##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---

FORM 10-Q



---

(Mark One)

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

For the quarterly period ended September 29, 2007

or



| ̈ | 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                                                       |  | 04-2958132                          
|(State or other jurisdiction of incorporation or organization) |  | (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  x    No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

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

There were 46,710,887 shares of the registrants Common Stock outstanding as of the close of business on October 31, 2007.



---



---

##### Table of Contents

GSI COMMERCE, INC.

FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 29, 2007

INDEX



|                               |  |                                                                                                                                       |  |     
|------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                                                       |  | Page
|PART I - FINANCIAL INFORMATION |  |                                                                                                                                      
|                               |  |                                                                                                                                      
|Item 1.                        |  | Financial Statements (unaudited):                                                                                                     |  |     
|                               |  | Condensed Consolidated Balance Sheets as of December 30, 2006 and September 29, 2007                                                  |  | 3   
|                               |  | Condensed Consolidated Statements of Operations for the three- and nine-month periods ended September 30, 2006 and September 29, 2007 |  | 4   
|                               |  | Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2006 and September 29, 2007            |  | 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                                                                            |  | 30  
|Item 4.                        |  | Controls and Procedures                                                                                                               |  | 30  
|                               | 
|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                                                                           |  | 35  
|Item 3.                        |  | Defaults Upon Senior Securities                                                                                                       |  | 35  
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                                                                   |  | 35  
|Item 5.                        |  | Other Information                                                                                                                     |  | 35  
|Item 6.                        |  | Exhibits                                                                                                                              |  | 35  
|                               | 
|SIGNATURES                     |  | 36                                                                                                                                   

Our fiscal year ends on the Saturday nearest to the last day of December. Accordingly, references
to fiscal 2003, fiscal 2004, fiscal 2005, fiscal 2006 and fiscal 2007 refer to the years ended January 3, 2004, January 1, 2005, December 31, 2005, December 30, 2006 and the year ending December 29, 2007.

Although we refer to the retailers, branded manufacturers, entertainment companies and professional sports organizations for which we
develop and operate e-commerce businesses as our partners, we do not act as an agent or legal representative for any of our partners. We do not have the power or authority to legally bind any of our partners. Similarly, our partners do
not have the power or authority to legally bind us. In addition, we do not have the types of liabilities for our partners that a general partner of a partnership would have.



2



---

##### Table of Contents

PART I



|ITEM 1: | FINANCIAL STATEMENTS
|------- | --------------------

GSI COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(unaudited)



|                                                                                                                                                                                                                                                                             |  |                  |          |   |                   |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                                                                                                                             |  | December 30,2006 |          |   | September 29,2007 |  
|ASSETS                                                                                                                                                                                                                                                                       |  |                  |          |   |                   |   |          |  
|Current assets:                                                                                                                                                                                                                                                              |  |                  |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                                                                                                                                    |  | $                | 71,382   |   |                   | $ | 93,943   |  
|Marketable securities                                                                                                                                                                                                                                                        |  |                  | 113,074  |   |                   |   | 72,300   |  
|Accounts receivable, net of allowance of $1,078 and $1,276                                                                                                                                                                                                                   |  |                  | 38,681   |   |                   |   | 39,631   |  
|Inventory                                                                                                                                                                                                                                                                    |  |                  | 46,816   |   |                   |   | 52,758   |  
|Deferred tax assets                                                                                                                                                                                                                                                          |  |                  | 10,403   |   |                   |   | 11,520   |  
|Prepaid expenses and other current assets                                                                                                                                                                                                                                    |  |                  | 6,409    |   |                   |   | 14,761   |  
|                                                                                                                                                                                                                                                                             |  |                  |          |   |                   |   |          |  
|Total current assets                                                                                                                                                                                                                                                         |  |                  | 286,765  |   |                   |   | 284,913  |  
|                                                                                                                                                                                                                                                                             |  |                 
|Property and equipment, net                                                                                                                                                                                                                                                  |  |                  | 106,204  |   |                   |   | 148,273  |  
|Goodwill                                                                                                                                                                                                                                                                     |  |                  | 17,786   |   |                   |   | 88,556   |  
|Intangible assets, net of accumulated amortization of $441 and $1,593                                                                                                                                                                                                        |  |                  | 2,027    |   |                   |   | 19,855   |  
|Equity investments and other                                                                                                                                                                                                                                                 |  |                  | 2,435    |   |                   |   | 2,777    |  
|Long-term deferred tax assets                                                                                                                                                                                                                                                |  |                  | 36,792   |   |                   |   | 47,338   |  
|Other assets, net of accumulated amortization of $11,926 and $13,617                                                                                                                                                                                                         |  |                  | 11,548   |   |                   |   | 16,768   |  
|                                                                                                                                                                                                                                                                             |  |                  |          |   |                   |   |          |  
|Total assets                                                                                                                                                                                                                                                                 |  | $                | 463,557  |   |                   | $ | 608,480  |  
|                                                                                                                                                                                                                                                                             |  |                  |          |   |                   |   |          |  
|                                                                                                                                                                                                                                                                             |  |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                                         |  |                  |          |   |                   |   |          |  
|Current liabilities:                                                                                                                                                                                                                                                         |  |                  |          |   |                   |   |          |  
|Accounts payable                                                                                                                                                                                                                                                             |  | $                | 76,553   |   |                   | $ | 55,677   |  
|Accrued expenses and other                                                                                                                                                                                                                                                   |  |                  | 72,740   |   |                   |   | 71,579   |  
|Deferred revenue                                                                                                                                                                                                                                                             |  |                  | 11,790   |   |                   |   | 15,832   |  
|Current portion  long-term debt and capital leases                                                                                                                                                                                                                          |  |                  | 510      |   |                   |   | 2,399    |  
|                                                                                                                                                                                                                                                                             |  |                  |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                                                                                                                                    |  |                  | 161,593  |   |                   |   | 145,487  |  
|                                                                                                                                                                                                                                                                             |  |                 
|Convertible notes                                                                                                                                                                                                                                                            |  |                  | 57,500   |   |                   |   | 207,500  |  
|Long-term debt and capital leases                                                                                                                                                                                                                                            |  |                  | 12,856   |   |                   |   | 26,893   |  
|Deferred revenue and other                                                                                                                                                                                                                                                   |  |                  | 3,901    |   |                   |   | 3,782    |  
|                                                                                                                                                                                                                                                                             |  |                  |          |   |                   |   |          |  
|Total liabilities                                                                                                                                                                                                                                                            |  |                  | 235,850  |   |                   |   | 383,662  |  
|                                                                                                                                                                                                                                                                             |  |                 
|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 December 30, 2006 and
September 29, 2007                                                                                                                                |  |                  |         |   |                   |   |         |  
|Common stock, $0.01 par value, 90,000,000 shares authorized; 45,878,527 and 46,662,912 shares issued as of December 30, 2006 and
September 29, 2007, respectively; 45,878,324 and 46,662,709 shares outstanding as of December 30, 2006 and September 29, 2007, respectively |  |                  | 458      |   |                   |   | 466      |  
|Additional paid in capital                                                                                                                                                                                                                                                   |  |                  | 347,676  |   |                   |   | 358,121  |  
|Accumulated other comprehensive (loss) income                                                                                                                                                                                                                                |  |                  | (97      | ) |                   |   | 25       |  
|Accumulated deficit                                                                                                                                                                                                                                                          |  |                  | (120,330 | ) |                   |   | (133,794 | )
|                                                                                                                                                                                                                                                                             |  |                  |          |   |                   |   |          |  
|Total stockholders equity                                                                                                                                                                                                                                                   |  |                  | 227,707  |   |                   |   | 224,818  |  
|                                                                                                                                                                                                                                                                             |  |                  |          |   |                   |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                                                                                                   |  | $                | 463,557  |   |                   | $ | 608,480  |  
|                                                                                                                                                                                                                                                                             |  |                  |          |   |                   |   |          |  

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



3



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



|                                                                                                             |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------- | - | ----------------- | - | ------- | ----------------- |  | - | ----------------- | - |  | - | ------- | -
|                                                                                                             |  | Three Months Ended |         |   | Nine Months Ended |  
|                                                                                                             |  | September 30,2006  |         |   | September 29,2007 |   |         | September 30,2006 |  |   | September 29,2007 |  
|Revenues:                                                                                                    |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Net revenues from product sales                                                                              |  | $                  | 84,673  |   |                   | $ | 91,298  |                   |  | $ | 270,856           |   |  | $ | 289,053 |  
|Service fee revenues                                                                                         |  |                    | 33,802  |   |                   |   | 45,987  |                   |  |   | 81,490            |   |  |   | 125,780 |  
|                                                                                                             |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Net revenues                                                                                                 |  |                    | 118,475 |   |                   |   | 137,285 |                   |  |   | 352,346           |   |  |   | 414,833 |  
|Cost of revenues from product sales                                                                          |  |                    | 60,811  |   |                   |   | 65,258  |                   |  |   | 200,914           |   |  |   | 207,843 |  
|                                                                                                             |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Gross profit                                                                                                 |  |                    | 57,664  |   |                   |   | 72,027  |                   |  |   | 151,432           |   |  |   | 206,990 |  
|                                                                                                             |  |                    |         |  
|Operating expenses                                                                                           |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Sales and marketing, inclusive of $668, $774, $3,046 and $2,084 of stock-based compensation                  |  |                    | 34,824  |   |                   |   | 47,321  |                   |  |   | 94,398            |   |  |   | 132,802 |  
|Product development, inclusive of $215, $395, $635 and $1,026 of stock-based compensation                    |  |                    | 13,944  |   |                   |   | 15,925  |                   |  |   | 31,111            |   |  |   | 44,737  |  
|General and administrative, inclusive of $1,232, $1,006, $2,205 and $2,708 of stock-based based compensation |  |                    | 9,465   |   |                   |   | 11,198  |                   |  |   | 24,827            |   |  |   | 31,014  |  
|Depreciation and amortization                                                                                |  |                    | 5,535   |   |                   |   | 9,129   |                   |  |   | 14,912            |   |  |   | 23,744  |  
|                                                                                                             |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Total operating expenses                                                                                     |  |                    | 63,768  |   |                   |   | 83,573  |                   |  |   | 165,248           |   |  |   | 232,297 |  
|                                                                                                             |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Loss from operations                                                                                         |  |                    | (6,104  | ) |                   |   | (11,546 | )                 |  |   | (13,816           | ) |  |   | (25,307 | )
|                                                                                                             |  |                    |         |  
|Other (income) expense:                                                                                      |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Interest expense                                                                                             |  |                    | 776     |   |                   |   | 2,075   |                   |  |   | 2,332             |   |  |   | 3,842   |  
|Interest income                                                                                              |  |                    | (1,445  | ) |                   |   | (3,342  | )                 |  |   | (4,428            | ) |  |   | (7,025  | )
|Other expense, net                                                                                           |  |                    | 194     |   |                   |   | 28      |                   |  |   | 101               |   |  |   | 51      |  
|Impairment on investment                                                                                     |  |                    | 737     |   |                   |   |        |                   |  |   | 2,763             |   |  |   |        |  
|                                                                                                             |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Total other (income) expense                                                                                 |  |                    | 262     |   |                   |   | (1,239  | )                 |  |   | 768               |   |  |   | (3,132  | )
|                                                                                                             |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Loss before income taxes                                                                                     |  |                    | (6,366  | ) |                   |   | (10,307 | )                 |  |   | (14,584           | ) |  |   | (22,175 | )
|Benefit for income taxes                                                                                     |  |                    | (151    | ) |                   |   | (4,221  | )                 |  |   | (149              | ) |  |   | (8,711  | )
|                                                                                                             |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Net loss prior to cumulative effect of change in accounting principle                                        |  |                    | (6,215  | ) |                   |   | (6,086  | )                 |  |   | (14,435           | ) |  |   | (13,464 | )
|Cumulative effect of change in accounting principle                                                          |  |                    |        |   |                   |   |        |                   |  |   | 268               |   |  |   |        |  
|                                                                                                             |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Net loss                                                                                                     |  | $                  | (6,215  | ) |                   | $ | (6,086  | )                 |  | $ | (14,167           | ) |  | $ | (13,464 | )
|                                                                                                             |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Basic and diluted loss per share:                                                                            |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Prior to cumulative effect of change in accounting principle                                                 |  | $                  | (0.14   | ) |                   | $ | (0.13   | )                 |  | $ | (0.32             | ) |  | $ | (0.29   | )
|                                                                                                             |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Cumulative effect of change in accounting principle                                                          |  | $                  |        |   |                   | $ |        |                   |  | $ | 0.01              |   |  | $ |        |  
|                                                                                                             |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Net loss                                                                                                     |  | $                  | (0.14   | ) |                   | $ | (0.13   | )                 |  | $ | (0.31             | ) |  | $ | (0.29   | )
|                                                                                                             |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Weighted average shares outstanding - basic and diluted                                                      |  |                    | 45,344  |   |                   |   | 46,567  |                   |  |   | 45,005            |   |  |   | 46,320  |  
|                                                                                                             |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  

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



4



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                            |  |                   |          |   |                   |   |          |  
|--------------------------------------------------------------------------- |  | ----------------- | -------- | - | ----------------- | - | -------- | -
|                                                                            |  | Nine Months Ended |         
|                                                                            |  | September 30,2006 |          |   | September 29,2007 |  
|Cash Flows from Operating Activities:                                       |  |                   |          |   |                   |   |          |  
|Net loss                                                                    |  | $                 | (14,167  | ) |                   | $ | (13,464  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                   |          |   |                   |   |          |  
|Depreciation and amortization                                               |  |                   | 14,912   |   |                   |   | 23,744   |  
|Stock-based compensation                                                    |  |                   | 5,886    |   |                   |   | 5,818    |  
|Loss on impairment of investment and sales of marketable securities         |  |                   | 2,763    |   |                   |   | 80       |  
|Loss on disposal of equipment                                               |  |                   | 334      |   |                   |   | 36       |  
|Deferred tax assets                                                         |  |                   |         |   |                   |   | (8,783   | )
|Cumulative effect of change in accounting principle                         |  |                   | (268     | ) |                   |   |         |  
|Changes in operating assets and liabilities:                                |  |                   |          |   |                   |   |          |  
|Accounts receivable, net                                                    |  |                   | 912      |   |                   |   | 9,063    |  
|Inventory                                                                   |  |                   | (8,727   | ) |                   |   | (5,930   | )
|Prepaid expenses and other current assets                                   |  |                   | (4,644   | ) |                   |   | (5,228   | )
|Other assets, net                                                           |  |                   | (2,414   | ) |                   |   | 995      |  
|Accounts payable and accrued expenses and other                             |  |                   | (26,155  | ) |                   |   | (45,056  | )
|Deferred revenue                                                            |  |                   | 5,732    |   |                   |   | 3,052    |  
|                                                                            |  |                   |          |   |                   |   |          |  
|Net cash used in operating activities                                       |  |                   | (25,836  | ) |                   |   | (35,673  | )
|Cash Flows from Investing Activities:                                       |  |                   |          |   |                   |   |          |  
|Payments for acquisitions of businesses, net of cash acquired               |  |                   | (5,847   | ) |                   |   | (92,889  | )
|Cash paid for property and equipment, including internal use software       |  |                   | (26,955  | ) |                   |   | (40,301  | )
|Proceeds from government grant related to corporate headquarters            |  |                   | 2,925    |   |                   |   |         |  
|Other deferred cost                                                         |  |                   | 95       |   |                   |   |         |  
|Cash paid for equity investment                                             |  |                   | (2,435   | ) |                   |   |         |  
|Purchases of marketable securities                                          |  |                   | (172,315 | ) |                   |   | (263,640 | )
|Sales of marketable securities                                              |  |                   | 191,803  |   |                   |   | 304,051  |  
|                                                                            |  |                   |          |   |                   |   |          |  
|Net cash used in investing activities                                       |  |                   | (12,729  | ) |                   |   | (92,779  | )
|Cash Flows from Financing Activities:                                       |  |                   |          |   |                   |   |          |  
|Proceeds from convertible notes                                             |  |                   |         |   |                   |   | 150,000  |  
|Issuance costs paid for convertible notes                                   |  |                   |         |   |                   |   | (5,080   | )
|Repayments of capital lease obligations                                     |  |                   | (388     | ) |                   |   | (342     | )
|Repayments of mortgage note                                                 |  |                   | (139     | ) |                   |   | (135     | )
|Proceeds from exercise of common stock options                              |  |                   | 5,252    |   |                   |   | 6,544    |  
|                                                                            |  |                   |          |   |                   |   |          |  
|Net cash provided by financing activities                                   |  |                   | 4,725    |   |                   |   | 150,987  |  
|                                                                            |  |                  
|Effect of exchange rate changes on cash and cash equivalents                |  |                   | 28       |   |                   |   | 26       |  
|                                                                            |  |                   |          |   |                   |   |          |  
|Net (decrease) increase in cash and cash equivalents                        |  |                   | (33,812  | ) |                   |   | 22,561   |  
|Cash and cash equivalents, beginning of period                              |  |                   | 48,361   |   |                   |   | 71,382   |  
|                                                                            |  |                   |          |   |                   |   |          |  
|Cash and cash equivalents, end of period                                    |  | $                 | 14,549   |   |                   | $ | 93,943   |  
|                                                                            |  |                   |          |   |                   |   |          |  
|Supplemental Cash Flow Information                                          |  |                   |          |   |                   |   |          |  
|Cash paid during the period for interest                                    |  | $                 | 1,975    |   |                   | $ | 2,222    |  
|Cash paid during the period for income taxes                                |  |                   |         |   |                   |   | 564      |  
|Noncash Investing and Financing Activities:                                 |  |                   |          |   |                   |   |          |  
|Increase in accrual for purchases of property and equipment                 |  |                   | 21       |   |                   |   | 3,840    |  
|Equipment financed under capital lease                                      |  |                   |         |   |                   |   | 14,563   |  
|Common stock issued to finance acquisition                                  |  |                   | 1,300    |   |                   |   |         |  

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



5



---

##### Table of Contents

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 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 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 presented in the Companys Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 13, 2007.

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.

Reclassifications:In order to conform to its current year presentation of intangible assets as a separate line item on the Condensed Consolidated
Balance Sheets, as a result of the acquisition disclosed in Note 5, the Company reclassified its intangible assets with a cost of $2,468 and a net book value of $2,027 from other assets, net to intangible assets, net in its Condensed Consolidated
Balance Sheet as of December 30, 2006.

Other Assets, Net: Other assets, net consists primarily of deferred partner
revenue share charges, prepaid revenue share payments, and the offering discounts and issuance costs related to the June 2005 and July 2007 convertible debt offerings.

Deferred partner revenue share charges, resulting from the exercise of a right to receive 1,600 shares of the Companys common stock in lieu of future cash partner revenue share payments, were $3,591 as of
September 29, 2007 and $4,351 as of December 30, 2006. As a result of certain revenue thresholds being achieved in fiscal 2006, the remaining partner revenue share charges related to the exercise of common stock are being amortized on a
straight-line basis over the remaining term of the contract. Stock-based compensation expense related to the amortization of deferred partner revenue share charges was $253 and $760 for the three- and nine-month periods ended September 29, 2007
and $410 and $2,374 for the three- and nine-month periods ended September 30, 2006, and is reflected within sales and marketing expenses in the Condensed Consolidated Statements of Operations. Upon achievement of the revenue thresholds, the
Company began making the partner revenue share payments in cash. Such payments are reflected as revenue share expense within sales and marketing expenses in the Condensed Consolidated Statements of Operations.

The total prepaid revenue share payments included in other assets were $1,875 as of September 29, 2007 and $2,438 as of December 30, 2006 and
are being amortized on a straight-line basis over the remaining term of the contract within sales and marketing expenses in the Condensed Consolidated Statements of Operations.

The offering discounts and issuance costs related to the June 2005 and July 2007 offerings of $207,500 aggregate convertible notes had a cost of $7,668
and a net book value of $6,279 as of September 29, 2007 and a cost of $2,589 and a net book value of $1,769 as of December 30, 2006. The offering discounts and issuance costs are being amortized using the



6



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except
per share data)

(unaudited)



straight-line method which approximates the effective interest method. Total amortization related to the offering discounts and issuance costs, which is
reflected as a portion of interest expense, was $310 and $569 for the three- and nine-month periods ended September 29, 2007 and $129 and $388 for the three- and nine-month periods ended September 30, 2006.

Intangible Assets, Net: Intangible assets, net, which primarily relate to intangible assets recorded as part of the Accretive Commerce, Inc.
acquisition (see Note 5), have a cost of $21,448 and a net book value of $19,855 as of September 29, 2007 and a cost of $2,468 and a net book value of $2,027 as of December 30, 2006. Amortization expense for intangible assets was $378 and
$1,152 for the three- and nine-month periods ended September 29, 2007 and $14 and $51 for the three- and nine-month periods ended September 30, 2006. Expected annual amortization expense of intangible assets for the next five years is as
follows: $3,379 for the remainder of fiscal 2007, $6,902 for fiscal 2008, $4,203 for fiscal 2009, $3,144 for fiscal 2010, $1,595 for fiscal 2011, and $387 for fiscal 2012. The weighted-average amortization period for intangible assets is four years.

Deferred Revenue:Deferred revenue consists primarily of fees paid to the Company in advance for service fees related to
enhancements to its partners e-commerce businesses, which are recognized ratably over the service period or upon completion of the service, and from the sale of gift certificates and gift cards redeemable through its partners e-commerce
businesses. The Company recognizes revenue received from the sale of gift certificates and gift cards when the gift certificates and or cards are redeemed.

Net Revenues from Product Sales:The Company recognizes revenues from product sales in accordance with Staff Accounting Bulletin 104, Revenue Recognition. Revenue is recognized when the following
revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable and collectibility is reasonably assured.

The Company considers the criteria presented in Emerging Issues Task Force (EITF) 99-19, Reporting Revenue Gross as a Principal versus
Net as an Agent, in determining the appropriate revenue recognition treatment. Generally, when the Company is the primary obligor in a transaction, has general inventory risk, establishes the selling price, has discretion in supplier
selection, has physical loss inventory risk after order placement, and has credit risk, or has several but not all of these indicators, the Company records revenue gross as a principal.

The Company recognizes revenue from product sales, which includes shipping revenue, net of estimated returns based on historical experience and current
trends, upon shipment of products to customers. The majority of product sales are shipped from the Companys fulfillment centers. The Company also relies upon vendors to ship products directly to customers on its behalf. The Company acts as
principal in these transactions, as orders are initiated directly through the e-commerce businesses that the Company operates, the Company takes title to the goods at the shipping point and has the economic risk related to collection, customer care
and returns. The Company recognizes revenue from shipping when products are shipped and title and significant risks of ownership passes to the customer. Net revenue from product sales includes shipping revenue for partners that the Company provides
fulfillment services from both the owned inventory model and the partner inventory model.

The Company pays a percentage of the revenues
generated from the product sales through the e-commerce businesses that the Company operates to the Companys respective partners in exchange for the rights to use their brand names and the promotions and advertising that its partners agree to
provide. The Company refers to these payments as partner revenue share charges. The Company has considered the revenue reduction provisions addressed in EITF 01-09, Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendors Products, (EITF 01-09) and believes that the payment of partner revenue share charges, or the issuance of warrants or stock in lieu of cash partner revenue share charges, to its partners should not result in any
reduction of revenues. EITF 01-09 addresses consideration paid to parties along a distribution chain. The Company purchases merchandise from its vendors, at its discretion, and is responsible for paying those vendors. The amounts purchased and the
prices paid to the Companys vendors are not in any way impacted by the revenue share provisions of the Companys agreements with its partners. Accordingly, the Companys partners and vendors are not linked in the distribution chain
and the Company believes that the provisions of EITF 01-09 do not apply.

Service Fee Revenues:The Company derives its service fee
revenues from service fees earned by it in connection with the development and operation of its partners e-commerce businesses. Service fees primarily consist of variable fees based on the value of merchandise sold or gross profit generated
through its partners e-commerce businesses. To a lesser



7



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except
per share data)

(unaudited)



extent, service fees include fixed periodic payments by partners for the development and operation of their e-commerce businesses and fees related to the
provision of marketing, design, development and other services. The Company recognizes revenues from services provided when the following revenue recognition criteria are met: persuasive evidence of an arrangement exists, services have been
rendered, the fee is fixed or determinable and collectibility is reasonably assured.

The Company follows EITF 00-21 Accounting for
Revenue Arrangements with Multiple Deliverables, for revenue arrangements that include multiple deliverables. The revenue arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the
arrangement meet the following criteria: the delivered item has value to the customer on a standalone basis, there is objective and reliable evidence of the fair value of undelivered items and delivery of any undelivered item is probable and
substantially in control of the Company.

The Company does not specifically record cost of service fee revenues as these costs
are incurred by the Companys fee-based partners rather than by the Company. Operating expenses relating to service fee revenues consist primarily of personnel and other costs associated with the Companys engineering, production and
creative departments which are included in product development expense, as well as fulfillment costs and personnel and other costs associated with its marketing and customer care departments which are included in sales and marketing expense in the
Condensed Consolidated Statements of Operations.

Sales and Marketing:Sales and marketing expenses include fulfillment costs,
customer care costs, credit card fees, partner revenue share charges, net advertising and promotional expenses incurred by the Company on behalf of its partners e-commerce businesses, and payroll related to the buying, business management and
marketing functions of the Company. Partner revenue share charges are payments made to the Companys partners in exchange for the use of their brands, the promotion of partners URLs, Web sites and toll-free telephone numbers in the
partners marketing and communications materials, the implementation of programs to provide incentives to customers to shop through the e-commerce businesses that the Company operates for its partners and other programs and services provided to
the customers of the e-commerce businesses that the Company operates for its partners, net of amounts reimbursed to the Company by its partners. Partner revenue share charges were $5,700 and $17,496 for the three- and nine-month periods ended
September 29, 2007, and $5,386 and $11,241 for the three- and nine-month periods ended September 30, 2006.

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 the customer and these costs are included in cost of revenues from product sales to the extent
of shipping revenue. In some instances, shipping and handling costs exceed shipping charges to the customer and are subsidized by the Company. Additionally, the Company selectively offers promotional free shipping whereby it ships merchandise to
customers free of all shipping and handling charges. The cost of promotional free shipping and subsidized shipping and handling was $519 and $2,708 for the three- and nine-month periods ended September 29, 2007, and $0 and $2,434 for the three-
and nine-month periods ended September 30, 2006 and is included in sales and 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 $15,252 and $37,997 for the three- and nine-month periods ended September 29, 2007, and $9,431 and $25,765 for the three- and
nine-month periods ended September 30, 2006, and are included in sales and marketing expenses in the Condensed Consolidated Statements of Operations.

Advertising:The Company expenses the cost of advertising, which includes online marketing fees, media, agency and production expenses, in accordance with the American Institute of Certified Public
Accountants Accounting Standards Executive Committees Statement of Position 93-7, Reporting on Advertising Costs (SOP 93-7). Advertising production costs are expensed the first time the advertisement runs. Online
marketing fees and media (television, radio and print) placement costs are expensed in the month the advertising appears. Agency fees are expensed as incurred. Advertising and promotional expenses are net of amounts reimbursed to the Company by its
partners. Advertising expenses were $3,442 and $10,460 for the three- and nine-month periods ended September 29, 2007, and $3,598 and $8,801 for the three-and nine-month periods ended September 30, 2006, and are included in sales and
marketing expenses in the Condensed Consolidated Statements of Operations.



8



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except
per share data)

(unaudited)



Catalog Costs:Direct response advertising consists primarily of creative design, paper,
printing, postage, and mailing costs, which are capitalized and amortized over the expected future revenue stream, which is generally a period not exceeding six months. The Company accounts for catalog costs in accordance with SOP 93-7, which
requires that the amortization of capitalized advertising costs be based upon the ratio of actual revenues to the total of actual and estimated future revenues on an individual catalog basis. Deferred catalog costs included in prepaid expenses and
other current assets were $301 as of September 29, 2007 and $592 as of December 30, 2006. Catalog costs were $733 and $1,758 for the three- and nine-month periods ended September 29, 2007, and $1,005 and $1,348 for the three- and
nine-month periods ended September 30, 2006, and are reflected in sales and marketing expenses in the Condensed Consolidated Statements of Operations.

Stock-Based Compensation: Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standard (SFAS) 123(R), Share-Based Payment (SFAS
123(R)), using the modified prospective approach, which requires measurement of compensation cost for all stock-based awards at fair value on the date of grant and recognition of compensation expense over the service period during which awards
are expected to vest. The fair value of restricted stock and restricted stock units is determined based on the number of shares granted and the quoted price of the Companys common stock and the fair value of stock options is determined using
the Black-Scholes valuation model. Such value is recognized as expense over the service period, net of estimated forfeitures, using the accelerated method under SFAS 123(R) for all unvested options as of January 1, 2006. The estimation of the
number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Companys current estimates, such amounts will be recorded as a cumulative adjustment in the period in
which estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and historical experience. Actual results, and future changes in estimates, may differ substantially from
the Companys current estimates.

The adoption of SFAS 123(R) resulted in a cumulative benefit from accounting change of $268 and a
decrease in loss per share of $0.01 in the first quarter of fiscal 2006, which reflects the cumulative impact of estimating future forfeitures in the determination of period expense, rather than recording forfeitures when they occur as previously
permitted.

Prior to the adoption of SFAS 123(R), the Company presented excess tax benefits resulting from stock-based compensation as
operating cash flows within the Condensed Consolidated Statements of Cash Flows. SFAS 123(R) requires that cash flows resulting from the impact of any tax deduction in excess of the recorded tax effects of compensation cost recognized in the
financial statements be classified as financing cash inflows within the Condensed Consolidated Statements of Cash Flows. There was no tax benefit resulting from stock-based compensation deductions in excess of amounts reported for financial
reporting purposes for the nine-month periods ended September 29, 2007 and September 30, 2006.

Upon adoption of SFAS 123(R), the
Company elected the alternative transition method for calculating the tax effects of stock-based compensation pursuant to Financial Accounting Standards Board (FASB) Staff Position SFAS 123(R)-3, Transition Election to Accounting
for the Tax Effects of Share Based Payment Awards (SFAS 123(R)-3). Under SFAS 123(R)-3, the Company determined the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of the
employee stock-based compensation as if the Company had adopted the recognition provisions of SFAS 123, Accounting for Stock-Based Compensation, since its effective date of January 1, 1995. The Company also determined
the subsequent impact on the APIC pool and Condensed Consolidated Statements of Cash Flows of the tax effect of employee stockbased compensation awards that were issued after the adoption of SFAS 123(R) and outstanding at the adoption date.

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

Effective December 31, 2006, the Company adopted the provisions of FASBs Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in
its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. FIN 48 states that a tax benefit from an uncertain tax position



9



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except
per share data)

(unaudited)



may be recognized only if it is more likely than not that the position is sustainable, based on its technical merits. The tax benefit of a
qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority having full knowledge of all relevant information. A tax benefit from an uncertain position was
previously recognized if it was probable of being sustained. Under FIN 48, the liability for unrecognized tax benefits is classified as noncurrent unless the liability is expected to be settled in cash within 12 months of the reporting date. See
 Note 9 Income Taxes.

New Accounting Pronouncements:In September 2006, the FASB issued SFAS 157,
Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007. The Company is in the process of evaluating the impact of the adoption of this statement on the Companys results of operations and financial condition.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159).
SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the impact of the adoption of this statement on the
Companys results of operations and financial condition.

Proposed Accounting Pronouncement:In September 2007, the FASB issued
Proposed FASB Staff Position No. APB 14-a, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB 14-a). FSP APB 14-a would require the issuer of
convertible debt instruments with cash settlement features to separately account for the liability and equity components of the instrument. The Companys $207,500 of convertible notes would be subject to the provisions of this proposal because
under the notes the Company has the ability to elect cash settlement upon conversion for the principle portion of the notes. The debt would be recognized at the present value of the Companys cash flows discounted using its nonconvertible debt
borrowing rate. The equity component would be recognized as the difference between the proceeds from the issuance of the note and the fair value of the liability. The proposed FSP would also require an accretion of the resultant debt discount over
the expected life of the debt. The proposed transition guidance requires retrospective application to all periods presented and does not grandfather existing instruments. It would result in a material decrease to the Companys liabilities and a
material increase to the Companys stockholders equity on the Condensed Consolidated Balance Sheets. It would also result in a material decrease to net income and a material non-cash increase to interest expense to accrete the value of
the debt from its fair value to its principle amount over the term of the convertible notes in the Condensed Consolidated Statements of Operations. These changes would not impact the Companys cash flows from operating activities, investing
activities or financing activities.

NOTE 3CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES

The Company had cash and cash equivalents of $93,943 as of September 29, 2007 and $71,382 as of December 30, 2006, and marketable securities of
$72,300 as of September 29, 2007 and $113,074 as of December 30, 2006 invested with multiple financial institutions, which are potentially subject to credit risk. The composition of these investments is regularly monitored by management of
the Company.

Marketable securities, which consist of investments in various debt securities, are classified as available-for-sale and are
reported at fair value, with unrealized gains and losses recorded as a component of stockholders equity. The Company classifies all of its available-for-sale securities as current assets, as these securities represent investments available for
current corporate purposes. All investments in marketable securities with original maturities of greater than 90 days are accounted for in accordance with SFAS 115, Accounting for Certain Investments in Debt and Equity Securities. At
September 29, 2007 and December 30, 2006, the Company held $72,300 and $73,625, respectively, of investments in auction rate securities classified as available-for-sale. Investments in these securities are recorded at cost, which
approximates fair value due to their variable interest rates. Auction rate securities provide liquidity through a Dutch auction process that resets the applicable interest rate at pre-determined calendar intervals, generally every 30 to 45 days.
This mechanism allows existing investors either to rollover their holdings, whereby they will continue to own their respective securities, or liquidate their holding by selling such securities at par. Recently, certain of these auctions have not had
sufficient buyers to cover investors sell orders, resulting in an unsuccessful auction. When an auction is unsuccessful, the interest rate is re-set to a level pre-determined by



10



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except
per share data)

(unaudited)



the loan documents and remains in effect until the next auction date, at which time the process repeats. The recent uncertainties in the credit markets have
affected our holdings in auction rate securities. In the third quarter of fiscal 2007, the Company liquidated $155,311 of investments in auction rate securities, but was unsuccessful in liquidating the remaining $72,300. While these investments are
of high credit quality and the respective credit ratings of the securities have not been lowered or put on credit watch, at this time the Company is uncertain as to when the liquidity issues relating to these investments will improve, but currently
expects liquidity within one year. As of September 29, 2007, the Company does not believe that it is necessary to adjust the fair value of its portfolio of auction rate securities or to reclassify them as long-term marketable securities on our
Condensed Consolidated Balance Sheet.

All income generated from marketable securities is recorded as interest income. Realized gains or
losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are reported in other (income) expense in the Condensed Consolidated Statements of Operations. Realized losses were $80 for both the three- and
nine-month periods ended September 29, 2007, and $0 for both the three- and nine-month periods ended September 30, 2006.

Marketable securities, at estimated fair value, consist of the following:



|                                  |  |                    |         |                      |   |      |                     |  |   |        
|--------------------------------- |  | ------------------ | ------- | -------------------- | - | ---- | ------------------- |  | - | -------
|                                  |  | December 30, 2006 
|                                  |  | AmortizedCost      |         | Net UnrealizedLosses |   |      | EstimatedFair Value
|Auction rate securities           |  | $                  | 73,625  |                      | $ |     |                     |  | $ | 73,625 
|Corporate bonds                   |  |                    | 27,888  |                      |   | (70  | )                   |  |   | 27,818 
|Certificates of deposit           |  |                    | 1,500   |                      |   |     |                     |  |   | 1,500  
|U.S. government agency securities |  |                    | 10,204  |                      |   | (73  | )                   |  |   | 10,131 
|                                  |  |                    |         |                      |   |      |                     |  |   |        
|                                  |  | $                  | 113,217 |                      | $ | (143 | )                   |  | $ | 113,074
|                                  |  |                    |         |                      |   |      |                     |  |   |        
|                                  | 
|                                  |  | September 29, 2007
|                                  |  | AmortizedCost      |         | NetUnrealizedLosses  |   |      | EstimatedFair Value
|Auction rate securities           |  | $                  | 72,300  |                      | $ |     |                     |  | $ | 72,300 
|                                  |  |                    |         |                      |   |      |                     |  |   |        

The Company considered the nature of these marketable securities, the amount of the unrealized
losses relative to the carrying value of the related investments and the duration of the unrealized losses, and concluded that the unrealized losses were not other-than-temporary.



11



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except
per share data)

(unaudited)



The amortized cost and estimated fair value of investments in marketable securities as of
September 29, 2007, by contractual maturity, are as follows:



|                                       |  |               |        |                     |   |       
|-------------------------------------- |  | ------------- | ------ | ------------------- | - | ------
|                                       |  | AmortizedCost |        | EstimatedFair Value
|Due within one year                    |  | $             | 45,600 |                     | $ | 45,600
|Due after one year through five years  |  |               |       |                     |   |      
|Due after five years through ten years |  |               |       |                     |   |      
|Due after ten years                    |  |               | 26,700 |                     |   | 26,700
|                                       |  |               |        |                     |   |       
|                                       |  | $             | 72,300 |                     | $ | 72,300
|                                       |  |               |        |                     |   |       

NOTE 4PROPERTY AND EQUIPMENT

The major classes of property and equipment, at cost, as of December 30, 2006 and September 29, 2007 are as follows:



|                                                     |  |                  |         |   |                   |   |         |  
|---------------------------------------------------- |  | ---------------- | ------- | - | ----------------- | - | ------- | -
|                                                     |  | December 30,2006 |         |   | September 29,2007 |  
|Computer hardware and software                       |  | $                | 101,985 |   |                   | $ | 137,058 |  
|Building and building improvements                   |  |                  | 43,842  |   |                   |   | 44,033  |  
|Furniture, warehouse and office equipment, and other |  |                  | 21,698  |   |                   |   | 33,573  |  
|Land                                                 |  |                  | 7,889   |   |                   |   | 7,889   |  
|Leasehold improvements                               |  |                  | 1,333   |   |                   |   | 3,223   |  
|Assets financed under capitalized leases             |  |                  | 1,692   |   |                   |   | 16,388  |  
|Construction in progress                             |  |                  | 689     |   |                   |   | 1,353   |  
|                                                     |  |                  |         |   |                   |   |         |  
|                                                     |  |                  | 179,128 |   |                   |   | 243,517 |  
|Less: Accumulated depreciation                       |  |                  | (72,924 | ) |                   |   | (95,244 | )
|                                                     |  |                  |         |   |                   |   |         |  
|Property and equipment, net                          |  | $                | 106,204 |   |                   | $ | 148,273 |  
|                                                     |  |                  |         |   |                   |   |         |  

During fiscal 2006, the Company received a government economic development grant of $3,000 related
to the purchase of its corporate headquarters. The cost basis of the Companys building and building improvements was reduced by the full amount of this grant.

The Companys net investment in capital leases, which consist of warehouse equipment and computer hardware, was $15,742 as of September 29, 2007 and $751 as of December 30, 2006. Interest expense
recorded on capital leases was $186 and $426 for the three- and nine-month periods ended September 29, 2007 and $10 and $37 for the three- and nine-month periods ended September 30, 2006.

Depreciation and amortization is shown as a separate line item on the Condensed Consolidated Statements of Operations. Accordingly, cost of revenues is
exclusive of depreciation and amortization.

NOTE 5ACQUISITION

On September 10, 2007, the Company completed the acquisition of Accretive Commerce, Inc. (Accretive) pursuant to the terms of an Agreement and Plan of Merger dated August 16, 2007
(Agreement). Accretive is an e-commerce solutions provider that offers e-commerce technology, customer care and fulfillment solutions as well as related services. Accretives partners are primarily in the merchandise categories of
apparel, home, health and beauty, and specialty foods. The Company believes the acquisition of Accretive strengthens its position in the e-commerce industry and enhances stockholder value by expanding its infrastructure and expanding its partner
base. As consideration for the acquisition of



12



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except
per share data)

(unaudited)



Accretive, the Company paid the shareholders of Accretive $97,500 in cash, of which $11,300 will be held in escrow for a period of 18 months to secure the
indemnification obligations under the Agreement. The acquisition was financed by the Company from its working capital.

The Company
accounted for the acquisition using the purchase method of accounting in accordance with SFAS 141, Business Combinations. The total preliminary purchase price is $98,600, including estimated acquisition related transaction costs of
approximately $1,100. Acquisition related transaction costs include legal and other external costs directly related to the merger. Under the purchase method, assets acquired and liabilities assumed from Accretive will be recorded at their fair
values as of the acquisition date. Any excess of the purchase price over the fair values of the net assets acquired will be recorded as goodwill. Accretives results of operations are included in the Companys Condensed Consolidated
Statement of Operations beginning on the acquisition date of September 10, 2007. The preliminary allocation of the purchase price was based upon a preliminary valuation and the Companys estimates and assumptions are subject to change. The
areas of the purchase price allocation that are not yet finalized relate primarily to intangible assets, goodwill and deferred income tax assets. Final adjustments could result in a materially different purchase price and/or allocation of the
purchase price, which will affect the value assigned to tangible and/or intangible assets acquired from Accretive. The following table summarizes the preliminary estimated fair values of the Accretive assets acquired and liabilities assumed,
including cash acquired, as of the acquisition date:



|                               |  |   |         |  
|------------------------------ |  | - | ------- | -
|Total current assets           |  | $ | 18,996  |  
|Property, plant and equipment  |  |   | 5,914   |  
|Identifiable intangible assets |  |   | 18,980  |  
|Goodwill                       |  |   | 70,770  |  
|Other assets                   |  |   | 4,244   |  
|                               |  |   |         |  
|Total assets acquired          |  |   | 118,904 |  
|Total current liabilities      |  |   | (18,467 | )
|Total non-current liabilities  |  |   | (1,837  | )
|                               |  |   |         |  
|Total liabilities assumed      |  |   | (20,304 | )
|                               |  |   |         |  
|Net assets acquired            |  | $ | 98,600  |  
|                               |  |   |         |  

In connection with the acquisition, the Company recorded exit cost liabilities of $6,100, which
includes $3,200 of severance payments and related benefits for employees of Accretive terminated or notified of their pending termination and $2,900 of lease payments for certain facilities that have been exited or will be exited prior to the
expiration of their leases. These amounts are included in the table above. These liabilities are subject to further adjustment based on finalization of these exit activities. Any adjustment to the exit liabilities will be recorded in purchase
accounting and will impact the net assets acquired.

The financial information in the table below summarizes the combined results of
operations of the Company and Accretive on a pro forma basis, as though the companies had been combined as of the beginning of each of the periods presented. The pro forma financial information is presented for informational purposes only and is not
indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of each of the periods presented and is not intended to be a projection of future results or trends. The pro forma financial
information for all periods presented includes pro-forma adjustments, net of any applicable tax for amortization expense from the acquired intangible assets, elimination of management fees paid by Accretive to its parent, a reduction to interest
income on marketable securities used to fund the acquisition, and an increase to depreciation expense. Final adjustments to the purchase accounting discussed above could result in a material charge to the pro-forma results.



13



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except
per share data)

(unaudited)



|                                                                      |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|--------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | ----------------- |  | - | ----------------- | - |  | - | ------- | -
|                                                                      |  | Three Months Ended |         |   | Nine Months Ended |  
|                                                                      |  | September 30,2006  |         |   | September 29,2007 |   |         | September 30,2006 |  |   | September 29,2007 |  
|Net revenues                                                          |  | $                  | 135,468 |   |                   | $ | 151,094 |                   |  | $ | 400,397           |   |  | $ | 469,845 |  
|Net loss prior to cumulative effect of change in accounting principle |  | $                  | (10,430 | ) |                   | $ | (8,744  | )                 |  | $ | (25,650           | ) |  | $ | (21,444 | )
|Net loss                                                              |  | $                  | (10,430 | ) |                   | $ | (8,744  | )                 |  | $ | (25,382           | ) |  | $ | (21,444 | )
|Basic and diluted loss per share:                                     |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Prior to cumulative effect of change in accounting principle          |  | $                  | (0.23   | ) |                   | $ | (0.19   | )                 |  | $ | (0.57             | ) |  | $ | (0.46   | )
|Net loss                                                              |  | $                  | (0.23   | ) |                   | $ | (0.19   | )                 |  | $ | (0.56             | ) |  | $ | (0.46   | )

NOTE 6LONG-TERM DEBT AND CREDIT FACILITY

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



|                                                   |  |                  |        |   |                   |   |         |  
|-------------------------------------------------- |  | ---------------- | ------ | - | ----------------- | - | ------- | -
|                                                   |  | December 30,2006 |        |   | September 29,2007 |  
|Convertible notes                                  |  | $                | 57,500 |   |                   | $ | 207,500 |  
|Notes payable                                      |  |                  | 12,994 |   |                   |   | 12,874  |  
|Capital lease obligations                          |  |                  | 329    |   |                   |   | 16,388  |  
|Other                                              |  |                  | 43     |   |                   |   | 30      |  
|                                                   |  |                  |        |   |                   |   |         |  
|                                                   |  |                  | 70,866 |   |                   |   | 236,792 |  
|Less: Current portion of notes payable             |  |                  | (162   | ) |                   |   | (167    | )
|Less: Current portion of capital lease obligations |  |                  | (329   | ) |                   |   | (2,208  | )
|Less: Other                                        |  |                  | (19    | ) |                   |   | (24     | )
|                                                   |  |                  |        |   |                   |   |         |  
|                                                   |  | $                | 70,356 |   |                   | $ | 234,393 |  
|                                                   |  |                  |        |   |                   |   |         |  

3% Convertible Notes due 2025

The Company has outstanding $57,500 aggregate principal amount of 3% convertible unsecured 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 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), subject to adjustment, on or prior to the close of business on the business day immediately preceding May 1, 2010. Holders may convert only if (i) the
trading price of the notes for a defined period is less than 103% of the product of the closing sale price of the Company common stock and the conversion rate or (ii) the Company elects to make certain distributions of assets or securities to
all holders of common stock. Upon conversion, the Company will have the right to deliver, in lieu of shares of the Companys common stock, cash or a combination of cash and shares of the Companys common stock, which is at the
Companys election. At any time prior to the maturity date; the Company may irrevocably elect to satisfy the Companys conversion obligation with respect to the principal amount of the notes to be converted with a combination of cash and
shares of the Companys common stock, which is at the Companys election. If holders elect to convert their notes in connection with a fundamental change (any transaction or event, as defined in the Indenture, whereby more than 50% of the
Companys common stock is exchanged, converted and/or acquired) that occurs on or prior to June 1, 2010, the Company is required to deliver shares of the Companys common stock, cash or a combination of cash and shares of the
Companys common stock, which is at the Companys election, inclusive of a make whole adjustment that could result in up to 11.23 additional shares issued per $1,000 principal amount of notes. This make-whole adjustment is based on the
sale price of the Companys common stock.



14



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except
per share data)

(unaudited)



At any time on or after June 6, 2010, the Company may redeem any of the notes for cash at a
redemption price of 100% of their principal amount, plus accrued and unpaid interest, if any, up to but excluding the redemption date. Holders may require the Company to repurchase the notes at a repurchase price equal to 100% of their principal
amount plus accrued and unpaid interest, if any, on June 1 of 2010, 2015 and 2020, or at any time prior to maturity upon the occurrence of a designated event.

2.5% Convertible Notes due 2027

In July 2007, the Company completed a private placement of $150,000 of aggregate principle
amount of 2.5% convertible unsecured 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 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), subject to adjustment, at any time prior to the close of business on the scheduled trading day immediately preceding
March 1, 2014 and at any time on or after June 8, 2014 and prior to the close of business on the scheduled trading day immediately preceding March 1, 2027. Holders may convert, in whole or in part, 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) if (i) after any five consecutive trading day period in which the trading price of the notes was less than 98% of the product of the
closing sale price of the Companys common stock and the applicable conversion rate, (ii) after the calendar quarter ending September 30, 2007, if the closing sale price of the Companys common stock for 20 or more trading days
in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect for the notes on the last trading day of the immediately preceding
calendar quarter, (iii) upon the occurrence of specified corporate events or (iv) if the Company calls the notes for redemption.

Upon conversion, the Company will have the right to deliver, in lieu of shares of the
Companys common stock, cash or a combination of cash and shares of the Companys common stock. At any time on or prior to the 25thscheduled
trading day prior to the maturity date, the Company may irrevocably elect to satisfy its conversion obligation by delivering cash for the principal amount of the notes and, if applicable, shares of the Companys common stock for any amount in
excess thereof. If holders elect to convert their notes in connection with certain makewhole fundamental changes (as defined in the Indenture governing the Companys 2.5% notes) that occurs on or prior to June 1, 2014, the Company will
increase the applicable conversion rate for the notes such that the holders will be entitled to receive additional shares of common stock (or cash, or a combination of cash and shares of common stock, if the Company so elects) upon conversion. No
adjustment to the conversion rate will be made if the stock price is less than $24.36 per share or if the stock price exceeds $100.00 per share.

At any time on or after June 8, 2014, the Company may redeem any of the notes for cash at a redemption price of 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the redemption
date. If a fundamental change occurs prior to the maturity of the notes, the holders may require the Company to repurchase all or part of their notes at a repurchase price of 100% of their principal amount, plus accrued and unpaid interest, if any,
to, but excluding, the fundamental change repurchase date. In addition, the holders may require the Company to repurchase all or part of their notes for cash on June 1 of 2014, 2017 and 2022, respectively, at a repurchase price equal to 100% of
their principal amount, plus any accrued or unpaid interest, if any, to, but excluding, the date of repurchase.

Note Payable

In fiscal 2004, a wholly-owned subsidiary of the Company entered into an agreement to purchase a new corporate headquarters in King of Prussia,
Pennsylvania, together with an option to purchase an additional parcel of land. The purchase price for the building was $17,000 and a $13,000 mortgage note was entered into, collateralized by a first lien on substantially all of the assets of that
subsidiary. The mortgage note has a term of ten years and six months, and bears interest at 6.32% per annum. The Company, in accordance with the terms of the mortgage note, provided a letter of credit in the amount of $3,000 as additional
security and in fiscal 2005 completed initial capital improvements to the building reducing the letter of credit to $1,000 in accordance with the terms of the mortgage note. In connection with the credit facility,



15



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except
per share data)

(unaudited)



described more fully below, the Company is required to pledge $1,000 of its cash equivalents as collateral for the letter of credit. This collateral is
classified as restricted cash and included in other assets, net on the Condensed Consolidated Balance Sheets. The letter of credit may be reduced further to $500 if the Company has positive income for fiscal years 2006, 2007 and 2008. The Company
recorded interest expense related to the note of $203 and $606 for three- and nine-month periods ended September 29, 2007 and $205 and $613 for the three- and nine-month periods ended September 30, 2006.

Capital Lease Obligations

Certain of the
Companys warehouse equipment and computer hardware have been acquired under capital leases. The capital leases have maturity dates of September 2012 and August 2014 and bear interest at rates ranging from 5.13% to 6.51% per annum.
Long-term capital lease obligations were as follows:



|                                                     |  |                   |        |  
|---------------------------------------------------- |  | ----------------- | ------ | -
|                                                     |  | September 29,2007 |       
|Gross capital lease obligations                      |  | $                 | 20,148 |  
|Less: imputed interest                               |  |                   | (3,760 | )
|                                                     |  |                   |        |  
|Total present value of future minimum lease payments |  |                   | 16,388 |  
|Less: current portion                                |  |                   | (2,208 | )
|                                                     |  |                   |        |  
|Long-term portion                                    |  | $                 | 14,180 |  
|                                                     |  |                   |        |  

Credit Facility

In fiscal 2006, the Company entered into a $5,000 one-year unsecured revolving credit facility with a bank. The credit facility also provides for the issuance of up to $5,000 of letters of credit, which is included in
the $5,000 available under the credit facility. The Company may elect to have amounts outstanding under the credit facility bear interest at a LIBOR rate plus an applicable margin of 1.25% to 2.00% or the prime rate minus an applicable margin of up
to 0.75%. The applicable margin is determined by the leverage ratio of funded debt to EBITDA, as defined in the credit facility.

The
credit facility contains certain financial and negative covenants which the Company was in compliance with at September 29, 2007 and December 30, 2006. The Company had $841 of outstanding letters of credit under the credit facility as of
September 29, 2007.

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 and claims relating to the manner in which goods are sold through its e-commerce platform. The Company does not believe, based on
current knowledge, that any of these claims are likely to have a material adverse effect on its business, financial position or results of operations. However, the Company may incur substantial expenses and devote substantial time to defend
third-party claims whether or not such claims are meritorious. In the event of a determination adverse to the Company, the Company may incur substantial monetary liability and may be required to implement expensive changes in its business practices
or enter into costly royalty or licensing agreements. Such a determination adverse to the Company could have a material adverse effect on the Companys business, financial position or results of operations.



16



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except
per share data)

(unaudited)



Operating and Capital Commitments

The following summarizes the Companys principal operating and capital commitments as of September 29, 2007:



|                                                              |  |                             |         |      |   |        |  |      |        |      |   |            |  |       |        |  |   |         |  |   |        
|------------------------------------------------------------- |  | --------------------------- | ------- | ---- | - | ------ |  | ---- | ------ | ---- | - | ---------- |  | ----- | ------ |  | - | ------- |  | - | -------
|                                                              |  | Payments due by fiscal year
|                                                              |  | 2007                        |         | 2008 |   | 2009   |  | 2010 |        | 2011 |   | Thereafter |  | Total
|Operating lease obligations(1)                                |  | $                           | 2,977   |      | $ | 11,163 |  | $    | 9,517  |      | $ | 7,544      |  | $     | 5,424  |  | $ | 16,763  |  | $ | 53,388 
|Purchase obligations(1)                                       |  |                             | 94,382  |      |   |       |  |      |       |      |   |           |  |       |       |  |   |        |  |   | 94,382 
|Advertising and media agreements(1)                           |  |                             | 54      |      |   |       |  |      |       |      |   |           |  |       |       |  |   |        |  |   | 54     
|Partner revenue share and other partner agreement payments(1) |  |                             | 3,500   |      |   | 21,512 |  |      | 26,500 |      |   | 27,050     |  |       | 27,683 |  |   | 83,375  |  |   | 189,620
|Debt interest(1)                                              |  |                             | 3,332   |      |   | 6,273  |  |      | 6,259  |      |   | 5,241      |  |       | 4,509  |  |   | 20,352  |  |   | 45,966 
|Debt obligations                                              |  |                             | 47      |      |   | 193    |  |      | 400    |      |   | 57,696     |  |       | 208    |  |   | 161,860 |  |   | 220,404
|Capital lease obligations, including interest(1)              |  |                             | 935     |      |   | 2,996  |  |      | 2,997  |      |   | 2,997      |  |       | 2,997  |  |   | 7,226   |  |   | 20,148 
|                                                              |  |                             |         |      |   |        |  |      |        |      |   |            |  |       |        |  |   |         |  |   |        
|Total                                                         |  | $                           | 105,227 |      | $ | 42,137 |  | $    | 45,673 |      | $ | 100,528    |  | $     | 40,821 |  | $ | 289,576 |  | $ | 623,962
|                                                              |  |                             |         |      |   |        |  |      |        |      |   |            |  |       |        |  |   |         |  |   |        

---

|(1) | Not required to be recorded in the Condensed Consolidated Balance Sheets as of September 29, 2007 in accordance with accounting principles generally accepted in the United
States of America. Capital lease obligations, excluding interest, are recorded in the Condensed Consolidated Balance Sheets.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 September 29, 2007, 3,369 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 appreciation rights (SARs) may be granted under the Plan
either alone or in tandem with stock options. No SARs have been granted to date under the plan.

Stock Options and Warrants

The following table summarizes the stock option activity for the nine-month period ended September 29, 2007:



|                                                  |  |                                |   |  |                              |       |                                                    |      |                         |   |       
|------------------------------------------------- |  | ------------------------------ | - |  | ---------------------------- | ----- | -------------------------------------------------- | ---- | ----------------------- | - | ------
|                                                  |  | Number ofShares (in thousands) |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualLife (in years) |      | AggregateIntrinsicValue
|Outstanding at December 30, 2006                  |  | 4,984                          |   |  | $                            | 9.97  |                                                    |      |                         |   |       
|Granted                                           |  |                               |   |  | $                            |      |                                                    |      |                         |   |       
|Exercised                                         |  | (635                           | ) |  | $                            | 10.32 |                                                    |      |                         |   |       
|Forfeited/Cancelled                               |  | (15                            | ) |  | $                            | 12.34 |                                                    |      |                         |   |       
|                                                  |  |                                |   |  |                              |       |                                                    |      |                         |   |       
|Outstanding at September 29, 2007                 |  | 4,334                          |   |  | $                            | 9.91  |                                                    | 4.98 |                         | $ | 72,350
|                                                  |  |                                |   |  |                              |       |                                                    |      |                         |   |       
|Vested and expected to vest at September 29, 2007 |  | 4,289                          |   |  | $                            | 9.91  |                                                    | 4.96 |                         | $ | 71,594
|                                                  |  |                                |   |  |                              |       |                                                    |      |                         |   |       
|Exercisable at September 29, 2007                 |  | 4,014                          |   |  | $                            | 9.89  |                                                    | 4.87 |                         | $ | 67,070
|                                                  |  |                                |   |  |                              |       |                                                    |      |                         |   |       



17



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except
per share data)

(unaudited)



The total intrinsic value of options exercised during the three- and nine-month periods ended
September 29, 2007 was $1,937 and $7,366 determined as of the date of exercise. Cash proceeds from options exercised during the nine months ended September 29, 2007 was $6,544. The total stock-based compensation cost recognized for stock
options for the three- and nine-month periods ended September 29, 2007 was $160 and $429 and for the three- and nine-month periods ended September 30, 2006 was $450 and $1,296.

The following table summarizes the warrant activity for the nine-month period ended September 29, 2007:



|                                                  |  |                               |   |  |                              |      |                                                    |      |                         |   |      
|------------------------------------------------- |  | ----------------------------- | - |  | ---------------------------- | ---- | -------------------------------------------------- | ---- | ----------------------- | - | -----
|                                                  |  | Number ofShares(in thousands) |   |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractualLife (in years) |      | AggregateIntrinsicValue
|Outstanding at September 29, 2006                 |  | 303                           |   |  | $                            | 3.09 |                                                    |      |                         |   |      
|Granted                                           |  |                              |   |  | $                            |     |                                                    |      |                         |   |      
|Exercised                                         |  |                              |   |  | $                            |     |                                                    |      |                         |   |      
|Forfeited/Cancelled                               |  | (13                           | ) |  | $                            | 5.00 |                                                    |      |                         |   |      
|                                                  |  |                               |   |  |                              |      |                                                    |      |                         |   |      
|Outstanding at September 29, 2007                 |  | 290                           |   |  | $                            | 3.01 |                                                    | 2.70 |                         | $ | 6,835
|                                                  |  |                               |   |  |                              |      |                                                    |      |                         |   |      
|Vested and expected to vest at September 29, 2007 |  | 290                           |   |  | $                            | 3.01 |                                                    | 2.70 |                         | $ | 6,835
|                                                  |  |                               |   |  |                              |      |                                                    |      |                         |   |      
|Exercisable at September 29, 2007                 |  | 90                            |   |  | $                            | 4.15 |                                                    | 0.88 |                         | $ | 2,015
|                                                  |  |                               |   |  |                              |      |                                                    |      |                         |   |      

Restricted Stock Units

The Company also has issued restricted stock units to certain employees. The grant-date fair value of restricted stock units 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
activity for the nine-month period ended September 29, 2007:



|                                       |  |                               |   |  |                                     |       |                         |   |       
|-------------------------------------- |  | ----------------------------- | - |  | ----------------------------------- | ----- | ----------------------- | - | ------
|                                       |  | Number ofShares(in thousands) |   |  | WeightedAverageGrant DateFair Value |       | AggregateIntrinsicValue
|Nonvested shares at December 30, 2006  |  | 1,064                         |   |  | $                                   | 14.90 |                         |   |       
|Granted                                |  | 943                           |   |  | $                                   | 19.34 |                         |   |       
|Vested                                 |  | (202                          | ) |  | $                                   | 20.33 |                         |   |       
|Forfeited/Cancelled                    |  | (57                           | ) |  | $                                   | 17.46 |                         |   |       
|                                       |  |                               |   |  |                                     |       |                         |   |       
|Nonvested shares at September 29, 2007 |  | 1,748                         |   |  | $                                   | 22.41 |                         | $ | 39,183
|                                       |  |                               |   |  |                                     |       |                         |   |       

The total intrinsic value of restricted stock units vested during the three- and nine-month
periods ended September 29, 2007 was $894 and $4,098 determined based on the grant date fair value. The total stock-based compensation cost recognized for restricted stock units for the three- and nine-month periods ended September 29,
2007 was $1,751 and $4,592 and for the three- and nine-month periods ended September 30, 2006 was $1,239 and $2,173.



18



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except
per share data)

(unaudited)



Restricted Stock Awards

The Company also has issued restricted stock awards to certain employees. The grant-date fair value of restricted stock units 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 total stock-based compensation cost recognized
for restricted stock awards for three- and nine-month periods ended September 29, 2007 was $11 and $37 and for the three- and nine-month periods ended September 30, 2006 was $16 and $43. For the three-month period ended September 29,
2007, four restricted stock awards vested with a weighted average grant date fair value of $9.31 and an intrinsic value of $98, and for the nine-month period ended September 29, 2007, five restricted stock award vested with a weighted average
grant date fair value of $9.51 and an intrinsic value of $112.

NOTE 9INCOME TAXES

Until fiscal 2006, in the opinion of management, the Company was not certain of the realization of its deferred tax assets. Thus, a valuation allowance
had been provided to offset federal and state deferred tax assets. In fiscal 2006, the Company evaluated the need for a full valuation allowance and concluded that a portion of the valuation allowance should be reduced. The Company determined that
it is more likely than not that it will realize the benefit of a portion of these deferred tax assets. This was based primarily on the Companys earnings history over the prior three years as well as expected future taxable income. In fiscal
2006, the Company recorded a tax benefit of $43,728, resulting primarily from the removal of a portion of the valuation allowance.

The
Companys tax provision for interim periods was determined using an estimate of its annual effective tax rate which is 40.0% for fiscal 2007. The effective tax rate is higher than the 35% federal statutory tax rate primarily due to state income
taxes and losses from international operations which yield no tax benefit.

Effective December 31, 2006 the Company adopted the
provisions of FIN 48. The total amount of unrecognized tax benefits as of December 30, 2006 was $437. As a result of the adoption of FIN 48, the Company did not recognize any cumulative effect to retained earnings for unrecognized tax benefits.
The Company recognizes interest and penalties related to its tax contingencies as income tax expense. Included in the Companys unrecognized tax benefits as of December 30, 2006, the Company had accrued $25 in interest and penalties. There
have been no material changes to unrecognized tax benefits or accrued interest and penalties as of September 29, 2007. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rates as of the date of
adoption is $284. The Companys federal income tax returns for 2003 through 2006 are open tax years and are subject to examination by the Internal Revenue Service. While the statute of limitations has expired on prior years tax returns,
the IRS is able to adjust the net operating loss generated in those years until the statute of limitations expires on the tax return when those net operating losses are utilized. There are no current or pending state income tax audits. The Company
does not believe that there will be any material changes to unrecognized tax positions over the next 12 months.

NOTE 10LOSS PER SHARE

Basic net loss per share for all periods has been computed in accordance with SFAS 128, Earnings per Share. 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.



19



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except
per share data)

(unaudited)



The amounts used in calculating loss per share data are as follows:



|                                                        |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |         |  
|------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | ----------------- |  | - | ----------------- | - |  | - | ------- | -
|                                                        |  | Three Months Ended |        |   | Nine Months Ended |  
|                                                        |  | September 30,2006  |        |   | September 29,2007 |   |        | September 30,2006 |  |   | September 29,2007 |  
|Net loss for basic and diluted earnings per share       |  | $                  | (6,215 | ) |                   | $ | (6,086 | )                 |  | $ | (14,167           | ) |  | $ | (13,464 | )
|                                                        |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |         |  
|Weighted average shares outstanding - basic and diluted |  |                    | 45,344 |   |                   |   | 46,567 |                   |  |   | 45,005            |   |  |   | 46,320  |  
|                                                        |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |         |  
|Net loss per common share - basic and diluted           |  | $                  | (0.14  | ) |                   | $ | (0.13  | )                 |  | $ | (0.31             | ) |  | $ | (0.29   | )
|                                                        |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |         |  

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 nine-month periods ended:



|                           |  |                   |  |                  
|-------------------------- |  | ----------------- |  | -----------------
|                           |  | September 30,2006 |  | September 29,2007
|Stock units and awards     |  | 1,024             |  | 1,753            
|Stock options and warrants |  | 5,760             |  | 4,624            
|Convertible notes          |  | 3,229             |  | 8,229            
|                           |  |                   |  |                  
|                           |  | 10,013            |  | 14,606           
|                           |  |                   |  |                  

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



|                                                                   |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |         |  
|------------------------------------------------------------------ |  | ------------------ | ------ | - | ----------------- | - | ------ | ----------------- |  | - | ----------------- | - |  | - | ------- | -
|                                                                   |  | Three Months Ended |        |   | Nine Months Ended |  
|                                                                   |  | September 30,2006  |        |   | September 29,2007 |   |        | September 30,2006 |  |   | September 29,2007 |  
|Net loss                                                           |  | $                  | (6,215 | ) |                   | $ | (6,086 | )                 |  | $ | (14,167           | ) |  | $ | (13,464 | )
|Other comprehensive income (loss):                                 |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |         |  
|Net unrealized gain (loss) on available-for-sale securities        |  |                    | 186    |   |                   |   | (88    | )                 |  |   | 212               |   |  |   | 10      |  
|Unrealized loss on equity investment                               |  |                    | (679   | ) |                   |   |       |                   |  |   | (835              | ) |  |   |        |  
|Add: reclassification adjustment for losses realized in net income |  |                    | 679    |   |                   |   | 80     |                   |  |   | 2,763             |   |  |   | 80      |  
|Other                                                              |  |                    |       |   |                   |   | 46     |                   |  |   |                  |   |  |   | 32      |  
|                                                                   |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |         |  
|Other comprehensive income                                         |  |                    | 186    |   |                   |   | 38     |                   |  |   | 2,140             |   |  |   | 122     |  
|                                                                   |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |         |  
|Comprehensive loss                                                 |  | $                  | (6,029 | ) |                   | $ | (6,048 | )                 |  | $ | (12,027           | ) |  | $ | (13,342 | )
|                                                                   |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |         |  



20



---

##### Table of Contents

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except
per share data)

(unaudited)



NOTE 12MAJOR SUPPLIERS/ECONOMIC DEPENDENCY

The Company purchased inventory from two suppliers amounting to $11,545 or 19.2% and $11,197 or 18.6% of total inventory purchased during the three-month
period ended September 29, 2007, and $35,041 or 21.9% and $17,845 or 11.1% of total inventory purchased during the nine-month period ended September 29, 2007.

The Company purchased inventory from two suppliers amounting to $11,935 or 20.8% and $6,688 or 11.7% of inventory purchased during the three-month period ended September 30, 2006 and from one supplier amounting
to $55,668 or 31.9% of total inventory purchased during the nine-month period ended September 30, 2006.

No customer accounted for
more than 10% of net revenues for any period presented.

NOTE 13SEGMENT INFORMATION

The Company has one reportable segment: e-commerce solutions. The Company provides e-commerce solutions that enable retailers, branded manufacturers,
entertainment companies and professional sports organizations to operate e-commerce businesses. The Company provides solutions for its partners through its integrated e-commerce platform, which is comprised of four
components  technology, customer care, fulfillment, and marketing services. Through the Companys integrated e-commerce platform, it provides an e-commerce engine, Web store management tools, Web infrastructure and hosting,
order management and processing, reporting and analytics, fulfillment and drop shipping, customer care, buying, user experience and design, content creation, online marketing, and e-mail marketing. The Company currently derives virtually all of its
revenues from the sales of products by the Company through its partners e-commerce businesses and service fees earned by the Company in connection with the development and operation of its partners e-commerce businesses. Substantially
all of the Companys net revenues, operating results, and assets are in the United States.



21



---

##### Table of Contents

|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 anticipate, believe, estimate, expect, intend, may, plan, will, would, should,
guidance, potential, opportunity, continue, project, forecast, confident, prospects, schedule and similar expressions typically are used to
identify forward-looking statements. Forward-looking statements are based on 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 partners operate, changes affecting the Internet, our ability to develop and maintain
relationships with strategic partners and suppliers, our ability to timely and successfully develop, maintain and protect our technology 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 II, Section IA under the heading
Risk Factors in this report on Form 10-Q and in our Form 10-K. We expressly disclaim any intent or obligation to update these forward-looking statements.

Executive Overview



| |  | We are a leading provider of e-commerce solutions that enable retailers, branded manufacturers, entertainment companies
and professional sports organizations to operate e-commerce businesses. We provide solutions for our partners through our integrated e-commerce platform, which is comprised of four components: technology, customer care, fulfillment and marketing
services. Through our platform, we provide an e-commerce engine, Web store management tools, Web infrastructure and hosting, order management and processing, reporting and analytics, fulfillment and drop shipping, customer care, and buying. Through
gsi interactive sm, our marketing services agency, we provide user experience and design, content creation (photography / copy), online marketing services,
and e-mail marketing.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | While we expect the opportunity for partnered e-commerce to continue to grow, we also anticipate continuing intense competition. We compete with in-house solutions
and a variety of third-party vendors that provide e-commerce software or partial e-commerce solutions. To satisfy our existing partners and to continue to attract new partners, we offer a comprehensive and compelling value proposition that includes
a high level of direct-to-consumer expertise and infrastructure. Through our solution, we help our partners grow their e-commerce businesses and use their e-commerce businesses as a channel to complement and enhance their offline businesses. Our
solution is provided to partners on a platform that includes shared technology, logistics and customer care, supporting infrastructure and marketing services. To differentiate our solution in the marketplace, we continually add new services and
functions to our platform. As part of our continuing efforts to add value to our platform, we evaluate opportunities to acquire complementary or new businesses or assets.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We grow our business by expanding the e-commerce businesses of our existing partners and by adding new partners. In the first nine months of fiscal 2007, we signed
agreements with eight new partners. In addition, we are implementing plans to broaden our long-term opportunity with two emerging growth initiatives: international and interactive marketing services. Generally, we launch the website of a new partner
within three to nine months after entering into a contract with such new partner. We anticipate that new Web sites typically will contribute to our income from operations in their first full year of operations.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We derive virtually all of our revenues from sales of products by us through our partners e-commerce businesses and service fees earned by us in connection
with the development and operation of our partners e-commerce businesses.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We generate a majority of our cash from operating activities in our fourth fiscal quarter due to the seasonality of our business. In our first fiscal quarter, we
typically use cash from operating activities to satisfy accounts payable and accrued expenses incurred in the fourth fiscal quarter of our prior fiscal year. We typically have not generated significant cash from operating activities in our second
and third fiscal quarters.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In June 2007, we opened our new fulfillment center in Richwood, Kentucky. The facility is approximately 540,000 square feet and we now manage nearly two million
square feet of fulfillment center space. We installed new warehouse management software at the Richwood, Kentucky fulfillment center in connection with the opening of this facility.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



22



---

##### Table of Contents

| |  | In July 2007, we completed a convertible bond offering of $150 million. Our net proceeds from the offering were approximately $145 million after deducting initial
purchasers discount and issuance costs. We expect to use the proceeds for working capital, general corporate purposes and possible acquisitions.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In September 2007, we acquired Accretive Commerce, Inc. (Accretive), a Huntersville, N.C.-based e-commerce solutions provider for $98.6 million,
including acquisition costs. We believe the acquisition of Accretive strengthens our position in the e-commerce industry and enhances stockholder value by expanding our infrastructure and expanding its partner base. Accretives results of
operations are included in our income statement beginning on the acquisition date of September 10, 2007.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Results of Operations

Three-month period ended September 30, 2006 and September 29, 2007 (amounts in tables in millions):

Net Revenues

We derive virtually all of our revenues
from sales of products by us through our partners e-commerce businesses and service fees earned by us in connection with the development and operation of our partners e-commerce businesses.

Net Revenues from Product Sales. Net revenues from product sales are derived from the sale of products by us through our partners
e-commerce businesses. Net revenues from product sales are net of allowances for returns and discounts and include outbound shipping charges and other product-related services such as gift wrapping and monogramming. We recognize revenue from product
sales and shipping when products are shipped and title and significant risks of ownership passes to the customer.

Service Fee
Revenues. Service fee revenues are derived from service fees earned by us in connection with the development and operation of our partners e-commerce businesses. Service fees primarily consist of variable fees based on the value of
merchandise sold or gross profit generated through our partners e-commerce businesses, and to a lesser extent, fees related to the provision of marketing, design, development and other services. However, our e-commerce agreements with some
partners include fixed periodic payments by such partners for the development and operation of their e-commerce businesses.



|                                                 |  |                       |       |  |                       |   |  |        |       |  |        |                                               |  |   |      |   |  |      |   
|------------------------------------------------ |  | --------------------- | ----- |  | --------------------- | - |  | ------ | ----- |  | ------ | --------------------------------------------- |  | - | ---- | - |  | ---- | --
|                                                 |  |                       |       |  |                       |   |  |        |       |  |        | Third Qtr Fiscal 2007vs.Third Qtr Fiscal 2006 | 
|                                                 |  | Third Qtr Fiscal 2006 |       |  | Third Qtr Fiscal 2007 |   |  | Change |       |  | Change |                                              
|Net revenues from product sales - sporting goods |  | $                     | 55.9  |  | 47.2                  | % |  | $      | 65.0  |  | 47.3   | %                                             |  | $ | 9.1  |   |  | 16.3 | % 
|Net revenues from product sales - other          |  |                       | 28.8  |  | 24.3                  | % |  |        | 26.3  |  | 19.2   | %                                             |  |   | (2.5 | ) |  | (8.7 | )%
|                                                 |  |                       |       |  |                       |   |  |        |       |  |        |                                               |  |   |      |   |  |      |   
|Net revenues from product sales                  |  |                       | 84.7  |  | 71.5                  | % |  |        | 91.3  |  | 66.5   | %                                             |  |   | 6.6  |   |  | 7.8  | % 
|Service fee revenues                             |  |                       | 33.8  |  | 28.5                  | % |  |        | 46.0  |  | 33.5   | %                                             |  |   | 12.2 |   |  | 36.1 | % 
|                                                 |  |                       |       |  |                       |   |  |        |       |  |        |                                               |  |   |      |   |  |      |   
|Net revenues                                     |  | $                     | 118.5 |  | 100                   | % |  | $      | 137.3 |  | 100    | %                                             |  | $ | 18.8 |   |  | 15.9 | % 
|                                                 |  |                       |       |  |                       |   |  |        |       |  |        |                                               |  |   |      |   |  |      |   

Net revenues from product sales in our sporting goods category increased due primarily to growth
of $5.4 million from partners that were launched after the third quarter of 2006, and $3.2 million from partners that operated for the entirety of both periods. Net revenues from product sales in our other category decreased primarily due to one
partner that operated for the entirety of both periods. Included in net revenues from product sales is shipping revenue for partners for which we provide fulfillment services from both the owned-inventory model and the partner-inventory model of
$15.2 million for the third quarter of fiscal 2007 and $11.9 million for the third quarter of fiscal 2006.

Service fee revenues increased
$12.2 million in the third quarter of fiscal 2007 due to an increase of $7.3 million in e-commerce related service fees from partners that operated for the entirety of both periods, and an increase of $4.9 million in e-commerce related service fees
attributable to the addition of new partners that were launched after the third quarter of fiscal 2006. Included in service fee revenues is marketing and other professional related service fees of $5.1 million for the third quarter of fiscal 2007
and $4.1 million for the third quarter of fiscal 2006.



23



---

##### Table of Contents

Gross Profit

Gross profit consists of gross profit from product sales and net revenues from service fees. We do not record cost of service fee revenue because the cost of the sales of the merchandise on which we earn service fees are incurred by our
service-fee partners who are the owners and sellers of the merchandise. Costs of revenues from product sales includes the cost of products sold and inbound freight related to those products, as well as outbound shipping and handling costs other than
those related to promotional free shipping and subsidized shipping and handling which are included in sales and marketing expense. Depreciation and amortization is shown as a separate line item on the Condensed Consolidated Statements of Operations.
Accordingly, cost of revenues is exclusive of depreciation and amortization.



|                                |  |                       |      |                  |                       |   |                 |                                               |   |                |      |   |   |   |                  |  |      |                 |  |     |                |  |      |          |  |          |      |  |      |  
|------------------------------- |  | --------------------- | ---- | ---------------- | --------------------- | - | --------------- | --------------------------------------------- | - | -------------- | ---- | - | - | - | ---------------- |  | ---- | --------------- |  | --- | -------------- |  | ---- | -------- |  | -------- | ---- |  | ---- | -
|                                |  | Third Qtr Fiscal 2006 |      |                  | Third Qtr Fiscal 2007 |   |                 | Third Qtr Fiscal 2007vs.Third Qtr Fiscal 2006 |  
|                                |  | $                     |      | % ofProductSales |                       |   | % ofServiceFees |                                               |   | % ofNetRevenue |      |   | $ |   | % ofProductSales |  |      | % ofServiceFees |  |     | % ofNetRevenue |  |      | $ Change |  | % Change |     
|Gross profit from product sales |  | $                     | 23.9 |                  | 28.2                  | % |                 |                                              |   |                |      |   |   | $ | 26.0             |  | 28.5 | %               |  |    |                |  |      |          |  | $        | 2.1  |  | 8.8  | %
|Gross profit from service fees  |  |                       | 33.8 |                  |                      |   |                 | 100                                           | % |                |      |   |   |   | 46.0             |  |     |                 |  | 100 | %              |  |      |          |  |          | 12.2 |  | 36.1 | %
|                                |  |                       |      |                  |                       |   |                 |                                               |   |                |      |   |   |   |                  |  |      |                 |  |     |                |  |      |          |  |          |      |  |      |  
|Gross profit                    |  | $                     | 57.7 |                  |                       |   |                 |                                               |   |                | 48.7 | % |   | $ | 72.0             |  |      |                 |  |     |                |  | 52.4 | %        |  | $        | 14.3 |  | 24.8 | %
|                                |  |                       |      |                  |                       |   |                 |                                               |   |                |      |   |   |   |                  |  |      |                 |  |     |                |  |      |          |  |          |      |  |      |  

The increase in gross profit as a percentage of net revenues from 48.7% to 52.4% is primarily due
to the larger percentage increase in gross profit from service fees than the percentage increase in gross profit from product sales, as service fees have no associated cost of revenue. In addition, the increase in gross profit percentage for product
sales from 28.2% to 28.5% was primarily due to a higher percentage of product sales in our sporting goods category, which has a higher gross margin than product sales in the other category. Product sales in our sporting goods category represented
71.2% of total product sales in the third quarter of fiscal 2007 and 66.0% in the third quarter of fiscal 2006.

Operating Expenses

Operating expenses consist of sales and marketing expenses, product development expenses, general and administrative expenses and depreciation and
amortization expenses.

Sales and Marketing Expenses: Sales and marketing expenses include net advertising and promotional
expenses, including promotional free shipping and subsidized shipping and handling costs, online marketing fees, commissions to participants in the affiliate programs for our partners Web sites, fulfillment costs, customer care costs, credit
card fees, merchandising costs and payroll and related expenses. These expenses also include net partner revenue share charges, which are royalty payments made to our partners in exchange for the use of their brands, our partners promotion of
their URLs, Web sites and toll-free telephone numbers in their marketing and communications materials, the implementation of programs to provide incentives to customers to shop through the e-commerce businesses that we operate for our partners and
other programs and services provided to the customers of the e-commerce businesses that we operate for our partners, net of amounts reimbursed by our partners.

Product Development Expenses: Product development expenses consist primarily of expenses associated with planning, maintaining and operating the technology platform on which we operate our partners
e-commerce businesses and payroll and related expenses for our technology information systems and creative departments.

General and
Administrative Expense: 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 Expense: Depreciation and amortization expenses
relate primarily to the depreciation 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; the depreciation of
improvements, furniture and equipment at our corporate facilities, our fulfillment centers and our customer contact centers; and the depreciation of the facilities owned by us.



24



---

##### Table of Contents

|                                       |  |                              |      |                 |                              |   |                 |                                                              |   |   |   |                 |  |      |                 |  |       |          |  |          |      |  |      |  
|-------------------------------------- |  | ---------------------------- | ---- | --------------- | ---------------------------- | - | --------------- | ------------------------------------------------------------ | - | - | - | --------------- |  | ---- | --------------- |  | ----- | -------- |  | -------- | ---- |  | ---- | -
|                                       |  | Third Quarter of Fiscal 2006 |      |                 | Third Quarter of Fiscal 2007 |   |                 | Third Quarter of Fiscal 2007vs. Third Quarter of Fiscal 2006 |  
|                                       |  | $                            |      | % ofNetRevenues |                              |   | % ofGrossProfit |                                                              |   | $ |   | % ofNetRevenues |  |      | % ofGrossProfit |  |       | $ Change |  | % Change |     
|Sales and marketing expenses           |  | $                            | 34.8 |                 | 29.4                         | % |                 | 60.3                                                         | % |   | $ | 47.3            |  | 34.5 | %               |  | 65.7  | %        |  | $        | 12.5 |  | 35.9 | %
|Product development expenses           |  |                              | 13.9 |                 | 11.7                         | % |                 | 24.1                                                         | % |   |   | 15.9            |  | 11.6 | %               |  | 22.1  | %        |  |          | 2.0  |  | 14.4 | %
|General and administrative expenses    |  |                              | 9.5  |                 | 8.0                          | % |                 | 16.5                                                         | % |   |   | 11.2            |  | 8.2  | %               |  | 15.6  | %        |  |          | 1.7  |  | 17.9 | %
|Depreciation and amortization expenses |  |                              | 5.5  |                 | 4.6                          | % |                 | 9.5                                                          | % |   |   | 9.2             |  | 6.7  | %               |  | 12.8  | %        |  |          | 3.7  |  | 67.3 | %
|                                       |  |                              |      |                 |                              |   |                 |                                                              |   |   |   |                 |  |      |                 |  |       |          |  |          |      |  |      |  
|Total operating expenses               |  | $                            | 63.7 |                 | 53.7                         | % |                 | 110.4                                                        | % |   | $ | 83.6            |  | 61.0 | %               |  | 116.2 | %        |  | $        | 19.9 |  | 31.2 | %
|                                       |  |                              |      |                 |                              |   |                 |                                                              |   |   |   |                 |  |      |                 |  |       |          |  |          |      |  |      |  

As a percentage of net revenues, sales and marketing expenses increased from 29.4% to 34.5%. The
increase was primarily due to service fees increasing as a percentage of net revenues from 28.5% to 33.5%. As a percentage of gross profit, sales and marketing expenses increased from 60.3% to 65.7% primarily due to start-up, occupancy and payroll
expenses related to our new fulfillment center which commenced operations in the second quarter of fiscal 2007 and for our second customer care center which commenced operations in the third quarter of fiscal 2006, and an increase in credit card
fees due to an increase in our sales volume. In absolute dollars, sales and marketing increased $12.5 million primarily due to a $6.3 million increase in payroll costs principally at our fulfillment and customer care centers, a $1.7 million increase
in credit card fees, a $1.6 million increase in occupancy costs, a $0.8 million increase in marketing expenses, and a $2.1 million increase in other sales and marketing expenses. We continue to expect that sales and marketing expenses will increase
in absolute dollars in 2007 compared to 2006, as we continue to grow by adding new partners and by expanding the e-commerce businesses of our existing partners as well as expanding our international operations and marketing services.

As a percentage of net revenues, product development expenses decreased slightly from 11.7% to 11.6%. As a percentage of gross profit, product
development expenses decreased from 24.1% to 22.1%. The decrease in product development expenses as a percentage of gross profit was primarily due to the timing of professional fee expenses incurred for partner launches, expected future partner
launches and expenses to enhance the technology features and functionality on our platform. In the third quarter of fiscal 2007 we launched five partner websites and also launched an additional three partner websites in October 2007. The $2.0
million increase in absolute dollars was primarily due to a $2.7 million increase in personnel and related costs and a $0.5 million increase in other product development costs, offset by a $1.2 million decrease in professional fees. We continue to
expect that product development expenses will increase in absolute dollars in 2007 compared to 2006, as we plan to continue to launch additional partner websites and invest in our platform as we enhance and expand our capabilities for the purpose of
growing our partners e-commerce businesses.

As a percentage of net revenues, general and administrative expenses increased from 8.0%
to 8.2%. The increase was primarily due to service fees increasing as a percentage of net revenues from 28.5% to 33.5%. As a percentage of gross profit, general and administrative expenses decreased from 16.5% to 15.6% primarily due to our ability
to utilize our existing infrastructure to support more growth in our business. In absolute dollars, general and administrative expenses increased $1.7 million primarily due to a $0.9 million increase in personnel and related costs, a $0.4 million
increase in bad debt expense and a $0.4 million increase in other general and administrative expenses. We continue to expect that general and administrative expenses will increase in absolute dollars in 2007 compared to 2006, as we continue to grow
by adding new partners and by expanding the e-commerce businesses of our existing partners as well as expanding our international operations and marketing services.

Depreciation and amortization expenses increased $3.7 million primarily due to increased technology purchases and capitalized costs related to internal-use software. The increase in amortization expense was primarily
due to the amortization of an intangible asset related to the purchase of the remaining minority interest of a joint venture.



25



---

##### Table of Contents

Results of Operations

Nine-month period ended September 30, 2006 and September 29, 2007 (amounts in tables in millions):

Net Revenues



|                                                 |  |                                 |       |        |                                 |   |        |                                                                     |       |  |      |   |  |   |       |   |  |       |   
|------------------------------------------------ |  | ------------------------------- | ----- | ------ | ------------------------------- | - | ------ | ------------------------------------------------------------------- | ----- |  | ---- | - |  | - | ----- | - |  | ----- | --
|                                                 |  | First Nine Monthsof Fiscal
2006 |       |        | First Nine Monthsof Fiscal
2007 |   |        | First Nine Months of Fiscal 2007vs.First Nine Months of Fiscal 2006 |      
|                                                 |  |                                 |       | Change |                                 |   | Change |                                                                    
|Net revenues from product sales - sporting goods |  | $                               | 166.4 |        | 47.2                            | % |        | $                                                                   | 201.9 |  | 48.7 | % |  | $ | 35.5  |   |  | 21.3  | % 
|Net revenues from product sales - other          |  |                                 | 104.4 |        | 29.7                            | % |        |                                                                     | 87.1  |  | 21.0 | % |  |   | (17.3 | ) |  | (16.6 | )%
|                                                 |  |                                 |       |        |                                 |   |        |                                                                     |       |  |      |   |  |   |       |   |  |       |   
|Net revenues from product sales                  |  |                                 | 270.8 |        | 76.9                            | % |        |                                                                     | 289.0 |  | 69.7 | % |  |   | 18.2  |   |  | 6.7   | % 
|Service fee revenues                             |  |                                 | 81.5  |        | 23.1                            | % |        |                                                                     | 125.8 |  | 30.3 | % |  |   | 44.3  |   |  | 54.4  | % 
|                                                 |  |                                 |       |        |                                 |   |        |                                                                     |       |  |      |   |  |   |       |   |  |       |   
|Net revenues                                     |  | $                               | 352.3 |        | 100                             | % |        | $                                                                   | 414.8 |  | 100  | % |  | $ | 62.5  |   |  | 17.7  | % 
|                                                 |  |                                 |       |        |                                 |   |        |                                                                     |       |  |      |   |  |   |       |   |  |       |   

Net revenues from product sales increased $18.2 million in the first nine months of fiscal 2007.
Of this increase, $27.2 million was attributable to growth in sales from partners e-commerce businesses that were operated for part of the first nine months of fiscal 2006 and all of the first nine months of fiscal 2007, $4.7 million was
attributable to the addition of partners that were launched after the third quarter of fiscal 2006, partially offset by a decrease of $13.7 million in sales from partners e-commerce businesses that were operated for the entirety of both
periods. This decrease was due to a decline in product sales for one non-sporting goods partner. Net revenues from product sales included shipping revenue from certain partners from both our owned-inventory model and our partner-inventory model of
$45.1 million for the first nine months of fiscal 2007 and $35.4 million for the first nine months of fiscal 2006.

Service fee revenues
increased $44.3 million in the first nine months of fiscal 2007 due to an increase of $24.2 million in e-commerce related service fees from partners that operated for the entirety of both periods, an increase of $12.8 million in e-commerce related
service fees from partners that operated for part of the first nine months of fiscal 2006 and all of the first nine months of fiscal 2007, and an increase of $7.3 million in e-commerce related service fees attributable to the addition of new
partners that were launched after the third quarter of fiscal 2006. Included in service fee revenues is marketing and other professional related service fees of $12.9 million for the first nine months of fiscal 2007 and $6.1 million for the first
nine months of fiscal 2006.

Gross Profit



|                                |  |                                  |       |                  |                                  |   |                 |                                                                     |   |                |      |   |   |   |                  |  |      |                 |  |     |                |  |      |          |  |          |      |  |      |  
|------------------------------- |  | -------------------------------- | ----- | ---------------- | -------------------------------- | - | --------------- | ------------------------------------------------------------------- | - | -------------- | ---- | - | - | - | ---------------- |  | ---- | --------------- |  | --- | -------------- |  | ---- | -------- |  | -------- | ---- |  | ---- | -
|                                |  | First Nine Months of Fiscal 2006 |       |                  | First Nine Months of Fiscal 2007 |   |                 | First Nine Months of Fiscal 2007vs.First Nine Months of Fiscal 2006 |  
|                                |  | $                                |       | % ofProductSales |                                  |   | % ofServiceFees |                                                                     |   | % ofNetRevenue |      |   | $ |   | % ofProductSales |  |      | % ofServiceFees |  |     | % ofNetRevenue |  |      | $ Change |  | % Change |     
|Gross profit from product sales |  | $                                | 69.9  |                  | 25.8                             | % |                 |                                                                    |   |                |      |   |   | $ | 81.2             |  | 28.1 | %               |  |    |                |  |      |          |  | $        | 11.3 |  | 16.2 | %
|Gross profit from service fees  |  |                                  | 81.5  |                  |                                 |   |                 | 100                                                                 | % |                |      |   |   |   | 125.8            |  |     |                 |  | 100 | %              |  |      |          |  |          | 44.3 |  | 54.4 | %
|                                |  |                                  |       |                  |                                  |   |                 |                                                                     |   |                |      |   |   |   |                  |  |      |                 |  |     |                |  |      |          |  |          |      |  |      |  
|Gross profit                    |  | $                                | 151.4 |                  |                                  |   |                 |                                                                     |   |                | 43.0 | % |   | $ | 207.0            |  |      |                 |  |     |                |  | 49.9 | %        |  | $        | 55.6 |  | 36.7 | %
|                                |  |                                  |       |                  |                                  |   |                 |                                                                     |   |                |      |   |   |   |                  |  |      |                 |  |     |                |  |      |          |  |          |      |  |      |  

The increase in gross profit as a percentage of net revenues from 43.0% to 49.9% is primarily due
to the larger percentage increase in service fees than the percentage increase in product sales, as service fees have no associated cost of revenue. In addition, the increase in gross profit percentage for product sales from 25.8% to 28.1% was
primarily due to a higher percentage of product sales in our sporting goods category, which has a higher gross margin than product sales in the other category. Product sales in our sporting goods category represented 69.9% of total product sales in
the first nine months of fiscal 2007 and 61.4% in the first nine months of fiscal 2006.



26



---

##### Table of Contents

Operating Expenses



|                                       |  |                                 |       |                 |                                 |   |                 |                                                                     |   |   |   |                 |  |      |                 |  |       |          |  |          |      |  |      |  
|-------------------------------------- |  | ------------------------------- | ----- | --------------- | ------------------------------- | - | --------------- | ------------------------------------------------------------------- | - | - | - | --------------- |  | ---- | --------------- |  | ----- | -------- |  | -------- | ---- |  | ---- | -
|                                       |  | First Nine Monthsof Fiscal 2006 |       |                 | First Nine Monthsof Fiscal 2007 |   |                 | First Nine Months of Fiscal 2007vs.First Nine Months of Fiscal 2006 |  
|                                       |  | $                               |       | % ofNetRevenues |                                 |   | % ofGrossProfit |                                                                     |   | $ |   | % ofNetRevenues |  |      | % ofGrossProfit |  |       | $ Change |  | % Change |     
|Sales and marketing expenses           |  | $                               | 94.4  |                 | 26.8                            | % |                 | 62.4                                                                | % |   | $ | 132.8           |  | 32.0 | %               |  | 64.2  | %        |  | $        | 38.4 |  | 40.7 | %
|Product development expenses           |  |                                 | 31.1  |                 | 8.8                             | % |                 | 20.5                                                                | % |   |   | 44.7            |  | 10.8 | %               |  | 21.6  | %        |  |          | 13.6 |  | 43.7 | %
|General and administrative expenses    |  |                                 | 24.8  |                 | 7.0                             | % |                 | 16.4                                                                | % |   |   | 31.0            |  | 7.5  | %               |  | 15.0  | %        |  |          | 6.2  |  | 25.0 | %
|Depreciation and amortization expenses |  |                                 | 14.9  |                 | 4.2                             | % |                 | 9.8                                                                 | % |   |   | 23.8            |  | 5.7  | %               |  | 11.5  | %        |  |          | 8.9  |  | 59.7 | %
|                                       |  |                                 |       |                 |                                 |   |                 |                                                                     |   |   |   |                 |  |      |                 |  |       |          |  |          |      |  |      |  
|Total operating expenses               |  | $                               | 165.2 |                 | 46.8                            | % |                 | 109.1                                                               | % |   | $ | 232.3           |  | 56.0 | %               |  | 112.3 | %        |  | $        | 67.1 |  | 40.6 | %
|                                       |  |                                 |       |                 |                                 |   |                 |                                                                     |   |   |   |                 |  |      |                 |  |       |          |  |          |      |  |      |  

As a percentage of net revenues, sales and marketing expenses increased from 26.8% to 32.0%. The
increase was primarily due to service fees increasing as a percentage of net revenues from 23.1% to 30.3%. As a percentage of gross profit, sales and marketing expenses increased from 62.4% to 64.2% primarily due to start-up, occupancy and payroll
expenses related to our new fulfillment center which commenced operations in the second quarter of fiscal 2007 and to our second customer care center which commenced operations in the third quarter of fiscal 2006, revenue share expenses related to
growth in net revenue from product sales in the sporting goods category as well as revenue share expenses for one partner that was classified as stock-based compensation expense in the first nine months of 2006, and credit card fees due to increased
sales volume. In absolute dollars, sales and marketing increased $38.4 million primarily due to a $15.9 million increase in payroll costs principally at our fulfillment and customer care centers, a $6.7 million increase in credit card fees, a $6.3
million increase in partner revenue share expenses a $3.4 million increase in marketing and catalog expenses, a $2.9 million increase in occupancy costs, and a $3.2 million increase in other sales and marketing expenses. We continue to expect that
sales and marketing expenses will increase in absolute dollars in 2007 compared to 2006, as we continue to grow by adding new partners and by expanding the e-commerce businesses of our existing partners as well as expanding our international
operations and marketing services.

As a percentage of net revenues, product development expenses increased from 8.8% to 10.8%. The
increase was primarily due to service fees increasing as a percentage of net revenues from 23.1% to 30.3%. As a percentage of gross profit, product development expenses increased from 20.5% to 21.6%. This increase, as well as the increase in
absolute dollars, was primarily due to payroll expenses and professional fees incurred for partner launches that occurred during the first nine months of fiscal 2007, expected future partner launches and increased expenses to enhance the technology
features and functionality on our platform. In the first nine months of fiscal 2007 we launched eight partner websites and also launched an additional three partner websites in October 2007. The absolute dollar increase of $13.6 million was
primarily due to a $9.7 million increase in personnel and related costs, a $2.0 million increase in professional fees and a $1.9 million increase in other product development costs. We continue to expect that product development expenses will
increase in absolute dollars in 2007 compared to 2006, as we plan to continue to launch additional partner websites and to invest in our platform as we enhance and expand our capabilities for the purpose of growing our partners
e-commerce businesses.

As a percentage of net revenues, general and administrative expenses increased from 7.0% to 7.5%. The increase was
primarily due to service fees increasing as a percentage of net revenues from 23.1% to 30.3%. As a percentage of gross profit, general and administrative expenses decreased from 16.4% to 15.0% primarily due to our ability to utilize our existing
infrastructure to support more growth in our business. In absolute dollars, general and administrative expenses increased $6.2 million primarily due to a $2.6 million increase in personnel and related costs incurred to support the growth of our
business, a $1.6 million increase in bad debt expense and a $2.0 million increase in other general and administrative costs. We continue to expect that general and administrative expenses will increase in absolute dollars in 2007 compared to 2006,
as we continue to grow by adding new partners and by expanding the e-commerce businesses of our existing partners as well as expanding our international operations and marketing services.

Depreciation and amortization expenses increased $8.9 million primarily due to increased technology purchases and capitalized costs related to
internal-use software. The increase in amortization expense was primarily due to the amortization of an intangible asset related to the purchase of the remaining minority interest of a joint venture.

Income Taxes

We recorded a benefit for income taxes
of $8.7 million in the first nine months of fiscal 2007. Our tax provision for interim periods is determined using an estimate of our annual effective tax rate which is 40.00% for fiscal 2007.



27



---

##### Table of Contents

As of December 30, 2006, we had available net operating loss carryforwards of approximately $417.7
million which will expire in the years 2011 through 2025. A portion of these net operating loss carryforwards are offset by a valuation allowance. Management will continue to monitor all available evidence related to our ability to utilize our
remaining deferred tax assets. Should management determine that it is more likely than not that these operating loss carryforwards will be utilized, we will reverse a portion of the remaining valuation allowance.

Effective December 31, 2006, we adopted the provisions of Financial Accounting Standards Boards Interpretation 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain
tax positions that the company has taken or expects to take on a tax return. FIN 48 states that a tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the position is sustainable, based on
its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority having full knowledge of all relevant information. A tax
benefit from an uncertain position was previously recognized if it was probable of being sustained. Under FIN 48, the liability for unrecognized tax benefits is classified as noncurrent unless the liability is expected to be settled in cash within
12 months of the reporting date. SeeNote 9 Income Taxes.

Liquidity and Capital Resources



|                                |  |                   |       |   |                   |   |       |  
|------------------------------- |  | ----------------- | ----- | - | ----------------- | - | ----- | -
|                                |  | Nine Months Ended |      
|                                |  | September 30,2006 |       |   | September 29,2007 |  
|                                |  | (in millions)     |      
|Net cash provided by (used in): |  |                   |       |   |                   |   |       |  
|Operating activities            |  | $                 | (25.8 | ) |                   | $ | (35.7 | )
|Investing activities            |  | $                 | (12.7 | ) |                   | $ | (92.8 | )
|Financing activities            |  | $                 | 4.7   |   |                   | $ | 151.0 |  

Our principal sources of liquidity are our cash, cash equivalents and marketable securities. Our
cash, cash equivalents, and marketable securities were $166.2 million as of the end of the third quarter of 2007 and $184.5 million as of the end of the fiscal 2006.

We had working capital of $139.4 million as of the end of the third quarter of fiscal 2007 and $125.2 million as of the end of fiscal 2006, and we had an accumulated deficit of $133.8 million as of the end of the
third quarter of fiscal 2007 and $120.3 million as of the end of fiscal 2006.

We used approximately $35.7 million in net cash for
operating activities during the first nine months of fiscal 2007. Our principal sources of operating cash during the first nine months of fiscal 2007 include: payments received from sales transactions that flow through our platform including
e-commerce businesses operated under both our owned-inventory model and partner-inventory model. Payments received from customers in our owned-inventory model generally approximate our net revenues from product sales and payments received from sales
transactions operated under our partner-inventory model, net of periodic payments to such partners, generally approximate our service fee revenues. Our principal uses of operating cash during the first nine months of fiscal 2007 were cash paid to
product suppliers, which generally approximates our cost of revenues from product sales, employee compensation and partner revenue share payments. Changes in our operating assets and liabilities during the first nine months of fiscal 2007 resulted
in a net cash outflow of $43.1 million. The most significant change was a decrease in accounts payable, accrued expenses and an increase in inventory, offset, in part, by a decrease in accounts receivable as compared to the end of fiscal 2006. The
decrease in accounts payable, accrued expenses and other was due primarily to the seasonality of our business, in which we derived a higher sales volume in the fourth quarter of fiscal 2006. Our investing activities during the first nine months of
fiscal 2007 consisted primarily of $92.9 million paid for our acquisition of Accretive and $40.3 million paid for capital expenditures, partially offset by $40.4 million in net sales of marketable securities. Our financing activities during the
first nine months of fiscal 2007 consisted primarily of the receipt of $150.0 million in gross proceeds received from the issuance of the convertible notes.

We used $25.8 million in net cash for operating activities during the first nine months of fiscal 2006. Our principal sources of operating cash during the first nine months of fiscal 2006 were payments received from
customers in our owned-inventory model and from partners in our partner-inventory model, which generally approximate our net revenues from product sales and our service fee revenues, respectively. Our principal uses of operating cash during the
first nine months of fiscal 2006 were cash paid to product suppliers, which generally approximates our cost of revenues from product sales,



28



---

##### Table of Contents

employee compensation and partner revenue share payments. Changes in our operating assets and liabilities during the first nine months of fiscal 2006
resulted in a net cash outflow of $35.3 million. The most significant change was a decrease in accounts payable, accrued expenses and other, and an increase in inventory, offset, in part, by an increase in deferred revenue compared to the end of
fiscal 2005. The decrease in accounts payable, accrued expenses and other was due primarily to a decrease in partner revenue share payments due at the end of the first nine months of fiscal 2006 due to the seasonality of our business. Our investing
activities during the first nine months of fiscal 2006 consisted primarily of $27.0 million paid in capital expenditures and the acquisition of and investment in businesses for $8.2 million. Offsetting these outflows, in part, we sold $191.8 million
and purchased $172.3 million of marketable securities and we received cash of $2.9 million from a government economic development grant for the construction and renovation of our headquarters. Our financing activities during the first nine months of
fiscal 2006 consisted primarily of the receipt of $5.3 million in gross proceeds from exercises of common stock options and warrants.

As
of September 29, 2007, we have a total of $72.3 million in marketable securities invested in auction rate securities. Our investments are governed by our investment policy, of which objective is to provide as high a level of current income as
is consistent with the preservation of capital and the maintenance of liquidity. Approved investments include U.S. Government securities and high-quality investments in corporations and municipalities, including investments in auction rate
securities. The recent uncertainties in the credit markets have affected our holdings in auction rate securities. Auction rate securities provide liquidity through a Dutch auction process that resets the applicable interest rate at pre-determined
calendar intervals, generally every 30-45 days. This mechanism allows existing investors either to rollover their holdings, whereby they will continue to own their respective securities, or liquidate their holding by selling such securities at par.
Recently, certain of these auctions have not had sufficient buyers to cover investors sell orders, resulting in an unsuccessful auction. When an auction is unsuccessful, the interest rate is re-set to a level pre-determined by the loan
documents and remains in effect until the next auction date, at which time the process repeats. In the third quarter of fiscal 2007, the Company liquidated $155.3 million of investments in auction rate securities but was unsuccessful in liquidating
the remaining $72.3. While the investments in auction rate securities that have had unsuccessful auctions are of high credit quality and the respective credit ratings of the securities have not been lowered or put on credit watch, at this time we
are uncertain as to when the liquidity issues relating to these investments will improve, but currently expect liquidity within the year. We currently anticipate that our existing cash resources, exclusive of our holdings in auction rate securities,
are sufficient to meet our anticipated working capital needs and fund our business plan. We are continuing to monitor the situation, as there is no assurance as to when the market for auction rate securities will stabilize. As of September 29,
2007, we do not believe that it is necessary to adjust the fair value of our portfolio of auction rate securities or to reclassify them as long-term marketable securities on our Condensed Consolidated Balance Sheet.

Critical Accounting Policies

The preparation of our
condensed 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
2006 Annual Report on Form 10-K filed with the Securities and Exchange Commissions (SEC) on March 13, 2007.

Certain Related Party
Transactions

As of October 31, 2007, Liberty Media Corporation, through its subsidiary QVC, Inc. (QVC), and QVCs
affiliate QK Holdings, Inc., beneficially owned approximately 19.8% of our outstanding common stock. On June 15, 2006, QK Holdings, Inc. exercised its warrant to purchase 300,000 shares of our common stock at an exercise price of $6.00 per
share. We received $1.8 million in proceeds from the exercise of the warrants.

On April 13, 2007 we entered into an E-Commerce
Distribution Agreement with QVC, Inc. (the New QVC Agreement) that will replace our existing agreement with iQVC, a division of QVC (the Old QVC Agreement), under which we provide technology, procurement and fulfillment
services for QVC, including selling sporting goods, recreational and/or fitness related equipment and related products, apparel and footwear to QVC for resale through the QVC Web site. Under the New QVC Agreement we will provide procurement and
fulfillment services for QVC, including selling sporting goods, recreational and/or fitness related equipment and related products, apparel and footwear to QVC for resale through the QVC Web site. The terms of these sales are comparable to those
with other similar partners.

On May 11, 2007, we entered into an agreement with QVC, Inc. (the QVC NFL Agreement),
pursuant to which GSI makes NFL licensed merchandise available to QVC for QVC to sell both on its website and on live direct response television programs. GSI will be the exclusive provider of NFL licensed merchandise to QVC, subject to limited
exceptions, and the GSI fulfillment network will fulfill product orders received from QVCs website and the QVC live direct response programs.



29



---

##### Table of Contents

We recognized net revenues of $1.9 million during the first nine months of fiscal 2007 on sales to QVC
under the Old QVC Agreement, the New QVC Agreement and the QVC NFL Agreement.

As of October 31, 2007, SOFTBANK Capital Partners LLC
and its affiliates collectively own approximately 17.5% of our outstanding common stock. Ronald D. Fisher, one of our directors, is vice-chairman of SOFTBANK Holdings Inc. and SOFTBANK Corp. and a managing general partner of SOFTBANK Capital
Partners LP, which are affiliates of SOFTBANK Capital Partners LLC. On July 5, 2007 we entered into a Learning Management System Agreement (the License Agreement) with LRN Corporation (LRN). Affiliates of
SOFTBANK Capital Partners LLC are investors in LRN. Under the License Agreement, LRN will provide us with software, content and integration services for online legal compliance training for a period of three years. We believe the terms of the
License Agreement are comparable to the terms available to us from other third-party providers of these services. The Company will pay LRN approximately $200,000 during the license period.

In exchange for Rustic Canyon Partners forfeiting its right to designate one member to our board of directors on June 25, 2004, our board of
directors approved the issuance to Rustic Canyon Partners of a warrant to purchase 12,500 shares of our common stock. On June 2, 2006, Rustic Canyon exercised its warrant to purchase 12,500 shares at an exercise price of $9.31. In lieu of
paying the exercise price in cash, Rustic Canyon Partners elected to exercise the warrant on a net settlement basis. Accordingly, we released 5,054 shares to Rustic Canyon Partners. Mark S. Menell, one of our directors, is a partner of Rustic Canyon
Partners.

We entered into an agreement as of December 20, 2005 with Interactive Commerce Partners LLC, or ICP, for certain financial
advisory services in connection with our evaluation of two proposed transactions: a proposed acquisition and a proposed strategic relationship. M. Jeffrey Branman, one of our directors, was President and owner of ICP through February 2007. Under the
agreement, we agreed to pay ICP $450,000 upon the successful consummation of the proposed acquisition and $50,000 upon the successful consummation of the proposed strategic relationship. On February 3, 2006, we agreed to pay ICP $350,000 in
connection with the proposed acquisition, which we chose not to pursue. ICP also earned $50,000 upon the successful completion of the strategic relationship in the first quarter of fiscal 2006.

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.

Seasonality

We have experienced and expect to continue to experience seasonal fluctuations in our
revenues. 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 and all of our income before taxes. 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.



|ITEM 3: | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|------- | -----------------------------------------------------------

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 December 30, 2006 filed with the SEC on March 13, 2007 for a discussion of
our interest rate risk. We believe our exposure associated with such market risks has not changed materially since December 30, 2006. See our discussion relating to auction rate securities in Part I, Item 2 under Liquidity and Capital
Resources in this Form 10-Q.



|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 September 29, 2007, 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 September 29, 2007, 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



30



---

##### Table of Contents

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 September 29, 2007 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 quarter ended September 29, 2007.



31



---

##### Table of Contents

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.
|-------- | -------------

Our Annual
Report on Form 10-K for the fiscal year ended December 30, 2006 includes a detailed discussion of our risk factors. The information presented below updates and should be read in conjunction with the risk factors and information disclosed in our
Form 10-K for the fiscal year ended December 30, 2006.

Risks Related to Our Business

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 believe that the current globalization of
the economy requires businesses to consider pursuing international expansion. We ship certain products to Canada and other countries. In addition, in January 2006, we completed the acquisition of Aspherio, a Barcelona, Spain-based provider of
outsourced e-commerce solutions, now known as GSI Commerce International. 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 increase
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 the year ended December 30, 2006, 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:



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



| |  |  | compliance with international legal and regulatory requirements and tariffs;
| | - |  | ----------------------------------------------------------------------------



| |  |  | managing fluctuations in currency exchange rates;
| | - |  | -------------------------------------------------



| |  |  | difficulties in staffing and managing foreign operations;
| | - |  | ---------------------------------------------------------



| |  |  | greater difficulty in accounts receivable collection;
| | - |  | -----------------------------------------------------



| |  |  | potential adverse tax consequences;
| | - |  | -----------------------------------



| |  |  | uncertain political and economic climates;
| | - |  | ------------------------------------------



| |  |  | potentially higher incidence of fraud;
| | - |  | --------------------------------------



| |  |  | price controls or other restrictions on foreign currency; and
| | - |  | -------------------------------------------------------------



| |  |  | 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



32



---

##### Table of Contents

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, our international expansion efforts, our business and our operating results.

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 recently completed the acquisition of Accretive Commerce,
Inc. 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.
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.

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, and, therefore, the value of the notes.

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:



| |  |  | use a significant portion of our available cash;
| | - |  | ------------------------------------------------



| |  |  | issue equity securities, which would dilute current stockholders percentage ownership;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | incur substantial debt;
| | - |  | -----------------------



| |  |  | incur or assume contingent liabilities, known or unknown;
| | - |  | ---------------------------------------------------------



| |  |  | incur amortization expenses related to intangibles; and
| | - |  | -------------------------------------------------------



| |  |  | 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.

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 options or for other reasons.

As of September 29, 2007, there were 3,368,831
shares available for new awards under the 2005 plan. Additionally, in the event of the cancellation, expiration, forfeiture or repurchase of any of the 4,317,517 shares of common stock that were subject to outstanding awards granted under the 1996
plan as of September 29, 2007, 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 sale, or the availability for sale, of substantial amounts of common stock by our
existing stockholders pursuant to an effective registration statement.



33



---

##### Table of Contents

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

In June 2005, we issued $57.5 million principal amount of our convertible notes due 2025 (the 3% convertible notes) and in July 2007 we
issued $150.0 million principal amount of our convertible notes due 2027 (the 2.5% convertible notes), which are all convertible into shares of our common stock. Under certain circumstances, a maximum of 6,157,635 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.

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.

In August 2007, the FASB issued for comment proposed FASB Staff Position (FSP) No. APB 14-a,
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). The proposed FSP would require the issuer of convertible debt instruments with cash settlement features to
separately account for the liability and equity components of the instrument. The debt would be recognized at the present value of its cash flows discounted using our nonconvertible debt borrowing rate. The equity component would be recognized as
the difference between the proceeds from the issuance of the note and the fair value of the liability. The proposed FSP would also require an accretion of the resultant debt discount over the expected life of the debt. The proposed transition
guidance requires retrospective application to all periods presented, and does not grandfather existing instruments. The comment deadline for the proposed FSP was October 15, 2007 and if issued, the proposed FSP would be effective for us in
fiscal 2008. We believe that if the FSP is issued as proposed, the convertible notes issued in June 2005 and July 2007 would be within the scope of the proposed FSP and we would be required to retroactively apply the guidance. Although we have
not completed our analysis of the impact of this guidance, we believe the application would cause a reduction to the carrying value of the debt on our balance sheet and a corresponding increase in non-cash interest expense to be recognized over the
initial redemption periods which could be significant.

Risks Related to Our Indebtedness

Our convertible notes could adversely affect our financial condition. We are not prohibited from incurring additional debt.

On June 1, 2005, we completed an offering of $57.5 million aggregate principal amount of our convertible notes due 2025. On July 5, 2007, we
completed an offering of $150 million aggregate principal amount of our convertible notes due 2027. Including these notes, we have approximately $236.8 million of indebtedness outstanding as of September 29, 2007.

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;
| | - |  | ------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



34



---

##### Table of Contents

We may incur substantial additional debt in the future. The terms of the convertible notes will not
prohibit us or our subsidiaries from doing so. If new debt is added, the related risks described above could intensify. In addition, in the event of default, the notes will become due prior to their stated maturity and it would adversely affect our
financial condition.



|ITEM 2: | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

None



|ITEM 3: | DEFAULTS UPON SENIOR SECURITIES.
|------- | --------------------------------

None



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

None



|ITEM 5: | OTHER INFORMATION.
|------- | ------------------

None



|ITEM 6: | EXHIBITS.
|------- | ---------



|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1  |  | Agreement and Plan of Merger dated as of August 16, 2007 among GSI Commerce, Inc., Blue Route, Inc., Accretive Commerce, Inc. and certain of the principal stakeholders of Accretive
Commerce, Inc. A list of the exhibits and schedules to the Agreement and Plan of Merger appears in the table of contents to the Agreement. The Company will furnish to the Securities and Exchange Commission a copy of any omitted exhibits and
schedules upon request. (filed with the Companys Current Report on Form 8-K filed on August 17, 2007 and incorporated herein by reference)
|     | 
|4.1  |  | Form of 2.50% Convertible Senior Note due 2027 (filed with the Companys Current Report on Form 8-K filed on July 5, 2007 and incorporated herein by reference)                                                                                                                                                                                                                                                                                                                                                                                                                  
|     | 
|4.2  |  | Indenture dated as of July 2, 2007 between the Company and The Bank of New York, as trustee (filed with the Companys Current Report on Form 8-K filed on July 5, 2007 and incorporated
herein by reference)                                                                                                                                                                                                                                                                                                                                                                     
|     | 
|4.3  |  | Registration Rights Agreement dated as of July 2, 2007 between the Company and Goldman, Sachs & Co. (filed with the Companys Current Report on Form 8-K filed on July 5, 2007 and
incorporated herein by reference)                                                                                                                                                                                                                                                                                                                                                             
|     | 
|10.1 |  | Purchase Agreement dated June 27, 2007 between the Company and Goldman, Sachs & Co. (filed with the Companys Current Report on Form 8-K filed on July 5, 2007 and incorporated herein by
reference)                                                                                                                                                                                                                                                                                                                                                                             
|     | 
|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                                                                                                                                                                                                                                                                                                                                                                                                    



35



---

##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf on the date indicated by the undersigned thereunto duly authorized.

Date:
November 7, 2007



GSI COMMERCE, INC.By:

/s/ MICHAEL G. RUBINMichael G. RubinChairman, President and Chief Executive OfficerBy:

/s/ MICHAEL R. CONNMichael R. ConnExecutive Vice President, Finance and Chief Financial Officer(principal financial officer & principal accounting officer)




36