PFSweb, Inc. and Subsidiaries

Notes to Unaudited Interim Condensed Consolidated Financial Statements

		September 30,				December 31,
		2010				2009
Assets (in thousands):
PFSweb		$	65,905			$	65,716
Supplies Distributors			66,793				69,291
eCOST			12,089				13,579
Eliminations			(20,297	)			(20,817	)
		$	124,490			$	127,769

8. COMMITMENTS AND CONTINGENCIES

     The Company receives municipal tax abatements in certain locations. During 2004 the Company received notice from a municipality that it 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 disputed the adjustment and such dispute has been settled with the municipality. However, the amount of additional property taxes to be assessed against the Company and the timing of the related payments has not been finalized. As of September 30, 2010, the Company believes it has adequately accrued for the expected assessment.

     In April 2010, a sales employee of eCOST was charged with violating various federal criminal statutes in connection with the sales of eCOST products to certain customers, and approximately $620,000 held in an eCOST deposit account was seized and turned over to the Office of the U.S. Attorney in connection 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 is responding 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 eCOST intends to seek the recovery or reimbursement of the funds which are currently classified as other receivables on the September 30, 2010 financial statements. Based on the information available to date, eCOST 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 eCOST 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. In addition, eCOST and other manufacturers, distributors and retailers of consumer electronic and computer and consumer products, may be subject to claims of patent and trademark holders alleging that the manufacture, distribution and sale of such products infringe their intellectual property rights. Neither the Company nor eCOST is currently a party to any litigation alleging infringement of the patents, trademarks and other intellectual property rights of third parties.