PFSWEB, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

		December 31,				December 31,
		2007				2006
Other			1,123				1,282
			25,414				24,755
Less — Valuation reserve			22,848				21,950
Total deferred tax asset			2,566				2,805
Deferred tax liabilities:
Intangible assets			(1,980	)			(2,254	)
Other			(289	)			(160	)
Total deferred tax liabilities			(2,269	)			(2,414	)
Deferred tax assets, net		$	297			$	391

     Management believes that PFSweb has not established a sufficient history of earnings, on a stand-alone basis, to support the more likely than not realization of certain deferred tax assets in excess of existing taxable temporary differences. A valuation allowance has been provided for these net deferred income tax assets as of December 31, 2007 and 2006. At December 31, 2007, net operating loss carryforwards relate to taxable losses of PFSweb’s European subsidiary totaling approximately $11.2 million, PFSweb’s Canadian subsidiary totaling approximately $5.3 million and PFSweb’s U.S. subsidiaries totaling approximately $45.7 million that expire at various dates through 2023. The U.S. NOL carryforward includes $4.6 million relating to tax benefits of stock option exercises and, if utilized, will be recorded against additional paid-in-capital upon utilization rather than as an adjustment to income tax expense from continuing operations. The U.S. NOL also includes approximately $21.0 million of NOL acquired through the acquisition of eCOST in February 2006. This acquired NOL carryforward is subject to annual limits under IRS Section 382.

9. Commitments and Contingencies

     The Company leases facilities, warehouse, office, transportation and other equipment under operating leases expiring in various years through December 31, 2012. In most cases, management expects that, in the normal course of business, leases will be renewed or replaced by other leases. Minimum future annual rental payments under non-cancelable operating leases having original terms in excess of one year are as follows (in thousands):

		Operating
		Lease
		Payments
Fiscal year ended December 31,
2008		$	8,458
2009			7,045
2010			5,638
2011			2,440
2012			675
Total		$	24,256

     Minimum rental payments under operating leases are recognized on a straight-line basis over the term of the lease including any periods of free rent. Total rental expense under operating leases approximated $10.3 million, $8.7 million and $7.3 million for the years ended December 31, 2007, 2006 and 2005, respectively. Certain landlord required deposits are secured by letters of credit.

     The Company receives municipal tax abatements in certain locations. During 2004 the Company received notice from a municipality that we did not satisfy certain criteria necessary to maintain the abatements. In December 2006 the Company received notice that the municipal authority planned to make an adjustment to the Company’s tax abatement. The Company has disputed the adjustment, but if the dispute is not resolved favorably, additional taxes of approximately $1.7 million could be assessed against the Company.

     On May 9, 2005, a lawsuit was filed in the District Court of Collin County, Texas, by J. Gregg Pritchard, as Trustee of the D.I.C. Creditors Trust, naming the former directors of Daisytek International Corporation and the Company as defendants. Daisytek filed for bankruptcy in May 2003 and the Trust was created pursuant to Daisytek’s Plan of Liquidation. The complaint alleged, among other things, that the spin-off of the Company from Daisytek in December 1999 was a fraudulent conveyance and that Daisytek was damaged thereby in the amount of at least $38 million. On May 3, 2007, the Court granted the Company’s motions for summary judgment and all of