PFSweb, Inc. and Subsidiaries

Notes to Unaudited Interim Condensed Consolidated Financial Statements

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

     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 58% of eCOST’s net revenues (13% of the Company’s consolidated total net revenues) in the three months ended March 31, 2010 and 42% of eCOST’s net revenues (10% of the Company’s consolidated total net revenues) in the comparable 2009 period.

Inventories

     The Company establishes inventory reserves based upon estimates of declines in values due to inventories that are slow moving or obsolete, excess levels of inventory or values assessed at lower than cost. Recoverability of the inventory on hand is measured by comparison of the carrying value of the inventory to the fair value of the inventory.

     Supplies Distributors assumes responsibility for slow-moving inventory under certain master distributor agreements, subject to certain termination rights, but has the right to return product rendered obsolete by engineering changes, as defined. In the event PFSweb, Supplies Distributors and IPS terminate the master distributor agreements, the agreements provide for the parties to mutually agree on a plan of disposition of Supplies Distributors’ then existing inventory.

Property and Equipment

     The Company’s property held under capital leases amounted to approximately $1.8 million and $2.1 million, net of accumulated amortization of approximately $7.1 million and $6.7 million, at March 31, 2010 and December 31, 2009, respectively.

Cash Paid for Interest and Taxes

     The Company made payments for interest of approximately $0.2 million and $0.4 million during the three months ended March 31, 2010 and 2009, respectively. Income taxes of approximately $25,000 and $0.2 million were paid by the Company during the three months ended March 31, 2010 and 2009, respectively.

Impact of Recently Issued Accounting Standards

     In October 2009, the FASB issued Accounting Standards Update (ASU) 2009-13, Multiple-Deliverable Revenue Arrangements — a consensus of the FASB Emerging Issues Task Force to amend certain guidance in FASB Accounting Standards Codification^TM (ASC) 605, Revenue Recognition, 25, “Multiple-Element Arrangements”. The amended guidance in ASC 605-25 (1) modifies the separation criteria by eliminating the criterion that requires objective and reliable evidence of fair value for the undelivered item(s), and (2) eliminates the use of the residual method of allocation and instead requires that arrangement consideration be allocated, at the inception of the arrangement, to all deliverables based on their relative selling price.