Exhibit 99.1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
GSI Commerce, Inc.
King of Prussia, Pennsylvania

We have audited the accompanying consolidated balance sheets of GSI Commerce, Inc. and subsidiaries (the “Company”) as of January 2, 2010 and January 3, 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three fiscal years in the period ended January 2, 2010. Our audits also included the financial statement schedule listed in the Index at Item 15(a) 2 of Form 10-K (not included herein). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GSI Commerce, Inc. and subsidiaries as of January 2, 2010 and January 3, 2009, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 2, 2010, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 14 to the consolidated financial statements, the Company has retrospectively adjusted the fiscal 2007, 2008 and 2009 segment disclosures to reflect the new measure of segment profit and loss, which was changed in the second fiscal quarter of 2010.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of January 2, 2010, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 5, 2010 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

Philadelphia, Pennsylvania
March 5, 2010 (August 10, 2010 as to the effect of the retrospective adjustment discussed in Note 14)

GSI COMMERCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

		January 3,				January 2,
		2009				2010
ASSETS
Current assets:
Cash and cash equivalents		$	130,315			$	228,430
Accounts receivable, net of allowance of $2,747 and $4,648			78,544				70,582
Inventory			42,856				55,678
Deferred tax assets			18,125				12,347
Prepaid expenses and other current assets			11,229				13,187
Total current assets			281,069				380,224
Property and equipment, net			164,833				163,329
Goodwill			194,996				373,003
Intangible assets, net of accumulated amortization of $18,340 and $29,172			46,663				132,875
Long-term deferred tax assets			11,296				—
Other assets, net of accumulated amortization of $16,384 and $17,264			17,168				12,417
Total assets		$	716,025			$	1,061,848
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	98,100			$	126,914
Accrued expenses			116,747				150,173
Deferred revenue			20,397				20,645
Convertible notes			—				55,443
Current portion of long-term debt			4,887				5,260
Total current liabilities			240,131				358,435
Convertible notes			161,951				116,948
Long-term debt			32,609				28,142
Deferred acquisition payments			—				63,763
Deferred tax liabilities			—				8,534
Deferred revenue and other long-term liabilities			6,838				9,686
Total liabilities			441,529				585,508
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized; 0 shares issued and outstanding as of January 3, 2009 and January 2, 2010			—				—
Common stock, $0.01 par value, 90,000,000 shares authorized; 47,630,824 and 60,033,393 shares issued as of January 3, 2009 and January 2, 2010 respectively; 47,630,621 and 60,033,190 shares outstanding as of January 3, 2009 and January 2, 2010, respectively			476				600
Additional paid in capital			430,933				642,852
Accumulated other comprehensive loss			(2,327	)			(1,498	)
Accumulated deficit			(154,586	)			(165,614	)
Total stockholders’ equity			274,496				476,340
Total liabilities and stockholders’ equity		$	716,025			$	1,061,848

The accompanying notes are an integral part of these consolidated financial statements.

GSI COMMERCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

		Fiscal Year Ended
		December 29,				January 3,				January 2,
		2007				2009				2010
Revenues:
Net revenues from product sales		$	512,194			$	577,073			$	542,249
Service fee revenues			237,763				389,853				461,966
Net revenues			749,957				966,926				1,004,215
Costs and expenses:
Cost of revenues from product sales			356,541				405,254				398,604
Marketing			64,573				70,282				54,831
Account management and operations, inclusive of $3,241 $7,505 and $9,028 of stock-based compensation			177,473				260,325				273,070
Product development, inclusive of $1,749 $4,118 and $5,740 of stock-based compensation			66,032				104,208				120,176
General and administrative, inclusive of $4,052 $7,780 and $9,994 of stock-based compensation			43,682				68,964				82,922
Depreciation and amortization			37,337				68,153				63,395
Changes in fair value of deferred acquisition payments			—				—				951
Total costs and expenses			745,638				977,186				993,949
Income (loss) from operations			4,319				(10,260	)			10,266
Other (income) expense:
Interest expense			12,191				18,841				19,430
Interest income			(9,270	)			(1,772	)			(478	)
Other expense			237				1,562				(2	)
Loss on sale of marketable securities			5,007				—				—
Impairment of equity investments			—				1,665				—
Total other expense			8,165				20,296				18,950
Loss before income taxes			(3,846	)			(30,556	)			(8,684	)
(Benefit) provision for income taxes			(2,887	)			(7,585	)			2,344
Net loss		$	(959	)		$	(22,971	)		$	(11,028	)
Loss per share- basic and diluted		$	(0.02	)		$	(0.49	)		$	(0.21	)
Weighted average shares outstanding — basic and diluted			46,433				47,347				51,457

The accompanying notes are an integral part of these consolidated financial statements.

GSI COMMERCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)

																						Accumulated
										Additional												Other
		Common Stock								Paid in				Accumulated				Comprehensive				Comprehensive
		Shares				Dollars				Capital				Deficit				(Loss) Income				Loss				Total
Consolidated balance at December 30, 2006			45,879			$	458			$	366,073			$	(130,656	)						$	(97	)		$	235,778
Net loss															(959	)			(959	)							(959	)
Net unrealized gain on available- for-sale securities, net of tax																			11				11				11
Add: Reclassification adjustment for losses realized in net income																			80				80				80
Cumulative translation adjustment, net of tax																			(150	)			(150	)			(150	)
Comprehensive income																		$	(1,018	)
Stock-based compensation expense											8,028																8,028
Issuance of convertible notes											26,783																26,783
Issuance of common stock and warrants upon exercise of options			805				8				8,072																8,080
Issuance of stock awards upon vesting			164				2				(2	)															—
Share-based awards retained for taxes											(1,288	)															(1,288	)
Tax benefit in connection with exercise of stock options and awards											4,537																4,537
Consolidated balance at December 29, 2007			46,848			$	468			$	412,203			$	(131,615	)						$	(156	)		$	280,900
Net loss															(22,971	)			(22,971	)							(22,971	)
Cumulative translation adjustment, net of tax																			(2,171	)			(2,171	)			(2,171	)
Comprehensive loss																		$	(25,142	)
Stock-based compensation expense											18,494																18,494
Issuance of common stock and warrants upon exercise of options			128				1				1,384																1,385
Issuance of stock awards upon vesting			655				7				(7	)															—
Share-based awards retained for taxes											(222	)															(222	)
Tax deficit in connection with exercise of stock options and awards											(919	)															(919	)
Consolidated balance at January 3, 2009			47,631			$	476			$	430,933			$	(154,586	)						$	(2,327	)		$	274,496
Net loss															(11,028	)			(11,028	)							(11,028	)
Cumulative translation adjustment, net of tax																			829				829				829
Comprehensive loss																		$	(10,199	)
Stock-based compensation expense											23,749																23,749
Issuance of common stock and warrants upon exercise of options			772				8				5,312																5,320
Issuance of stock awards upon vesting			1,368				14				(14	)															—
Share-based awards retained for taxes											(60	)															(60	)
Tax benefit in connection with exercise of stock options and awards											1,175																1,175
Acquisition consideration			4,798				48				93,897																93,945
Common stock issued in public offering, net of costs			5,464				54				87,860																87,914
Consolidated balance at January 2, 2010			60,033			$	600			$	642,852			$	(165,614	)						$	(1,498	)		$	476,340

The accompanying notes are an integral part of these consolidated financial statements.

GSI COMMERCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

		Fiscal Year Ended
		December 29,				January 3,				January 2,
		2007				2009				2010
Cash Flows from Operating Activities:
Net loss		$	(959	)		$	(22,971	)		$	(11,028	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation			32,763				54,557				52,633
Amortization			4,574				13,596				10,762
Amortization of discount on convertible notes			6,542				9,462				10,440
Changes in fair value of deferred acquisition payments			—				—				951
Stock-based compensation			9,042				19,403				24,762
Foreign currency transaction losses			—				1,571				14
Loss on sale of marketable securities			5,007				—				—
Impairment of equity investments			—				1,665				—
Loss (gain) on disposal of equipment			34				(354	)			(10	)
Deferred income taxes			(3,305	)			(7,722	)			202
Changes in operating assets and liabilities:
Accounts receivable, net			(7,005	)			(8,130	)			10,010
Inventory			(471	)			4,437				7,677
Prepaid expenses and other current assets			(2,265	)			2,142				(544	)
Other assets, net			739				1,724				2,159
Accounts payable and accrued expenses and other			7,633				23,513				33,967
Deferred revenue			5,805				3,076				(1,771	)
Net cash provided by operating activities			58,134				95,969				140,224
Cash Flows from Investing Activities:
Payments for acquisitions of businesses, net of cash acquired			(100,574	)			(145,001	)			(88,892	)
Cash paid for property and equipment, including internal use software			(54,196	)			(57,180	)			(43,007	)
Proceeds from disposition of assets			—				1,500				—
Release of restricted cash escrow funds			—				—				1,052
Cash paid for equity investments			(3,083	)			—				—
Purchases of marketable securities			(263,688	)			—				—
Sales of marketable securities			371,264				—				—
Net cash used in investing activities			(50,277	)			(200,681	)			(130,847	)
Cash Flows from Financing Activities:
Proceeds from convertible notes			150,000				—				—
Borrowings on revolving credit loan			—				70,000				—
Repayments on revolving credit loan			—				(70,000	)			—
Proceeds from sale of common stock			—				—				92,596
Proceeds from capital lease financing			—				7,901				—
Equity issuance costs paid			—				—				(4,728	)
Debt issuance costs paid			(5,042	)			(561	)			—
Repayments of capital lease obligations			(935	)			(3,032	)			(4,503	)
Repayments of mortgage note			(182	)			(195	)			(184	)
Excess tax benefit in connection with exercise of stock options and awards			359				14				92
Proceeds from exercise of common stock options and warrants			8,080				1,385				5,320
Net cash provided by financing activities			152,280				5,512				88,593
Effect of exchange rate changes on cash and cash equivalents			(8	)			(1,996	)			145
Net increase (decrease) in cash and cash equivalents			160,129				(101,196	)			98,115
Cash and cash equivalents, beginning of period			71,382				231,511				130,315
Cash and cash equivalents, end of period		$	231,511			$	130,315			$	228,430
Supplemental Cash Flow Information
Cash paid during the period for interest		$	5,622			$	9,798			$	8,055
Cash paid during the period for income taxes			564				699				3,032
Noncash Investing and Financing Activities:
Accrual for purchases of property and equipment			2,943				3,712				2,363
Equipment financed under capital lease			15,562				2,497				451

The accompanying notes are an integral part of these consolidated financial statements.

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)

NOTE 1—DESCRIPTION OF BUSINESS

GSI Commerce, Inc. (“GSI” or the “Company”), a Delaware corporation, is a leading provider of e-commerce and interactive marketing services to large businesses that sell products directly to consumers (b2c). The Company has three reportable segments — e-commerce services, interactive marketing services and consumer engagement. Through the Company’s e-commerce services, it delivers customized solutions to its clients through an e-commerce platform, which is comprised of three components: technology, fulfillment and customer care. The Company offers each of the platform’s components on a modular basis, or as part of an integrated, end-to-end solution. Through the Company’s interactive marketing services, it offers comprehensive digital and traditional agency and e-mail marketing services that include brand development and strategic account planning, user experience and creative design, interactive marketing, traditional advertising, media buying, video, marketing content and promotional development, e-mail marketing and distribution, Web store usability, and photography and content development. Through consumer engagement, the Company offers retailers and brands an online platform to sell excess inventory in the private sales channel as well as in the off-price marketplace.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following summarize the Company’s significant accounting policies:

Fiscal Year: The Company’s fiscal year ends on the Saturday closest to December 31. The fiscal year is named for the calendar year ending on that December 31. Fiscal 2007 and fiscal 2009 each included 52 weeks, and fiscal 2008 included 53 weeks.

Basis of Consolidation: The financial statements presented include the accounts of the Company and all wholly owned subsidiaries. Inter-company balances and transactions among consolidated entities have been eliminated.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.

Fair Values: The carrying amount of cash and cash equivalents, trade receivables and trade payables approximates their fair values due to their short-term maturity. See Note 3, Fair Value of Financial and Nonfinancial Instruments, for information related to the fair value of the Company’s financial and nonfinancial instruments and items required to be remeasured at fair value on a recurring basis.

Cash and Cash Equivalents: Cash primarily consists of bank deposits. Cash equivalents primarily consist of money market mutual funds. All investments with an original maturity of three months or less are considered cash equivalents.

Inventory: Inventory is valued at the lower of cost (determined using the weighted average method) or market. Inherent in this valuation are significant management judgments and estimates, including among others, assessments concerning obsolescence and shrinkage rates. Based upon these judgments and estimates, which are applied consistently from period to period, the Company records a valuation adjustment to adjust the carrying amount of its inventory.

The Company’s obsolescence reserve represents the excess of the carrying value over the amount it expects to realize from the ultimate sale or other disposal of the inventory. The obsolescence reserve establishes a new cost basis for the Company’s inventory. Subsequent changes in facts or circumstances do not result in the reversal of previously recorded reserves or an increase in that newly established cost basis.

The Company’s shrinkage loss reserve represents estimated physical inventory losses (e.g., theft or damages) that have occurred since the last inventory count date. Inventory counts are taken on a regular basis to ensure that the inventory reported in the Company’s consolidated financial statements are accurately stated. During the interim period between inventory counts, the Company reserves for anticipated physical inventory losses.

The Company also provides fulfillment-related services for certain of its clients in which its clients maintain ownership of the related products. As such, the related inventory is not reported in the Company’s Consolidated Balance Sheets.

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)

Property and Equipment: Property and equipment are stated at cost, net of accumulated depreciation or amortization. The Company capitalizes costs incurred during the application development stage related to the development of internal-use software and amortizes these costs over the estimated useful life of four years. Depreciation or amortization is provided using the straight-line method over the estimated useful lives of the assets, which are:

•

Three to six years for office equipment;

•

Three to four years for computer hardware and software including internal use software;

•

Seven years for furniture and fulfillment center equipment;

•

The lesser of fifteen years or lease term for leasehold improvements;

•

Fifteen years for building improvements; and

•

Thirty years for buildings.

Expenditures for maintenance and repairs are expensed as incurred. Major renewals or replacements that substantially extend the useful life of an asset are capitalized.

Goodwill and Other Intangible Assets: Goodwill is measured as the excess of the cost of an acquisition over the sum of the amounts assigned to tangible and intangible assets acquired less liabilities assumed. The determination of the fair value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital.

The Company does not amortize goodwill or indefinite-lived intangible assets but performs tests for impairment annually, or when indications of potential impairment exist, utilizing a fair value approach at the reporting unit level. The Company determines fair value using widely accepted valuation techniques, including the income approach which estimates the fair value of its reporting units based on the future discounted cash flows, and the market approach which estimates the fair value of its reporting units based on comparable market prices. In testing for a potential impairment of goodwill, the Company estimates the fair value of its reporting units to which goodwill relates and determines the carrying value (book value) of the assets and liabilities related to those businesses.

In the fourth quarter of fiscal 2009, the Company completed its annual impairment testing of goodwill and indefinite-lived intangible assets and determined there was no impairment.

The Company amortizes other intangible assets with determinable lives over their estimated useful lives. The Company records an impairment charge on these assets when it determines that their carrying value may not be recoverable. The carrying value is not recoverable if it exceeds the undiscounted future cash flows resulting from the use of the asset and its eventual disposition. When there is existence of one or more indicators of impairment, the Company measures any impairment of intangible assets based on a projected discounted cash flow method using a discount rate determined by the Company’s management to be commensurate with the risk inherent in its business model. The Company’s estimates of future cash flows attributable to its other intangible assets require significant judgment based on the Company’s historical and anticipated results and are subject to many factors.

See Note 5, Goodwill and Other Intangible Assets, for more information about goodwill and other intangible assets.

Long-Lived Assets: The Company reviews long-lived assets for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Impairment exists when the sum of undiscounted estimated future cash flows expected to result from the use of the asset is less than the asset’s carrying value. If an impairment exists, an impairment loss is recognized for the difference between the asset’s carrying value and its estimated fair value. When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value based on quoted market prices or other valuation techniques.

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)

Other Assets, Net:

The following table summarizes our other assets as of:

		January 3,				January 2,
		2009				2010
Equity investments		$	5,374			$	3,420
Unamortized debt issuance costs			3,835				2,754
Deferred client revenue share charges			3,677				2,247
Deferred compensation			991				1,396
Other			3,291				2,600
Total other assets, net		$	17,168			$	12,417

The Company’s equity investments represent cost method investments in private companies. Unamortized debt issuance costs are primarily attributable to the Company’s July 2007 offering of $150,000 aggregate subordinated convertible notes, and is amortized using the effective interest method over a weighted average remaining amortization period of 4.5 years into interest expense. Deferred client revenue share charges are being amortized on a straight-line basis over the remaining term of the related contracts. In the first quarter of fiscal 2009, the Company expensed approximately $1,300 of deferred acquisition costs related to a terminated agreement.

Accrued Expenses: Accrued expenses include $62,705 of amounts payable to the Company’s clients and accrued payroll of $25,617 as of the end of fiscal 2009. No other individual balance was greater than 5% of total current liabilities as of January 2, 2010.

Accrued expenses include $55,573 of amounts payable to the Company’s clients, accrued payroll of $15,931, and marketing accruals of $12,368 as of the end of fiscal 2008. No other individual balance was greater than 5% of total current liabilities as of January 3, 2009.

Deferred Acquisition Payments: Deferred acquisition payments consist of the Company’s estimate of the fair value of future acquisition payments. The Company determines the fair value of the deferred acquisition payments by utilizing discounted cash flow models that incorporate several different assumptions of future performance. The liability is accreted up to the estimated payment amount over the earnout period using a risk-adjusted discount rate with a corresponding charge recorded to changes in fair value of deferred acquisition payments on the Consolidated Statements of Operations. In addition to accreting up the liability based on the passage of time, the fair value of deferred acquisition payments is also assessed for changes at each reporting period with any changes recorded as an increase or decrease to changes in fair value of deferred acquisition payments on the Consolidated Statements of Operations.

As of January 2, 2010, the Company’s fair value of deferred acquisition payments was $63,763. The Company’s accretion of the liability to fair value was $951 in fiscal 2009 and was recorded to changes in fair value of deferred acquisition payments on the Consolidated Statements of Operations.

Revenue Recognition: The Company recognizes revenues when the following revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable and collectability is reasonably assured.

For the Company’s fulfillment and drop-shipping services, when the Company is the primary obligor in a transaction, has general inventory risk, has established the selling price, has discretion in supplier selection and has credit risk, or have several but not all of these indicators, it records revenue on a gross basis as a principal and records these revenues as revenues from product sales. When the Company does not have several or all of these factors, it records the commission or fee retained as service fee revenue. Revenue generated from the Company’s customer care, interactive marketing and technology services are also recorded as service fees.

Revenue arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the arrangement meet the following criteria: the delivered item has value to the customer on a standalone basis, there is objective and reliable evidence of the fair value of undelivered items and delivery of any undelivered item is probable and substantially in the Company’s control.

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)

Net Revenues from Product Sales: The Company recognizes revenue from product sales, which includes shipping revenue and excludes sales tax, for all Web stores that it provides fulfillment services, net of estimated returns based on historical experience and current trends. The Company recognizes revenue when title and risk of ownership passes to the consumer either upon shipment of products to customers or upon receipt of products to customers based on the terms and conditions. The majority of product sales are shipped from the Company’s fulfillment centers. The Company also relies upon certain vendors to ship products directly to customers on its behalf. The Company acts as principal in these transactions, as orders are initiated directly through the e-commerce businesses that it operates, because the Company has inventory risk, establishes selling prices, takes title to the goods at the shipping point and has the economic risk related to collection, customer care and returns.

The Company pays a percentage of the revenues generated from product sales through the e-commerce businesses that it operates to its respective clients in exchange for the rights to use their brand names and the promotions and advertising that its clients agree to provide. The Company refers to these payments as client revenue share expenses. The Company has considered the revenue reduction accounting provisions, and believes that the payment of client revenue share expense to its clients should not result in any reduction of revenues. The Company purchases merchandise from its vendors, at its discretion, and is responsible for paying those vendors. The amounts purchased and the prices paid to the Company’s vendors are not in any way impacted by the revenue share provisions of its agreements with its clients. Accordingly, the Company’s clients and its vendors are not linked in the distribution chain and it believes that the provisions of this standard do not apply.

Service Fee Revenues: Services fees are generated based on a client’s use of one or more of the Company’s e-commerce platform components or elements of those components, which include technology, fulfillment and customer care. Service fees are also generated from professional, technology and interactive marketing services. Service fees can be fixed or variable and are based on the activity performed, the value of merchandise sold, or the gross profit from a transaction. For transactions in which the Company is deemed to be the agent, rather than the principal, the Company records service fee revenue based on the net fee retained.

The Company does not specifically record “cost of service fee revenues” as these costs are incurred by its service fee-based clients rather than by the Company. Operating expenses relating to service fee revenues consist primarily of personnel and other costs associated with the Company’s engineering, production and creative departments which are included in product development expense, as well as fulfillment costs and personnel and other costs associated with its marketing and customer care departments which are included in account management and operations on the Consolidated Statements of Operations.

For Web stores for which the Company owns the inventory and records revenue as product sales in its e-commerce and consumer engagement segments, the Company sells gift cards to its customers through its clients’ Web stores and through selected third parties. The Company recognizes income from gift cards when: (i) the gift card is redeemed by the customer; or (ii) the likelihood of the gift card being redeemed by the customer is remote and the Company determines that it does not have a legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions (“gift card breakage”). Based on historical redemption patterns, the likelihood of a gift card remaining unredeemed can be determined 24 months after the gift card is issued. At that time, the Company recognizes breakage income for those cards for which the likelihood of redemption is deemed to be remote and the Company does not have a legal obligation to remit the value of the unredeemed gift cards to the relevant jurisdiction. Gift card breakage income is included in service fee revenues in the Company’s Consolidated Statements of Operations.

Fiscal 2008 was the first year in which the Company obtained sufficient historical redemption data for its gift card program to make a reasonable estimate of the ultimate redemption patterns and breakage rates and began recognizing gift card breakage income. In fiscal 2009, the Company recognized $2,314 of gift card breakage income. In fiscal 2008, the Company recognized $2,974 of gift card breakage income, of which $1,649 would have been recorded prior to fiscal 2008 had the Company began recognizing gift card breakage income prior to fiscal 2008.

The Company’s deferred revenue consists of unredeemed sales of gift cards, as well as payments received for service fees in advance of the delivery of the Company’s service obligation. For service fees received in advance, revenue is recognized either over the service period or upon completion of the Company’s obligation.

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)

Cost of Revenues from Product Sales: Cost of revenues from product sales include the cost of products sold and inbound freight related to these products, as well as outbound shipping and handling costs, other than those related to promotional free shipping and subsidized shipping and handling which are included in marketing expense in the Consolidated Statements of Operations. The Company does not record cost of service fee revenue because the Company is deemed to be an agent, rather than the principal.

Costs of revenues from product sales consist primarily of direct costs associated with (i) products we sell through our clients Web stores, (ii) products we sell through the Web stores in our consumer engagement segment, and (iii) our shipping charges for all Web stores for which we provide fulfillment services. Costs of revenues from product sales were attributable to our e-commerce services and consumer engagement segments.

Vendor Allowances: The Company has agreements to receive funds from certain of its vendors, including rebates and cooperative marketing reimbursements. The Company has agreements with vendors setting forth the specific conditions for each allowance or payment. Vendor allowances are recorded as a reduction in the cost of the applicable vendor’s products and recognized in cost of revenues from product sales when the related product is sold unless the allowances represent reimbursement of a specific incremental and identifiable cost incurred to promote the vendor’s product. If the allowance represents a reimbursement of cost, it is recorded as an offset to the associated expense incurred. Any reimbursement greater than the costs incurred is recognized as a reduction in the cost of the product.

Marketing: Marketing expenses include client revenue share charges, net advertising and promotional expenses incurred by the Company in operating its clients’ e-commerce businesses and its consumer engagement Web stores, subsidized shipping and handling costs and catalog costs.

Client revenue share charges are payments made to the Company’s clients in exchange for the use of their brand names, logos, the promotion of its clients’ URLs, Web stores and toll-free telephone numbers in clients’ marketing and communications materials, the implementation of programs to provide incentives to consumers to shop through the e-commerce businesses that the Company operates for its clients and other programs and services provided to the consumers of the e-commerce businesses that the Company operates for its clients, net of amounts reimbursed to the Company by its clients. Client revenue share is calculated as either a percentage of product sales or a guaranteed annual amount. Client revenue share charges were $34,233 for fiscal 2009, $41,796 for fiscal 2008 and $35,297 for fiscal 2007.

The Company expenses the cost of advertising, which includes online marketing fees, media, agency and production expenses. Advertising production costs are expensed the first time the advertisement runs. Online marketing fees and media (television, radio and print) placement costs are expensed in the month the advertising appears. Agency fees are expensed as incurred. Advertising and promotional expenses are recorded net of amounts reimbursed to the Company by its clients. Advertising costs were $15,684 for fiscal 2009, $19,750 for fiscal 2008 and $19,285 for fiscal 2007.

The Company defines shipping and handling costs as only those costs incurred for a third-party shipper to transport products to consumers and these costs are included in cost of revenues from product sales to the extent the costs are less than or equal to shipping revenue. In some instances, shipping and handling costs exceed shipping charges to the consumer and are subsidized by the Company. Additionally, the Company selectively offers promotional free shipping whereby it ships merchandise to consumers free of all shipping and handling charges. The cost of promotional, free, and subsidized shipping and handling was $0 for fiscal 2009, $4,009 for fiscal 2008 and $5,908 for fiscal 2007.

Catalog costs consist primarily of creative design, paper, printing, postage and mailing costs, which are capitalized and amortized over the expected future revenue stream, which is generally a period not exceeding six months. The Company amortizes capitalized advertising costs per the ratio of actual revenues to the total of actual and estimated future revenues on an individual catalog basis. Deferred catalog costs included in prepaid expenses and other current assets were $692 as of January 2, 2010 and $613 as of January 3, 2009. Catalog costs were $5,470 for fiscal 2009, $5,222 for fiscal 2008 and $4,263 for fiscal 2007.

Account Management and Operations: Account management and operations expenses include fulfillment costs, customer care costs, credit card fees, and payroll related to the buying, business management and marketing functions of the Company.

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)

The Company defines fulfillment costs as personnel, occupancy and other costs associated with its fulfillment centers, personnel and other costs associated with its logistical support and vendor operations departments and third-party warehouse and fulfillment services costs. Fulfillment costs were $92,663 for fiscal 2009, $100,131 for fiscal 2008 and $72,624 for fiscal 2007.

Product Development: Product development expenses consist primarily of expenses associated with planning, maintaining and operating the technology platform on which the Company operates e-commerce businesses, and payroll and related expenses for the Company’s engineering, production, creative and management information systems departments. Cost incurred to develop internal-use software is capitalized during the application development stage. Costs incurred relating to planning and training or maintenance of internal-use software is expensed as incurred.

General and Administrative: General and administrative expenses consist primarily of payroll and related expenses for executive, finance, human resources, legal, sales and administrative personnel, as well as bad debt expense and occupancy costs for the Company’s headquarters and other offices.

Foreign Currency Translation and Transactions: The functional currency of the Company’s foreign operations is the applicable local currency. The functional currency is translated into U.S. dollars for balance sheet accounts using current exchange rates in effect as of the balance sheet date and for revenue and expense accounts using a weighted-average exchange rate during the period. The translation adjustments are recorded as a separate component of stockholders’ equity, captioned accumulated other comprehensive loss in the Consolidated Balance Sheets. Cumulative translation adjustments included in accumulated other comprehensive loss in the Consolidated Balance Sheets were $1,498 as of January 2, 2010 and $2,327 as of January 3, 2009. Losses resulting from transactions denominated in currencies other than the functional currencies were $14 for fiscal 2009, $1,571 for fiscal 2008 and $329 for fiscal 2007, and are included in other expense, net on the Consolidated Statements of Operations.

Stock-Based Compensation: The Company measures compensation cost for all stock-based awards at fair value on the date of grant and recognition of compensation expense over the service period during which awards are expected to vest. The fair value of restricted stock awards and restricted stock units is determined based on the number of shares granted and the quoted price of the Company’s common stock and the fair value of stock options is determined using the Black-Scholes valuation model. Such value is recognized as expense on a straight-line basis over the requisite service period, net of estimated forfeitures. The estimation of the number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts will be recorded as a cumulative adjustment in the period in which estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and historical experience. During each of fiscal 2009, fiscal 2008 and fiscal 2007, the Company recalculated its projected forfeiture rate as it applies to stock-based compensation based on historical data. For fiscal 2009, the impact of the change in estimate for the change in forfeiture rate increased costs and expenses and increased net loss by $512, which increased both basic and diluted loss per share by $0.01. For fiscal 2008 the impact of the change in estimate for the change in forfeiture rate increased costs and expenses and increased net loss by $784, which increased both basic and diluted loss per share by $0.02. For fiscal 2007 the impact of the change in estimate for the change in forfeiture rate increased costs and expenses and decreased net income by $495, which decreased both basic and diluted earnings per share by $0.01.

See Note 10, Stock Awards, for more information about stock-based compensation.

Income Taxes: The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities and expected benefits of utilizing net operating loss carryforwards. The impact on deferred taxes of changes in tax rates and laws, if any, applied to the years during which temporary differences are expected to be settled, is reflected in the consolidated financial statements in the period of enactment.

The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event the Company determines it would be able to realize its deferred tax assets in the future in excess of their recorded amount, the Company would make an adjustment to the valuation allowance which would reduce the provision for income taxes.

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)

The Company does not provide for U.S. taxes on its undistributed earnings of foreign subsidiaries since it intends to invest such undistributed earnings indefinitely outside of the U.S. If such amounts were repatriated, the amount of U.S. income taxes would be immaterial.

The Company recognizes a tax benefit from an uncertain tax position only if it is “more likely than not” that the position is sustainable upon examination, including resolutions of any related appeals or litigation processes, based on its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority having full knowledge of all relevant information. The liability for unrecognized tax benefits is classified as noncurrent unless the liability is expected to be settled in cash within 12 months of the reporting date. The Company records any estimated interest or penalties from the uncertain tax position as income tax expense. The Company adopted this standard effective December 31, 2006, the first day of its fiscal 2007. As a result of the implementation, the Company recognized no increase in the liability for unrecognized tax benefits.

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)

Recent Accounting Pronouncements:

The following is a summary of recent accounting standards issued by the Financial Accounting Standards Board (“FASB”):

								Effective Date for The
Subject		Date Issued		Summary		Effect of Adoption		Company
Effective Date of Fair Value Measurements		February 2008		Delayed the effective date of previously issued accounting standards for “Fair Value Measurements” of nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis, at least annually, until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years.		No material impact.		January 4, 2009
Business Combinations		December 2007		Establishes principles and requirements for an acquirer in a business combination for recognizing and measuring the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the entity acquired in its financial statements. Provides guidance on the recognition and measurement of goodwill acquired in the business combination or a gain from a bargain purchase as well as what information to disclose to enable users of the financial statements to evaluate the nature and financial impact of the business combination. Also, requires recognition of assets and liabilities of noncontrolling interests acquired, fair value measurement of consideration and contingent consideration, expense recognition for transaction costs and certain integration costs, recognition of the fair value of contingencies, and adjustments to income tax expense for changes in an acquirer’s existing valuation allowances or uncertain tax positions that result from the business combination.		No material impact.		January 4, 2009
Noncontrolling Interests in Consolidating Financial Statements		December 2007		Establishes principles and requirements of treatment for the portion of equity in a subsidiary that is not attributable directly or indirectly to a parent. This is commonly known as a minority interest. The objective is to improve relevance, comparability, and transparency concerning ownership interests in subsidiaries held by parties other than the parent by providing disclosures that clearly identify between interests of the parent and interest of the noncontrolling owners and the related impacts on the consolidated statement of income and the consolidated statement of financial position. Also provides guidance on disclosures related to changes in the parent’s ownership interest and deconsolidation of a subsidiary.		No material impact.		January 4, 2009
Disclosures about Derivative Instruments and Hedging Activities		March 2008		Requires companies with derivative instruments to disclose how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under accounting standards for “Accounting for Derivative Instruments and Hedging Activities,” and how derivative instruments and related hedged items affect a company’s financial statements.		No material impact.		January 4, 2009
Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)		May 2008		Changes the accounting treatment for convertible debt instruments that allow for either mandatory or optional cash settlements. Requires the issuer of convertible debt instruments with cash settlement features to separately account for the liability and equity components of the instrument. The Company’s $207,500 principal amount of subordinated convertible notes are subject to the provisions of these standards because under the notes the Company has the ability to elect cash settlement of the conversion value of the notes. The provisions require retrospective application.		The Company retrospecively applied this standard to all periods presented. See the Company’s Current Report on Form 8-K filed with the Securities Exchange Commission on August 4, 2009 for the impact of this standard on the Company’s previously reported financial statements.		January 4, 2009
Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock		June 2008		Provides a two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the scope exception under accounting standards of “Accounting for Derivative Instruments and Hedging Activities.”		No material impact.		January 4, 2009

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)

								Effective Date for The
Subject		Date Issued		Summary		Effect of Adoption		Company
Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities		June 2008		Requires that unvested stock-based compensation awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) should be classified as participating securities and should be included in the computation of earnings per share pursuant to the two-class method as described in accounting standards for “Earnings Per Share.”		No material impact.		January 4, 2009
Interim Disclosures about Fair Value of Financial Instruments		April 2009		Requires companies to disclose in interim financial statements the fair value of financial instruments within the scope of accounting standards for “Disclosures About Fair Value of Financial Instruments.” Also requires that companies disclose the method or methods and significant assumptions used to estimate the fair value of financial instruments.		No material impact.		July 4, 2009
Subsequent Events		May 2009, Amended February 2010		Sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.		No material impact.		July 4, 2009
The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles		June 2009		Identifies the FASB Accounting Standards Codification as the authoritative source of generally accepted accounting principles in the United States. Rules and interpretive releases of the Securities and Exchange Commission under federal securities laws are also sources of authoritative GAAP for SEC registrants.		No material impact.		July 5, 2009
Multiple Element Arrangements		October 2009		Removes the objective-and-reliable-evidence-of-fair-value criterion from the separation criteria used to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. Replaces references to “fair value” with “selling price” to distinguish from the fair value measurements required under accounting standards for “Fair Value Measurements.” Provides a hierarchy that entities must use to estimate the selling price, eliminates the use of the residual method for allocation, and expands the ongoing disclosure requirements.		The Company does not expect the adoption of this statement to have a material on its consolidated financial statements		January 2, 2011, with early adoption permitted. The Company has chosen to prospectively adopt this standard as of January 3, 2010

NOTE 3—FAIR VALUE OF FINANCIAL AND NONFINANCIAL INSTRUMENTS

Fair value is measured as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor.

Assets and liabilities measured at fair value are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3 — Inputs are unobservable and reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)

The Company’s financial and nonfinancial assets and liabilities subject to fair value measurements on a recurring basis are as follows:

Fair Value Measurements on January 3, 2009

Quoted Prices in

Significant

Active Markets for

Significant Other

Unobservable

Identical Assets

Observable Inputs

Inputs

(Level 1)

(Level 2)

(Level 3)

Assets

Cash and cash equivalents:(1)

Money market mutual funds

$

97,849

$

—

$

—

		Fair Value Measurements on January 2, 2010
		Quoted Prices in								Significant
		Active Markets for				Significant Other				Unobservable
		Identical Assets				Observable Inputs				Inputs
		(Level 1)				(Level 2)				(Level 3)
Assets
Cash and cash equivalents:(1)
Money market mutual funds		$	13,606			$	—			$	—
Liabilities
Deferred acquisition payments(2)		$	—			$	—			$	60,963

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)

The Company’s financial assets subject to fair value measurements on a nonrecurring basis are as follows:

Fair Value Measurements on January 3, 2009

Quoted Prices in

Significant

Active Markets for

Significant Other

Unobservable

Identical Assets

Observable Inputs

Inputs

(Level 1)

(Level 2)

(Level 3)

Assets

Other assets:

Equity investments

$

—

$

—

$

1,418

For fiscal 2008, the Company recognized an other than temporary impairment loss of $1,665 which reduced the carrying value of one of its equity investments from $3,083 to its estimated fair value of $1,418. Fair value was determined using Level 3 unobservable inputs including the use of discounted cash flow models.

There were no nonrecurring fair value measurements in fiscal 2009.

NOTE 4—PROPERTY AND EQUIPMENT

The major classes of property and equipment, at cost, as of January 3, 2009 and January 2, 2010 were as follows:

		January 3,				January 2,
		2009				2010
Computer hardware and software		$	190,957			$	231,954
Building and building improvements			44,721				44,822
Furniture, warehouse and office equipment, and other			40,423				45,722
Land			7,889				7,889
Leasehold improvements			4,592				8,847
Capitalized leases			28,141				29,132
Construction in progress			1,497				—
			318,220				368,366
Less: Accumulated depreciation			(153,387	)			(205,037	)
Property and equipment, net		$	164,833			$	163,329

The Company’s net book value in capital leases, which consist of warehouse equipment and computer hardware, was $18,500 as of January 2, 2010, and $22,595 as of January 3, 2009. Amortization of capital leases is included within depreciation and amortization expense on the Consolidated Statements of Operations. Interest expense recorded on capital leases was $1,470 for fiscal 2009, $1,375 for fiscal 2008 and $711 for fiscal 2007.

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)

NOTE 5—GOODWILL AND OTHER INTANGIBLE ASSETS

The following table summarizes the changes in the carrying amount of goodwill for each of the Company’s reportable segments:

						Interactive
		E-Commerce				Marketing				Consumer
		Services				Services				Engagement				Consolidated
January 3, 2009		$	82,758			$	112,238			$	—			$	194,996
Acquisitions(1)			—				4,787				172,888				177,675
Foreign currency translation			332				—				—				332
January 2, 2010		$	83,090			$	117,025			$	172,888			$	373,003

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)

The Company’s intangible assets were as follows:

										Weighted-
		January 3,				January 2,				Average
		2009				2010				Life
Gross carrying value of intangible assets subject to amortization:
Customer contracts		$	38,773			$	41,190				2.4
Member relationships			—				22,200				2.6
Supplier relationships			—				11,186				3.4
Non-compete agreements			3,838				4,079				3.0
Purchased technology			4,493				4,805				4.0
Trade names			470				840				1.5
Foreign currency translation			(691	)			(482	)
			46,883				83,818				2.7
Accumulated amortization:
Customer contracts			(15,302	)			(22,907	)
Member relationships			—				(489	)
Supplier relationships			—				—
Non-compete agreements			(1,599	)			(2,888	)
Purchased technology			(1,152	)			(2,428	)
Trade names			(470	)			(532	)
Foreign currency translation			183				72
			(18,340	)			(29,172	)
Net carrying value:
Customer contracts			23,471				18,283
Member relationships			—				21,711
Supplier relationships			—				11,186
Non-compete agreements			2,239				1,191
Purchased technology			3,341				2,377
Trade names			—				308
Foreign currency translation			(508	)			(410	)
Total intangible assets subject to amortization, net			28,543				54,646
Indefinite life intangible assets:
Trade names			18,120				78,229
Total intangible assets		$	46,663			$	132,875

Amortization expense of intangible assets was $10,722 for fiscal 2009, $13,553 for fiscal 2008 and $4,531 for fiscal 2007. Estimated future amortization expense related to intangible assets as of January 2, 2010, is as follows:

Fiscal 2010		$	16,118
Fiscal 2011			14,283
Fiscal 2012			10,105
Fiscal 2013			7,715
Fiscal 2014			6,425
		$	54,646

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)

NOTE 6—ACQUISITIONS

The Company accounts for acquisitions using the acquisition method of accounting. Under the acquisition method, assets acquired and liabilities assumed from acquisitions are recorded at their fair values as of the acquisition date. Any excess of the purchase price over the fair values of the net assets acquired are recorded as goodwill. The Company’s purchased intangible assets and goodwill are not deductible for tax purposes. However, acquisition method accounting allows for the establishment of deferred tax liabilities on purchased intangible assets, other than goodwill.

Retail Convergence

On November 17, 2009, the Company completed the acquisition of 100% of the outstanding common stock of RCI pursuant to the terms of an Agreement and Plan of Merger dated October 27, 2009. RCI operates RueLaLa.com, a provider of online private sales and SmartBargains.com, an off-price e-commerce marketplace. The Company believes the acquisition will allow the Company to enter the private sale and off-price e-commerce marketplace markets and broaden its e-commerce solution offerings.

As consideration for the acquisition of RCI, the Company paid cash of $92,133 and issued 4,572 shares of the Company’s common stock valued at $93,945 based on the closing share price on the acquisition date. In addition, the Company is obligated to pay additional payments of up to $170,000 over a three year period beginning with RCI fiscal year 2010 contingent on RCI’s achievement of certain financial performance targets, of which the Company has the ability to pay up to $44,100 with shares of the Company’s common stock. To reach the maximum earnout, RCI will need to achieve earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $51,900 in fiscal year 2012, excluding compensation expense on the earnout payment and certain other adjustments as defined in the RCI merger agreement. A maximum of $46,200 of the earnout will be paid to RCI employees based on performance conditions, which will be treated as compensation expense. The remaining $123,800 of the earnout will be accounted for as additional acquisition consideration. On the acquisition date, the Company recorded a liability of $60,012 which represents the fair value of the portion of the earnout that will be accounted for as additional acquisition consideration. Any adjustment to the fair value of the Company’s estimate of the earnout payment will impact changes in fair value of deferred acquisition payments on the Company’s Consolidated Statements of Operations and could have a material impact to its financial results.

Additionally, the Company incurred approximately $2,100 in transaction costs directly related to the acquisition that were expensed in fiscal 2009. RCI’s results of operations are included on the Company’s Consolidated Statement of Operations beginning on November 17, 2009, and the Company generated $26,347 of net revenues and incurred a net loss of $3,022 in fiscal 2009.

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)

The table below summarizes the fair values of the RCI assets and acquired liabilities assumed based on the total consideration at acquisition of $246,090 which represents $92,133 of cash, $93,945 of common stock issued, and $60,012 of deferred acquisition payments. The following table also includes cash acquired of $8,841 as of the acquisition date:

Total current assets		$	31,129
Propery, plant and equipment			8,031
Goodwill			172,888
Identifiable intangible assets:
Trade name			59,569
Member relationships			22,200
Supplier relationships			11,186
Non-compete agreements			241
Total assets acquired			305,244
Total current liabilities			(29,718	)
Long-term deferred tax liabilities and other			(29,436	)
Total liabilities assumed			(59,154	)
Total consideration			246,090
Liability arising from contingent consideration			(60,012	)
Consideration paid at acquisition date		$	186,078

e-Dialog, Inc.

On February 13, 2008, the Company completed the acquisition of e-Dialog, Inc. (“e-Dialog”) pursuant to the terms of an Agreement and Plan of Merger dated January 23, 2008. e-Dialog is a provider of advanced e-mail marketing services and solutions to more than 100 companies in the U.S. and Europe. The Company believes the acquisition will expand the breadth and depth of its interactive marketing services capabilities, its reach into existing and new vertical markets, and its growing European presence. The Company also believes that e-Dialog will benefit from the Company’s large scale and market-leading position in e-commerce and multichannel services. As consideration for the acquisition of e-Dialog, the Company paid $148,363 in cash. In connection with the acquisition, the Company issued 568 restricted stock units and restricted stock awards with an aggregate value of approximately $9,300 to employees of e-Dialog based on the market price of the Company’s stock on the grant date. Recipients are required to remain employed for specified periods of time subsequent to the acquisition in order for the stock units to vest. The $9,300 will be recognized as stock-based compensation cost, net of estimated forfeitures, over the required service period.

The total purchase price was $150,066, including acquisition-related transaction costs of $1,703. Acquisition-related transaction costs include advisory, legal and other external costs directly related to the merger. e-Dialog’s results of operations are included in the Company’s Consolidated Statement of Operations beginning on February 13, 2008.

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)

The following table summarizes the fair values of the e-Dialog assets acquired and liabilities assumed, including cash acquired, as of the acquisition date:

Total current assets		$	17,067
Property, plant and equipment			4,530
Goodwill			112,238
Identifiable intangible assets:
Customer contracts			19,470
Internal-developed software			4,493
Trade name			17,874
Total assets acquired			175,672
Total current liabilities			(6,564	)
Long-term deferred tax liabilities			(19,042	)
Total liabilities assumed			(25,606	)
Net assets acquired		$	150,066

Zendor.com Ltd.

On December 14, 2007, the Company completed the acquisition of Zendor.com Ltd. (“Zendor”) pursuant to the terms of an Agreement and Plan of Merger dated November 30, 2007 (“Zendor Agreement”). Zendor is a United Kingdom-based provider of fulfillment, customer care and e-commerce solutions. The Company believes the acquisition establishes it as an end-to-end e-commerce solution provider capable of delivering integrated, multichannel e-commerce solutions to both the U.K. and global retailers and brands. As consideration for the acquisition of Zendor, the Company paid $9,920 in cash, including acquisition-related transaction costs of approximately $1,159. Acquisition-related transaction costs include advisory, legal and other external costs directly related to the merger. Zendor’s results of operations are included in the Company’s results of operations beginning on the acquisition date of December 14, 2007.

The allocation of the purchase price over the fair value of the tangible and identifiable intangible assets acquired resulted in $1,878 recorded as goodwill. The following table summarizes the fair values of the Zendor assets acquired and liabilities assumed, including cash acquired, as of the acquisition date:

Total current assets		$	9,830
Property, plant and equipment			3,281
Goodwill			1,878
Identifiable intangible assets:
Customer contracts			2,155
Trade name			388
Total assets acquired			17,532
Total liabilities assumed			(7,612	)
Net assets acquired		$	9,920

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)

Accretive Commerce, Inc.

On September 10, 2007, the Company completed the acquisition of Accretive Commerce, Inc. (“Accretive”) pursuant to the terms of an Agreement and Plan of Merger dated August 16, 2007 (“Accretive Agreement”). Accretive is an e-commerce solutions provider that offers e-commerce technology, customer care and fulfillment solutions as well as related services. The Company believes the acquisition of Accretive strengthens its position in the e-commerce industry and enhances stockholder value by expanding its infrastructure and expanding its client base. As consideration for the acquisition of Accretive, the Company paid approximately $98,200 in cash.

The total purchase price is $98,600, including acquisition-related transaction costs of approximately $400. Acquisition-related transaction costs include advisory, legal and other external costs directly related to the merger. Accretive’s results of operations are included in the Company’s Consolidated Statement of Operations beginning on the acquisition date of September 10, 2007. The following table summarizes the fair values of the Accretive assets acquired and liabilities assumed, including cash acquired, as of the acquisition date:

Total current assets		$	16,802
Property, plant and equipment			9,197
Identifiable intangible assets:
Customer contracts			15,008
Employee non-compete agreements			3,838
Goodwill			61,916
Other assets			8,638
Total assets acquired			115,399
Total current liabilities			(14,962	)
Total non-current liabilities			(1,837	)
Total liabilities assumed			(16,799	)
Net assets acquired		$	98,600

Unaudited Pro Forma Financial Information

The financial information in the table below summarizes the combined results of operations of the Company, RCI and e-Dialog on a pro forma basis, as though the companies had been combined as of the beginning of each of the periods presented. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had actually taken place at the beginning of each of the periods presented and is not intended to be a projection of future results or trends. The pro forma financial information for all periods presented includes pro forma adjustments, net of any applicable tax for a reduction to interest income on the Company’s cash and cash equivalents used to fund the acquisition.

		Fiscal Year Ended
		January 3,				January 2,
		2009				2010
Net revenues		$	1,054,843			$	1,103,978
Net loss		$	(44,400	)		$	(24,433	)

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)

NOTE 7—LONG-TERM DEBT AND CREDIT FACILITY

The following table summarizes the Company’s long-term debt as of:

		January 3,				January 2,
		2009				2010
Convertible notes		$	161,951			$	172,391
Notes payable (1)			12,663				12,479
Capital lease obligations			24,833				20,923
Total debt			199,447				205,793
Less: Current portion of convertible notes			—				(55,443	)
Less: Current portion of notes payable			(184	)			(195	)
Less: Current portion of capital lease obligations			(4,703	)			(5,065	)
Total long-term debt		$	194,560			$	145,090

In May 2008, the FASB issued accounting standards which require the issuer of convertible debt instruments with cash settlement features to separately account for the liability and equity components of the instrument. The Company’s $207,500 principal amounts of subordinated convertible notes are subject to the provisions of these standards because the Company has the ability to elect cash settlement of the conversion value of the notes. The liability component of the notes is determined based on the present value of the notes using the Company’s nonconvertible debt borrowing rate on the issuance date. In order to determine the fair value of the debt portion and equity portion of the Company’s convertible notes, the Company used a market approach to determine the market rate for comparable transactions had the Company issued nonconvertible debt with similar embedded features other than the conversion feature by using prices and other relevant information generated by market transactions at or near the issuance date of its convertible notes. The equity component is the difference between the proceeds from the issuance of the note and the fair value of the liability component. The resulting debt discount, equal to the excess of the principal amount of the liability over its carrying amount, is amortized to interest expense using the effective interest method over the expected life of the debt. The Company adopted these standards on January 4, 2009, and applied it retrospectively to all prior periods presented.

3% Convertible Notes due 2025

In fiscal 2005, the Company completed a public offering of $57,500 aggregate principal amount of 3% subordinated convertible notes due June 1, 2025. The notes bear interest at 3%, payable semi-annually on June 1 and December 1.

Holders may convert the notes into shares of the Company’s common stock (or cash or a combination of the Company’s common stock and cash, if the Company so elects) at a conversion rate of 56.1545 shares per $1,000 principal amount of notes (representing a conversion price of approximately $17.81 per share). At any time on or after June 6, 2010, the Company may redeem any of the notes for cash at a redemption price of 100% of their principal amount, plus accrued and unpaid interest, if any, up to but excluding the redemption date. Holders may require the Company to repurchase the notes at a repurchase price equal to 100% of their principal amount plus accrued and unpaid interest, if any, on June 1 of 2010, 2015 and 2020, or at any time prior to maturity upon the occurrence of a designated event. Based on the Company’s closing stock price of $25.39 on January 2, 2010, the if-converted value of the notes exceeds the aggregate principal amount of the notes by $24,475.

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)

The following table provides additional information about the Company’s 3% convertible notes:

		As of				As of
		January 3, 2009				January 2, 2010
Carrying amount of the equity component		$	18,187			$	18,187
Principal amount of the liability component		$	57,500			$	57,500
Unamortized discount of liability component		$	6,574			$	2,057
Net carrying amount of liability component		$	50,926			$	55,443
Remaining amortization period of discount						5 months
Effective interest rate on liability component							12.00	%

The following table provides the components of interest expense for the Company’s 3% convertible notes:

		Fiscal Year Ended
		December 29,				January 3,				January 2,
		2007				2009				2010
Amortization of the discount on the liability component		$	3,579			$	4,021			$	4,517
Contract interest coupon			1,725				1,725				1,725
Amortization of the liability component of the issue costs			331				359				391
Interest expense		$	5,635			$	6,105			$	6,633

The estimated fair market value of the 3% subordinated convertible notes was $82,584 as of January 2, 2010 and $40,825 as of January 3, 2009 based on quoted market prices.

2.5% Convertible Notes due 2027

In July 2007, the Company completed a private placement of $150,000 of aggregate principal amount of 2.5% subordinated convertible notes due June 1, 2027, raising net proceeds of approximately $145,000, after deducting initial purchaser’s discount and issuance costs. The notes bear interest at 2.5%, payable semi-annually on June 1 and December 1.

Holders may convert the notes into shares of the Company’s common stock (or cash or a combination of the Company’s common stock and cash, if the Company so elects) at a conversion rate of 33.3333 shares per $1,000 principal amount of notes (representing a conversion price of approximately $30.00 per share). At any time on or after June 8, 2014, the Company may redeem any of the notes for cash at a redemption price of 100% of their principal amount, plus accrued and unpaid interest, if any, up to but excluding, the redemption date. If a fundamental change occurs prior to the maturity of the notes, the holders may require the Company to repurchase all or part of their notes at a repurchase price of 100% of their principal amount, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. In addition, the holders may require the Company to repurchase all or part of their notes for cash on June 1 of 2014, 2017 and 2022, respectively, at a repurchase price equal to 100% of their principal amount, plus any accrued or unpaid interest, if any, to, but excluding, the date of repurchase. Based on the Company’s closing stock price of $25.39 on January 2, 2010, the if-converted value of the notes does not exceed the aggregate principal amount of the notes.

The following table provides additional information about the Company’s 2.5% convertible notes:

		As of				As of
		January 3, 2009				January 2, 2010
Carrying amount of the equity component		$	26,783			$	26,783
Principal amount of the liability component		$	150,000			$	150,000
Unamortized discount of liability component		$	38,975			$	33,052
Net carrying amount of liability component		$	111,025			$	116,948
Remaining amortization period of discount						53 months
Effective interest rate on liability component							8.60	%

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)

The following table provides the components of interest expense for the Company’s 2.5% convertible notes:

		Fiscal Year Ended
		December 29,				January 3,				January 2,
		2007				2009				2010
Amortization of the discount on the liability component		$	2,964			$	5,445			$	5,923
Contract interest coupon			2,188				3,750				3,750
Amortization of the liability component of the issue costs			243				434				457
Interest expense		$	5,395			$	9,629			$	10,130

The estimated fair market value of the 2.5% subordinated convertible notes was $157,125 as of January 2, 2010 and $68,748 as of January 3, 2009 based on quoted market prices.

Note Payable

In fiscal 2004, a wholly-owned subsidiary of the Company entered into an agreement to purchase a new corporate headquarters in King of Prussia, Pennsylvania, together with an option to purchase an additional parcel of land. The purchase price for the building was $17,000. In connection with the purchase of the corporate headquarters, a wholly-owned subsidiary of the Company entered into a $13,000 mortgage note collateralized by a first lien on substantially all of the assets of that subsidiary. The mortgage note bears interest at 6.32% per annum and has a maturity date of July 2014, at which time the Company is required to pay the remaining principal balance of approximately $11,100. The Company recorded interest expense related to the note of $783 for fiscal 2009, $805 for fiscal 2008 and $803 for fiscal 2007.

Capital Lease Obligations

Certain of the Company’s warehouse equipment and computer hardware have been acquired under capital leases. The capital leases have maturity dates ranging from May 2010 to September 2014 and bear interest at rates ranging from 5.3% to 8.7% per annum. Capital lease obligations were as follows:

		January 2,
		2010
Gross capital lease obligations		$	23,816
Less: imputed interest			(2,893	)
Total present value of future minimum lease payments			20,923
Less: current portion			(5,065	)
Long-term portion		$	15,858

Credit Facilities

In January 2008, the Company obtained a secured revolving credit facility that matures in January 2013 with a syndicate of banks with an initial availability of $75,000. In May 2008, the Company expanded the credit facility by $15,000 thereby increasing the availability under the credit facility to $90,000. Subject to certain conditions, the credit facility may be increased to $150,000. The $90,000 credit facility provides for the issuance of up to $20,000 of letters of credit, which is included in the $90,000 available under the credit facility. The credit facility is collateralized by substantially all of the Company’s assets. The Company may elect to have amounts outstanding under the credit facilities bear interest at either a LIBOR rate plus an applicable margin of 0.75% to 1.50%, the prime rate plus an applicable margin of 0.75% to 1.50%, or at the Federal Funds Open Rate plus 0.5%. The applicable margin is determined by the leverage ratio of funded debt to EBITDA, as defined in the credit facility. The Company had no outstanding borrowings and $6,652 of outstanding letters of credit under the secured revolving credit facility as of January 2, 2010.

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)

NOTE 8—COMMITMENTS AND CONTINGENCIES

Legal Proceedings

The Company is involved in various litigation incidental to its business, including alleged contractual claims, claims relating to infringement of intellectual property rights of third parties, claims relating to the manner in which goods are sold through its integrated platform and claims relating to the Company’s collection of sales taxes in certain states. The Company collects sales taxes for goods owned and sold by it and shipped into certain states. As a result, the Company is subject from time to time to claims from other states alleging that the Company failed to collect and remit sales taxes for sales and shipments of products to customers in states.

Based on the merits of the cases and/or the amounts claimed, the Company does not believe that any claims are likely to have a material adverse effect on its business, financial position or results of operations. The Company may, however incur substantial expenses and devote substantial time to defend these claims whether or not such claims are meritorious. In the event of a determination adverse to the Company, the Company may incur substantial monetary liability and may be required to implement expensive changes in its business practices, enter into costly royalty or licensing agreements, or begin to collect sales taxes in states in which we previously did not. An adverse determination could have a material adverse effect on the Company’s business, financial position or results of operations. Expenditures for legal costs are expensed as incurred.

Operating and Capital Commitments

The following summarizes the Company’s principal operating and capital commitments as of January 2, 2010:

		Payments due by fiscal year
		2010				2011				2012				2013				2014				Thereafter				Total
Operating lease obligations(1)		$	20,627			$	17,034			$	16,854			$	12,730			$	9,219			$	18,984			$	95,448
Purchase obligations(1)			72,097				13,878				13,878				5,350				4,045				45,951				155,199
Client revenue share payments(1)			20,274				21,400				14,658				4,368				4,491				24,269				89,460
Debt interest(1)			5,882				4,509				4,497				4,481				2,278				8,784				30,431
Debt obligations			57,696				209				563				237				150,252				11,022				219,979
Capital lease obligations, including interest(2)			6,416				6,119				5,821				3,671				1,789				—				23,816
Deferred acquisition payments(3)			1,250				1,050				750				1,000				—				—				4,050
Total		$	184,242			$	64,199			$	57,021			$	31,837			$	172,074			$	109,010			$	618,383