PFSweb, Inc. and Subsidiaries

Notes to Unaudited Interim Consolidated Financial Statements

with such activity. The Company received subpoenas from the Office of the U.S. Attorney requesting information regarding the employee and other matters, and the Company has responded to the subpoenas and is fully cooperating with the Office of the U.S. Attorney. The Company has commenced its own investigation into the actions of the employee. Neither the Company nor eCOST have been charged with any criminal activity, and the Company intends to seek the recovery or reimbursement of the funds which are currently classified as other receivables in the September 30, 2011 financial statements. Based on the information available to date, the Company is unable to determine the amount of the loss, if any, relating to the seizure of such funds. No assurance can be given, however, that the seizure of such funds, or the inability of the Company to recover such funds or any significant portion thereof, or any costs and expenses incurred by the Company in connection with this matter will not have a material adverse effect upon the Company’s financial condition or results of operations.

     The Company is subject to claims in the ordinary course of business, including claims of alleged infringement by the Company or its subsidiaries of the patents, trademarks and other intellectual property rights of third parties. PFS is generally required to indemnify its service fee clients against any third party claims alleging infringement by PFS of the patents, trademarks and other intellectual property rights of third parties.

10. DISCONTINUED OPERATIONS

     In February 2011, the Company sold certain assets of eCOST to a third party for a total aggregate cash purchase price of approximately $2.3 million (before expenses of approximately $0.2 million). Accordingly, the accompanying consolidated financial statements reflect the related operating results of the eCOST segment as discontinued operations for all periods presented.

     Summarized financial information in the accompanying consolidated statements of operations for the discontinued eCOST operations is as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30
		2011				2010				2011				2010
Revenue, net		$	47			$	16,408			$	6,858			$	52,490
Expenses			27				16,742				7,418				53,246
Income (loss) before provision for income taxes			20				(334	)			(560	)			(756	)
Provision for income taxes			—				(3	)			(9	)			(27	)
Discontinued operations, net of income taxes		$	20			$	(337	)		$	(569	)		$	(783	)

     Summarized financial information in the accompanying consolidated balance sheet for the discontinued eCOST operations, which were sold in February 2011, is as follows (in thousands):

		December 31,
		2010
Inventories, net		$	2,776
Identifiable intangibles			316
Goodwill			810
Assets of discontinued operations		$	3,902

     At December 31, 2010, the amount of allowance for slow moving inventory included in discontinued operations was $0.2 million.

     The original eCOST acquisition resulted in a purchase price in excess of the fair value of net identifiable assets acquired and liabilities assumed. This excess purchase price was allocated to goodwill. Goodwill, which is not deductible for tax purposes, is not amortized yet is subject to an annual impairment test, using a fair-value-based approach. The remaining balance of goodwill, $0.8 million as of December 31, 2010, was included in assets of discontinued operations.