e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 4, 2009


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number 0-16611

GSI COMMERCE, INC.

(Exact name of registrant as specified in its charter)


DELAWARE (State or other jurisdiction of incorporation or organization)		04-2958132 (I.R.S. employer identification no.)

935 FIRST AVENUE, KING OF PRUSSIA, PA		19406
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (610) 491-7000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

There were 49,228,303 shares of the registrant’s Common Stock outstanding as of the close of business on August 4, 2009.

PART I

ITEM 1: FINANCIAL STATEMENTS

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


	January 3,			July 4,
	2009			2009
ASSETS
Current assets:
Cash and cash equivalents	$	130,315		$	59,833
Accounts receivable, less allowance for doubtful accounts of $2,747 and $2,622		78,544			51,247
Inventory		42,856			37,135
Deferred tax assets		18,125			18,697
Prepaid expenses and other current assets		11,229			12,341

Total current assets		281,069			179,253

Property and equipment, net		164,833			158,159
Goodwill		194,996			197,854
Intangible assets, net of accumulated amortization of $18,340 and $23,302		46,663			43,586
Long-term deferred tax assets		11,296			21,579
Other assets, net of accumulated amortization of $16,384 and $17,569		17,168			13,520

Total assets	$	716,025		$	613,951


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	98,100		$	49,248
Accrued expenses		116,747			69,359
Deferred revenue		20,397			20,853
Convertible notes		—			53,118
Current portion of long-term debt		4,887			4,938

Total current liabilities		240,131			197,516

Convertible notes		161,951			113,924
Long-term debt		32,609			30,114
Deferred revenue and other long-term liabilities		6,838			9,297

Total liabilities		441,529			350,851

Commitments and contingencies (Note 7)

Stockholders’ equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized; 0 shares issued and outstanding as of January 3, 2009 and July 4, 2009		—			—
Common stock, $0.01 par value, 90,000,000 shares authorized; 47,630,824 and 49,037,690 shares issued as of January 3, 2009 and July 4, 2009 respectively; 47,630,621 and 49,037,487 shares outstanding as of January 3, 2009 and July 4, 2009, respectively		476			490
Additional paid in capital		430,933			443,964
Accumulated other comprehensive loss		(2,327	)		(1,545	)
Accumulated deficit		(154,586	)		(179,809	)

Total stockholders’ equity		274,496			263,100


Total liabilities and stockholders’ equity	$	716,025		$	613,951

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

GSI COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)


	Three Months Ended						Six Months Ended
	June 28,			July 4,			June 28,			July 4,
	2008 (1)			2009			2008 (1)			2009
Revenues:
Net revenues from product sales	$	107,055		$	91,192		$	230,175		$	197,383
Service fee revenues		86,154			95,989			158,577			186,273


Net revenues		193,209			187,181			388,752			383,656

Costs and expenses:
Cost of revenues from product sales		78,444			70,442			163,861			149,797
Marketing		11,853			7,054			28,729			17,915
Account management and operations, inclusive of $1,364, $2,394, $2,831 and $4,650 of stock-based compensation		57,550			59,055			116,993			116,796
Product development, inclusive of $687, $1,185, $1,297 and $2,636 of stock-based compensation		25,214			28,101			47,835			56,475
General and administrative, inclusive of $2,273, $2,513, $4,864 and $5,760 of stock-based compensation		18,694			19,527			34,948			38,804
Depreciation and amortization		18,826			15,279			32,635			30,680


Total costs and expenses		210,581			199,458			425,001			410,467


Loss from operations		(17,372	)		(12,277	)		(36,249	)		(26,811	)

Other (income) expense:
Interest expense		4,539			4,759			8,909			9,555
Interest income		(168	)		(54	)		(1,207	)		(205	)
Other (income) expense		208			(394	)		353			(165	)


Total other expense		4,579			4,311			8,055			9,185


Loss before income taxes		(21,951	)		(16,588	)		(44,304	)		(35,996	)
Benefit for income taxes		(1,604	)		(3,475	)		(12,459	)		(10,773	)


Net loss	$	(20,347	)	$	(13,113	)	$	(31,845	)	$	(25,223	)


Basic and diluted loss per share	$	(0.43	)	$	(0.27	)	$	(0.68	)	$	(0.52	)


Weighted average shares outstanding — basic and diluted		47,364			48,681			47,144			48,304


⁽¹⁾		As retrospectively adjusted and corrected, see Note 13.

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

GSI COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)


	Six Months Ended
	June 28,			July 4,
	2008 (1)			2009
Cash Flows from Operating Activities:
Net loss	$	(31,845	)	$	(25,223	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		26,827			25,821
Amortization		5,808			4,859
Amortization of discount on convertible notes		4,617			5,092
Stock-based compensation		8,992			13,046
Foreign currency transaction gains		—			(153	)
Gain on disposal of equipment		(282	)		—
Deferred income taxes		(10,834	)		(10,737	)
Changes in operating assets and liabilities:
Accounts receivable, net		15,248			28,156
Inventory		6,336			5,721
Prepaid expenses and other current assets		(2,081	)		(923	)
Other assets, net		683			1,824
Accounts payable and accrued expenses		(68,115	)		(97,290	)
Deferred revenue		7,181			155


Net cash used in operating activities		(37,465	)		(49,652	)

Cash Flows from Investing Activities:
Payments for acquisitions of businesses, net of cash acquired		(145,001	)		(2,273	)
Cash paid for property and equipment, including internal use software		(29,866	)		(17,929	)
Proceeds from disposition of assets		1,500			—
Release from restricted cash escrow funds		—			1,052


Net cash used in investing activities		(173,367	)		(19,150	)

Cash Flows from Financing Activities:
Borrowings on revolving credit loan		30,000			—
Debt issuance costs paid		(550	)		(42	)
Repayments of capital lease obligations		(1,004	)		(2,353	)
Repayments of mortgage note		(110	)		(91	)
Proceeds from exercise of common stock options		572			522


Net cash provided by (used in) financing activities		28,908			(1,964	)

Effect of exchange rate changes on cash and cash equivalents		(29	)		284


Net decrease in cash and cash equivalents		(181,953	)		(70,482	)
Cash and cash equivalents, beginning of period		231,511			130,315


Cash and cash equivalents, end of period	$	49,558		$	59,833


Supplemental Cash Flow Information
Cash paid during the period for interest	$	4,483		$	4,080
Cash paid during the period for income taxes		434			2,352
Noncash Investing and Financing Activities:
Accrual for purchases of property and equipment		5,522			4,494


⁽¹⁾		As retrospectively adjusted and corrected, see Note 13.

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

GSI COMMERCE, INC. AND SUBSIDIARIES

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

NOTE 1—BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements of GSI Commerce, Inc. and Subsidiaries (“the Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all information and note disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements.

The accompanying financial information is unaudited; however, in the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the financial position, results of operations and cash flows for the periods reported have been included. The results of operations for the periods reported are not necessarily indicative of those that may be expected for a full year.

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

This quarterly report should be read in conjunction with the financial statements and notes thereto included in the Company’s audited financial statements for the fiscal year ended January 3, 2009, presented in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on August 4, 2009.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

Client Revenue Share: 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 $5,013 and $12,287 for the three- and six-month periods ended July 4, 2009, and $7,146 and $16,552 for the three- and six-month periods ended June 28, 2008 and are included in marketing expenses in the Condensed Consolidated Statements of Operations.

Shipping and Handling Costs: 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 shipping and subsidized shipping and handling was $0 for the three- and six-month periods ended July 4, 2009, and $967 and $3,229 for the three- and six-month periods ended June 28, 2008, and is included in marketing expenses in the Condensed Consolidated Statements of Operations.

Fulfillment Costs: 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 $19,462 and $39,810 for the three- and six-month periods ended July 4, 2009, and $22,386 and $46,326 for the three- and six-month periods ended June 28, 2008, and are included in account management and operations expenses in the Condensed Consolidated Statements of Operations.

Recent Accounting Pronouncements: In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), which delayed the

GSI COMMERCE, INC. AND SUBSIDIARIES

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

effective date of Statement of Financial Accounting Standards (“SFAS”) 157 “Fair Value Measurements” (“SFAS 157”) for 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. The Company adopted FSP 157-2 for its non-financial assets and liabilities on January 4, 2009 with no impact to its condensed consolidated financial statements.

In December 2007, the FASB issued SFAS 141(R), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for an acquirer in a business combination on recognizing and measuring the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the entity acquired in its financial statements. In addition, SFAS 141(R) 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. SFAS 141(R) 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. The Company adopted the provisions of SFAS 141(R) on January 4, 2009 with no material impact to its condensed consolidated financial statements.

In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51” (“SFAS 160”). SFAS 160 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 of SFAS 160 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. SFAS 160 also provides guidance on disclosures related to changes in the parent’s ownership interest and deconsolidation of a subsidiary. The Company adopted the provisions of SFAS 160 on January 4, 2009 with no impact to its condensed consolidated financial statements.

In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 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 SFAS 133 “Accounting for Derivative Instruments and Hedging Activities,” and how derivative instruments and related hedged items affect a company’s financial statements. The Company adopted the provisions of SFAS 161 on January 4, 2009 with no impact to the disclosures in its condensed consolidated financial statements.

In May 2008, the FASB issued FSP APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement),” (“FSP APB 14-1”), which changes the accounting treatment for convertible debt instruments that allow for either mandatory or optional cash settlements. FSP APB 14-1 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 FSP APB 14-1 because under the notes the Company has the ability to elect cash settlement of the conversion value of the notes. The Company adopted FSP APB 14-1 on January 4, 2009, and is required to apply its provisions retrospectively for all periods presented. See Note 6, Long-Term Debt and Credit Facility, for additional information regarding the Company’s convertible notes and Note 13, Financial Statement Correction of Misstatement and Retrospective Application of FSP APB 14-1, for the impact of FSP APB 14-1 on the Company’s previously reported financial statements.

In June 2008, the FASB ratified the consensus reached on Emerging Issues Task Force (“EITF”) Issue 07-5, “Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock,” (“EITF 07-5”). EITF 07-5 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 SFAS 133. The Company adopted the provisions of EITF 07-5 on January 4, 2009 with no impact to its condensed consolidated financial statements.

In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 requires that unvested stock-based compensation awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) should

GSI COMMERCE, INC. AND SUBSIDIARIES

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

be classified as participating securities and should be included in the computation of earnings per share pursuant to the two-class method as described by SFAS 128, “Earnings per Share.” The Company adopted the provisions of FSP EITF 03-6-1 on January 4, 2009 with no material impact to its condensed consolidated financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 require companies to disclose in interim financial statements the fair value of financial instruments within the scope of SFAS 107, “Disclosures about Fair Value of Financial Instruments.” FSP FAS 107-1 and APB 28-1 also requires that companies disclose the method or methods and significant assumptions used to estimate the fair value of financial instruments. The Company adopted the disclosure requirements of FSP FAS 107-1 and APB 28-1 for the quarter ended July 4, 2009 with no material impact to its condensed consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 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. The Company adopted the provisions of SFAS 165 for the quarter ended July 4, 2009 with no material impact to its condensed consolidated financial statements. See Note 14, Subsequent Events, for more information.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (“SFAS 168”). SFAS 168 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. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company intends to update its disclosures when it issues its Form 10-Q for the period ended October 3, 2009.

NOTE 3— FAIR VALUE OF FINANCIAL INSTRUMENTS

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

Fair Value Measurements on January 3, 2009

Quoted Prices in

Significant

Active Markets for

Significant Other

Unobservable

Identical Assets

Observable Inputs

Inputs

Recurring Fair Value Measures

(Level 1)

(Level 2)

(Level 3)

Assets

Cash and cash equivalents⁽¹⁾

Money market mutual funds

97,849

—


(1)		Cash and cash equivalents total $130,315 as of January 3, 2009, and are comprised of $97,849 of money market mutual funds and $32,466 of bank deposits.

GSI COMMERCE, INC. AND SUBSIDIARIES

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

Fair Value Measurements on July 4, 2009

Quoted Prices in

Significant

Active Markets for

Significant Other

Unobservable

Identical Assets

Observable Inputs

Inputs

Recurring Fair Value Measures

(Level 1)

(Level 2)

(Level 3)

Assets

Cash and cash equivalents⁽¹⁾

Money market mutual funds

42,263

—


(1)		Cash and cash equivalents total $59,833 as of July 4, 2009, and are comprised of $42,263 of money market mutual funds and $17,570 of bank deposits.

The Company’s financial assets and liabilities subject to fair value measurements on a nonrecurring basis are as follows (in thousands):


	Fair Value Measurements on January 3, 2009
	Quoted Prices in				Significant
	Active Markets for		Significant Other		Unobservable
	Identical Assets		Observable Inputs		Inputs
Nonrecurring Fair Value Measures	(Level 1)		(Level 2)		(Level 3)
Assets
Other assets
Equity investments	$	—	$	—	$	1,418


	$	—	$	—	$	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.

The Company did not have any nonrecurring fair value measurements in the first six months of fiscal 2009.

GSI COMMERCE, INC. AND SUBSIDIARIES

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

NOTE 4—PROPERTY AND EQUIPMENT

The major classes of property and equipment, at cost, as of January 3, 2009 and July 4, 2009 are as follows:


	January 3,			July 4,
	2009			2009
Computer hardware and software	$	190,957		$	205,133
Building and building improvements		44,721			44,797
Furniture, warehouse and office equipment, and other		40,423			43,893
Land		7,889			7,889
Leasehold improvements		4,592			5,269
Capitalized leases		28,141			28,141
Construction in progress		1,497			1,497


		318,220			336,619
Less: Accumulated depreciation		(153,387	)		(178,460	)


Property and equipment, net	$	164,833		$	158,159

The Company’s net book value in capital leases, which consist of warehouse equipment and computer hardware, was $20,020 as of July 4, 2009 and $22,595 as of January 3, 2009. Amortization of capital leases is included within depreciation and amortization expense on the Condensed Consolidated Statements of Operations. Interest expense recorded on capital leases was $373 and $769 for the three- and six-month periods ended July 4, 2009 and $253 and $529 for the three- and six-month periods ended June 28, 2008.

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
	Services		Services		Consolidated
January 3, 2009	$	82,758	$	112,238	$	194,996
Acquisition⁽¹⁾		—		2,637		2,637
Foreign currency translation		221		—		221

July 4, 2009	$	82,979	$	114,875	$	197,854


⁽¹⁾		In April 2009, the Company completed an acquisition of a digital marketing services agency. The allocation of the purchase price over the fair value of the tangible and intangible assets acquired resulted in $2,637 of goodwill. The acquisition did not have a material impact on the Company’s condensed consolidated financial statements.

GSI COMMERCE, INC. AND SUBSIDIARIES

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

The Company’s intangible assets are as follows:


							Weighted-
	January 3,			July 4,			Average
	2009			2009			Life
							(in years)
Gross carrying value of intangible assets subject to amortization:
Customer contracts	$	38,773		$	39,888			2.5
Non-compete agreements		3,838			3,838			3.0
Purchased technology		4,493			4,493			4.0
Trade names		470			470			1.1
Foreign currency translation		(691	)		(461	)

		46,883			48,228			2.6
Accumulated amortization:
Customer contracts		(15,302	)		(18,879	)
Non-compete agreements		(1,599	)		(2,239	)
Purchased technology		(1,152	)		(1,773	)
Trade names		(470	)		(470	)
Foreign currency translation		183			59

		(18,340	)		(23,302	)
Net carrying value:
Customer contracts		23,471			21,009
Non-compete agreements		2,239			1,599
Purchased technology		3,341			2,720
Trade names		—			—
Foreign currency translation		(508	)		(402	)

Total intangible assets subject to amortization, net		28,543			24,926

Indefinite life intangible assets:
Trade names		18,120			18,660

Total intangible assets	$	46,663		$	43,586

Amortization expense of intangible assets was $2,514 and $4,962 for the three- and six-month periods ended July 4, 2009 and $3,900 and $5,785 for the three- and six-month periods ended June 28, 2008. Estimated future amortization expense related to intangible assets as of July 4, 2009, which does not reflect any foreign currency translation effects, is as follows:


Fiscal 2009	$	5,163
Fiscal 2010		8,257
Fiscal 2011		5,929
Fiscal 2012		2,538
Fiscal 2013		1,786
Thereafter		1,482

	$	25,155

GSI COMMERCE, INC. AND SUBSIDIARIES

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

NOTE 6—LONG-TERM DEBT AND CREDIT FACILITY

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


	January 3,			July 4,
	2009			2009
Convertible notes	$	161,951		$	167,042
Notes payable ⁽¹⁾		12,663			12,571
Capital lease obligations		24,833			22,481
Credit facility ⁽²⁾		—			—


		199,447			202,094
Less: Current portion of convertible notes ⁽³⁾		—			(53,118	)
Less: Current portion of notes payable		(184	)		(190	)
Less: Current portion of capital lease obligations		(4,703	)		(4,748	)

	$	194,560		$	144,038


(1)		The estimated fair market value of the notes payable approximated their carrying value as of July 4, 2009 and January 3, 2009.

(2)		The Company had no outstanding borrowings and $4,073 of outstanding letters of credit under its $90,000 secured revolving credit facility as of July 4, 2009.

(3)		In the second quarter of fiscal 2009, the Company reclassified the $53,118 debt carrying value of its 3% convertible notes from long-term liabilities to short-term liabilities as holders are permitted to require the Company to repurchase the notes for 100% of the $57,500 principal amount outstanding on June 1, 2010.

In May 2008, the FASB issued FSP APB 14-1, which 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 FSP APB 14-1 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 in accordance with SFAS 157, 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 our 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, will be amortized to interest expense using the effective interest method over the expected life of the debt. The Company adopted FSP APB 14-1 on January 4, 2009 and applied it retrospectively to all 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). Based on the Company’s closing stock price of $14.39 on July 2, 2009, the if-converted value of the notes does not exceed the aggregate principal amount of the notes.

GSI COMMERCE, INC. AND SUBSIDIARIES

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

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


	As of		As of
	January 3, 2009		July 4, 2009
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		4,382
Net carrying amount of liability component		50,926		53,118
Remaining amortization period of discount			11 months
Effective interest rate on liability component				12.00	%

The Company recognized interest expense from the 3% convertible notes of $1,623 and $3,247 for the three- and six-months ended July 4, 2009, which was comprised of $1,097 and $2,193 respectively, for the amortization of the discount on the liability component, $432 and $863 respectively, for the contractual interest coupon, and $94 and $191 respectively, for the amortization of the liability component of the issue costs. The Company recognized interest expense of $1,496 and $2,991 for the three- and six-months ended June 28, 2008 which was comprised of $976 and $1,952 respectively, for the amortization of the discount on the liability component, $432 and $863 respectively, for the contractual interest coupon and $88 and $176 respectively, for the amortization of the liability component of the issue costs.

The estimated fair market value of the 3% subordinated convertible notes was $57,212 as of July 4, 2009 and $40,825 as of January 3, 2009 based on quoted market prices.

2.5% Convertible Notes due 2027

In fiscal 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). Based on the Company’s closing stock price of $14.39 on July 2, 2009, 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		July 4, 2009
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		36,076
Net carrying amount of liability component		111,025		113,924
Remaining amortization period of discount			59 months
Effective interest rate on liability component				8.60	%

The Company recognized interest expense on the 2.5% convertible notes of $2,500 and $5,000 for the three- and six-months ended July 4, 2009 which was comprised of $1,449 and $2,899 respectively, for the amortization of the discount on the liability component, $937 and $1,875 respectively, for the contractual interest coupon, and $114 and $226 respectively, for the amortization of the liability component of the issue costs. The Company recognized interest expense of $2,377 and $4,755 for the three- and six-months ended June 28, 2008 which was comprised of $1,332 and $2,665 respectively, for the amortization of the discount on the liability component, $937 and $1,875 respectively, for the contractual interest coupon and $108 and $215 respectively, for the amortization of the liability component of the issue costs.

The estimated fair market value of the 2.5% subordinated convertible notes was $109,500 as of July 4, 2009 and $68,748 as of January 3, 2009 based on quoted market prices.

GSI COMMERCE, INC. AND SUBSIDIARIES

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

NOTE 7—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 addition, litigation is inherently unpredictable. 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 it 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 July 4, 2009:


	Payments due by fiscal year
	2009		2010		2011		2012		2013		Thereafter		Total
Operating lease obligations⁽¹⁾	$	8,768	$	16,847	$	13,869	$	10,506	$	8,488	$	19,289	$	77,767
Purchase obligations and marketing commitments⁽¹⁾		91,721		10,897		6,970		5,978		3,978		49,795		169,339
Client revenue share payments⁽¹⁾		10,100		20,768		21,400		14,658		4,368		28,760		100,054
Debt interest⁽¹⁾		3,650		5,241		4,509		4,497		4,481		11,061		33,439
Debt obligations		92		57,696		209		563		237		161,275		220,072
Capital lease obligations, including interest⁽²⁾		2,969		5,976		5,925		5,705		3,608		1,747		25,930

Total	$	117,300	$	117,425	$	52,882	$	41,907	$	25,160	$	271,927	$	626,601


(1)		Not required to be recorded in the Condensed Consolidated Balance Sheet as of July 4, 2009 in accordance with accounting principles generally accepted in the United States of America.

(2)		Capital lease obligations, excluding interest, are recorded in the Condensed Consolidated Balance Sheets.

Approximately $1,879 of unrecognized tax benefits have been recorded as liabilities as of July 4, 2009, in accordance with FASB’s Interpretation (“FIN”) 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” and the Company is uncertain as to if or when such amounts may be settled; as a result, these obligations are not included in the table above. Changes to these tax contingencies that are reasonably possible in the next 12 months are not expected to be material.

GSI COMMERCE, INC. AND SUBSIDIARIES

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

NOTE 8—STOCK AWARDS

The Company currently maintains the 2005 Equity Incentive Plan (“the Plan”) which provides for the grant of equity to certain employees, directors and other persons. As of July 4, 2009, 1,451 shares of common stock were available for future grants under the Plan. The equity awards granted under the Plan generally vest at various times over periods ranging up to five years and have terms of up to ten years after the date of grant, unless the optionee’s service to the Company is interrupted or terminated.

Stock Options and Warrants

The following table summarizes the stock option and warrant activity for the six-month period ended July 4, 2009:


						Weighted
				Weighted		Average
	Number of			Average		Remaining		Aggregate
	Shares			Exercise		Contractual		Intrinsic
	(in thousands)			Price		Life (in years)		Value
Outstanding at January 3, 2009		4,244		$	9.50
Granted		—			—
Exercised		(65	)	$	7.99
Forfeited/Cancelled		(132	)	$	12.53


Outstanding at July 4, 2009		4,047		$	9.44		3.18	$	21,566

Vested and expected to vest at July 4, 2009		4,047		$	9.44		3.18	$	21,566

Exercisable at July 4, 2009		4,047		$	9.44		3.18	$	21,566

The Company recognized no stock-based compensation expense for stock options for the three- and six-month periods ended July 4, 2009, as all options were fully vested, and recognized a stock based compensation benefit of $110 and $53 for the three- and six-month periods ended June 28, 2008 due to forfeited shares in excess of the Company’s estimated forfeiture rate.

Restricted Stock Units and Awards

The Company also has issued restricted stock units and restricted stock awards to certain employees. The grant-date fair value of restricted stock is based on the market price of the stock, and compensation cost is amortized to expense on a straight-line basis over the vesting period during which employees perform services.

The following summarizes the restricted stock unit and restricted stock award activity for the six-month period ended July 4, 2009:


				Weighted
	Number of			Average
	Shares			Grant Date
	(in thousands)			Fair Value
Nonvested shares at January 3, 2009		3,793		$	18.86
Granted		1,711		$	10.70
Vested		(852	)	$	(15.70	)
Forfeited/Cancelled		(187	)	$	(14.31	)


Nonvested shares at July 4, 2009		4,465		$	16.53

GSI COMMERCE, INC. AND SUBSIDIARIES

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

The Company recognized $5,838 and $12,538 of stock-based compensation expense for the three-and six-month periods ended July 4, 2009, and $4,180 and $8,537 of stock-based compensation expense for the three- and six-month periods ended June 28, 2008.

NOTE 9—INCOME TAXES

At the end of each interim period, the Company estimates its annual effective tax rate and applies that rate to its ordinary year-to-date earnings. FIN 18, “Accounting for Income Taxes in Interim Periods,” (“FIN 18”) provides that if in a separate jurisdiction, the Company anticipates an ordinary loss for the year in which a tax benefit cannot be recognized in accordance with SFAS 109, “Accounting for Income Taxes” (“SFAS 109”), then the Company excludes the ordinary loss in that jurisdiction and the related tax benefit from the computation of its estimated annual effective tax rate. In addition, the effect of changes in enacted tax laws, rates or tax status is recognized in the interim period in which the change occurs, however, the related benefit or expense is excluded from the annual effective tax rate. The tax expense or benefit related to significant, unusual, or extraordinary items are individually computed and recognized as a discrete item in the interim period in which the item occurs.

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in foreign jurisdictions, permanent and temporary differences as a result of differences between amounts measured and recognized in accordance with tax laws and financial accounting standards, and the likelihood of recovering deferred tax assets. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the tax environment changes. The Company has a historical seasonal pattern of reporting a net loss before income taxes in the first three quarters of its fiscal year offset by income before income taxes in its fiscal fourth quarter. The Company recognizes a tax benefit and increases its deferred tax assets in its interim periods as realization of the tax benefit at the end of the fiscal year is more likely than not.

The Company’s tax provision for the six months ended July 4, 2009 was determined using an estimate of its annual effective tax rate which is 31.5% for fiscal 2009 plus any discrete items that affect taxes that occur during the quarter. The effective tax rate is lower than the 35% federal statutory tax rate primarily due to an increase to the federal net operating loss valuation allowance caused by capital losses partially offset by permanent items. FIN 18 provides that if in a separate jurisdiction, the Company anticipates an ordinary loss for the year in which a tax benefit cannot be recognized in accordance with SFAS 109, the Company should exclude the ordinary loss in that jurisdiction and the related tax benefit from the computation of the estimated annual effective tax rate. Estimated annual losses from international operations yield no tax benefit and were removed from the calculation of the annual effective tax rate. 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.

The Company’s reported effective tax rate for the six months ended July 4, 2009 was 29.9%. The annual effective tax rate of 31.5% was different from the actual tax rate of 29.9% primarily due to the benefit from certain discrete state items partially offset by losses in foreign operations that generate no tax benefit and therefore they are not included in the pre-tax book income calculation for the annual effective tax rate.

The reported effective tax rate for the six months ended June 28, 2008 was 26.3%. The annual effective tax rate of 30.6% was different from the actual tax rate of 26.3% primarily due to the change in estimate of losses in jurisdictions in which little or no tax benefit is recognized under SFAS 109.

The total amount of liabilities, interest and penalties related to uncertain tax positions and recognized in the Condensed Consolidated Balance Sheets were $1,879 as of July 4, 2009, and $1,708 as of January 3, 2009. During the first six months of fiscal 2009 and fiscal 2008, the Company recorded an increase in liabilities, including interest and penalties for uncertain tax positions that were recorded as income tax expense of $86 and $171 for the three- and six-month periods ended July 4, 2009 and $79 and $168 for the three- and six-month periods ended June 28, 2008.

NOTE 10—LOSS PER SHARE

Basic net loss per share for all periods has been computed in accordance with SFAS 128. Basic and diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the fiscal year.

GSI COMMERCE, INC. AND SUBSIDIARIES

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

The following is a summary of the securities outstanding during the respective periods that have been excluded from the calculations because the effect on net loss per share would have been anti-dilutive for the three- and six-month periods ended:


	June 28,		July 4,
	2008		2009
Stock units and awards		3,850		4,465
Stock options and warrants		4,324		4,047
Convertible notes		8,229		8,229

		16,403		16,741

The potential number of common shares and dilution from the Company’s Series A Junior Participating Preferred Stock from its Stockholders Right Plan cannot be determined because these shares are not exercisable unless certain future contingent events occur.

NOTE 11 – COMPREHENSIVE LOSS

Comprehensive loss is computed as net loss plus certain other items that are recorded directly to shareholders’ equity in accordance with SFAS 130 “Reporting Comprehensive Income.” Comprehensive loss is calculated as follows:


	Three Months Ended						Six Months Ended
	June 28,			July 4,			June 28,			July 4,
	2008			2009			2008			2009
Net loss	$	(20,347	)	$	(13,113	)	$	(31,845	)	$	(25,223	)
Other comprehensive income (loss):
Cumulative translation adjustment		10			845			56			782


Comprehensive loss	$	(20,337	)	$	(12,268	)	$	(31,789	)	$	(24,441	)

NOTE 12—SEGMENT INFORMATION

The Company operates two reportable segments: e-commerce services and interactive marketing services. For e-commerce services, the Company delivers customized solutions to its clients through an integrated 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. For interactive marketing services, the Company offers online marketing and advertising, user experience and design, studio and e-mail marketing services.

The Company manages its segments based on an internal management reporting process that provides segment revenue and segment operating income before depreciation, amortization and stock-based compensation expense for determining financial decisions and allocating resources. The Company believes that segment operating income before depreciation, amortization and stock-based compensation expense is an appropriate measure of evaluating the operational performance of the Company’s segments. The Company uses this financial measure for financial and operational decision making and as a means to evaluate segment performance. It is also used for planning, forecasting and analyzing future periods. However, this measure should be considered in addition to, not as a substitute for, or superior to, income from operations or other measures of financial performance prepared in accordance with GAAP.

The Company manages its working capital on a consolidated basis and does not allocate long-lived assets to segments. In addition, segment assets are not reported to, or used by, the Company and therefore, pursuant to SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” total segment assets have not been disclosed.

GSI COMMERCE, INC. AND SUBSIDIARIES

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

The following tables present summarized information by segment:


	Three Months Ended June 28, 2008
	E-Commerce		Interactive		Intersegment
	Services		Marketing Services		Eliminations			Consolidated
Net revenues	$	175,936	$	21,529	$	(4,256	)	$	193,209
Costs and expenses before depreciation, amortization and stock-based compensation expense		173,860		17,827		(4,256	)		187,431

Operating income before depreciation, amortization and stock-based compensation expense		2,076		3,702		—			5,778
Depreciation and amortization									18,826
Stock-based compensation expense									4,324

Loss from operations									(17,372	)

Interest expense									4,539
Interest income									(168	)
Other expense, net									208

Loss before income taxes								$	(21,951	)


	Three Months Ended July 4, 2009
	E-Commerce		Interactive		Intersegment
	Services		Marketing Services		Eliminations			Consolidated
Net revenues	$	163,770	$	28,486	$	(5,075	)	$	187,181
Costs and expenses before depreciation, amortization and stock-based compensation expense		161,336		21,826		(5,075	)		178,087

Operating income before depreciation, amortization and stock-based compensation expense		2,434		6,660		—			9,094
Depreciation and amortization									15,279
Stock-based compensation expense									6,092

Loss from operations									(12,277	)

Interest expense									4,759
Interest income									(54	)
Other income, net									(394	)

Loss before income taxes								$	(16,588	)

GSI COMMERCE, INC. AND SUBSIDIARIES

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


	Six Months Ended June 28, 2008
	E-Commerce		Interactive		Intersegment
	Services		Marketing Services		Eliminations			Consolidated
Net revenues	$	363,535	$	33,614	$	(8,397	)	$	388,752
Costs and expenses before depreciation, amortization and stock-based compensation expense		362,752		29,019		(8,397	)		383,374

Operating income before depreciation, amortization and stock-based compensation expense		783		4,595		—			5,378
Depreciation and amortization									32,635
Stock-based compensation expense									8,992

Loss from operations									(36,249	)

Interest expense									8,909
Interest income									(1,207	)
Other expense, net									353

Loss before income taxes								$	(44,304	)


	Six Months Ended July 4, 2009
	E-Commerce		Interactive		Intersegment
	Services		Marketing Services		Eliminations			Consolidated
Net revenues	$	342,280	$	53,608	$	(12,232	)	$	383,656
Costs and expenses before depreciation, amortization and stock-based compensation expense		336,177		42,796		(12,232	)		366,741

Operating income before depreciation, amortization and stock-based compensation expense		6,103		10,812		—			16,915
Depreciation and amortization									30,680
Stock-based compensation expense									13,046

Loss from operations									(26,811	)

Interest expense									9,555
Interest income									(205	)
Other income, net									(165	)

Loss before income taxes								$	(35,996	)

The Company’s operations are substantially within the United States.

NOTE 13—FINANCIAL STATEMENT CORRECTION OF MISSTATEMENT AND RETROSPECTIVE APPLICATION OF FSP APB 14-1

The Company adopted FSP APB 14-1 on January 4, 2009 and retrospectively applied its provisions for all periods presented. See Recent Accounting Pronouncements in Note 2, Summary of Significant Accounting Policies, and Note 6, Long-Term Debt and Credit Facility, for more information regarding the Company’s adoption of FSP APB 14-1.

The Company recognizes stock-based compensation expense for all stock-based awards over the requisite service period, net of estimated forfeitures, in accordance with SFAS 123(R), “Share-based Payment” (SFAS 123(R)). SFAS 123(R) requires the amount of stock-based compensation expense recognized at any date must at least equal the portion of grant date value of the award that is vested at that date. In the second quarter of fiscal 2009, the Company discovered a computational error in the software used by the Company to calculate the stock-based compensation expense whereby the expense recognized for each vested portion of the award was less than the grant date fair value of that vested portion of the

GSI COMMERCE, INC. AND SUBSIDIARIES

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

award. The error resulted in an understatement of stock-based compensation expense in fiscal 2006, 2007, 2008 and the first quarter of fiscal 2009.

In accordance with Staff Accounting Bulletin (“SAB”) 99, “Materiality,” and SAB 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” the Company evaluated the materiality of the error from qualitative and quantitative perspectives, and concluded that the error was immaterial to any prior year financial statements.

The following tables reflect the impact of the retrospective application of FSP APB 14-1 and the correction on the Company’s (i) Condensed Consolidated Statement of Operations for the three and six months ended June 28, 2008, and (ii) Condensed Consolidated Statement of Cash Flows for the six months ended June 28, 2008:


				Effect of						As Retrospectively
	As Originally			Retrospective			Effect of			Adjusted and
Condensed Consolidated Statement of Operations	Reported			Application			Correction			Corrected
	Three Months Ended June 28, 2008
Account management and operations	$	57,497		$	—		$	53		$	57,550
Product development		25,184			—			30			25,214
General and administrative		18,609			—			85			18,694
Total costs and expenses		210,413			—			168			210,581
Loss from operations		(17,204	)					(168	)		(17,372	)
Interest expense		2,347			2,192			—			4,539
Total other expense		2,387			2,192			—			4,579
Loss before income taxes		(19,591	)		(2,192	)		(168	)		(21,951	)
Benefit for income taxes		(631	)		(909	)		(64	)		(1,604	)
Net loss		(18,960	)		(1,283	)		(104	)		(20,347	)
Basic and diluted loss per share		(0.40	)		(0.03	)		—			(0.43	)

	Six Months Ended June 28, 2008
Account management and operations	$	116,607		$	—		$	386		$	116,993
Product development		47,620			—			215			47,835
General and administrative		34,333			—			615			34,948
Total costs and expenses		423,785			—			1,216			425,001
Loss from operations		(35,033	)					(1,216	)		(36,249	)
Interest expense		4,524			4,385			—			8,909
Total other expense		3,670			4,385			—			8,055
Loss before income taxes		(38,703	)		(4,385	)		(1,216	)		(44,304	)
Benefit for income taxes		(10,178	)		(1,819	)		(462	)		(12,459	)
Net loss		(28,525	)		(2,566	)		(754	)		(31,845	)
Basic and diluted loss per share		(0.61	)		(0.05	)		(0.02	)		(0.68	)


				Effect of						As Retrospectively
	As Originally			Retrospective			Effect of			Adjusted and
Condensed Consolidated Statement of Cash Flows	Reported			Application			Correction			Corrected
	Six Months Ended June 28, 2008
Net loss	$	(28,525	)	$	(2,566	)	$	(754	)	$	(31,845	)
Amortization of discount on convertible notes		—			4,617			—			4,617
Stock-based compensation		7,776			—			1,216			8,992
Deferred income taxes		(8,553	)		(1,819	)		(462	)		(10,834	)
Other assets, net		915			(232	)		—			683
Net cash used in operating activities		(37,465	)		—			—			(37,465	)

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

All statements made in this Quarterly Report on Form 10-Q, other than statements of historical fact, are forward-looking statements, as defined under federal securities law. The words “look forward to,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “will,” “would,” “should,” “could,” “guidance,” “potential,” “opportunity,” “continue,” “project,” “forecast,” “confident,” “prospects,” “schedule,” “designed,” “future,” “discussions,” “if” and similar expressions typically are used to identify forward-looking statements. Forward-looking statements are based on the then-current expectations, beliefs, assumptions, estimates and forecasts about our business. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. Factors which may affect our business, financial condition and operating results include the effects of changes in the economy, consumer spending, the financial markets and the industries in which we and our clients operate, changes affecting the Internet and e-commerce, our ability to develop and maintain relationships with strategic clients and suppliers and the timing of our establishment, extension or termination of our relationships with strategic clients, our ability to timely and successfully develop, maintain and protect our technology, confidential and proprietary information, and product and service offerings and execute operationally, our ability to attract and retain qualified personnel, our ability to successfully integrate our acquisitions of other businesses, and the performance of acquired businesses. More information about potential factors that could affect us are described in Part I, Item 1A in our Form 10-K for the fiscal year ended January 3, 2009, filed with the SEC on March 16, 2009. We expressly disclaim any intent or obligation to update these forward-looking statements.

Executive Overview

Second Quarter of Fiscal 2009 Financial Results and Significant Events:

•

Net revenues decreased 3% compared to the second quarter of fiscal 2008. Service fee revenues grew 11% and net revenues from product sales decreased 15%. E-commerce services segment net revenues decreased by 7% and interactive marketing services segment net revenues increased by 33%.

•

Net loss was $13.1 million in the second quarter of fiscal 2009, inclusive of a benefit for income taxes of $3.5 million, compared to a net loss of $20.3 million in the second quarter of fiscal 2008, inclusive of a tax benefit of $1.6 million. Loss from operations improved to $12.3 million in the second quarter of fiscal 2009 compared to a loss of $17.4 million in the second quarter of fiscal 2008.

2009 Outlook:

•

For the remainder of fiscal 2009, compared to the same period in fiscal 2008, we expect a modest decrease in net revenues due primarily to the termination of a client relationship of one our top ten contributors of service fee revenues in fiscal 2008 as a result of the client’s liquidation, and the transition during fiscal 2009 of one owned inventory client to a non-owned inventory deal structure. We believe that the client transition will result in a decrease in net revenues from product sales partially offset by an increase in service fee revenues and will have no material effect on earnings. We also expect this transition will decrease our cost of revenues from product sales and our marketing expenses. In addition, we believe, due to the current economic environment, same store e-commerce revenues for the remainder of fiscal 2009 will grow at a more moderate rate than in fiscal 2008 and that capital expenditures will modestly decrease in fiscal 2009 compared to fiscal 2008. We continue to expect that we will have a net loss in fiscal 2009.

Financial Statement Correction and Retrospective Application of FSP APB 14-1

The accompanying condensed consolidated financial statements for the three and six months ended June 28, 2008 have been corrected and retrospectively adjusted from amounts previously reported. Accordingly, amounts presented in Management’s Discussion and Analysis include the effects of the changes. See Note 13, Financial Statement Correction of Misstatement and Retrospective Application of FSP APB 14-1, for a summary of the impact of the correction and retrospective adjustment.

Results of Operations

Three-month period ended July 4, 2009 and June 28, 2008 (amounts in tables in millions):

Net Revenues

We derive our revenues from products we sell through our clients’ e-commerce business, from service fees we earn for developing and operating our clients’ e-commerce businesses, and from service fees we earn from providing interactive marketing services.

Net Revenues from Product Sales. Net revenues from product sales are derived from products we sell through our clients’ e-commerce Web stores, including outbound shipping charges for all clients for which we provide fulfillment services. Net revenues from product sales are net of allowances for returns and discounts. We recognize revenue from product sales and shipping when products are shipped and title and risk of ownership passes to the consumer.

Service Fee Revenues. Service fee revenues include revenues we earn from providing e-commerce services and interactive marketing services. E-commerce service fee revenues are generated from a client’s use of one or more of our e-commerce platform components, which include technology, fulfillment and customer care, as well as from professional services and gift card breakage. Interactive marketing service fee revenues are generated from online marketing, advertising, email and design services. Service fee revenues can be fixed or variable and are based on the activity performed, the value of merchandise sold, or the gross profit from a transaction.


											Second Qtr Fiscal 2009
											vs.
											Second Qtr Fiscal 2008
	Second Qtr Fiscal 2008					Second Qtr Fiscal 2009					Increase/(Decrease)			% Change
Net Revenues by Type:
Net revenues from product sales	$	107.1		55	%	$	91.2		49	%	$	(15.9	)		(15	%)
Service fee revenues		86.1		45	%		96.0		51	%		9.9			11	%

Total net revenues	$	193.2		100	%	$	187.2		100	%	$	(6.0	)		(3	%)


Net Revenues by Segment:
E-Commerce services	$	176.0		91	%	$	163.8		88	%	$	(12.2	)		(7	%)
Interactive marketing services		21.5		11	%		28.5		15	%		7.0			33	%
Intersegment eliminations		(4.3	)	(2	%)		(5.1	)	(3	%)		(0.8	)		19	%

Total net revenues	$	193.2		100	%	$	187.2		100	%	$	(6.0	)		(3	%)

Net Revenues by Type

Net Revenues from Product Sales. Net revenues from product sales decreased $15.9 million in the second quarter of fiscal 2009. This decrease was primarily due to the transition during the first quarter of fiscal 2009 of one owned inventory client to a non-owned inventory deal structure, and a decrease in sales from one consumer electronics client. Of this decrease, $13.9 million was due to a decrease in revenues due to the client transition and from clients that ceased doing business with us after the second quarter of fiscal 2008, and $2.0 million was due to a decrease in revenues from clients that operated for the entirety of both periods. Overall, clients that operated for the entirety of both periods decreased 2%. Shipping revenue for all clients for which we provide fulfillment services was $25.6 million for the second quarter of fiscal 2009 and $23.7 million for the second quarter of fiscal 2008.

Service Fee Revenues. Service fee revenues increased $9.9 million in the second quarter of fiscal 2009. This increase was primarily due to the client transition discussed above, the growth of our interactive marketing segment, and an increase in revenues from our e-commerce segment. Partially offsetting these increases was a decrease in revenues from clients that terminated their relationship with us, including the liquidation of the business of a client that was one of our top ten contributors of service fee revenues for fiscal 2008.

For the remainder of fiscal 2009, we continue to expect a decrease in net revenues from product sales due to the client transition discussed above. We expect this transition to continue to result in an increase in service fee revenues for the remainder of fiscal 2009, but an overall decline in total net revenues.

Net Revenues by Segment

E-Commerce Services Segment Revenues. Net revenues from e-commerce services decreased $12.2 million in the second quarter of fiscal 2009 due to a $15.9 million decrease in net revenues from product sales which was partially offset by an increase of $3.7 million in service fee revenues.

Of the $12.2 million decrease in net revenues from our e-commerce services segment, $12.4 million was from clients that did not operate for the entirety of both periods, including a client that was one of our top ten contributors of service fee revenues for fiscal 2008 with which we terminated our relationship as a result of that client’s liquidation, which was partially offset by $0.2 million from clients that operated for the entirety of both periods.

Of the $3.7 million increase in service fee revenues, $2.1 million was from an increase in revenues from clients that operated for the entirety of both periods, and $1.6 million was from clients that did not operate for the entirety of both periods. See the discussion above under Net Revenues by Type — Net Revenues from Product Sales for an explanation of the $15.9 million decrease in net revenues from product sales.

Interactive Marketing Services Segment Revenues. Net revenues increased by 33%, or $7.0 million, due primarily to growth of e-Dialog and gsi interactive, as well as from Silverlign which we acquired in April 2009.

Costs and Expenses

Costs and expenses consist of costs of revenues from product sales, marketing expenses, account management and operations expenses, product development expenses, general and administrative expenses and depreciation and amortization expenses.

Costs of Revenues from Product Sales. Costs of revenues from product sales consist primarily of direct costs associated with (i) products we sell through our clients’ Web stores, and (ii) our shipping charges for all clients for which we provide fulfillment services. All costs of revenues from product sales were attributable to our e-commerce services segment.

Marketing. Marketing expenses consist primarily of net client revenue share charges, promotional free shipping and subsidized shipping and handling costs, catalog costs, and net advertising and promotional expenses. All marketing expenses were attributable to our e-commerce services segment and generally supported revenues from product sales.

Account Management and Operations. Account management and operations expenses consist primarily of costs to operate our fulfillment centers and customer care centers, credit card fees, and payroll related to our buying, business management, operations and marketing functions.

Product Development. Product development expenses consist primarily of expenses associated with planning, maintaining and operating our proprietary e-commerce and e-mail platforms and related systems, and payroll and related expenses for engineering, production, creative and management information systems.

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 our headquarters and other offices.

Depreciation and Amortization. Depreciation and amortization expenses relate primarily to the depreciation or amortization of the capitalized costs for our purchased and internally-developed technology, including a portion of the cost related to the employees that developed such technology, hardware and software; furniture and equipment at our corporate headquarters, fulfillment centers and customer care centers; the office buildings and other facilities owned by us; and acquisition-related intangible assets.


											Second Quarter of Fiscal 2009
	Second Quarter					Second Quarter					vs.
	of Fiscal 2008					of Fiscal 2009					Second Quarter of Fiscal 2008
			% of					% of
			Net					Net			Increase /
	$		Revenues			$		Revenues			(Decrease)			% Change
Cost of revenues from product sales	$	78.4		40	%	$	70.4		38	%	$	(8.0	)		(10	%)
Marketing		11.9		6	%		7.1		4	%		(4.8	)		(40	%)
Account management and operations		57.6		30	%		59.1		32	%		1.5			3	%
Product development		25.2		13	%		28.1		15	%		2.9			12	%
General and administrative		18.7		10	%		19.5		10	%		0.8			4	%
Depreciation and amortization		18.8		10	%		15.3		8	%		(3.5	)		(19	%)

Total costs and expenses	$	210.6		109	%	$	199.5		107	%	$	(11.1	)		(5	%)

Cost of Revenues from Product Sales:


	Second Qtr			Second Qtr
	Fiscal 2008			Fiscal 2009
Cost of revenues from product sales	$	78.4		$	70.4
As a percentage of net revenues from product sales		73	%		77	%

Cost of revenues from product sales decreased $8.0 million in the second quarter of fiscal 2009. The decrease in cost of revenues as a percentage of net revenues from 40% in the second quarter of fiscal 2008 to 38% in the second quarter of fiscal 2009 was primarily due to the increase in service fees and the decrease in product sales, because service fees have no associated cost of revenue. We continue to expect a decrease in cost of revenues from product sales as a percentage of net revenues as we expect service fee revenues to continue to grow and net revenues from product sales to continue to decrease.

The increase in cost of revenues from product sales as a percentage of net revenues from product sales from 73% to 77% was primarily due to an increase in shipping revenue. Our cost of generating shipping revenue is higher than our cost of generating revenue on sale of products.

Marketing:


	Second Qtr			Second Qtr
	Fiscal 2008			Fiscal 2009
Marketing	$	11.9		$	7.1
As a percentage of net revenues from product sales		11	%		8	%

Marketing expense decreased $4.8 million in the second quarter of fiscal 2009. As a percentage of net revenues, marketing expenses decreased from 6% to 4%. This decrease was primarily due to the increase in service fees and the decrease in product sales, because service fees have no associated marketing expenses.

As a percentage of net revenues from product sales, marketing expenses decreased from 11% to 8% due primarily to the transition during fiscal 2009 of one owned inventory client to a non-owned inventory deal structure and a decrease in net revenues from product sales. Of the $4.8 million decrease in marketing expenses, $2.1 million was due to a decrease in client revenue share expenses caused by decreased sales from owned inventory clients, $1.7 million was due to a decrease in advertising costs, and $1.0 million was due to a decrease in promotional free shipping and subsidized shipping and handling costs. We expect marketing expenses to continue to decrease in absolute dollars during fiscal 2009 compared to fiscal 2008, because of the expected decrease in net revenues from product sales. We continue to expect a decrease in marketing expenses as a percentage of net revenues, as we expect service fee revenues to increase and net revenues from product sales to decrease.

Account Management and Operations. Account management and operations expenses increased $1.5 million in the second quarter of fiscal 2009. As a percentage of net revenues, account management and operations expenses increased from 30% to 32%. The increases in absolute dollars and as a percentage of net revenues were primarily due to increases in personnel and related costs mostly from our interactive marketing services and our customer service operations. The increases were partially offset by decreases in fulfillment expenses and occupancy costs. We expect account management and operations expenses to be relatively constant in absolute dollars during fiscal 2009 compared to fiscal 2008, as we believe our fulfillment and call center capacity will be sufficient to accommodate the growth of our domestic and international e-commerce businesses and our interactive marketing services business.

Product Development. Product development expenses increased $2.9 million in the second quarter of fiscal 2009. As a percentage of net revenues, product development expenses increased from 13% to 15%. The increases in absolute dollars and as a percentage of net revenues were primarily due to increased personnel expenses to enhance our e-commerce technology platform. We continue to expect product development expenses to increase in absolute dollars in fiscal 2009 compared to fiscal 2008, as we plan to continue to launch additional client Web stores, invest in our e-commerce and interactive marketing services platforms and expand our international operations.

General and Administrative. General and administrative expenses increased $0.8 million in the second quarter of fiscal 2009. As a percentage of net revenues, general and administrative expenses remained constant at 10%. The increase in absolute dollars was primarily due to personnel and related expenses. We continue to expect general and administrative expenses to increase in absolute dollars in fiscal 2009 compared to fiscal 2008 as we expect to add new clients, expand our e-commerce and interactive marketing services platforms, and expand our international operations.

Depreciation and Amortization. Depreciation and amortization expenses decreased $3.5 million in the second quarter of fiscal 2009. As a percentage of net revenues, depreciation and amortization expenses decreased from 10% to 8%. Depreciation expenses decreased $2.0 million due primarily to the acceleration of depreciation for abandoned equipment in the second quarter of fiscal 2008 related to a facility closure and from reduced capital expenditures in fiscal 2009. Amortization expenses decreased $1.5 million primarily due to the intangible asset amortization related to the e-Dialog acquisition. While we expect capital expenditures for fiscal 2009 to decrease, we expect depreciation expenses to remain relatively constant in fiscal 2009 compared to fiscal 2008 as we continue to depreciate capital expenditures made in prior years. We expect amortization expenses to decrease in fiscal 2009 compared to fiscal 2008 due to a decrease in intangible asset amortization associated with our acquisitions of Accretive Commerce and e-Dialog.

Other (Income) Expense


													Second Quarter of Fiscal 2009
	Second Quarter						Second Quarter						vs.
	of Fiscal 2008						of Fiscal 2009						Second Quarter of Fiscal 2008
				% of						% of
				Net						Net			Increase /
	$			Revenues			$			Revenues			(Decrease)			% Change
Interest expense	$	4.6			2.4	%	$	4.8			2.6	%	$	0.2			4	%
Interest income		(0.2	)		(0.1	%)		(0.1	)		(0.1	%)		0.1			(50	%)
Other (income) expense		0.2			0.1	%		(0.4	)		(0.2	%)		(0.6	)		(300	%)

Total other expenses	$	4.6			2.4	%	$	4.3			2.3	%	$	(0.3	)		(7	%)

Total other expenses decreased $0.3 million in the second quarter of fiscal 2009. The $0.2 million increase in interest expense is due to the amortization of the debt discount on our convertible notes in accordance with FSP APB 14-1. The $0.1 million decrease in interest income was due to lower interest rates earned in the second quarter of fiscal 2009. The $0.6 million decrease in other (income) expense was primarily due to foreign currency exchange gains on transactions denominated in currencies other than the functional currency.

Results of Operations

Six-month period ended July 4, 2009 and June 28, 2008 (amounts in tables in millions):

Net Revenues


											First Six Months of Fiscal 2009
											vs.
	First Six Months					First Six Months					First Six Months of Fiscal 2008
	of Fiscal 2008					of Fiscal 2009					Increase/(Decrease)			% Change
Net Revenues by Type:
Net revenues from product sales	$	230.2		59	%	$	197.4		51	%	$	(32.8	)		(14	%)
Service fee revenues		158.6		41	%		186.3		49	%		27.7			17	%

Total net revenues	$	388.8		100	%	$	383.7		100	%	$	(5.1	)		(1	%)


Net Revenues by Segment:
E-Commerce services	$	363.6		93	%	$	342.3		89	%	$	(21.3	)		(6	%)
Interactive marketing services		33.6		9	%		53.6		14	%		20.0			60	%
Intersegment eliminations		(8.4	)	(2	%)		(12.2	)	(3	%)		(3.8	)		45	%

Total net revenues	$	388.8		100	%	$	383.7		100	%	$	(5.1	)		(1	%)

Net Revenues by Type

Net Revenues from Product Sales. Net revenues from product sales decreased $32.8 million in the first six months of fiscal 2009. This decrease was primarily due to the transition during the first quarter of fiscal 2009 of one owned inventory client to a non-owned inventory deal structure and a decrease in sales from one consumer electronics client. Of this decrease, $26.2 million was due to a decrease in revenues due to the client transition and from clients that ceased doing business with us after the second quarter of fiscal 2008, and $7.1 million was due to a decrease in revenues from clients that operated for the entirety of both periods, partially offset by $0.5 million from clients that initially began generating revenue during the first six months of fiscal 2008. Shipping revenue for all clients for which we provide fulfillment services was $52.4 million for the first six months of fiscal 2009 and $48.5 million for the first six months of fiscal 2008.

Service Fee Revenues. Service fee revenues increased $27.7 million in the first six months of fiscal 2009. This increase was primarily due to the client transition discussed above, the growth of our interactive marketing segment, and an increase in revenues from our e-commerce segment. Partially offsetting these increases was a decrease in revenues from clients that terminated their relationship with us, including the liquidation of the business of a client that was one of our top ten contributors of service fee revenues for fiscal 2008.

Net Revenues by Segment

E-Commerce Services Segment Revenues. Net revenues from e-commerce services decreased $21.3 million in the first six months of fiscal 2009 due to a $32.8 million decrease in net revenues from product sales which was partially offset by an increase of $11.5 million in service fee revenues.

Substantially all of the $21.3 million decrease in net revenues from our e-commerce services segment was from clients that did not operate for the entirety of both periods, including a client that was one of our top ten contributors of service fee revenues for fiscal 2008 with which we terminated our relationship as a result of that client’s liquidation.

Of the $11.5 million increase in service fee revenues, $6.1 million was from an increase in revenues from clients that operated for the entirety of both periods, and $5.4 million was from clients that did not operate for the entirety of both periods. See the discussion above under Net Revenues by Type — Net Revenues from Product Sales for an explanation of the $32.8 million decrease in net revenues from product sales.

Interactive Marketing Services Segment Revenues. Net revenues increased by 60%, or $20.0 million, due primarily to growth of e-Dialog and gsi interactive.

Costs and Expenses


											First Six Months of Fiscal 2009
	First Six Months					First Six Months					vs.
	of Fiscal 2008					of Fiscal 2009					First Six Months of Fiscal 2008
			% of					% of
			Net					Net			Increase /
	$		Revenues			$		Revenues			(Decrease)			% Change
Cost of revenues from product sales	$	163.9		42	%	$	149.8		39	%	$	(14.1	)		(9	%)
Marketing		28.8		8	%		17.9		5	%		(10.9	)		(38	%)
Account management and operations		117.0		30	%		116.8		30	%		(0.2	)		(0	%)
Product development		47.8		12	%		56.5		15	%		8.7			18	%
General and administrative		34.9		9	%		38.8		10	%		3.9			11	%
Depreciation and amortization		32.6		8	%		30.7		8	%		(1.9	)		(6	%)

Total costs and expenses	$	425.0		109	%	$	410.5		107	%	$	(14.5	)		(3	%)

Cost of Revenues from Product Sales:


	First Six Months			First Six Months
	of Fiscal 2008			of Fiscal 2009
Cost of revenues from product sales	$	163.9		$	149.8
As a percentage of net revenues from product sales		71	%		76	%

Cost of revenues from product sales decreased $14.1 million in the first six months of fiscal 2009. The decrease in cost of revenues as a percentage of net revenues from 42% in the first six months of fiscal 2008 to 39% in the first six months of fiscal 2009 was primarily due to the increase in service fees and the decrease in product sales, because service fees have no associated cost of revenue. We continue to expect a decrease in cost of revenues from product sales as a percentage of net revenues as we expect service fee revenues to continue to grow and net revenues from product sales to continue to decrease.

The increase in cost of revenues from product sales as a percentage of net revenues from product sales from 71% to 76% was primarily due to an increase in shipping revenue. Our cost of generating shipping revenue is higher than our cost of generating revenue on sale of products.

Marketing:


	First Six Months			First Six Months
	of Fiscal 2008			of Fiscal 2009
Marketing	$	28.8		$	17.9
As a percentage of net revenues from product sales		13	%		9	%

Marketing expense decreased $10.9 million in the first six months of fiscal 2009. As a percentage of net revenues, marketing expenses decreased from 8% to 5%. This decrease was primarily due to the increase in service fees and the decrease in product sales, because service fees have no associated marketing expenses.

As a percentage of net revenues from product sales, marketing expenses decreased from 13% to 9% due primarily to the transition during fiscal 2009 of one owned inventory client to a non-owned inventory deal structure and a decrease in net revenues from product sales. Of the $10.9 million decrease in marketing expenses, $4.2 million was due to a decrease in client revenue share expenses caused by decreased sales from owned inventory clients, $3.4 million was due to a decrease in marketing costs, and $3.3 million was due to a decrease in promotional free shipping and subsidized shipping and handling costs. We expect marketing expenses to continue to decrease in absolute dollars during fiscal 2009 compared to fiscal 2008, because of the expected decrease in net revenues from product sales. We continue to expect a decrease in marketing expenses as a percentage of net revenues, as we expect service fee revenues to increase and net revenues from product sales to decrease.

Account Management and Operations. Account management and operations expenses decreased $0.2 million in the first six months of fiscal 2009. As a percentage of net revenues, account management and operations expenses remained constant at 30%. The decrease in absolute dollars was primarily due to decreases in fulfillment expenses, occupancy costs and credit card fees, partially offset by personnel and related costs mostly from our interactive marketing services and our customer service operations. We expect account management and operations expenses to be relatively constant in absolute dollars during fiscal 2009 compared to fiscal 2008, as we believe our fulfillment and call center capacity will be sufficient to

accommodate the growth of our domestic and international e-commerce businesses and our interactive marketing services business.

Product Development. Product development expenses increased $8.7 million in the first six months of fiscal 2009. As a percentage of net revenues, product development expenses increased from 12% to 15%. The increases in absolute dollars and as a percentage of net revenues were primarily due to increased personnel expenses to enhance our e-commerce technology platform. We continue to expect product development expenses to increase in absolute dollars in fiscal 2009 compared to fiscal 2008, as we plan to continue to launch additional client Web stores, invest in our e-commerce and interactive marketing services platforms and expand our international operations.

General and Administrative. General and administrative expenses increased $3.9 million in the first six months of fiscal 2009. As a percentage of net revenues, general and administrative expenses increased from 9% to 10%. The increases in absolute dollars and as a percentage of net revenues were primarily due to personnel and related expenses and a $1.3 million charge for acquisition related costs for a potential acquisition that terminated in the first quarter of fiscal 2009. We continue to expect general and administrative expenses to increase in absolute dollars in fiscal 2009 compared to fiscal 2008 as we expect to add new clients, expand our e-commerce and interactive marketing services platforms, and expand our international operations.

Depreciation and Amortization. Depreciation and amortization expenses decreased $1.9 million in the first six months of fiscal 2009. As a percentage of net revenues, depreciation and amortization expenses remained constant at 8%. Depreciation expenses decreased $1.0 million due to the acceleration of depreciation for abandoned equipment in the first six months of fiscal 2008 related to a facility closure and from reduced capital expenditures in fiscal 2009, partially offset by the depreciation of prior and current year fixed asset additions. Amortization expenses decreased $0.9 million primarily due to the intangible asset amortization related to the e-Dialog acquisition. While we expect capital expenditures for fiscal 2009 to decrease, we expect depreciation expenses to remain relatively constant as we continue to depreciate capital expenditures made in prior years. We expect amortization expenses to decrease in fiscal 2009 compared to fiscal 2008 due to a decrease in intangible asset amortization associated with our acquisitions of Accretive Commerce, Inc. and e-Dialog.

Other (Income) Expense


													First Six Months of Fiscal 2009
	First Six Months						First Six Months						vs.
	of Fiscal 2008						of Fiscal 2009						First Six Months of Fiscal 2008
				% of						% of
				Net						Net			Increase /
	$			Revenues			$			Revenues			(Decrease)			% Change
Interest expense	$	8.9			2.3	%	$	9.6			2.5	%	$	0.7			8	%
Interest income		(1.2	)		(0.3	%)		(0.2	)		(0.1	%)		1.0			(83	%)
Other (income) expense		0.4			0.1	%		(0.2	)		(0.1	%)		(0.6	)		(150	%)

Total other expenses	$	8.1			2.1	%	$	9.2			2.3	%	$	1.1			14	%

Total other expenses increased $1.1 million in the first six months of fiscal 2009. The $0.7 million increase in interest expense is due to the amortization of the debt discount on our convertible notes in accordance with FSP APB 14-1. The $1.0 million decrease in interest income was due to lower cash balances as a result of the February 2008 acquisition of e-Dialog, as well as lower interest rates earned in the second quarter of fiscal 2009. The $0.6 million decrease in other (income) expense was primarily due to foreign currency exchange gains on transactions denominated in currencies other than the functional currency.

Income Taxes

We recorded a benefit of $10.8 million in the first six months of fiscal 2009. Our tax provision for interim periods was determined using an estimate of our annual effective tax rate which is 31.5% for fiscal 2009 plus any discrete items that effect taxes that occur during the quarter. The effective tax rate is lower than the 35% federal statutory tax rate primarily due to an increase of the federal net operating loss valuation allowance caused by capital losses partially offset by permanent items.

As of January 3, 2009, we had available federal net operating loss carryforwards of approximately $430.9 million which expire in the years 2009 through 2028. As of January 3, 2009, we had available state net operating loss carryforwards of approximately $187.0 million which expire in the years 2010 through 2028 and foreign net operating loss carryforwards of approximately $8.5 million that either begin expiring in 2021 or have no expiration date. A portion of these net operating loss

carryforwards are offset by a valuation allowance. Management monitors all available positive and negative evidence related to our ability to utilize our deferred tax assets. Should management determine that it is more likely than not that these deferred tax assets will be utilized, we will release a portion of the remaining valuation allowance. Should management determine that it is more likely than not that these deferred tax assets will not be utilized, we will increase the valuation allowance.

We have federal net operating losses of approximately $231.5 million which will expire as a result of the Internal Revenue Code Section 382 limitation regardless of the amount of future taxable income; and thus has a full valuation allowance recorded against this deferred tax asset.

Seasonality

We have experienced and expect to continue to experience seasonal fluctuations in our revenues from our e-commerce services segment. These seasonal patterns will cause quarterly fluctuations in our operating results. In particular, our fourth fiscal quarter has accounted for and is expected to continue to account for a disproportionate percentage of our total annual revenues. We experience less seasonality in our revenues from our interactive marketing services segment. We believe that results of operations for a quarterly period may not be indicative of the results for any other quarter or for the full year.

Liquidity and Capital Resources


	As of
	January 3,			July 4,
	2009			2009
	(in millions)
Cash and cash equivalents	$	130.3		$	59.8
Percentage of total assets		18	%		10	%

We expect to generate positive cash flow from operations in fiscal 2009, the majority of which will be generated in our fourth fiscal quarter. We believe that our cash flow from operating activities, cash and cash equivalents balances, and borrowing availability under our $90 million secured revolving credit facility, which may be increased to $150 million subject to certain conditions, will be sufficient to meet our anticipated operating cash needs for at least the next 12 months.

Sources of Cash

Our principal sources of liquidity in the first six months of fiscal 2009 were our cash and cash equivalents balances. As of July 4, 2009, we had cash and cash equivalents totaling $59.8 million, compared to $130.3 million of cash and cash equivalents as of January 3, 2009. Our cash equivalents are comprised of money market mutual funds.

We have experienced and expect to continue to experience seasonal fluctuations in our cash flows. We generate the substantial majority of cash from our operating activities in our fourth fiscal quarter. In our first fiscal quarter, we typically use cash generated from operating activities in the fourth quarter of the prior fiscal year to satisfy accounts payable and accrued expenses incurred in the fourth fiscal quarter of our prior fiscal year. During our second and third fiscal quarters, we generally fund our operating expenses and capital expenditures from either cash generated from operating activities, cash and cash equivalents, or financing activities.

As of July 4, 2009, we had no outstanding borrowings under our $90 million secured revolving bank credit facility, compared with $30.0 million of borrowings as of June 28, 2008. The credit facility contains financial and restrictive covenants that limit our ability to engage in activities that may be in our long term best interests. We do not believe the financial covenants will limit our ability to utilize the entire borrowing availability in fiscal 2009, if necessary.

Uses of Cash

We used $49.7 million and $37.5 million of cash flows from operating activities in the first six months of fiscal 2009 and fiscal 2008, respectively.

We invest cash to support our operations and infrastructure needs and to make acquisitions and strategic investments. We invested $2.3 million in the first six months of fiscal 2009 and $145.0 million in the first six months of fiscal 2008 for our business acquisitions. Our capital expenditures totaled $17.9 million and $29.9 million in the first six months of fiscal 2009 and fiscal 2008, respectively. Our capital expenditures have generally comprised purchases of computer hardware and

software, internally developed software, and furniture and fixtures. We expect a modest decrease in capital expenditures in fiscal 2009.

Outlook

We continually evaluate opportunities to sell additional equity or debt securities, obtain credit facilities, or repurchase, refinance, or otherwise restructure our long-term debt for strategic reasons or to further strengthen our financial position. Our secured revolving bank credit facility contains negative covenants including prohibitions on our ability to incur additional indebtedness. The sale of additional equity or convertible debt securities would likely be dilutive to our stockholders. In addition, we will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services, and technologies, which might affect our liquidity requirements or cause us to issue additional equity or debt securities. There can be no assurance that additional lines-of-credit or financing instruments will be available in amounts or on terms acceptable to us, if at all.

Critical Accounting Policies

The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect our assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical data and trends, current fact patterns, expectations and other sources of information we believe are reasonable. Actual results may differ from these estimates under different conditions. For a full description of our critical accounting policies, see Item 7— Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2008 Annual Report on Form 10-K for the fiscal year ended January 3, 2009, filed with the SEC on March 16, 2009.

Recent Accounting Pronouncements

See Item 1 of Part I, “Financial Statements — Note 2, Summary of Significant Accounting Policies” for recent accounting pronouncements that could have an effect on us.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

There have been no significant changes in market risks for the fiscal quarter ended July 4, 2009. See the information set forth in Part II, Item 7A of the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009 filed with the Securities and Exchange Commissions (“SEC”) on March 16, 2009.

ITEM 4: CONTROLS AND PROCEDURES.

Evaluation of disclosure controls and procedures. Our management, with the participation of our chief executive officer and our chief financial officer, conducted an evaluation, as of July 4, 2009, of the effectiveness of our disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e).

Based on this evaluation, our chief executive officer and our chief financial officer have concluded that, as of July 4, 2009, our disclosure controls and procedures, as defined in Rule 13a-15(e), were effective at the reasonable assurance level, to ensure that (i) information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting. We monitor and evaluate on an ongoing basis our internal control over financial reporting in order to improve its overall effectiveness. In the course of these evaluations, we modify and refine our internal processes and controls as conditions warrant. As required by Rule 13a-15(d), our management, including our chief executive officer and our chief financial officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the fiscal quarter ended July 4, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the fiscal quarter ended July 4, 2009.

PART II — OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS.

See Item 1 of Part I, “Financial Statements — Note 7, Commitments and Contingencies.”

ITEM 1A: RISK FACTORS.

Any investment in our securities involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information contained in this prospectus. If any of the following risks occur, our business, financial position and operating results could be materially harmed. In these circumstances, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock. Additional risks not necessarily known to us or that we currently deem immaterial may also impair our business operations.

Risks Related to Our Business

Our future success cannot be predicted based upon our limited operating history.

Compared to certain of our current and potential competitors, we have a relatively short operating history. In addition, the nature of our business and the industries in which we operate have undergone rapid development and change since we began operating. Accordingly, it is difficult to predict whether we will be successful. Thus, our chances of financial and operational success should be evaluated in light of the risks, uncertainties, expenses, delays and difficulties associated with operating a business with limited history in a relatively rapidly changing industry. If we are unable to address these issues, we may not be financially or operationally successful.

Our failure to manage growth and diversification of our business could harm us.

We are continuing our efforts to grow and diversify our business both in the United States and internationally. As a result, we must expand and adapt our operational infrastructure and increase the number of our personnel in certain areas. To effectively manage our growth initiatives, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. These enhancements and improvements are likely to be complex and will require significant capital expenditures and allocation of valuable management resources. If we are unable to adapt our systems in a timely manner to accommodate our growth, our business may be adversely affected.

We have an accumulated deficit and may incur additional losses.

We incurred a net loss in fiscal 2008 and 2007, recorded net income in fiscal 2006 and 2005, and incurred net losses in the previous four fiscal years. As of the end of the second fiscal quarter of fiscal 2009 we had an accumulated deficit of $179.8 million. We may not generate sufficient revenue and gross profit from our existing clients, add an appropriate number of new clients or adequately control our expenses. If we fail to do this, we may not be able to return to profitability.

We will continue to incur significant operating expenses and capital expenditures as we seek to:

	•		launch new clients;

	•		expand internationally;

	•		enhance our fulfillment capabilities and increase fulfillment capacity;

	•		develop new technologies and features to improve our clients’ e-commerce businesses;

	•		enhance our customer care center capabilities to better serve customers’ needs and increase customer care capacity;

	•		expand our marketing services business;

	•		increase our general and administrative functions to support our growing operations;

	•		continue our business development, sales and marketing activities; and

	•		make strategic or opportunistic acquisitions of complementary or new businesses or assets or internally develop new business initiatives.

			If we incur expenses at a greater pace than we generate revenues, we could incur additional losses.

Our success is tied to the success of, and continued relationships with, the clients for which we operate e-commerce businesses.

Our success is substantially dependent upon the success of the clients for which we operate e-commerce businesses. The retail business is intensely competitive. If our clients were to have financial difficulties or seek protection from their creditors or if they were to suffer impairment of their brands, it could adversely affect our ability to maintain and grow our business or to collect client receivables. Our business could also be adversely affected if our clients’ marketing, brands or retail stores are not successful or if our clients reduce their marketing or number of retail stores. Additionally, a change in management at our clients could adversely affect our relationship with those clients and our revenue from our agreements with those clients. As a result of our relationship with certain of our clients, these clients identify, buy, and bear the financial risk of inventory obsolescence for their corresponding Web stores and merchandise. As a result, if any of these clients fail to forecast product demand or optimize or maintain access to inventory, we would receive reduced service fees under the agreements and our business and reputation could be harmed. If any of our clients were to exit the e-commerce channel and/or terminate their relationships with us, our business and financial performance could be adversely affected.

The uncertainty regarding the general economy may reduce our revenues.

Our revenue and rate of growth depends on the continued growth of demand for the products offered by our clients, and our business is affected by general economic and business conditions. A decrease in demand, whether caused by changes in consumer spending or a weakening of the U.S. economy or the local economies outside of the United States where we sell products, may result in decreased revenue or growth or problems with our ability to collect customer receivables. Uncertainty about current economic conditions poses a risk as consumers may postpone sending in response to tighter credit, negative financial news and/or declines in income or asset values, which could have a material negative effect on the demand for the products sold by our clients. Terrorist attacks and armed hostilities could create economic and consumer uncertainty that could adversely affect our revenue or growth. Other factors that could adversely influence demand from the customers of our clients include increases in fuel and energy costs, conditions in the residential real estate and mortgage markets, healthcare costs, access to credit, consumer confidence, and other macroeconomic factors affecting consumer spending behavior.

We rely on access to the credit and capital markets to finance a portion of our working capital requirements and support our liquidity needs. Access to these markets may be adversely affected by factors beyond our control, including turmoil in the financial services industry, volatility in securities trading markets and general economic downturns.

We rely upon access to the credit and capital markets as a source of liquidity for the portion of our working capital requirements not provided by cash from operations. Market disruptions such as those recently experienced in the United States and abroad may increase our cost of borrowing or adversely affect our ability to access sources of liquidity upon which we rely to finance our operations and satisfy our obligations as they become due. These disruptions may include turmoil in the financial services industry, including uncertainty surrounding lending institutions with which we do business or wish to do business. If the lenders in our secured revolving bank credit facility are unable to meet their obligations to provide loans to us under the terms of the credit facility, if we are unable to access credit at competitive rates, or at all, or if our short-term or long-term borrowing costs dramatically increase, our ability to finance our operations, meet our short-term obligations and implement our operating strategy could be adversely affected.

Our substantial indebtedness could adversely affect our financial condition.

We currently have and will continue to have a significant amount of indebtedness. On June 1, 2005, we completed an offering of $57.5 million aggregate principal amount of our convertible notes due 2025, referred to as the 3% convertible notes. On July 5, 2007, we completed an offering of $150 million aggregate principal amount of our convertible notes due 2027, referred to as the 2.5% convertible notes. In addition, we have a secured revolving bank credit facility with a borrowing

capacity of $90 million, which, subject to certain conditions, may be increased to $150 million. There were no borrowings outstanding under our secured revolving bank credit facility as of July 4, 2009. Including the notes, borrowings under the credit facility and capital leases, we had approximately $202.1 million of indebtedness outstanding as of July 4, 2009 with an aggregate principal amount of $242.6 million. In accordance with FSP APB 14-1, as of July 4, 2009, our 3% convertible notes were included in our indebtedness outstanding at a net debt carrying value of $53.1 million, however, the principal amount owed to the holders of our 3% convertible notes was $57.5 million; as of July 4, 2009, our 2.5% convertible notes were included in our indebtedness outstanding at a net debt carrying value of $113.9 million, however, the principal amount owed to the holders of our 2.5% convertible notes was $150 million. On June 1, 2010, holders of the 3% convertible notes are permitted to require us to repurchase the 3% convertible notes for 100% of the principal amount outstanding plus accrued and unpaid interest. Although we cannot provide any assurances, in the event our holders require us to repurchase the 3% convertible notes in fiscal 2010, we currently expect to have sufficient liquidity from our cash from operating activities, our cash and cash equivalents and/or our secured revolving bank credit facility to fund any such required repurchases.

Our indebtedness could have important consequences to you. For example, it could:

•

increase our vulnerability to general adverse economic and industry conditions;

•

limit our ability to obtain additional financing;

•

require the dedication of a substantial portion of our cash flow from operations to the payment of interest and principal on our indebtedness, thereby reducing the availability of such cash flow to fund our growth strategy, working capital, capital expenditures and other general corporate purposes;

•

limit our flexibility in planning for, or reacting to, changes in our business and the industry;

•

place us at a competitive disadvantage relative to competitors with less debt; and

•

make it difficult or impossible for us to pay the principal amount of the convertible notes at maturity, thereby causing an event of default under the convertible notes.

In addition, our secured revolving bank credit facility contains financial and other restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interests. In the event of default under the notes or the secured revolving bank credit facility, our indebtedness could become immediately due and payable and could adversely affect our financial condition.

The terms of our secured revolving credit facility impose financial and operating restrictions.

Our secured revolving credit facility contains restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. These covenants limit or restrict, among other things, our ability to:

•

incur additional indebtedness or pre-pay existing indebtedness;

•

pay dividends or make other distributions in respect of our equity securities;

•

sell assets, including the capital stock of us and our subsidiaries;

•

enter into certain transactions with our affiliates;

•

transfer any capital stock of any subsidiary or permit any subsidiary to issue capital stock;

•

create liens;

•

make certain loans or investments; and

•

effect a consolidation or merger or transfer of all or substantially all of our assets.

These limitations and restrictions may adversely affect our ability to finance our future operations or capital needs or engage in other business activities that may be in our best interests. In addition, our ability to borrow under the secured revolving credit facility is subject to compliance with covenants. If we breach any of

the covenants in our secured revolving credit facility, we may be in default under our secured revolving credit facility. If we default, the lenders under our secured revolving credit facility could declare all borrowings owed to them, including accrued interest and other fees, to be due and payable.

We may in the future need additional debt or equity financing to continue our growth. Such additional financing may not be available on satisfactory terms or it may not be available when needed, or at all.

We have funded the growth of our e-commerce business primarily from the sale of equity securities and through the issuance of convertible notes. If our cash flows are insufficient to fund our operations and repay our debt, we may in the future need to seek additional equity or debt financings or reduce costs. Our secured revolving credit facility contains restrictive covenants restricting our ability to incur additional indebtedness. Further, we may not be able to obtain financing on satisfactory terms or it may not be available when needed, or at all. Our inability to finance our operations and repay our debt, may limit our growth potential and our ability to execute our business strategy. If we issue securities to raise capital, our existing stockholders may experience dilution or the new securities may have rights senior to those of our common stock. In addition, the terms of these securities could impose restrictions on our operations.

If we fail to manage our exposure to global financial and securities market risk successfully, our operating results and financial statements could be materially impacted.

The primary objective of most of our investment activities is to conservatively invest excess cash in highly rated liquid securities. To achieve this objective, a majority of our cash and cash equivalents are held in institutional money market mutual funds and bank deposit accounts. If the carrying value of our investments exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, we will be required to write down the value of our investments, which could materially harm our results of operations and financial condition. These investments are subject to general credit, liquidity, market, and interest rate risks, which may be directly or indirectly impacted by economic uncertainties that have affected various sectors of the global financial markets causing credit and liquidity issues. With the current unstable credit environment, we might incur significant realized, unrealized or impairment losses associated with these investments.

Seasonal fluctuations in sales cause wide fluctuations in our quarterly results.

We have experienced and expect to continue to experience seasonal fluctuations in our revenues. These seasonal patterns have caused and will continue to cause quarterly fluctuations in our operating results. Our results of operations historically have been seasonal primarily because consumers increase their purchases on our clients’ e-commerce businesses during the fourth quarter holiday season.

Our fourth fiscal quarter has accounted for and is expected to continue to account for a disproportionate percentage of our total annual revenues. For fiscal 2008, fiscal 2007 and fiscal 2006, 40.5%, 44.7% and 42.2% of our annual net revenues were generated in our fiscal fourth quarter, respectively. Since fiscal 1999, we have not generated net income in any fiscal quarter other than a fiscal fourth quarter. If our revenues are below seasonal expectations during the fourth fiscal quarter or if we do not execute operationally, our operating results could be below the expectations of securities analysts and investors. In the future, our seasonal sales patterns may become more pronounced, may strain our personnel, customer care operations, fulfillment operations, IT capacity and shipment activities and may cause a shortfall in revenues compared to expenses in a given period.

In addition, if too many consumers access our clients’ e-commerce businesses within a short period of time due to increased holiday or other demand or if we inaccurately forecast consumer traffic, we may experience system interruptions that make our clients’ e-commerce businesses unavailable or prevent us from transmitting orders to our fulfillment operations, which may reduce the volume of goods we sell as well as the attractiveness of our clients’ e-commerce businesses to consumers. In anticipation of increased sales activity during our fourth fiscal quarter, we and our clients increase our respective inventory levels. If we and our clients do not increase inventory levels for popular products in sufficient amounts or are unable to restock popular products in a timely manner, we and our clients may fail to meet customer demand which could reduce the attractiveness of our clients’ e-commerce businesses. Alternatively, if we overstock products, we may be required to take significant inventory markdowns or write-offs, which could reduce profits.

Consumers are constantly changing their buying preferences. If we and our clients fail to anticipate these changes and adjust inventory accordingly, we could experience lower sales, higher inventory markdowns and lower margins for the inventory that we own.

Our success depends, in part, upon our ability and our clients’ ability to anticipate and respond to consumer trends with respect to products sold through the e-commerce businesses we operate. Consumers’ tastes are subject to frequent and significant changes. In order to be successful, we and our clients must accurately predict consumers’ tastes and avoid overstocking or understocking products. If we or our clients fail to identify and respond to changes in merchandising and consumer preferences, sales on our clients’ e-commerce businesses could suffer and we or our clients could be required to mark down unsold inventory. This would depress our profit margins. In addition, any failure to keep pace with changes in consumers’ tastes could result in lost opportunities which could reduce sales.

High merchandise returns or shrinkage rates could adversely affect our business, financial condition and results of operations.

We cannot be assured that inventory loss and theft, or “shrinkage,” and merchandise returns will not increase in the future. If merchandise returns are significant, or our shrinkage rate increases, our revenues and costs of operations could be adversely affected.

Our growth depends, in part, on our ability to add and launch new clients on a timely basis and on favorable terms and to extend the length of existing client agreements on favorable terms.

Key elements of our growth strategy include adding new clients, extending the length of existing client agreements on favorable terms and growing the business of our existing clients. If we are unable to add our targeted amount of new business, add clients with good reputations or add new clients on favorable terms, our growth may be limited. If we are unable to add and launch new clients within the time frames projected by us, we may not be able to achieve our targeted results in the expected periods. In addition, our ability to add new clients and retain and renew existing clients depends on the quality of the services we provide and our reputation. To the extent that we have difficulties with the quality of the services we provide or have operational issues that adversely affect our reputation, it could adversely impact our ability to add new clients, retain and renew existing clients and grow the business of our existing clients. Because competition for new clients is intense, we may not be able to add new clients on favorable terms, or at all. Further, our ability to add new clients on favorable terms is dependent on our success in building and retaining our sales organization and investing in infrastructure to serve new clients.

We enter into contracts with our clients. In fiscal 2008, we derived 38.0% of our revenue from five clients’ e-commerce businesses. If we do not maintain good working relationships with our clients, or perform as required under these agreements, it could adversely affect our business.

The contracts with our clients establish complex relationships between our clients and us. We spend a significant amount of time and effort to maintain our relationships with our clients and address the issues that from time to time may arise from these complex relationships. For fiscal 2008, sales to customers through one of our client’s e-commerce businesses accounted for 11.5% of our revenue, and sales through another one of our client’s e-commerce businesses accounted for 11.5% of our revenue. For fiscal 2008, sales through our top five clients’ e-commerce businesses accounted for 38.0% of our revenue. For fiscal 2007, sales to customers through one of our client’s e-commerce businesses accounted for 13.2% of our revenue, and sales to customers through another one of our client’s e-commerce businesses accounted for 11.9% of our revenue. For fiscal 2007, sales through our top five clients’ e-commerce businesses accounted for 45.3% of our revenue. For fiscal 2006, sales to customers through one of our client’s e-commerce businesses accounted for 14.9% of our revenue, and sales to customers through another one of our client’s e-commerce businesses accounted for 13.9% of our revenue. For fiscal 2006, sales through our top five clients’ e-commerce businesses accounted for 52.9% of our revenue. Our clients could decide not to renew their agreements at the end of their respective terms or could terminate or otherwise fail to perform under their agreements prior to the end of their respective terms. Additionally, if we do not perform as required under these agreements, our clients could seek to terminate their agreements prior to the end of their respective terms or seek damages from us. Loss of our existing clients, particularly our major clients, could adversely affect our business, financial condition and results of operations.

We and our clients must develop and maintain relationships with key manufacturers to obtain a sufficient assortment and quantity of quality merchandise on acceptable commercial terms. If we or our clients are unable to do so, it could adversely affect our business, results of operations and financial condition.

For the e-commerce businesses for which we own inventory, we primarily purchase products from the manufacturers and distributors of the products. For the e-commerce businesses for which our clients own inventory, our clients typically purchase products from the manufacturers and distributors of products or source their own products. If we or our

clients are unable to develop and maintain relationships with these manufacturers, distributors or sources, we or our clients may be unable to obtain or continue to carry a sufficient assortment and quantity of quality merchandise on acceptable commercial terms and our clients’ e-commerce businesses and our business could be adversely impacted. We do not have written contracts with some of our manufacturers, distributors or sources. During fiscal 2008, we purchased 16.8% of the total amount of inventory we purchased from one manufacturer. During fiscal 2007, we purchased 18.0% of the total amount of inventory we purchased from one manufacturer. During fiscal 2006, we purchased 28.6% of the total amount of inventory we purchased from the same manufacturer. While we have a contract with this manufacturer, this manufacturer and other manufacturers could stop selling products to us or our clients and may ask us or our clients to remove their products or logos from our clients’ Web stores. If we or our clients are unable to obtain products directly from manufacturers, especially popular brand manufacturers, we or our clients may not be able to obtain the same or comparable merchandise in a timely manner or on acceptable commercial terms.

We rely on our ability to enter into marketing and promotional agreements with online services, search engines, comparison shopping sites, affiliate marketers and other web sites to drive traffic to the e-commerce businesses we operate. If we are unable to enter into or properly develop these marketing and promotional agreements, our ability to generate revenue could be adversely affected. In addition, new technologies could block our ads and manipulate web search results, which could harm our business.

We have entered into marketing and promotional agreements with search engines, comparison shopping sites, affiliate marketers and other web sites to provide content, advertising banners and other links to our clients’ e-commerce businesses. We rely on these agreements as significant sources of traffic to our clients’ e-commerce businesses and to generate new customers. If we are unable to maintain these relationships or enter into new agreements on acceptable terms, our ability to attract new customers could be harmed. Further, many of the parties with which we may have online advertising arrangements provide advertising services for other marketers of goods. As a result, these parties may be reluctant to enter into or maintain relationships with us. In addition, technologies may be developed that can block the display of our ads and could harm our ability to contact customers. Further, “index spammers” who develop ways to manipulate web search results could reduce the traffic that is directed to our clients’ e-commerce businesses. Failure to achieve sufficient traffic or generate sufficient revenue from purchases originating from third parties may limit our clients’ and our ability to maintain market share and revenue.

In addition, we contact customers through e-mail. Our ability to contact customers through e-mail could be harmed and our business may be adversely affected if we mistakenly end up on SPAM lists, or lists of entities that have been involved in sending unwanted, unsolicited e-mails.

If we experience problems in our fulfillment operations, our business could be adversely affected.

Under some of our client agreements, we maintain the inventory of our clients in our fulfillment centers. Our failure to properly handle and protect such inventory could adversely affect our relationship with our clients.

In addition, because it is difficult to predict demand, we may not manage our fulfillment centers in an optimal way, which may result in excess or insufficient inventory or warehousing, fulfillment, and distribution capacity. We may be unable to adequately staff our fulfillment centers. As we continue to add fulfillment and warehouse capability or add new clients with different fulfillment requirements, our fulfillment network becomes increasingly complex and operating it becomes more challenging. In addition, our financial systems and equipment are complex and any additions, changes or upgrades to these systems or equipment could cause disruptions that could harm our business.

Although we operate our own fulfillment centers, we rely upon multiple third parties for the shipment of our products. We also rely upon certain vendors to ship products directly to consumers. As a result, we are subject to the risks associated with the ability of these vendors and other third parties to successfully and in a timely manner fulfill and ship customer orders. The failure of these vendors and other third parties to provide these services, or the termination or interruption of these services, could adversely affect the satisfaction of consumers, which could result in reduced sales by our clients’ e-commerce businesses. In addition, if third parties were to increase the prices they charge to ship our products, and we passed these increases on to consumers, consumers might choose to buy comparable products locally to avoid shipping charges.

A disruption in our operations could materially and adversely affect our business, results of operations and financial condition.

Any disruption to our operations, including system, network, telecommunications, software or hardware failures, and any damage to our physical locations, could materially and adversely affect our business, results of operations and financial condition.

Our operations are subject to the risk of damage or interruption from:

•

fire, flood, hurricane, tornado, earthquake or other natural disasters;

•

power losses and interruptions;

•

Internet, telecommunications or data network failures;

•

physical and electronic break-ins or security breaches;

•

computer viruses;

•

acts of terrorism; and

•

other similar events.

If any of these events occur, it could result in interruptions, delays or cessations in service to customers of our clients’ e-commerce businesses and adversely impact our clients’ e-commerce businesses. These events could also prevent us from fulfilling orders for our clients’ e-commerce businesses. Our clients might seek significant compensation from us for their losses. Even if unsuccessful, this type of claim likely would be time consuming and costly for us to address and damaging to our reputation.

Our primary data centers are located at two facilities of a third-party hosting company. We do not control the security, maintenance or operation of these facilities, which are also susceptible to similar disasters and problems.

Our insurance policies may not cover us for losses related to these events, and even if they do, they may not adequately compensate us for any losses that we may incur. Any system failure that causes an interruption of the availability of our clients’ e-commerce businesses could reduce the attractiveness of our clients’ e-commerce businesses to consumers and result in reduced revenues, which could materially and adversely affect our business, results of operations and financial condition.

If we do not respond to rapid technological changes, our services and proprietary technology and systems may become obsolete.

The Internet and e-commerce are constantly changing. Due to the costs and management time required to introduce new services and enhancements, we may be unable to respond to rapid technological changes in a timely enough manner to avoid our services becoming uncompetitive. To remain competitive, we must continue to enhance and improve the functionality and features of our clients’ e-commerce businesses. If competitors introduce new services using new technologies or if new industry standards and practices emerge, our clients’ existing e-commerce businesses and our services and proprietary technology and systems may become uncompetitive and our ability to attract and retain customers and new clients may be at risk.

Developing our e-commerce platform offering, our clients’ e-commerce businesses and other proprietary technology entails significant technical and business risks. We may use new technologies ineffectively or fail to adapt our e-commerce platform, our clients’ e-commerce businesses and our technology to meet the requirements of clients and customers or emerging industry standards. In addition, the new technologies may be challenging to develop and implement and may cause us to incur substantial costs. Additionally, the vendors we use for our clients’ e-commerce businesses may not provide the level of service we expect or may not be able to provide their products or services to us on commercially reasonable terms, if at all.

Our success is tied to the continued growth in the use of the Internet and the adequacy of the Internet infrastructure.

Our future success is substantially dependent upon continued growth in the use of the Internet. The number of users and advertisers on the Internet may not increase and commerce over the Internet may not continue to grow for a number of reasons, including:

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actual or perceived lack of security of information or privacy protection;

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lack of access and ease of use;

•

congestion of traffic on the Internet;

•

inconsistent quality of service and lack of availability of cost-effective, high-speed service;

•

possible disruptions, computer viruses or other damage to Internet servers or to users’ computers;

•

governmental regulation;

•

uncertainty regarding intellectual property ownership;

•

lack of access to high-speed communications equipment; and

•

increases in the cost of accessing the Internet.

As currently configured, the Internet may not support an increase in the number or requirements of users. In addition, there have been outages and delays on the Internet as a result of damage to the current infrastructure. The amount of traffic on our clients’ Web stores could decline materially if there are outages or delays in the future. The use of the Internet may also decline if there are delays in the development or adoption of modifications by third parties that are required to support increased levels of activity on the Internet. If any of the foregoing occurs, the number of our clients’ customers could decrease. In addition, we may be required to spend significant capital to adapt our operations to any new or emerging technologies relating to the Internet.

Consumers may be unwilling to use the Internet to purchase goods.

Our future success depends heavily upon the general public’s willingness to use the Internet as a means to purchase goods. The failure of the Internet to continue to develop as an effective commercial tool would seriously damage our future operations. If consumers are unwilling to use the Internet to conduct business, our business may not continue to grow. The Internet may not continue to succeed as a medium of commerce because of security risks and delays in developing elements of the needed Internet infrastructure, such as a reliable network, high-speed communication lines and other enabling technologies. In addition, anything that diverts our users from their customary level of usage of our websites could adversely affect our business.

Third parties may have the technology or know-how to breach the security of customer transaction data and confidential information stored on our servers. Any breach could cause customers to lose confidence in the security of our clients’ e-commerce businesses and choose not to purchase from those businesses. Our security measures may not effectively prevent others from obtaining improper access to the information on our clients’ e-commerce businesses. If someone is able to circumvent our security measures, he or she could destroy or steal valuable information or disrupt the operation of our clients’ e-commerce businesses. Concerns about the security and privacy of transactions over the Internet could inhibit our growth.

We and/or our clients may be unable to protect our and their proprietary technology and intellectual property rights.

Our success depends to a significant degree upon the protection of our intellectual property rights in the core technology and other components of our e-commerce and e-mail platforms including our software and other proprietary information and material, and our ability to develop technologies that are as good as or better than our competitors. We may be unable to deter infringement or misappropriation of our software and other proprietary information and material, detect unauthorized use or take appropriate steps to enforce our intellectual property rights. Additionally, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the U.S. In addition, the failure of our clients to protect their intellectual property rights, including their trademarks and domain names, could impair our operations. Our competitors could, without violating our intellectual property rights, develop technologies that are as good as or better than our technology. Protecting our intellectual property and other proprietary rights can be expensive. Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and consequently harm our operating results. Our failure to protect our intellectual property rights in our software and other information and material or

to develop technologies that are as good as or better than our competitors’ could put us at a disadvantage to our competitors. These failures could have a material adverse effect on our business.

We may be subject to intellectual property claims or competition or trade practices claims that could be costly and could disrupt our business.

Third parties may assert that our business or technologies infringe or misappropriate their intellectual property rights. Third parties may claim that we do not have the right to offer certain services or products or to present specific images or logos on our clients’ e-commerce businesses, or we have infringed their patents, trademarks, copyrights or other rights. We may in the future receive claims that we are engaging in unfair competition or other illegal trade practices. We may be unsuccessful in defending against these claims, which could result in substantial damages, fines or other penalties. The resolution of a claim could also require us to change how we do business, redesign our service offering or clients’ e-commerce businesses or enter into burdensome royalty or license agreements. These license or royalty agreements, if required, may not be available on acceptable terms, if at all, in the event of a successful claim of infringement. Our insurance coverage may not be adequate to cover every claim that third parties could assert against us. Even unsuccessful claims could result in significant legal fees and other expenses, diversion of management’s time and disruptions in our business. Any of these claims could also harm our reputation.

We may not be able to compete successfully against current and future competitors, which could harm our margins and our business.

The market for the development and operation of e-commerce businesses and interactive marketing services is continuously evolving and is intensely competitive. Increased competition could result in fewer successful opportunities to obtain clients, price reductions, reduced gross margins and/or loss of market share, any of which could seriously harm our business, results of operations and financial condition. In the development and operation of e-commerce businesses, we often compete with in-house solutions promoted and supported by internal information technology staffs, marketing departments, merchandising groups and other internal corporate constituencies. In these situations, we compete with technology and service providers, which supply one or more components of an e-commerce solution primarily to allow the prospect or others to develop and operate the prospect’s e-commerce business in-house. In addition, the e-commerce businesses operated by us compete with the online and offline businesses of a variety of retailers and manufacturers.

Many of our current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we have. They may be able to secure merchandise from vendors on more favorable terms and may be able to adopt more aggressive pricing policies. They may also receive investments from or enter into other commercial relationships with larger, well-established companies with greater financial resources. Competitors in the retail, e-commerce services and interactive marketing services industries also may be able to devote more resources to technology development and marketing than we do.

Competition in the e-commerce and interactive marketing industries may intensify. Other companies in our industries may enter into business combinations or alliances that strengthen their competitive positions. Additionally, there are relatively low barriers to entry into the e-commerce services and interactive marketing services markets. As various Internet market segments obtain large, loyal customer bases, participants in those segments may expand into the market segments in which we operate. In addition, new and expanded web technologies may further intensify the competitive nature of online retail and interactive marketing. The nature of the Internet as an electronic marketplace facilitates competitive entry and comparison shopping and renders it inherently more competitive than conventional retailing formats. This increased competition may reduce our sales, our ability to operate profitably, or both.

We may be subject to product liability claims that could be costly and time-consuming.

We sell products manufactured by third parties, some of which may be defective. We also sell some products that are manufactured by third parties for us. If any product that we sell were to cause physical injury or injury to property, the injured party or parties could bring claims against us as the retailer or manufacturer of the product. These claims may not be covered by insurance and, even if they are, our insurance coverage may not be adequate to cover every claim that could be asserted. Similarly, we could be subject to claims that customers of our clients’ e-commerce businesses were harmed due to their reliance on our product information, product selection guides, advice or instructions. If a successful claim were brought against us in excess of our insurance coverage, it could adversely affect our business. Even unsuccessful claims could result in the expenditure of funds and management time and adverse publicity and could have a negative impact on our business.

We may be liable if third parties misappropriate our customers’ personal information. Additionally, we are limited in our ability to use and disclose customer information.

Any security breach could expose us to risks of loss, litigation and liability and could seriously disrupt our operations. If third parties are able to penetrate our network or telecommunications security or otherwise misappropriate our customers’ personal information or credit card information or if we give third parties improper access to our customers’ personal information or credit card information, we could be subject to liability. This liability could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims. They could also include claims for other misuses of personal information, including unauthorized marketing purposes. These claims could result in litigation. Liability for misappropriation of this information could be significant. In addition, the Federal Trade Commission and state agencies regularly investigate various companies’ uses of customers’ personal information. We could incur additional expenses if new regulations regarding the security or use of personal information are introduced or if government agencies investigate our privacy practices. Further, any resulting adverse publicity arising from investigations would impact our business negatively.

Changes to credit card association fees, rules, or practices could harm our business.

We must rely on banks or payment processors to process transactions, and must pay a fee for this service. From time to time, credit card associations may increase the interchange fees that they charge for each transaction using one of their cards. Our credit card processors have the right to pass any increases in interchange fees on to us as well as increase their own fees for processing. These increased fees increase our operating costs and reduce our profit margins. We are also required by our processors to comply with credit card association operating rules, and we will reimburse our processors for any fines they are assessed by credit card associations as a result of any rule violations by us. The credit card associations and their member banks set and interpret operating rules related to their credit cards. The credit card associations and/or member banks could adopt new operating rules or re-interpret existing rules that we might find difficult or even impossible to follow. As a result, we could lose our ability to give customers the option of using credit cards to fund their payments. If we are unable to accept credit cards, our business would be seriously damaged.

Credit card fraud could adversely affect our business.

The failure to adequately control fraudulent transactions could increase our expenses. To date, we have not suffered material losses due to fraud. However, we may in the future suffer losses as a result of orders placed with fraudulent credit card data. Under current credit card practices, we are liable for fraudulent credit card transactions because we do not obtain a cardholder’s signature. With respect to checks and installment sales, we generally are liable for fraudulent transactions.

If one or more states successfully assert that we should collect or should have collected sales or other taxes on the sale of our merchandise, our business could be harmed.

We currently collect sales or other similar taxes only for goods sold by us and shipped into certain states. One or more local, state or foreign jurisdictions may seek to impose historical and future sales tax obligations on us or our clients and other out-of-state companies that engage in e-commerce. In recent years, certain large retailers expanded their collection of sales tax on purchases made through affiliated web sites. Our business could be adversely affected if one or more states or any foreign country successfully asserts that we should collect sales or other taxes on the sale of merchandise through the e-commerce businesses we operate.

We may have exposure to greater than anticipated tax liabilities.

We are subject to income, payroll and other taxes in both the United States and foreign jurisdictions. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Moreover, significant judgment is required in evaluating our worldwide provision for income taxes. Our determination of our tax liability is always subject to review by applicable tax authorities. Any adverse outcome of such a review could have a negative effect on our operating results and financial conditions. Although we believe our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.

We rely on insurance to mitigate some risks and, to the extent the cost of insurance increases, or we are unable or choose not to maintain sufficient insurance to mitigate the risks facing our business, or our insurers are unable to meet their obligations, our operating results may be diminished.

We contract for insurance to cover certain potential risks and liabilities. In the current environment, insurance companies are increasingly specific about what they will and will not insure. It is possible that we may not be able to get enough insurance to meet our needs, may have to pay very high prices for the coverage we do get, have very high deductibles or may not be able to acquire any insurance for certain types of business risk. In addition, we have in the past and may in the future choose not to obtain insurance for certain risks facing our business. This could leave us exposed to potential claims. If we were found liable for a significant claim in the future, our operating results could be negatively impacted. Also, to the extent the cost of maintaining insurance increases, our operating results will be negatively affected. Additionally, we are subject to the risk that one or more of our insurers may become insolvent and would be unable to pay a claim that may be made in the future.

Variability in self-insurance liability estimates could significantly impact our financial results.

In the fourth quarter of fiscal 2008, we began to self-insure for employee medical coverage up to a set retention level, beyond which we maintain excess insurance coverage. We may decide to self-insure for other risks for which we currently purchase insurance. Liabilities are determined using actuarial estimates of the aggregate liability for claims incurred and an estimate of incurred but not reported claims, on an undiscounted basis. Our accruals for insurance reserves reflect certain actuarial assumptions and management judgments, which are subject to a high degree of variability. The variability is caused by factors external to us such as:

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historical claims experience;

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medical inflation;

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legislative changes to benefit levels;

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jury verdicts; and

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claim settlement patterns.

Any significant variation in these factors could cause a material change to our reserves for self-insurance liabilities as well as earnings.

Existing or future laws or regulations could harm our business or marketing efforts.

We are subject to international, federal, state and local laws applicable to businesses in general and to e-commerce specifically. Due to the increasing growth and popularity of the Internet and e-commerce, many laws and regulations relating to the Internet and online retailing are proposed and considered at the country, federal, state and local levels. These laws and regulations could cover issues such as taxation, pricing, content, distribution, access, quality and delivery of products and services, electronic contracts, intellectual property rights, user privacy and information security.

For example, at least one state has enacted, and other states have proposed, legislation limiting the uses of personal information collected online or requiring collectors of information to establish procedures to disclose and notify users of privacy and security policies, obtain consent from users for use and disclosure of information, or provide users with the ability to access, correct and delete stored information. Even in the absence of such legislation, the Federal Trade Commission has settled several proceedings resulting in consent decrees in which Internet companies have been required to establish programs regulating the manner in which personal information is collected from users and provided to third parties. We could become a party to a similar enforcement proceeding. These regulatory and enforcement efforts could also harm our ability to collect demographic and personal information from users, which could be costly or adversely affect our marketing efforts.

The applicability of existing laws governing issues such as property ownership, intellectual property rights, taxation, libel, obscenity, qualification to do business and export or import matters could also harm our business. Many of these laws may not contemplate or address the unique issues of the Internet or online retailing. Some laws that do contemplate or address those unique issues, such as the Digital Millennium Copyright Act and The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or the “CAN-SPAM,” Act, are only beginning to be interpreted by the courts and their applicability and reach are therefore uncertain. These current and future laws and regulations could reduce our ability to operate efficiently.

Our e-Dialog e-mail marketing solutions business is dependent on the market for e-mail marketing solutions and there may be changes in the market that may harm our business.

In our e-Dialog e-mail marketing solutions business, we derive revenue from e-mail marketing solutions. The market for e-mail marketing solutions is at a relatively early stage of development, making this business and future prospects difficult to evaluate. Our current expectations with respect to areas of growth within the market may not prove to be correct.

Should our clients lose confidence in the value or effectiveness of e-mail marketing, the demand for our products and services will likely decline. A number of factors could affect our clients’ assessment of the value or effectiveness of e-mail marketing, including the following:

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growth in the number of e-mails sent or received on a daily or regular basis;

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the ability of filters to effectively screen for unwanted e-mails;

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the ability of smart phones or similar communications to adequately display e-mail;

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continued security concerns regarding Internet usage in general from viruses, worms or similar problems affecting Internet and e-mail utilization; and

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increased governmental regulation or restrictive policies adopted by Internet service providers, or “ISPs,” that make it more difficult or costly to utilize e-mail for marketing communications.

Any decrease in the use of e-mail by businesses would reduce demand for our e-mail marketing products or services and the business and results of operation for our e-mail marketing business would suffer.

In addition, it is uncertain whether our e-mail marketing solutions will achieve and sustain the high level of market acceptance that is critical to the success of our business. If the market for e-mail marketing solutions fails to grow or grows more slowly than we currently anticipate, demand for our e-mail marketing solutions may decline and our revenue would suffer. We may not be able to successfully address any of these challenges, risks and difficulties, including the other risks related to our business and industry described below. Failure to adequately do so could adversely affect our business, results of operations or financial condition.

Existing federal, state and international laws regulating e-mail marketing practices impose certain obligations on the senders of commercial e-mails and could expose us to liability for violations, decrease the effectiveness of our e-mail marketing solutions, and expose us to financial, criminal and other penalties for non-compliance, which could increase our operating costs.

The CAN-SPAM Act establishes certain requirements for commercial e-mail messages and specifies penalties for commercial e-mail that violates the CAN-SPAM Act. The CAN-SPAM Act, among other things, obligates the sender of commercial e-mails to provide recipients with the ability to opt out of receiving future commercial e-mail messages from the sender. As a result, in the event our products and services were to become unavailable or malfunction for any period of time for any reason, it is possible that certain opt-out requests would not be received, or other compliance obligations would be impeded, potentially exposing our clients and us to liability under the CAN-SPAM Act. Non-compliance with the CAN-SPAM Act may carry significant financial penalties. Moreover, penalties under the CAN-SPAM Act may increase if it is determined that e-mail lists provided to us by our clients were obtained using unlawful means. We generally cannot confirm the origins of e-mail lists provided to us by our clients. The CAN-SPAM Act preempts similar state laws directed at commercial e-mail in many instances, but there are some exceptions and liability in connection with e-mail marketing campaigns can arise under state law as well. In addition, many states have more general laws that may apply to commercial e-mail practices. These laws often provide a private right of action and specify damages and other penalties, which in some cases may be more substantial than the penalties provided under the CAN-SPAM Act. In addition, certain foreign countries have enacted laws that regulate e-mail marketing, and some of these laws are more restrictive than U.S. laws. For example, some foreign laws prohibit sending unsolicited e-mail unless the recipient has provided the sender advance consent to receipt of such e-mail, or in other words has “opted-in” to receiving it. If we were found to be in violation of the CAN-SPAM Act, applicable state laws not preempted by the CAN-SPAM Act, or foreign laws regulating the distribution of e-mail, whether as a result of violations by our clients or if we were deemed to be directly subject to and in violation of these requirements, we could be exposed to one or more of the following consequences:

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payment of statutory, actual or other damages;

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criminal penalties;

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actions by state attorneys general;

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actions by private citizens or class actions; and

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penalties imposed by regulatory authorities of the U.S. government, state governments and foreign governments.

Any of these potential areas of exposure would adversely affect our financial performance, could preclude us from doing business in specific jurisdictions, and significantly harm our business. We also may be required to change one or more aspects of the way we operate our business, which could impair our ability to attract and retain clients or increase our operating costs.

Private spam blacklists may interfere with our ability to communicate with our e-commerce customers and the ability of the clients of e-Dialog to effectively deploy our e-mail marketing products or services which could harm our business.

In operating the e-commerce businesses of our clients, we depend on e-mail to market to and communicate with customers, our clients also rely on e-mail to communicate with their customers and e-Dialog provides e-mail marketing solutions to its clients. In an effort to regulate the use of e-mail for commercial solicitation, various private companies maintain “blacklists” of companies and individuals (and the websites, ISPs and Internet protocol addresses associated with those companies or individuals) that do not adhere to standards of conduct or practices for commercial e-mail solicitations that the blacklisting entity believes are appropriate. If a company’s Internet protocol addresses are listed by a blacklisting entity, e-mails sent from those addresses may be blocked if they are sent to any Internet domain or Internet address that subscribes to the blacklisting entity’s service or purchases its blacklist. It is possible that this sort of blacklisting or similar restrictive activity could interfere with our ability to communicate with customers of our clients’ e-commerce businesses or to market our clients’ products or services and could undermine the effectiveness of our clients’ e-mail marketing campaigns, all of which could damage our business.

ISPs can also block e-mails from reaching their users. Recent releases of ISP software and the implementation of stringent new policies by ISPs make it more difficult to deliver our clients’ e-mails. If ISPs materially limit, delay or halt the delivery of our or our clients’ e-mails, or if we fail to deliver our or our clients’ e-mails in a manner compatible with ISPs’ e-mail handling or authentication technologies, then the demand for our products or services could be reduced and our clients may seek to terminate their agreements with us.

From time to time, we may acquire or invest in other companies. There are risks associated with potential acquisitions and investments and we may not achieve the expected benefits of future acquisitions and investments.

We have recently completed several acquisitions and if we are presented with opportunities that we consider appropriate, we may make investments in complementary companies, products or technologies or we may purchase other companies. We may not realize the anticipated benefits of any investment or acquisition. We may be subject to unanticipated problems and liabilities of acquired companies. While we attempt in our acquisitions to determine the nature and extent of any pre-existing liabilities, and to obtain indemnification rights from the previous owners for acts or omissions arising prior to the date of acquisition, resolving issues of liability between the parties could involve a significant amount of time, manpower and expense. If we or any of our subsidiaries were to be unsuccessful in a claim for indemnity from a seller, the liability imposed on us or our subsidiary could have a material adverse effect on us. We may not be able to assimilate successfully the additional personnel, operations, acquired technology or products or services into our business. Any acquisition may strain our existing financial and managerial controls and reporting systems and procedures. If we do not successfully integrate any acquired business, the expenditures on integration efforts will reduce our cash position without us being able to realize the expected benefits of the acquisition. In addition, key personnel of an acquired company may decide not to work for us. These difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses. Further, the physical expansion in facilities that could occur as a result of any acquisition may result in disruptions that could seriously impair our business. In addition, due to the recent disruptions in the global financial markets, valuations supporting our acquisitions could change rapidly, and we could determine that such valuations have experienced impairments which could adversely impact our financial results. Finally, we may have to use our cash resources, incur debt or issue additional equity securities to pay for other acquisitions or investments, which could increase our leverage or be dilutive to our stockholders.

We plan to continue to expand our business internationally which may cause our business to become increasingly susceptible to numerous international business risks and challenges. We have limited experience in international operations.

We ship certain products to Canada and other countries. In addition, in January 2006, we completed the acquisition of Aspherio S.L., a Barcelona, Spain-based provider of outsourced e-commerce solutions now known as GSI Commerce Solutions International. In December 2007, we completed the acquisition of Zendor.com Ltd., a Manchester, United Kingdom-based provider of outsourced e-commerce solutions now known as Zendor/GSI Commerce Ltd. In February 2008, we completed the acquisition of e-Dialog, Inc. with operations in London, England. Because our growth strategy involves expanding our business internationally, we intend to continue to expand our international efforts. However, we have limited experience in international business, and we cannot assure you that our international expansion strategy will be successful. To date, however, our international business activities have been limited. Our lack of a track record outside the United States increases the risks described below. In addition, our experience in the United States may not be relevant to establishing a business outside the United States. Accordingly, our international expansion strategy is subject to significant execution risk, as we cannot assure you that our strategy will be successful. For fiscal 2008, substantially all of our net revenues, operating results and assets were in the United States.

International expansion is subject to inherent risks and challenges that could adversely affect our business, including:

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the need to develop new supplier and manufacturer relationships, particularly because major manufacturers may require that our international operations deal with local distributors;

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compliance with international legal and regulatory requirements and tariffs;

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managing fluctuations in currency exchange rates;

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difficulties in staffing and managing foreign operations;

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greater difficulty in accounts receivable collection;

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potential adverse tax consequences;

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uncertain political and economic climates;

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potentially higher incidence of fraud;

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price controls or other restrictions on foreign currency; and

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difficulties in obtaining export and import licenses and compliance with applicable export controls.

Any negative impact from our international business efforts could negatively impact our business, operating results and financial condition as a whole. In addition, gains and losses on the conversion of foreign payments into U.S. dollars may contribute to fluctuations in our results of operations and fluctuating exchange rates could cause reduced revenues and/or gross margins from non-dollar-denominated international sales.

In addition, if we further expand internationally, we may face additional competition challenges. Local companies may have a substantial competitive advantage because of their greater understanding of, and focus on, the local customer. In addition, governments in foreign jurisdictions may regulate e-commerce or other online services in such areas as content, privacy, network security, copyright, encryption, taxation, or distribution. We also may not be able to hire, train, motivate and manage the required personnel, which may limit our growth in international market segments.

In addition, compliance with foreign and U.S. laws and regulations that are applicable to our international operations is complex and may increase our cost of doing business in international jurisdictions and our international operations could expose us to fines and penalties if we fail to comply with these regulations. These laws and regulations include import and export requirements, U.S. laws such as the Foreign Corrupt Practices Act, and local laws prohibiting corrupt payments to governmental officials. Any violations of such laws could subject us to civil or criminal penalties, including substantial fines or prohibitions on our ability to offer our products and services to one or more countries, and could also materially damage our reputation, international expansion efforts, business and operating results.

Our success is dependent upon our executive officers and other key personnel.

Our success depends to a significant degree upon the contribution of our executive officers and other key personnel, particularly Michael G. Rubin, chairman of the board, president and chief executive officer. Our executive officers and key personnel could terminate their employment with us at any time despite any employment agreements we may have with these employees. Due to the competition for highly qualified personnel, we cannot be sure that we will be able to retain or attract executive, managerial or other key personnel. We do not intend to obtain key person life insurance for any of our executive officers or key personnel.

We may be unable to hire and retain skilled personnel which could limit our growth.

Our future success depends on our ability to continue to identify, attract, retain and motivate skilled personnel which could limit our growth. We intend to continue to seek to hire a significant number of skilled personnel. Due to intense competition for these individuals from our competitors and other employers, we may not be able to attract or retain highly qualified personnel in the future. Our failure to attract and retain the experienced and highly trained personnel that are integral to our business may limit our growth. Additionally, we have experienced recent growth in personnel numbers and expect to continue to hire additional personnel in selected areas. Managing this growth requires significant time and resource commitments from our senior management. If we are unable to effectively manage a large and geographically dispersed group of employees or to anticipate our future growth and personnel needs, our business may be adversely affected.

There are limitations on the liabilities of our directors and executive officers. Under certain circumstances, we are obligated to indemnify our directors and executive officers against liability and expenses incurred by them in their service to us.

Pursuant to our amended and restated certificate of incorporation and under Delaware law, our directors are not liable to us or our stockholders for monetary damages for breach of fiduciary duty, except for liability for breach of a director’s duty of loyalty, acts or omissions by a director not in good faith or which involve intentional misconduct or a knowing violation of law, dividend payments or stock repurchases that are unlawful under Delaware law or any transaction in which a director has derived an improper personal benefit. In addition, we have entered into indemnification agreements with each of our directors and executive officers. These agreements, among other things, require us to indemnify each director and executive officer for certain expenses, including attorneys’ fees, judgments, fines and settlement amounts, incurred by any such person in any action or proceeding, including any action by us or in our right, arising out of the person’s services as one of our directors or executive officers. The costs associated with actions requiring indemnification under these agreements could be harmful to our business.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential stockholders and clients could lose confidence in our financial reporting, which could harm our business, the trading price of our common stock and our ability to retain our current clients and obtain new clients.

Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on the effectiveness of our internal control over financial reporting. We have expended significant resources to comply with our obligations under Section 404. If we fail to correct any issues in the design or operating effectiveness of internal control over financial reporting or fail to prevent fraud, current and potential stockholders and clients could lose confidence in our financial reporting, which could harm our business, the trading price of our common stock and our ability to retain our current clients and obtain new clients.

Future changes in financial accounting standards or practices or existing taxation rules or practices may cause adverse unexpected revenue and/or expense fluctuations and affect our reported results of operations.

A change in accounting standards or practices or a change in existing taxation rules or practices can have a significant effect on our reported results and may even require retroactive or retrospective application. New accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements and taxation practice have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

Our ability to use net operating loss carryforwards to reduce future tax payments may be limited if we experience a change in ownership, or if taxable income does not reach sufficient levels.

As of January 3, 2009, we had approximately $430.9 million of U.S. Federal net operating loss carryforwards, referred to as NOLs, available to reduce taxable income in future years. A portion of these NOLs are currently subject to an annual limitation under Section 382 of the Internal Revenue Code of 1986, as amended, referred to as the Code.

Our ability to utilize the NOLs may be further limited if we undergo an ownership change, as defined in Section 382 of the Code. This ownership change could be triggered by substantial changes in the ownership of our outstanding stock, which are generally outside of our control. An ownership change would exist if the stockholders, or group of stockholders, who own or have owned, directly or indirectly, 5% or more of the value of our stock, or are otherwise treated as 5% stockholders under Section 382 and the regulations promulgated thereunder, increase their aggregate percentage ownership of our stock by more than 50 percentage points over the lowest percentage of our stock owned by these stockholders at any time during the testing period, which is generally the three-year period preceding the potential ownership change. In the event of an ownership change, Section 382 imposes an annual limitation on the amount of post-ownership change taxable income a corporation may offset with pre-ownership change NOLs. The limitation imposed by Section 382 for any post-change year would be determined by multiplying the value of our stock immediately before the ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Any unused annual limitation may be carried over to later years, and the limitation may under certain circumstances be increased by built-in gains which may be present with respect to assets held by us at the time of the ownership change that are recognized in the five-year period after the ownership change. Our use of NOLs arising after the date of an ownership change would not be affected.

In addition, the ability to use NOLs will be dependent on our ability to generate taxable income. The NOLs may expire before we generate sufficient taxable income. There were no NOLs that expired in the fiscal years ended December 29, 2007 or January 3, 2009.

Risks Related to Our Common Stock

We may enter into future acquisitions and take certain actions in connection with such acquisitions that could affect the price of our common stock.

As part of our growth strategy, we expect to review acquisition prospects that would offer growth opportunities and we may acquire businesses, products or technologies in the future. In the event of future acquisitions, we could:

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use a significant portion of our available cash;

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issue equity securities, which would dilute current stockholders’ percentage ownership;

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incur substantial debt;

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incur or assume contingent liabilities, known or unknown;

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incur amortization expenses related to intangibles; and

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incur large, immediate accounting write-offs.

Such actions by us could harm our results from operations and adversely affect the price of our common stock

Our operating results have fluctuated and may continue to fluctuate significantly, which may cause the market price of our common stock to be volatile.

Our annual and quarterly operating results have and may continue to fluctuate significantly due to a variety of factors, many of which are outside of our control. Because our operating results may be volatile and difficult to predict, period-to-period comparisons of our operating results may not be a good indication of our future performance. Our operating results may also fall below our published expectations and the expectations of securities analysts and investors, which likely will cause the market price of our common stock to decline significantly.

Factors that may cause our operating results to fluctuate or harm our business include but are not limited to the following:

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our ability to obtain new clients or to retain existing clients in our e-commerce and marketing services businesses;

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the performance of one or more of our client’s e-commerce businesses;

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our and our clients’ ability to obtain new customers at a reasonable cost or encourage repeat purchases;

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the number of visitors to the e-commerce businesses operated by us or our ability to convert these visitors into customers;

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our and our clients’ ability to offer an appealing mix of products or to sell products that we purchase;

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our ability to achieve effective results for our marketing services clients;

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our ability to adequately develop, maintain and upgrade our clients’ e-commerce businesses or the technology and systems we use to process customers’ orders and payments;

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the timing and costs of upgrades and developments of our systems and infrastructure;

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the ability of our competitors to offer new or superior e-commerce businesses, services or products or new or superior marketing services;

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price competition that results in lower profit margins or losses;

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the seasonality of our business, especially the importance of our fiscal fourth quarter to our business;

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our inability to obtain or develop specific products or brands or unwillingness of vendors to sell their products to us;

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unanticipated fluctuations in the amount of consumer spending on various products that we sell, which tend to be discretionary spending items;

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the cost of advertising and the amount of free shipping and other promotions we offer;

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increases in the amount and timing of operating costs and capital expenditures relating to expansion of our operations;

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our inability to manage our shipping costs on a profitable basis or unexpected increases in shipping costs or delivery times, particularly during the holiday season;

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inflation of prices of fuel and gasoline and other raw materials that impact our costs;

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technical difficulties, system security breaches, system downtime or Internet slowdowns;

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our inability to manage inventory levels or control inventory shrinkage;

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our inability to manage fulfillment operations or provide adequate levels of customer care or our inability to forecast the proper staffing levels in fulfillment and customer care;

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an increase in the level of our product returns or our inability to effectively process returns;

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government regulations related to the Internet or e-commerce which could increase the costs associated with operating our businesses, including requiring the collection of sales tax on all purchases through the e-commerce businesses we operate; and

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unfavorable economic conditions in general or specific to the Internet or e-commerce, which could reduce demand for the products sold through our clients’ e-commerce businesses.

Future sales of our common stock in the public market or the issuance of securities senior to our common stock could adversely affect the trading price of our common stock and our ability to raise funds in new securities offerings.

Future sales of our common stock, the perception that such sales could occur or the availability for future sale of shares of our common stock or securities convertible into or exercisable for our common stock could adversely affect the market prices of our common stock prevailing from time to time and could impair our ability to raise capital through future offerings of equity or equity-related securities. In addition, we may issue common stock or equity securities senior to our common stock in the future for a number of reasons, including to finance our operations and business strategy, to adjust our ratio of debt to equity, to satisfy our obligations upon the exercise of stock options or for other reasons.

As of July 4, 2009, there were 1,450,524 shares available for new awards under our 2005 Equity Incentive Plan, referred to as the “2005 plan.” Additionally, as of July 4, 2009 there were 4,607,190 shares of common stock that were subject to awards granted under the 2005 plan (including 226,081 restricted stock awards which are issued and outstanding and subject to forfeiture under certain conditions) and 3,692,455 shares of common stock that were subject to awards granted under our 1996 Equity Incentive Plan. In the event of the cancellation, expiration, forfeiture or repurchase of any of these shares, such shares would become available for issuance under the 2005 plan. In order to attract and retain key personnel, we may issue additional securities, including stock options, restricted stock grants and shares of common stock, in connection with our employee benefit plans, or may lower the price of existing stock options. No prediction can be made as to the effect, if any, that the sale, or the availability for sale, of substantial amounts of common stock by our existing stockholders pursuant to an effective registration statement will have on market prices of our common stock.

We have never paid dividends on our common stock and do not anticipate paying dividends in the foreseeable future.

We have never paid cash dividends on our common stock and do not anticipate that any cash dividends will be declared or paid in the foreseeable future. In addition, the terms of our secured revolving credit facility prohibit us from declaring or paying dividends on our common stock. As a result, holders of our common stock will not receive a return, if any, on their investment unless they sell their shares of our common stock.

We are controlled by certain principal stockholders.

As of July 24, 2009, Michael G. Rubin, our chairman, president and chief executive officer, beneficially owned 15.0%, funds affiliated with SOFTBANK Holdings Inc., or SOFTBANK, beneficially owned 16.6%, and Liberty Media Corporation, or Liberty, through its subsidiary QVC, Inc. and QVC’s affiliate QK Holdings, Inc. beneficially owned approximately 18.8% of our outstanding common stock. If they decide to act together, any two of Mr. Rubin, SOFTBANK, and Liberty would be in a position to exercise considerable control, and all three would be in a position to exercise complete control, over most matters requiring stockholder approval, including the election or removal of directors, approval of significant corporate transactions and the ability generally to direct our affairs. Furthermore, pursuant to stock purchase agreements, SOFTBANK and Liberty each have the right to designate up to one member of our board of directors. This concentration of ownership and the right of SOFTBANK and Liberty to designate members to our board of directors may have the effect of delaying or preventing a change in control of us, including transactions in which stockholders might otherwise receive a premium over prevailing market prices for our common stock. Furthermore, Mr. Rubin has entered into voting agreements with each of SOFTBANK and Liberty, and SOFTBANK and Liberty have entered into voting agreements with each other. The parties to these voting agreements have agreed to support the election of the directors designated by each of the other parties.

It may be difficult for a third-party to acquire us and this could depress our stock price.

Certain provisions of our amended and restated certificate of incorporation, bylaws, stockholder rights agreement and Delaware law may have the effect of discouraging, delaying or preventing transactions that involve any actual or threatened change in control. The rights issued under our stockholder rights agreement may be a substantial deterrent to a person acquiring beneficial ownership of 20% or more (or, in the case of any stockholder that as of April 2, 2006 beneficially owned 19% or more of the outstanding shares of common stock, 25.1% or more) of our common stock without the approval of our board of directors. The stockholder rights agreement would cause extreme dilution to such person.

In addition, we are subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, restricts certain transactions and business combinations between a corporation and a stockholder owning 15% or more of the corporation’s outstanding voting stock for a period of three years from the date the stockholder becomes a 15% stockholder. In addition to discouraging a third party from seeking to acquire control of us, the foregoing provisions could impair the ability of existing stockholders to remove and replace our management and/or our board of directors.

Because many investors consider a change of control a desirable path to liquidity, delaying or preventing a change in control of our company may reduce the number of investors interested in our common stock, which could depress our stock price.

See “— We are controlled by certain principal stockholders.”

The price of our common stock may fluctuate significantly.

The price of our common stock on the Nasdaq Global Select Market has been volatile. From December 30, 2007, the first day of our fiscal 2008, through July 4, 2009, the high and low sales prices of our common stock ranged from $19.75 to $5.69 per share. During fiscal 2007, the high and low sale prices of our common stock ranged from $29.27 to $16.09 per share. During fiscal 2006, the high and low sale prices of our common stock ranged from $19.52 to $10.67 per share. We expect that the market price of our common stock may continue to fluctuate.

Our common stock price can fluctuate as a result of a variety of factors, many of which are beyond our control. These factors include, among others:

•

our performance and prospects;

•

the performance and prospects of our clients;

•

the depth and liquidity of the market for our common stock;

•

the vesting of our equity awards resulting in the sale of large amounts of our common stock during concentrated trading windows;

•

investor perception of us and the industry in which we operate;

•

changes in earnings estimates or buy/sell recommendations by analysts;

•

general financial and other market conditions; and

	•		general economic conditions.

	In addition, the stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the market price of our common stock.

Holders of our common stock will be subordinated to our secured revolving credit facility, convertible notes and other indebtedness.

In the event of our liquidation or insolvency, holders of common stock would receive a distribution only after payment in full of all principal and interest due under our secured revolving credit facility, due to holders of our convertible notes and due to other creditors, and there may be little or no proceeds to distribute to holders of common stock at such time.

Conversion of our convertible notes would dilute the ownership interest of existing stockholders.

In June 2005, we issued $57.5 million principal amount of our 3% convertible notes, and in July 2007 we issued $150.0 million principal amount of our 2.5% convertible notes, which are all convertible into shares of our common stock. Under certain circumstances, a maximum of 6,156,495 shares of common stock could be issued upon conversion of the 2.5% convertible notes and a maximum of 3,874,661 shares of common stock could be issued upon conversion of the 3% convertible notes, in each case, subject to adjustment for stock dividends, stock splits, cash dividends, certain tender offers, other distributions and similar events. The conversion of some or all of these notes will dilute the ownership interest of existing stockholders. Any sales in the public market of the common stock issuable upon such conversions could adversely affect prevailing market prices of our common stock. In addition, the existence of these notes could encourage short selling by market participants because the conversion of the notes could depress the price of our common stock.


ITEM 2:		*UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS*

On April 6, 2009, in connection with the acquisition of Silverlign Group, Inc. (“Silverlign”), the Company issued an aggregate of 168,778 shares of common stock to the two selling stockholders of Silverlign (the “Silverlign Shares”).

Pursuant to the terms of a Consulting Agreement dated April 22, 2009 between Arimor, LLC (“Arimor”) and GSI Commerce Solutions, Inc., the Company agreed to issue to Arimor shares of the Company’s common stock as a fee for consulting services provided by Arimor. During the fiscal quarter ended July 4, 2009, the Company issued an aggregate of 15,334 shares of common stock to Arimor (“Arimor Shares”) pursuant to such agreement.

The issuances of the Silverlign Shares and the Arimor Shares were completed in accordance with Section 4(2) of the Securities Act of 1933, as amended, in offerings without any public offering or distribution. The Silverlign Shares and the Arimor Shares are restricted securities and include appropriate restrictive legends.


ITEM 3:		*DEFAULTS UPON SENIOR SECURITIES.*

None


ITEM 4:		*SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS WHO ARE NOT ALSO DIRECTORS*.

On June 18, 2009, we held our Annual Meeting of Stockholders. Proxies were solicited for the Annual Meeting pursuant to Regulation 14A of the Securities Exchange Act of 1934. At the Annual Meeting, the following matters were voted on:

1. Election of the following persons as directors of GSI Commerce, Inc., to serve for a one-year term and until their successors are duly elected and qualified:


No. of Votes
Name	For		Withhold
Michael G. Rubin		43,995,454		436,681
M. Jeffrey Branman		44,284,411		147,724
Michael J. Donahue		44,213,820		218,315
Ronald D. Fisher		44,292,234		139,901
John A. Hunter		43,122,724		1,309,411
Mark S. Menell		44,291,900		140,235
Jeffrey F. Rayport		43,281,826		1,150,309
Lawrence S. Smith		44,212,098		220,037
Andrea M. Weiss		43,281,745		1,150,390

2. Approval of the appointment of Deloitte & Touche LLP as the Company’s independent registered public accounting firm.


No. of Votes
For	Against		Abstain
44,256,170		154,023		22,014


ITEM 5:		*OTHER INFORMATION.*

None


	Page
PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of January 3, 2009 and July 4, 2009		3
Condensed Consolidated Statements of Operations for the three- and six-month periods ended June 28, 2008 (corrected) and July 4, 2009		4
Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 28, 2008 (corrected) and July 4, 2009		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3. Quantitative and Qualitative Disclosures About Market Risk		31
Item 4. Controls and Procedures		31

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		32
Item 1A. Risk Factors		32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		51
Item 3. Defaults Upon Senior Securities		51
Item 4. Submission of Matters to a Vote of Security Holders		51
Item 5. Other Information		51
Item 6. Exhibits		52

SIGNATURES		53
EX-31.1
EX-31.2
EX-32.1


References To		Refer to the Years Ended/Ending
Fiscal 2005		December 31, 2005
Fiscal 2006		December 30, 2006
Fiscal 2007		December 29, 2007
Fiscal 2008		January 3, 2009
Fiscal 2009		January 2, 2010
Fiscal 2010		January 1, 2011
Fiscal 2011		December 31, 2011
Fiscal 2012		December 29, 2012
Fiscal 2013		December 28, 2013


31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


	GSI COMMERCE, INC.
	By:	/s/ MICHAEL G. RUBIN
		Michael G. Rubin
		Chairman, President and Chief Executive Officer


	By:	/s/ MICHAEL R. CONN
		Michael R. Conn
		Executive Vice President, Finance and Chief Financial Officer (principal financial officer & principal accounting officer)