PFSweb, Inc. and Subsidiaries

Notes to Unaudited Interim Consolidated Financial Statements

Investment in Affiliates

     PFS 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 $5.0 million or decreased to less than $3.5 million without prior approval of the Company’s lenders. At September 30, 2011 and December 31, 2010, the outstanding balance of the Subordinated Note was $3.5 million in both periods. The Subordinated Note is eliminated in the Company’s consolidated financial statements.

     PFS has also made advances to Retail Connect, which aggregated $11.1 million as of both September 30, 2011 and December 31, 2010. Certain terms of the Company’s debt facilities provide that the total advances to Retail Connect may not be less than $2.0 million without prior approval of Retail Connect’s lender, if needed. PFSweb, Inc. has also advanced to Retail Connect an additional $7.7 million and $7.4 million as of September 30, 2011 and December 31, 2010, respectively. The PFS and PFSweb advances are eliminated in the Company’s consolidated financial statements.

Concentration of Business and Credit Risk

     The Company’s service fee revenue is generated under contractual service fee relationships with multiple client relationships. No service fee client or product revenue customer exceeded 10% of the Company’s consolidated total net revenue or accounts receivable during the nine months ended September 30, 2011. A summary of the nonaffiliated customer and client concentrations is as follows:

		Nine Months Ended
		September 30,
		2011				2010
Product Revenue (as a percentage of Product Revenue):
Customer 1			16	%			17	%
Customer 2			9	%			10	%
Service Fee Revenue (as a percentage of Service Fee Revenue):
Client 1			15	%			6	%
Client 2			15	%			7	%
Client 3			1	%			10	%

     PFS previously operated three distinct geographical contract arrangements with Client 3, which are aggregated in the service fee revenue percentages reflected above. As of September 30, 2010, substantially all of Client 3’s contracts with PFS had expired in accordance with their terms and were not renewed.

     The Company 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.

     Supplies Distributors has multiple arrangements with International Business Machines Corporation (“IBM”) and IPS and is dependent upon the continuation of such arrangements. These arrangements, which are critical to Supplies Distributors’ ongoing operations, include master distributor agreements and certain working capital financing agreements. Substantially all of 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 affiliates.