreement, we also obtained a waiver from U.S. Bank, which prohibited us from forming any subsidiaries, in regards to our formed subsidiary Overstock.com Services, Inc.

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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 facility prior to its stated termination date.

On September 17, 2010 we entered into a Master Lease Agreement and a Financial Covenants Rider (collectively, the “Master Lease Agreement”) with U.S. Bancorp Equipment Finance, Inc.-Technology Finance Group (“Lessor”), an affiliate of U.S. Bank. Under the Master Lease Agreement we entered into four separate leases, pursuant to which we sold certain information technology hardware (the “IT Assets”) to Lessor, which were simultaneously leased back for a period of 48 months and financed certain software licenses for a period of 48 months for proceeds totaling approximately $16.4 million. Subsequently, we entered into eleven additional leases; whereby we leased $8.2 million 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 and terminate the Master lease Agreement twelve months following the initial term, or under certain situations where there is a change in control of the Lessor, defined as a circumstance where the Lessor merges, or sells 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 Master Lease Agreement are due

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monthly. The weighted average effective interest rate under the Master Lease Agreement is 6.29%. We have accounted for the Master Lease Agreement as a financing transaction and amounts owed are included in Finance Obligations, current and non-current in the consolidated balance sheets. We recorded no gain or loss on these leasing transactions.

U.S. Bank has the contractual right to demand payment of all amounts outstanding under the Financing Agreement and Master Lease Agreement if we fail to comply with certain loan covenants. At September 30, 2011 our Total Fixed Charge Coverage annualized ratio was in excess of the required 1.20:1.00. However, based on our results for the first three quarters of 2011, it is likely that we will be out of compliance with the Total Fixed Charge Coverage ratio at December 31, 2011 unless current trends improve substantially. We have held initial and collegial discussions with U.S. Bank regarding this potential non-compliance.

U.S. Bank Purchasing Card Agreement

Long-term debt arrangements and interest

We have a Financing Agreement with U.S. Bank and Master Lease Agreement with an affiliate of U.S. Bank, see Item 1 of Part I, “Financial Statements (Unaudited)” —Note 4— “Borrowings” contained in the “Notes to Consolidated Financial Statements” of this Quarterly Report on Form 10-Q is incorporated by reference.

On September 21, 2011 we redeemed all of the outstanding Senior Notes, see Item 1 of Part I, “Financial Statements (Unaudited)” —Note 7— “Stock and Debt Repurchase Program contained in the “Notes to Consolidated Financial Statements” of this Quarterly Report on Form 10-Q is incorporated by reference.

Off-Balance Sheet Arrangements

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

Non-GAAP Financial Measures

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

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 and marketing expense and reflects an additional way of viewing our results. Contribution Margin is Contribution as a percentage of revenues. When viewed with our GAAP gross profit less sales and marketing expenses, we believe Contribution and Contribution margin provides management and users of the financial statements information about our ability to cover our fixed operating costs, such as technology and general and administrative expenses. Contribution and Contribution Margin are used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. You should review our financial statements and publicly-filed reports in their entirety and not rely on any single financial measure. The material limitation associated with the use of Contribution is that it is an incomplete measure of profitability as it does not include all operating expenses or non-operating income and expenses. Management compensates for these limitations when using this measure by looking at other GAAP measures, such as operating income (loss) and net income (loss).

For further details on Contribution, see the calculation of this non-GAAP measure below (in thousands):

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	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
Total revenue	$	239,738		$	245,420		$	740,200		$	741,003
Cost of goods sold	201,365			204,042			611,973			610,775
Gross profit	38,373			41,378			128,227			130,228
Less: Sales and marketing expense	13,822			15,626			42,902			44,084
Contribution	$	24,551		$	25,752		$	85,325		$	86,144
Contribution margin	10.2		%	10.5		%	11.5		%	11.6		%

Free Cash Flow.

Free cash flow (a non-GAAP financial measure) reflects an additional way of viewing our cash flows and liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows and liquidity. Free cash flow, which we reconcile to “Net cash provided by (used in) operating activities”, is cash flows from operations reduced by “Expenditures for fixed assets, including internal-use software and website development.” We believe that cash flows from operating activities is an important measure, since it includes both the cash impact of the continuing operations of the business and changes in the balance sheet that impact cash. However, we believe free cash flow is a useful measure to evaluate our business since purchases of fixed assets are a necessary component of ongoing operations and free cash flow measures the amount of cash we have available for future investment, debt retirement or other changes to our capital structure after we have paid all of our expenses. Therefore, we believe it is important to view free cash flow as a complement to our entire consolidated statements of cash flows as calculated below (in thousands):

	Nine months ended September 30,						Twelve months ended September 30,
	2011			2010			2011			2010
Net cash provided by (used in) operating activities	$	(16,300	)	$	(31,722	)	$	31,744		$	34,654
Expenditures for fixed assets, including internal-use software and website development	(6,344		)	(19,317		)	(7,538		)	(20,583		)
Free cash flow	$	(22,644	)	$	(51,039	)	$	24,206		$	14,071

Government Regulation

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

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

Factors that May Affect Future Results

Any investment in our securities involves a high degree of risk. Investors should consider carefully the risks and uncertainties described in this Form 10-Q, and all other information in this Form 10-Q and in our other filings with the SEC including those we file after we file this Form 10-Q, before deciding whether to purchase or hold our securities.

Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also become important factors that may harm our business. The occurrence of any of the risks described in under “Risk Factors” in our most recent Annual Report on Form 10-K or herein could harm our business. The trading price of our securities could decline due to any of these risks and

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uncertainties, and investors may lose part or all of their investment.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents, marketable securities, trade accounts and contracts receivable, accounts payable and long-term obligations. We consider investments in highly-liquid instruments with a remaining maturity of 90 days or less at the date of purchase to be cash equivalents.

Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-term obligations; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities. However, the fair values of our investments may be subject to fluctuations due to volatility of the stock market in general, investment-specific circumstances, and changes in general economic conditions.

At September 30, 2011, we had $81.5 million in cash and cash equivalents including restricted cash. Hypothetically, an increase or decrease in interest rates of one hundred basis points would have an estimated impact of $815,000 on our earnings or loss or cash flows of these instruments.

At September 30, 2011, we had $17.0 million outstanding under our long-term debt, and letters of credit totaling $2.4 million were outstanding under our credit facilities. Hypothetically, an increase or decrease in interest rates of one hundred basis points would have an estimated impact of $194,000 on our earnings or loss or cash flows of these instruments. We have entered into an interest rate cap agreement with U.S. Bank with an effective date of October 1, 2011 limiting our exposure for one-month LIBOR at 0.5% for the term of the Financing Agreement.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures, as such term is defined in Rule 13a-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 provide reasonable assurance that information 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, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation required by the Securities Exchange Act of 1934 (the “1934 Act”), under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the 1934 Act, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

During the most recent fiscal quarter, there has not occurred any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth under Item 1 of Part I, “Financial Statements “—Note 5—“Commitments and Contingencies,” subheading “Legal Proceedings,” contained in the “Notes to Consolidated Financial Statements” of this Quarterly Report on Form 10-Q is incorporated by reference in answer to this Item.

ITEM 1A. RISK FACTORS

Except as set forth below, there have been no material changes in the risk factors disclosed in Item 1A, (“Risk Factors”) of our most recently filed Form 10-K which sets forth information relating to important risks and uncertainties that could materially affect our business, financial condition or operating results. Except as outlined herein, the Risk Factors described in our Annual Report on Form 10-K continue to be relevant to an understanding of our business, financial condition and operating results and, accordingly, you should review and consider such Risk Factors in making any investment decision with respect to our securities. An investment in our securities continues to involve a high degree of risk.

We are subject to cybersecurity risks and may incur increasing costs in an effort to minimize those risks and to respond to cyber incidents.

Our business is entirely dependent on the secure operation of our website and systems as well as the operation of the internet generally. Our business involves the storage and transmission of users’ proprietary information, and security breaches could expose us to a risk of loss or misuse of this information, litigation, and potential liability. A number of large internet companies have disclosed security breaches, some of which have involved intentional attacks. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber attacks. Attacks may be targeted at us, our customers, or both. If an actual or perceived breach of our security occurs, customer and/or supplier perception of the effectiveness of our security measures could be harmed and we could lose customers, suppliers or both. Actual or anticipated attacks and risks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third party experts and consultants.

A person who is able to circumvent our security measures could misappropriate our or our users’ proprietary information, cause interruption in our operations, damage our computers or those of our users, or otherwise damage our reputation and business. Any compromise of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures, which could harm our business.

Most of our customers use credit cards to pay for their purchases. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication to effectively secure transmission of confidential information, including customer payment card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in the technology used by us to protect transaction data being breached or compromised. Data breaches can also occur as a result of non-technical issues.

Under payment card rules and our contracts with our card processors, if there is a breach of payment card information that we store, we could be liable to the payment card issuing banks for their cost of issuing new cards and related expenses. In addition, if we fail to follow payment card industry security standards, even if there is no compromise of customer information, we could incur significant fines or lose our ability to give customers the option of using payment cards to fund their payments or pay their fees. If we were unable to accept payment cards, our business would be seriously damaged.

Our servers are also vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions, including “denial-of-service” type attacks. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. Security breaches, including any breach by us or by persons with whom we have commercial relationships that result in the unauthorized release of our users’ personal information, could damage our reputation and expose us to a risk of loss or litigation and possible liability.

Our insurance coverage and indemnity rights may not adequately protect us against loss.

Although we maintain liability and other types of insurance, including but not limited to, property, workers compensation, general liability, product liability, and security and privacy breach insurance, we cannot be certain that the types, coverage, or the amounts of coverage we maintain will be adequate for losses actually incurred, or that the insurance will continue to be available to us on economically reasonable terms. Similarly, although we are indemnified by most of our suppliers and vendors for product liability for products they supply us, and we have indemnification agreements with software and hardware suppliers for losses we might incur as a result of the use of the technology products they supply, we are not indemnified by all our suppliers, nor can we be certain that our indemnification rights are enforceable or adequate to cover actual losses we may incur as a result of the sale or use of products our

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indemintors provide to us. Actual losses for which we are not insured or indemnified, or which exceed our insurance coverage or the capacity of our indemnitors, could harm our business, prospects, financial condition and results of operations.

Our insurance business is a relatively new business that may not succeed in the long-term.

Our insurance business site began operation in July 2011. The insurance site allows customer to comparison shop for home and auto insurance. The online insurance business site is a relatively new business for us. We cannot ensure that our expansion into this business will succeed. Our entry into the business will require us to devote financial, technical, managerial and other resources to this insurance business site. It will also expose us to additional risks, including legal and regulatory risks, and it will require us to compete with established businesses having substantially greater experience in the online insurance business, including insurance business comparison shopping sites which have substantially greater resources than we have.

Our insurance 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 insurance sellers and public advertisement insurance sales. Generally, these regulations govern the conduct of those sellers advertising their insurance products 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 a service providing advertisement or comparison shopping services for insurance products is not clear. Although we do not expect these laws to have a significant effect on our insurance businesses site, we will incur costs in researching and complying with these laws, and we may from time to time be required to make changes in our businesses that may increase our costs, reduce our revenues, cause us to prohibit certain listing or advertising practices, or make other changes that may adversely affect our insurance business site.

Current and future laws could affect our insurance business.

Like our shopping business, our insurance business is subject to most of the same laws and regulations that apply to other companies conducting business on and off the Internet. In addition, our insurance business may be affected by other laws and regulations, such as those that expressly apply to advertising insurance products for sale. To the extent that such current or future laws or regulations prevent insurance companies from offering or selling products on our insurance business site, they could harm our business.

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

The law regarding the potential liability of an online service providing a platform for sales of insurance products is not clear. The platform of the insurance business site is accessible to insurance product vendors who have insurance products for sale, and which describe these products to customer and inform them of other important information related to the insurance products and the companies which sell them. We have no ability to know whether the information insurance sellers provide is correct. While our site terms and conditions of usage prohibit unlawful acts, we cannot rule out the possibility that insurance sellers will engage in unlawful transactions, or fail to comply with all laws and regulations applicable to them and their transactions. We may be subject to allegations of civil or criminal liability for any unlawful activities conducted by such users. Any costs we incur as a result of any such allegations, as a result of actual or alleged unlawful transactions using our site, or in our efforts to prevent any such transactions, may harm our business. In addition, any negative publicity we receive regarding any such transactions or allegations may damage our reputation, our ability to attract new customers to our main shopping site, and the O.co and Overstock.com brand names generally.

We have significant indebtedness.

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 economic conditions and the health of the Internet retail industry. If our operations do not generate sufficient cash flow from operations to satisfy our indebtedness, we may need to borrow additional funds to make these payments or undertake alternative financing plans, such as refinancing our debt, or reducing or delaying capital investments. Additional funds or alternative financing may not be available to us on acceptable terms, or at all. Our inability to generate sufficient cash flow from operations or obtain additional funds or alternative financing on acceptable terms could have a material adverse affect on our business, prospects, financial condition and results of operations.

If one or more states successfully assert that we should collect sales or other taxes on the sale of our merchandise or the merchandise of third parties that we offer for sale on our Website, 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, even though we have no physical presence in those jurisdictions. The future location of our

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fulfillment centers and customer service center networks, or any other operation of the company, establishing a physical presence in states where we are not now present, may result in additional sales and other tax obligations. In at least one state, New York, we have contested the constitutionality of a law requiring Internet retailers to collect and remit New York sales taxes on their New York sales though they have no physical presence or “tax nexus” in New York, if the retailer uses the services of New York based Internet advertisers. The trial court dismissed our challenge, and on appeal, the appellate court has partially affirmed the trial court. We intend to continue to pursue this legal challenge through appeal. Other states have passed similar Internet affiliate advertising statutes, and in those states we have terminated our use of locally based Internet advertisers. There are other states that currently have similar tax proposals under consideration. If such laws survive constitutional challenge, we may have to elect to discontinue in those states valuable marketing through the use of affiliates based in those states, or begin in those states the collection of the taxes. In either event, our business could be harmed and our business could be adversely affected if one or more states or any foreign country successfully asserts that we should collect sales or other taxes on the sale of our merchandise in compliance with these or any other state law. There are also in the U.S. Congress proposals to allow states to require out-of-state retailers to collect and remit sales tax. Should Congress enact such a law, requiring us to collect and remit state sales tax in one or more states in which we do not now collect and remit taxes, our business could harmed.

At least one state, Ohio, asserts that we should pay a commercial activity tax because we sell merchandise in Ohio, even though we have no physical presence there. We challenged in Ohio state court the constitutionality of the commercial activity tax; however, the court declined the case for the reason that it was not a ripe controversy. The State of Ohio has since assessed us $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 $73,489 as of September 30, 2011.We believe the assessment to be wrong and are contesting the assessment. If Ohio is successful and its assessment withstands constitutional challenge in both administratively and in court appeals, the enforcement of the assessment could harm our business. If other states similarly enact and are successful in enforcing similar commercial activity tax laws, these also could harm our business.

The States of Colorado, South Dakota and Oklahoma have enacted laws requiring remote vendors to notify resident purchasers in those states of their obligation to pay a 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, and provide 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 in Colorado, citing constitutional concerns and noting that a party challenging the constitutionality of the Colorado law would have a likelihood of success at trial, 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 such detailed notices, or the threat of invasion of privacy, discourage customers from making purchases over the Internet.

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, Current Reports 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 charge through our Internet Website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our Internet Website and the information contained therein or connected thereto are not a part of or incorporated into this Annual Report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth all purchases made by or on behalf of us or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Exchange Act, of shares of the our common stock made during each month within the second quarter of 2011, including all purchases made pursuant to publicly announced plans or programs and those not made pursuant to publicly announced plans or programs. Column (a) sets forth the total number of shares purchased, and the footnotes to the table disclose the number of shares purchased other than pursuant to a publicly announced plan or program and the nature of any such purchases. Column (b) sets forth the average price paid per share. Column (c) sets forth the total number of shares purchased as part of publicly announced repurchase plans or programs. Column (d) sets forth the maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs.

The footnotes to the table indicate the date each plan or program was announced, the dollar amount or share amount approved, the expiration date, if any, of each plan or program, each plan or program that has expired during the period covered by the table, and each plan or program we have determined to terminate prior to expiration, or under which we do not intend to make further purchases.

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Period	(a) Total Number of Shares (or Units) Purchased		(b) Average Price Paid per Share or Unit		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
July 1, 2011 to July 31, 2011	—		$	—	—	$	—
August 1, 2011 to August 31, 2011	180		12.92		—	—
September 1, 2011 to September 30, 2011	—		—		—	—
Total	180	(1)			—	$	—

(1) Represents shares withheld for minimum tax withholdings upon the vesting of a portion of certain restricted stock award grants. No shares were repurchased in the open market.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. (REMOVED AND RESERVED)

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

(a)	Exhibits

	31.1	Exhibit 31.1 Certification of Chief Executive Officer

	31.2	Exhibit 31.2 Certification of Chief Financial Officer

	32.1	Exhibit 32.1 Section 1350 Certification of Chief Executive Officer

	32.2	Exhibit 32.2 Section 1350 Certification of Chief Financial Officer

	101	The following financial information from our Quarterly Report on From 10-Q for the third quarter of fiscal 2011, filed with the SEC on October 27, 2011, formatted in Extensible Business Reporting Language (“XBRL”): (i) the Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statements of Stockholders’ Equity, and (v) Notes to Consolidated Financial Statements.(1)

	10.32	First Amendment to Financing Agreement and Waiver dated as of August 19, 2011; amending Financing Agreement dated December 22, 2009 (the “Financing Agreement”) with U.S. Bank National Association (incorporated by reference to exhibit 10.1 to our Report on Form 8-K (File No. 000-49799) filed August 22, 2011).

	10.33	Revolving Note (Regular Advances) dated as of August 19, 2011 pursuant to the Financing Agreement (incorporated by reference to exhibit 10.2 to our Report on Form 8-K (File No. 000-49799) filed August 22, 2011).

	10.34	Revolving Note (Cash Secured Advances) dated as of August 19, 2011 pursuant to the Financing Agreement (incorporated by reference to exhibit 10.3 to our Report on Form 8-K (File No. 000-49799) filed August 22, 2011).

(1) Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability under these sections.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: October 27, 2011	OVERSTOCK.COM, INC.

	/s/ Stephen J. Chesnut
	Stephen J. Chesnut
	Senior Vice President, Finance and Risk Management