PFSweb, Inc. and Subsidiaries

Notes to Unaudited Interim Condensed Consolidated Financial Statements

Investment in Affiliates

     Priority Fulfillment Services, Inc. (“PFS”), a wholly-owned subsidiary of PFSweb, has made advances to Supplies Distributors that are evidenced by a Subordinated Demand Note (the “Subordinated Note”). Under the terms of certain of the Company’s debt facilities, the outstanding balance of the Subordinated Note cannot be increased to more than $6.5 million or decreased to less than $5.5 million without prior approval of the Company’s lenders. As of June 30, 2008, the outstanding balance of the Subordinated Note was $5.5 million. The Subordinated Note is eliminated in the Company’s consolidated financial statements.

     PFS has also made advances to eCOST, which aggregated $9.4 million as of June 30, 2008. Certain of the Company’s debt facilities provide that the total advances to eCOST may not be less than $2.0 million without prior approval of eCOST’s lender or increased above $11.7 million without the approval of PFS’ lender. PFSweb has also advanced to eCOST $4.7 million as of June 30, 2008. PFS has received the approval of its lender to advance an additional $2.3 million to certain of its subsidiaries, including eCOST, if needed.

Concentration of Business and Credit Risk

     The Company’s service fee revenue is generated under contractual service fee relationships with multiple client relationships. No clients/customers exceeded 10% of consolidated revenue during the six months ended June 30, 2008. A summary of the customer and client concentrations is as follows:

		Six Months Ended
		June 30,				June 30,
		2008				2007
Product Revenue (as a percentage of Product Revenue):
Customer 1			11	%			9	%
Customer 2			10	%			10	%
Service Fee Revenue (as a percentage of Service Fee Revenue):
Client 1			39	%			25	%
Client 2			10	%			13	%
Client 3			6	%			11	%
Accounts Receivable:
Client/Customer 1			10	%			13	%
Client/Customer 2			9	%			10	%

     PFSweb has provided certain collateralized guarantees of its subsidiaries’ financings and credit arrangements. These subsidiaries’ ability to obtain financing on similar terms would be significantly impacted without these guarantees.

     The Company has multiple arrangements with IBM and IPS and is dependent upon the continuation of such arrangements. Substantially all of the Supplies Distributors’ revenue is generated by its sale of product purchased from IPS. These arrangements, which are critical to the Company’s ongoing operations, include Supplies Distributors’ master distributor agreements, certain of Supplies Distributors’ working capital financing agreements, product sales to IBM and IPS business units and an IBM term master lease agreement. Supplies Distributors also relies upon IPS’s sales force and product demand generation activities and the discontinuance of such activities would have a material impact upon Supplies Distributors’ business.

     eCOST’s arrangements with its vendors are terminable by either party at will. Loss of any vendors could have a material adverse effect on eCOST’s financial position, results of operations and cash flows. Sales of HP and HP-related products represented 52% of eCOST’s net revenues (12% of the Company’s consolidated total net revenues) in the six months ended June 30, 2008 and 2007.