PFSWEB, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

certain special bids, the cost of products provided to replace defective product returned by customers and other certain expenses as defined. Supplies Distributors and its subsidiaries can return to IBM product rendered obsolete by IBM engineering changes after customer demand ends. IBM determines when a product is obsolete. IBM, Supplies Distributors and SDSA also have verbal agreements under which IBM reimburses or collects from Supplies Distributors or SDSA amounts calculated in certain inventory cost adjustments.

     Supplies Distributors and its subsidiaries pass through to customers marketing programs specified by IBM and administer, along with GMS, such programs according to IBM guidelines.

6. Transactions with Daisytek

     On May 25, 2001, PFSweb completed the sale of certain assets to Daisytek pursuant to an Asset Purchase Agreement (the “Purchase Agreement”) (See Note 7). The Purchase Agreement included a termination by PFSweb and Daisytek of certain transaction management services agreements previously entered into between PFSweb and Daisytek and a Daisytek subsidiary. Concurrently with the closing of the asset sale, PFSweb and Daisytek also entered into a six-month transition services agreement under which PFSweb provided Daisytek with certain transitional and information technology services that expired in November 2001.

     Through September 2001, the consolidated financial statements include service fee revenues and cost of service fee revenues for certain services subcontracted to PFSweb by Daisytek under Daisytek’s contractual agreements.

     Service fee revenues charged to Daisytek under (i) certain IBM master distributor agreements, (ii) terms of the transaction management services agreement with Daisytek, (iii) for certain subcontracted services, and (iv) for certain transaction and information technology services, were $9.6 million for the nine months ended December 31, 2001.

     As of December 31, 2001, the Company was no longer party to any agreement to provide services for Daisytek, however, through its master distributor relationships operated by Supplies Distributors, the Company continued to buy and sell certain product from Daisytek. As of December 31, 2003, the Company no longer buys or sells product from Daisytek or any Daisytek-owned subsidiary.

7. Disposition and Impairment of Assets and Leases

     On May 25, 2001, PFSweb completed the sale of certain assets to Daisytek pursuant to the Purchase Agreement. Under the Purchase Agreement, PFSweb transferred and sold to Daisytek certain distribution and fulfillment assets, including equipment and fixtures, that were previously used by PFSweb to provide outsourcing services to Daisytek. Daisytek also assumed certain related equipment leases and a warehouse lease and hired certain employees who were associated with the warehouse facility. The consideration payable under the Purchase Agreement of $11.0 million included a termination by PFSweb and Daisytek of certain transaction management services agreements previously entered into between PFSweb and Daisytek and a Daisytek subsidiary. Proceeds of $10.9 million were received for assets with an approximately $4.5 million net book value with a resulting $5.8 million gain, after closing costs of $0.6 million. Concurrently with the closing of the asset sale, PFSweb and Daisytek also entered into a six-month transition services agreement under which PFSweb provided Daisytek with certain transitional and information technology services.

     Unaudited pro forma revenues and pro forma loss from operations for the nine months ended December 31, 2001, assuming the transaction had occurred in April 2001, would have been $22.0 million and ($10.4) million, respectively. The pro forma data do not give effect to any fees earned by PFSweb for services provided to Daisytek under a six-month transition services agreement entered into on May 25, 2001 or the effect of the $5.8 million gain on the sale of the assets. Additionally, these pro forma adjustments do not consider certain infrastructure costs, such as operating costs associated with the information technology function, salaries of certain management and personnel, telephone and lease costs, and depreciation expense which supported this business but that will continue in the future. Because these ongoing costs were not considered, the pro forma adjustments to the loss from operations are not indicative of the overall margin earned under these transaction management services agreements.

     In September 2002, the Company changed the manner in which certain warehouse and order management

63