On Monday, Gradient retracted allegations that Salt Lake City-based Overstock's methods did not comply with rules established by the Financial Accounting Standards Board, which establishes accounting and reporting standards for U.S. companies.

"Gradient now believes that, to the best of its knowledge, Overstock's stated accounting policies did in fact conform to Generally Accepted Accounting Principles and regrets any prior statements to the contrary," Gradient said in a statement.

Gradient, based in Scottsdale, Ariz., also apologized for saying that Overstock directors Allison Abraham, John Fisher and Gordon Macklin were not outside directors.

"Gradient regrets that the parties have been embroiled in litigation over its reports and looks forward to both sides moving forward with their respective businesses," the company said.

Terms of the settlement were kept confidential by Gradient and Overstock, which sells discounted and close-out merchandise through the Internet.

"This is very very positive for Overstock," CEO Patrick Byrne said. "This represents a great step forward in our case."

Overstock sued Gradient in 2005, alleging the research company issued false and misleading reports about Overstock using information from hedge fund Rocker Partners LLC to help it benefit from short-selling, or bets that Overstock's shares would decline.

Byrne said his company will continue to pursue its claims against Rocker Partners, now known as Copper River Management LLC, and principles David Rocker and Mark Cohodes.

- Paul Beebe