##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 28, 2008 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to.
 Commission file number 0-16611
 
 GSI COMMERCE, INC.
  DELAWARE
    
    04-2958132(State or other jurisdiction of
    
    (I.R.S. employer identification no.)incorporation or organization)935 FIRST AVENUE, KING OF PRUSSIA, PA
    
    19406(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



GSI COMMERCE, INC.
FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JUNE 28, 2008
INDEX
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited):Condensed Consolidated Balance Sheets as of December 29, 2007 and June 28, 2008
    
    
    3Condensed Consolidated Statements of Operations for the three- and six-month periods ended
June 30, 2007 and June 28, 2008
    
    
    4Condensed Consolidated Statements of Cash Flows for the six-month periods ended
June 30, 2007 and June 28, 2008
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    34PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 1A. Risk Factors
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3. Defaults Upon Senior Securities
    
    
    36Item 4. Submission of Matters to a Vote of Security Holders
    
    
    36Item 5. Other Information
    
    
    37Item 6. Exhibits
    
    
    37SIGNATURES
    
    
    38Exhibit 31.1Exhibit 31.2Exhibit 32.1
     2




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##### 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 29,
    
    
    June 28,2007
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    231,511
    
    
    $
    49,558Accounts receivable, less allowance for doubtful accounts of $1,833 and $2,154
    
    
    64,285
    
    
    
    57,658Inventory
    
    
    47,293
    
    
    
    40,957Deferred tax assets
    
    
    14,114
    
    
    
    14,771Prepaid expenses and other current assets
    
    
    12,459
    
    
    
    15,809Total current assets
    
    
    369,662
    
    
    
    178,753Property and equipment, net
    
    
    156,774
    
    
    
    166,069Goodwill
    
    
    82,757
    
    
    
    171,591Intangible assets, net of accumulated amortization of $4,972 and $10,757
    
    
    16,476
    
    
    
    54,937Long-term deferred tax assets
    
    
    45,234
    
    
    
    58,986Other assets, net of accumulated amortization of $14,545 and $16,044
    
    
    22,737
    
    
    
    21,594Total assets
    
    $
    693,640
    
    
    $
    651,930LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    85,667
    
    
    $
    54,429Accrued expenses
    
    
    98,179
    
    
    
    71,260Deferred revenue
    
    
    17,588
    
    
    
    24,804Current portion of long-term debt
    
    
    2,406
    
    
    
    2,861Total current liabilities
    
    
    203,840
    
    
    
    153,354Convertible notes
    
    
    207,500
    
    
    
    207,500Long-term debt
    
    
    27,245
    
    
    
    56,350Deferred revenue and other long-term liabilities
    
    
    5,634
    
    
    
    5,995Total liabilities
    
    
    444,219
    
    
    
    423,199Commitments and contingencies (Note 8)Stockholders equity:Preferred stock, $0.01 par value, 5,000,000 shares authorized; 0 shares issued and
outstanding as of December 29, 2007 and June 28, 2008
    
    
    
    
    
    
    Common stock, $0.01 par value, 90,000,000 shares authorized; 46,847,919 and
47,426,300 shares issued as of December 29, 2007 and June 28, 2008
respectively; 46,847,716 and 47,426,097 shares outstanding as of December 29,
2007 and June 28, 2008, respectively
    
    
    468
    
    
    
    474Additional paid in capital
    
    
    366,400
    
    
    
    374,173Accumulated other comprehensive loss
    
    
    (156
    )
    
    
    (100
    )Accumulated deficit
    
    
    (117,291
    )
    
    
    (145,816
    )Total stockholders equity
    
    
    249,421
    
    
    
    228,731Total liabilities and stockholders equity
    
    $
    693,640
    
    
    $
    651,930
   3




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##### Table of Contents



GSI COMMERCE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 28,
    
    
    June 30,
    
    
    June 28,2007
    
    
    2008
    
    
    2007
    
    
    2008Revenues:Net revenues from product sales
    
    $
    89,004
    
    
    $
    107,055
    
    
    $
    197,754
    
    
    $
    230,175Service fee revenues
    
    
    42,260
    
    
    
    86,154
    
    
    
    79,793
    
    
    
    158,577Net revenues
    
    
    131,264
    
    
    
    193,209
    
    
    
    277,547
    
    
    
    388,752Costs and expenses:Cost of revenues from product sales
    
    
    65,782
    
    
    
    78,444
    
    
    
    142,584
    
    
    
    163,861Marketing
    
    
    9,709
    
    
    
    11,853
    
    
    
    21,930
    
    
    
    28,729Account management and operations, inclusive of $753,
$1,311, $1,310 and $2,445 of stock-based
compensation
    
    
    31,598
    
    
    
    57,497
    
    
    
    63,551
    
    
    
    116,607Product development, inclusive of $343, $656, $631
and $1,083 of stock-based compensation
    
    
    15,074
    
    
    
    25,184
    
    
    
    28,812
    
    
    
    47,620General and administrative, inclusive of $950, $2,188,
$1,702 and $4,248 of stock-based compensation
    
    
    10,405
    
    
    
    18,609
    
    
    
    19,816
    
    
    
    34,333Depreciation and amortization
    
    
    7,691
    
    
    
    18,826
    
    
    
    14,615
    
    
    
    32,635Total costs and expenses
    
    
    140,259
    
    
    
    210,413
    
    
    
    291,308
    
    
    
    423,785Loss from operations
    
    
    (8,995
    )
    
    
    (17,204
    )
    
    
    (13,761
    )
    
    
    (35,033
    )Other (income) expense:Interest expense
    
    
    925
    
    
    
    2,347
    
    
    
    1,767
    
    
    
    4,524Interest income
    
    
    (1,739
    )
    
    
    (168
    )
    
    
    (3,683
    )
    
    
    (1,207
    )Other expense, net
    
    
    8
    
    
    
    208
    
    
    
    23
    
    
    
    353Total other (income) expense
    
    
    (806
    )
    
    
    2,387
    
    
    
    (1,893
    )
    
    
    3,670Loss before income
taxes
    
    
    (8,189
    )
    
    
    (19,591
    )
    
    
    (11,868
    )
    
    
    (38,703
    )Benefit for income taxes
    
    
    (3,156
    )
    
    
    (631
    )
    
    
    (4,490
    )
    
    
    (10,178
    )Net loss
    
    $
    (5,033
    )
    
    $
    (18,960
    )
    
    $
    (7,378
    )
    
    $
    (28,525
    )Basic and diluted loss per share
    
    $
    (0.11
    )
    
    $
    (0.40
    )
    
    $
    (0.16
    )
    
    $
    (0.61
    )Weighted average shares outstanding  basic and diluted
    
    
    46,391
    
    
    
    47,364
    
    
    
    46,195
    
    
    
    47,144
   4




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##### Table of Contents



GSI COMMERCE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Six Months EndedJune 30,
    
    
    June 28,2007
    
    
    2008Cash Flows from Operating Activities:Net loss
    
    $
    (7,378
    )
    
    $
    (28,525
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation
    
    
    13,820
    
    
    
    26,827Amortization
    
    
    795
    
    
    
    5,808Stock-based compensation
    
    
    3,643
    
    
    
    7,776Loss (gain) on disposal of assets
    
    
    66
    
    
    
    (282
    )Deferred income taxes
    
    
    (4,590
    )
    
    
    (8,553
    )Changes in operating assets and liabilities:Accounts receivable, net
    
    
    9,098
    
    
    
    15,248Inventory
    
    
    8,185
    
    
    
    6,336Prepaid expenses and other current assets
    
    
    (1,850
    )
    
    
    (2,081
    )Other assets, net
    
    
    392
    
    
    
    915Accounts payable and accrued expenses
    
    
    (62,555
    )
    
    
    (68,115
    )Deferred revenue
    
    
    2,382
    
    
    
    7,181Net cash used in operating activities
    
    
    (37,992
    )
    
    
    (37,465
    )Cash Flows from Investing Activities:Payments for acquisitions of businesses, net of cash acquired
    
    
    
    
    
    
    (145,001
    )Cash paid for property and equipment, including internal use software
    
    
    (22,716
    )
    
    
    (29,866
    )Proceeds from disposition of assets
    
    
    
    
    
    
    1,500Purchases of marketable securities
    
    
    (102,041
    )
    
    
    Sales of marketable securities
    
    
    119,955
    
    
    
    Net cash used in investing activities
    
    
    (4,802
    )
    
    
    (173,367
    )Cash Flows from Financing Activities:Borrowings on revolving credit loan
    
    
    
    
    
    
    30,000Debt issuance costs paid
    
    
    
    
    
    
    (550
    )Repayments of capital lease obligations
    
    
    (249
    )
    
    
    (1,004
    )Repayments of mortgage note
    
    
    (90
    )
    
    
    (110
    )Proceeds from exercise of common stock options
    
    
    4,838
    
    
    
    572Net cash provided by financing activities
    
    
    4,499
    
    
    
    28,908Effect of exchange rate changes on cash and cash equivalents
    
    
    14
    
    
    
    (29
    )Net decrease in cash and cash equivalents
    
    
    (38,281
    )
    
    
    (181,953
    )Cash and cash equivalents, beginning of period
    
    
    71,382
    
    
    
    231,511Cash and cash equivalents, end of period
    
    $
    33,101
    
    
    $
    49,558Supplemental Cash Flow InformationCash paid during the period for interest
    
    $
    1,635
    
    
    $
    4,483Cash paid during the period for income taxes
    
    
    564
    
    
    
    434Noncash Investing and Financing Activities:Accrual for
purchases of
property and
equipment
    
    
    3,773
    
    
    
    5,522Equipment financed under capital lease
    
    
    12,364
    
    
    
    
   5




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GSI COMMERCE, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 NOTE 1BASIS OF PRESENTATION
     NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Use of Estimates:
 Reclassifications:
  
    
    to amortization, $795 for the six months ended June 30, 2007, which was previously
reported in depreciation and amortization on its Condensed Consolidated Statement of
Cash Flows;
    
    to other assets, net, $6,202 as of December 29, 2007, which was previously reported
in equity investments on its Condensed Consolidated Balance Sheet.
  Partner Revenue Share:
  6




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 Shipping and Handling Costs:
 Advertising:
 Catalog Costs:
 Fulfillment Costs:
 Income Taxes:
   7




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
    New Accounting Pronouncements:
    8




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
    NOTE 3FAIR VALUE OF FINANCIAL INSTRUMENTS
       9




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
  Fair Value Measurements on June 28, 2008Quoted Prices inActive Markets
    
    
    
    
    
    
    Significantfor Identical
    
    
    Significant Other
    
    
    UnobservableAssets
    
    
    Observable Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash surrender value
of life insurance
policies(1)
    
    $
    
    
    
    $
    1,016
    
    
    $
    
 (1)
    
    Amounts relate to the Companys deferred compensation plan and are included in
other assets, net on the Companys Condensed Consolidated Balance Sheet. NOTE 4PROPERTY AND EQUIPMENT
  December 29,
    
    
    June 28,2007
    
    
    2008Computer hardware and software
    
    $
    148,091
    
    
    $
    167,824Building and building improvements
    
    
    44,213
    
    
    
    44,657Furniture, warehouse and office equipment, and other
    
    
    38,916
    
    
    
    42,203Land
    
    
    7,889
    
    
    
    7,889Leasehold improvements
    
    
    4,200
    
    
    
    4,452Capitalized leases
    
    
    17,403
    
    
    
    18,042Construction in progress
    
    
    1,528
    
    
    
    9,665262,240
    
    
    
    294,732Less: Accumulated depreciation
    
    
    (105,466
    )
    
    
    (128,663
    )Property and equipment, net
    
    $
    156,774
    
    
    $
    166,069
   10




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##### Table of Contents



GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 NOTE 5GOODWILL AND OTHER INTANGIBLE ASSETS
  InteractiveE-Commerce
    
    
    MarketingServices
    
    
    Services
    
    
    ConsolidatedDecember 29, 2007
    
    $
    82,757
    
    
    $
    
    
    
    $
    82,757Purchase price adjustments
    
    
    (3,272
    )
    
    
    
    
    
    
    (3,272
    )e-Dialog acquisition (see Note 6)
    
    
    
    
    
    
    92,106
    
    
    
    92,106June 28, 2008
    
    $
    79,485
    
    
    $
    92,106
    
    
    $
    171,591
    Weighted-December 29,
    
    
    June 28,
    
    
    Average2007
    
    
    2008
    
    
    LifeGross carrying value of intangible assets
subject to amortization:Customer contracts
    
    $
    17,282
    
    
    $
    38,773
    
    
    
    2.5Non-compete agreements
    
    
    3,838
    
    
    
    3,838
    
    
    
    3.0Purchased technology
    
    
    
    
    
    
    4,493
    
    
    
    4.0Trade name
    
    
    82
    
    
    
    470
    
    
    
    1.121,202
    
    
    
    47,574
    
    
    
    2.5Accumulated amortization:Customer contracts
    
    
    (4,570
    )
    
    
    (9,202
    )Non-compete agreements
    
    
    (320
    )
    
    
    (960
    )Purchased technology
    
    
    
    
    
    
    (384
    )Trade name
    
    
    (82
    )
    
    
    (211
    )(4,972
    )
    
    
    (10,757
    )Net carrying value:Customer contracts
    
    
    12,712
    
    
    
    29,571Non-compete agreements
    
    
    3,518
    
    
    
    2,878Purchased technology
    
    
    
    
    
    
    4,109Trade name
    
    
    
    
    
    
    259Total amortized intangible assets, net
    
    
    16,230
    
    
    
    36,817Indefinite life
intangible assets:Trade name
    
    
    246
    
    
    
    18,120Total intangible assets
    
    $
    16,476
    
    
    $
    54,937
  11




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
  Fiscal 2008
    
    $
    7,766Fiscal 2009
    
    
    9,712Fiscal 2010
    
    
    7,892Fiscal 2011
    
    
    5,641Fiscal 2012
    
    
    2,538Thereafter
    
    
    3,268$
    36,817
 NOTE 6ACQUISITIONS
  e-Dialog, Inc.
    12




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
  Total current assets
    
    $
    17,068Property, plant and equipment
    
    
    4,530Goodwill
    
    
    92,106Identifiable intangible assets:Customer contracts
    
    
    19,470Internal-developed software
    
    
    4,493Trade name
    
    
    17,874Total assets acquired
    
    
    155,541Total current liabilities
    
    
    (6,258
    )Total non-current liabilities
    
    
    (75
    )Total liabilities assumed
    
    
    (6,333
    )Net assets acquired
    
    $
    149,208
 Pro Forma Financial Information
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 28,
    
    
    June 30,
    
    
    June 28,2007
    
    
    2008
    
    
    2007
    
    
    2008Net revenues
    
    $
    140,075
    
    
    $
    193,209
    
    
    $
    294,178
    
    
    $
    393,723Net loss
    
    $
    (6,603
    )
    
    $
    (18,960
    )
    
    $
    (11,015
    )
    
    $
    (30,410
    )Basic and diluted loss per share:
    
    $
    (0.14
    )
    
    $
    (0.40
    )
    
    $
    (0.24
    )
    
    $
    (0.65
    )
 Zendor.com Ltd.
   13




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
  Total current assets
    
    $
    9,830Property, plant and equipment
    
    
    3,281Goodwill
    
    
    1,093Identifiable intangible assets:Customer contracts
    
    
    2,155Trade name
    
    
    388Total assets acquired
    
    
    16,747Total liabilities assumed
    
    
    (6,827
    )Net assets acquired
    
    $
    9,920
 Accretive Commerce, Inc.
   14




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##### Table of Contents



GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
  Total current assets
    
    $
    17,722Property, plant and equipment
    
    
    9,197Identifiable intangible assets:Customer contracts
    
    
    15,008Employee non-compete agreements
    
    
    3,838Goodwill
    
    
    60,606Other assets
    
    
    8,968Total assets acquired
    
    
    115,339Total current liabilities
    
    
    (14,902
    )Total non-current liabilities
    
    
    (1,837
    )Total liabilities assumed
    
    
    (16,739
    )Net assets acquired
    
    $
    98,600
  December 29,
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    June 28,2007
    
    
    Additions
    
    
    Payments
    
    
    Adjustments
    
    
    2008Severance payments
    
    $
    2,667
    
    
    $
    45
    
    
    $
    (2,134
    )
    
    $
    (360
    )
    
    $
    218Lease payments
    
    
    2,824
    
    
    
    49
    
    
    
    (224
    )
    
    
    (2,182
    )
    
    
    467$
    5,491
    
    
    $
    94
    
    
    $
    (2,358
    )
    
    $
    (2,542
    )
    
    $
    685
 NOTE 7LONG-TERM DEBT AND CREDIT FACILITY
  December 29,
    
    
    June 28,2007
    
    
    2008Convertible notes
    
    $
    207,500
    
    
    $
    207,500Notes payable
    
    
    12,858
    
    
    
    12,749Capital lease obligations
    
    
    16,793
    
    
    
    16,462Credit facilities
    
    
    
    
    
    
    30,000237,151
    
    
    
    266,711Less: Current portion of notes payable
    
    
    (193
    )
    
    
    (178
    )Less: Current portion of capital lease obligations
    
    
    (2,213
    )
    
    
    (2,683
    )$
    234,745
    
    
    $
    263,850
  15




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 3% Convertible Notes due 2025
    2.5% Convertible Notes due 2027
   th
  16




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
  Note Payable
  Capital Lease Obligations
  June 28,2008Gross capital lease obligations
    
    $
    19,753Less: imputed interest
    
    
    (3,291
    )Total present value of future minimum lease payments
    
    
    16,462Less: current portion
    
    
    (2,683
    )Long-term portion
    
    $
    13,779
 Credit Facilities
    17




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 NOTE 8COMMITMENTS AND CONTINGENCIES
 Legal Proceedings
  Operating and Capital Commitments
  Payments due by fiscal year2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    Thereafter
    
    
    TotalOperating lease obligations(1)
    
    $
    7,862
    
    
    $
    13,485
    
    
    $
    11,126
    
    
    $
    7,736
    
    
    $
    6,926
    
    
    $
    18,514
    
    
    $
    65,649Purchase obligations(1)
    
    
    94,629
    
    
    
    5,953
    
    
    
    5,953
    
    
    
    992
    
    
    
    
    
    
    
    
    
    
    
    107,527Advertising and media agreements(1)
    
    
    48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48Partner revenue share payments(1)
    
    
    7,830
    
    
    
    25,935
    
    
    
    27,190
    
    
    
    27,683
    
    
    
    20,818
    
    
    
    62,557
    
    
    
    172,013Debt interest(1)
    
    
    4,219
    
    
    
    7,288
    
    
    
    6,270
    
    
    
    5,538
    
    
    
    5,526
    
    
    
    15,940
    
    
    
    44,781Debt obligations
    
    
    86
    
    
    
    399
    
    
    
    57,695
    
    
    
    209
    
    
    
    220
    
    
    
    191,640
    
    
    
    250,249Capital lease obligations, including interest(2)
    
    
    1,866
    
    
    
    3,456
    
    
    
    3,318
    
    
    
    3,231
    
    
    
    3,231
    
    
    
    4,651
    
    
    
    19,753Total
    
    $
    116,540
    
    
    $
    56,516
    
    
    $
    111,552
    
    
    $
    45,389
    
    
    $
    36,721
    
    
    $
    293,302
    
    
    $
    660,020
 (1)
    
    Not required to be recorded in the Condensed Consolidated Balance Sheet as of June 28,
2008 in accordance with accounting principles generally accepted in the United States of
America.(2)
    
    Capital lease obligations, excluding interest, are recorded in the Condensed
Consolidated Balance Sheets.   18




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##### Table of Contents



GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 NOTE 9STOCK AWARDS
  Stock Options and Warrants
  WeightedWeighted
    
    
    AverageNumber of
    
    
    Average
    
    
    Remaining
    
    
    AggregateShares
    
    
    Exercise
    
    
    Contractual
    
    
    Intrinsic(in thousands)
    
    
    Price
    
    
    Life (in years)
    
    
    ValueOutstanding at December 29, 2007
    
    
    4,163
    
    
    $
    9.94Granted
    
    
    
    
    
    
    Exercised
    
    
    (60
    )
    
    $
    9.54Forfeited/Cancelled
    
    
    (9
    )
    
    $
    13.41Outstanding at June 28, 2008
    
    
    4,094
    
    
    $
    9.94
    
    
    
    4.18
    
    
    $
    19,597Vested and expected to vest at June 28, 2008
    
    
    4,093
    
    
    $
    9.94
    
    
    
    4.18
    
    
    $
    19,594Exercisable at June 28, 2008
    
    
    4,080
    
    
    $
    9.94
    
    
    
    4.17
    
    
    $
    19,532
   Restricted Stock Units
   19




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##### Table of Contents



GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
  WeightedNumber of
    
    
    AverageShares
    
    
    Grant Date(in thousands)
    
    
    Fair ValueNonvested shares at December 29, 2007
    
    
    1,870
    
    
    $
    23.40Granted
    
    
    2,372
    
    
    $
    14.09Vested
    
    
    (530
    )
    
    $
    12.76Forfeited/Cancelled
    
    
    (168
    )
    
    $
    18.74Nonvested shares at June 28, 2008
    
    
    3,544
    
    
    $
    18.98
  Restricted Stock Awards
   NOTE 10INCOME TAXES
    20




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
   NOTE 11LOSS PER SHARE
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 28,
    
    
    June 30,
    
    
    June 28,2007
    
    
    2008
    
    
    2007
    
    
    2008Net loss for basic and diluted earnings per share
    
    $
    (5,033
    )
    
    $
    (18,960
    )
    
    $
    (7,378
    )
    
    $
    (28,525
    )Weighted average shares outstanding  basic and diluted
    
    
    46,391
    
    
    
    47,364
    
    
    
    46,195
    
    
    
    47,144Net loss per common share  basic and diluted
    
    $
    (0.11
    )
    
    $
    (0.40
    )
    
    $
    (0.16
    )
    
    $
    (0.61
    )
  June 30,
    
    
    June 28,2007
    
    
    2008Stock units and awards
    
    
    1,764
    
    
    
    3,850Stock options and warrants
    
    
    4,777
    
    
    
    4,324Convertible notes
    
    
    3,229
    
    
    
    8,2299,770
    
    
    
    16,403
   21




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##### Table of Contents



GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 NOTE 12COMPREHENSIVE LOSS
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 28,
    
    
    June 30,
    
    
    June 28,2007
    
    
    2008
    
    
    2007
    
    
    2008Net loss
    
    $
    (5,033
    )
    
    $
    (18,960
    )
    
    $
    (7,378
    )
    
    $
    (28,525
    )Other comprehensive income (loss):Net unrealized gain on available-for-sale securities, net of tax
    
    
    31
    
    
    
    
    
    
    
    98
    
    
    
    Cumulative translation adjustment, net of tax
    
    
    (17
    )
    
    
    10
    
    
    
    (14
    )
    
    
    56Other comprehensive income
    
    
    14
    
    
    
    10
    
    
    
    84
    
    
    
    56Comprehensive loss
    
    $
    (5,019
    )
    
    $
    (18,950
    )
    
    $
    (7,294
    )
    
    $
    (28,469
    )
 NOTE 13MAJOR SUPPLIERS/ECONOMIC DEPENDENCY
    NOTE 14SEGMENTS
      22




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
  Three Months Ended June 30, 2007E-Commerce
    
    
    Interactive
    
    
    IntersegmentServices
    
    
    Marketing Services
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    128,446
    
    
    $
    6,098
    
    
    $
    (3,280
    )
    
    $
    131,264Operating expenses before depreciation, amortization
and stock-based compensation expense
    
    
    128,340
    
    
    
    5,462
    
    
    
    (3,280
    )
    
    
    130,522Operating income before depreciation, amortization
and stock-based compensation expense
    
    
    106
    
    
    
    636
    
    
    
    
    
    
    
    742Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,691Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,046Loss from operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,995
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    925Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,739
    )Other expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (8,189
    )
 Three Months Ended June 28, 2008E-Commerce
    
    
    Interactive
    
    
    IntersegmentServices
    
    
    Marketing Services
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    175,936
    
    
    $
    21,529
    
    
    $
    (4,256
    )
    
    $
    193,209Operating expenses before depreciation, amortization
and stock-based compensation expense
    
    
    173,861
    
    
    
    17,827
    
    
    
    (4,256
    )
    
    
    187,432Operating income before depreciation, amortization
and stock-based compensation expense
    
    
    2,075
    
    
    
    3,702
    
    
    
    
    
    
    
    5,777Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,826Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,155Loss from operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,204
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,347Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (168
    )Other expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    208Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (19,591
    )
  23




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##### Table of Contents



GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 Six Months Ended June 30, 2007E-Commerce
    
    
    Interactive
    
    
    IntersegmentServices
    
    
    Marketing Services
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    272,943
    
    
    $
    10,913
    
    
    $
    (6,309
    )
    
    $
    277,547Operating expenses before depreciation, amortization
and stock-based compensation expense
    
    
    269,186
    
    
    
    10,173
    
    
    
    (6,309
    )
    
    
    273,050Operating income before depreciation, amortization
and stock-based compensation expense
    
    
    3,757
    
    
    
    740
    
    
    
    
    
    
    
    4,497Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,615Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,643Loss from operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,761
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,767Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,683
    )Other expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (11,868
    )
 Six Months Ended June 28, 2008E-Commerce
    
    
    Interactive
    
    
    IntersegmentServices
    
    
    Marketing Services
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    363,535
    
    
    $
    33,614
    
    
    $
    (8,397
    )
    
    $
    388,752Operating expenses before depreciation, amortization
and stock-based compensation expense
    
    
    362,752
    
    
    
    29,019
    
    
    
    (8,397
    )
    
    
    383,374Operating income before depreciation, amortization
and stock-based compensation expense
    
    
    783
    
    
    
    4,595
    
    
    
    
    
    
    
    5,378Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,635Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,776Loss from operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,033
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,524Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,207
    )Other expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    353Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (38,703
    )
  
    
    the Companys E-Commerce Services segment generates revenues by selling information
technology services to our Interactive Marketing Services segment
    
    the Companys Interactive Marketing Services segment generates revenues by selling
online marketing, advertising, email and design services to our E-Commerce Services segment
  24




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##### 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 look
forward to, anticipate, believe, estimate, expect, intend, may, plan, will,
would, should, could, guidance, potential, opportunity, continue, project,
forecast, confident, prospects, schedule, designed, future, discussions, if and
similar expressions typically are used to identify forward-looking statements. Forward-looking
statements are based on the then-current expectations, beliefs, assumptions, estimates and
forecasts about our business. These statements are not guarantees of future performance and involve
risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and
results may differ materially from what is expressed or implied by these forward-looking
statements. Factors which may affect our business, financial condition and operating results
include the effects of changes in the economy, consumer spending, the financial markets and the
industries in which we and our partners operate, changes affecting the Internet and e-commerce, our
ability to develop and maintain relationships with strategic partners and suppliers and the timing
of our establishment, extension or termination of our relationships with strategic partners, our
ability to timely and successfully develop, maintain and protect our technology, confidential and
proprietary information, and product and service offerings and execute operationally, our ability
to attract and retain qualified personnel, our ability to successfully integrate our acquisitions
of other businesses, and the performance of acquired businesses. More information about potential
factors that could affect us are described in Part I, Item 1A under the heading Risk Factors in
our Form 10-K for the fiscal year ended December 29, 2007, filed with the SEC on March 13, 2008. We
expressly disclaim any intent or obligation to update these forward-looking statements.
 Executive Overview
  
    
    We are a leading provider of services for e-commerce, multichannel retailing and
interactive marketing to large business-to-consumer enterprises, which we call partners.
Beginning in the first quarter of fiscal 2008, we operate in two reportable business
segments: e-commerce services and interactive marketing services. For e-commerce services,
we deliver customized solutions to partners through an integrated e-commerce platform,
which is comprised of three components: technology, fulfillment and customer care. We offer
each of the platforms components on a modular basis, or as part of an integrated,
end-to-end solution. For interactive marketing services, we offer a full suite of online
interactive marketing, advertising, e-mail and design services.
 
    
    We derive virtually all of our revenues from sales of products by us through our
partners e-commerce businesses, service fees earned by us in connection with the
development and operation of our partners e-commerce businesses, and service fees earned
by us through our provision of interactive marketing services.
 
    
    We generate the 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 January 2008, we entered into a $75 million revolving secured bank line of credit,
which may be increased to $150 million subject to certain
conditions. In May 2008, we
increased the line of credit by $15 million, which expanded the total available revolving
secured bank line of credit to $90 million. The five-year, revolving secured line of credit
is available to us for working capital and general corporate purposes, including possible
acquisitions, and contains certain financial and negative covenants with which we must
comply. As of June 28, 2008, $30.0 million was outstanding under the line of credit.
 
    
    In February 2008, we acquired e-Dialog, Inc., a Lexington, Mass.based market-leading
provider of advanced e-mail marketing services and solutions to more than 100 companies in
the U.S. and Europe for $149.2 million, including estimated acquisition costs. We expect
the acquisition to expand the breadth and depth of our interactive marketing services
capabilities, our reach into existing and new vertical markets, and our growing European
presence.
  25




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##### Table of Contents




    
    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 one or more components of an e-commerce solution. To
satisfy our existing partners and to continue to attract new partners, we offer a complete
integrated solution designed to increase efficiencies and improve integration. This
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 interactive 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.
 
    
    Our objective is to grow our business by expanding the e-commerce businesses of our
existing partners, by adding new partners, by expanding internationally, by generating
incremental revenue from interactive marketing and other services, and selectively through
acquisitions.
 Results of Operations
 Three-month period ended June 30, 2007 and June 28, 2008 (amounts in tables in millions):
 Net Revenues
  Net Revenues from Product Sales
 Service Fee Revenues.
 Second Qtr Fiscal 2008vs.Second Qtr Fiscal 2007Second Qtr Fiscal 2007
    
    
    Second Qtr Fiscal 2008
    
    
    Change
    
    
    ChangeNet Revenues by Type:Net revenues from product sales
    
    $
    89.0
    
    
    
    68
    %
    
    $
    107.1
    
    
    
    55
    %
    
    $
    18.1
    
    
    
    20
    %Service fee revenues
    
    
    42.3
    
    
    
    32
    %
    
    
    86.1
    
    
    
    45
    %
    
    
    43.8
    
    
    
    104
    %Total net revenues
    
    $
    131.3
    
    
    
    100
    %
    
    $
    193.2
    
    
    
    100
    %
    
    $
    61.9
    
    
    
    47
    %Net Revenues by Segment:E-Commerce services
    
    $
    128.5
    
    
    
    98
    %
    
    $
    176.0
    
    
    
    91
    %
    
    $
    47.5
    
    
    
    37
    %Interactive marketing services
    
    
    6.1
    
    
    
    5
    %
    
    
    21.5
    
    
    
    11
    %
    
    
    15.4
    
    
    
    252
    %Intersegment eliminations
    
    
    (3.3
    )
    
    
    (3
    %)
    
    
    (4.3
    )
    
    
    (2
    %)
    
    
    (1.0
    )
    
    
    30
    %Total net revenues
    
    $
    131.3
    
    
    
    100
    %
    
    $
    193.2
    
    
    
    100
    %
    
    $
    61.9
    
    
    
    47
    %
  26




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##### Table of Contents



Net Revenues by Type
 Net Revenues from Product Sales.
 Service Fee Revenues.
 Net Revenues by Segment
 E-Commerce Services Segment Revenues.
 Net Revenues by Type  Net Revenues from Product Sales
 Interactive Marketing Services Segment Revenues.
 Costs and Expenses
  Costs of Revenues from Product Sales.
 Marketing.
 Account Management and Operations.
 Product Development
 General and Administrative.
  27




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##### Table of Contents



Depreciation and Amortization.
 Second Quarter of Fiscal 2008Second Quarter
    
    
    Second Quarter
    
    
    vs.of Fiscal 2007
    
    
    of Fiscal 2008
    
    
    Second Quarter of Fiscal 2007% of
    
    
    
    
    
    
    % ofNet
    
    
    
    
    
    
    Net$
    
    
    Revenues
    
    
    $
    
    
    Revenues
    
    
    $ Change
    
    
    % ChangeCost of revenues from product sales
    
    $
    65.8
    
    
    
    50.1
    %
    
    $
    78.4
    
    
    
    40.6
    %
    
    $
    12.6
    
    
    
    19.1
    %Marketing
    
    
    9.7
    
    
    
    7.4
    %
    
    
    11.9
    
    
    
    6.2
    %
    
    
    2.2
    
    
    
    22.7
    %Account management and operations
    
    
    31.6
    
    
    
    24.1
    %
    
    
    57.5
    
    
    
    29.8
    %
    
    
    25.9
    
    
    
    82.0
    %Product development
    
    
    15.1
    
    
    
    11.5
    %
    
    
    25.2
    
    
    
    13.0
    %
    
    
    10.1
    
    
    
    66.9
    %General and administrative
    
    
    10.4
    
    
    
    7.9
    %
    
    
    18.6
    
    
    
    9.6
    %
    
    
    8.2
    
    
    
    78.8
    %Depreciation and amortization
    
    
    7.7
    
    
    
    5.9
    %
    
    
    18.8
    
    
    
    9.7
    %
    
    
    11.1
    
    
    
    144.2
    %Total costs and expenses
    
    $
    140.3
    
    
    
    106.9
    %
    
    $
    210.4
    
    
    
    108.9
    %
    
    $
    70.1
    
    
    
    50.0
    %
 Cost of Revenues from Product Sales:
 Second Qtr
    
    
    Second QtrFiscal 2007
    
    
    Fiscal 2008Cost of revenues from product sales
    
    $
    65.8
    
    
    $
    78.4As a percentage of net revenues from product sales
    
    
    73.9
    %
    
    
    73.2
    %
   Marketing.
 Account Management and Operations.
  28




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##### Table of Contents



Product Development.
 General and Administrative.
 Depreciation and Amortization.
 Results of Operations
 Six-month period ended June 30, 2007 and June 28, 2008 (amounts in tables in millions):
 Net Revenues
 First Six Months of Fiscal 2008vs.First Six Months
    
    
    First Six Months
    
    
    First Six Months of Fiscal 2007of Fiscal 2007
    
    
    of Fiscal 2008
    
    
    Change
    
    
    ChangeNet Revenues by Type:Net revenues from product sales
    
    $
    197.7
    
    
    
    71
    %
    
    $
    230.2
    
    
    
    59
    %
    
    $
    32.5
    
    
    
    16
    %Service fee revenues
    
    
    79.8
    
    
    
    29
    %
    
    
    158.6
    
    
    
    41
    %
    
    
    78.8
    
    
    
    99
    %Total net revenues
    
    $
    277.5
    
    
    
    100
    %
    
    $
    388.8
    
    
    
    100
    %
    
    $
    111.3
    
    
    
    40
    %Net Revenues by Segment:E-Commerce services
    
    $
    272.9
    
    
    
    98
    %
    
    $
    363.6
    
    
    
    93
    %
    
    $
    90.7
    
    
    
    33
    %Interactive marketing services
    
    
    10.9
    
    
    
    4
    %
    
    
    33.6
    
    
    
    9
    %
    
    
    22.7
    
    
    
    208
    %Intersegment eliminations
    
    
    (6.3
    )
    
    
    (2
    %)
    
    
    (8.4
    )
    
    
    (2
    %)
    
    
    (2.1
    )
    
    
    33
    %Total net revenues
    
    $
    277.5
    
    
    
    100
    %
    
    $
    388.8
    
    
    
    100
    %
    
    $
    111.3
    
    
    
    40
    %
  29




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##### Table of Contents



Net Revenues by Type
 Net Revenues From Product Sales.
 Service Fee Revenues.
 Net Revenues by Segment
 E-Commerce Services Segment Revenues.
 Net Revenues by Type  Net Revenues from Product Sales
 Interactive Marketing Services Segment Revenues.
 Costs and Expenses
 First Six Months of Fiscal 2008First Six Months
    
    
    First Six Months
    
    
    vs.of Fiscal 2007
    
    
    of Fiscal 2008
    
    
    First Six Months of Fiscal 2007% of
    
    
    
    
    
    
    % ofNet
    
    
    
    
    
    
    Net$
    
    
    Revenues
    
    
    $
    
    
    Revenues
    
    
    $ Change
    
    
    % ChangeCost of revenues from product sales
    
    $
    142.6
    
    
    
    51.4
    %
    
    $
    163.9
    
    
    
    42.2
    %
    
    $
    21.3
    
    
    
    14.9
    %Marketing
    
    
    21.9
    
    
    
    7.9
    %
    
    
    28.8
    
    
    
    7.4
    %
    
    
    6.9
    
    
    
    31.5
    %Account management and operations
    
    
    63.6
    
    
    
    22.9
    %
    
    
    116.6
    
    
    
    30.0
    %
    
    
    53.0
    
    
    
    83.3
    %Product development
    
    
    28.8
    
    
    
    10.4
    %
    
    
    47.6
    
    
    
    12.2
    %
    
    
    18.8
    
    
    
    65.3
    %General and administrative
    
    
    19.8
    
    
    
    7.1
    %
    
    
    34.3
    
    
    
    8.8
    %
    
    
    14.5
    
    
    
    73.2
    %Depreciation and amortization
    
    
    14.6
    
    
    
    5.3
    %
    
    
    32.6
    
    
    
    8.4
    %
    
    
    18.0
    
    
    
    123.3
    %Total operating expenses
    
    $
    291.3
    
    
    
    105.0
    %
    
    $
    423.8
    
    
    
    109.0
    %
    
    $
    132.5
    
    
    
    45.5
    %
  First Six Months
    
    
    First Six Monthsof Fiscal 2007
    
    
    of Fiscal 2008Cost of revenues from product sales
    
    $
    142.6
    
    
    $
    163.9As a percentage of net revenues
from product sales
    
    
    72.1
    %
    
    
    71.2
    %
  30




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##### Table of Contents



Marketing Expenses.
 Account Management and Operations.
 Product Development Expenses.
 General and Administrative Expenses.
  31




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##### Table of Contents



Depreciation and Amortization Expenses.
 Income Taxes
   Liquidity and Capital Resources
 As ofDecember 29,
    
    
    June 28,2007
    
    
    2008(in millions)Cash and cash equivalents
    
    $
    231.5
    
    
    $
    49.6Percentage of total assets
    
    
    33.4
    %
    
    
    7.6
    %
     32




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##### Table of Contents



Cash Flow Changes
    Critical Accounting Policies
  Recent Accounting Pronouncements
  Seasonality
  
 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
   33




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##### Table of Contents



ITEM 4: CONTROLS AND PROCEDURES.
 Evaluation of disclosure controls and procedures.
  Changes in internal control over financial reporting.
  34




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1: LEGAL PROCEEDINGS .
  
 ITEM 1A: RISK FACTORS.
  Risks Related to Our Business
 We have an accumulated deficit and may incur additional losses.
   
    
    launch new partners;
 
    
    expand internationally;
 
    
    enhance our fulfillment capabilities and increase fulfillment capacity;
 
    
    develop new technologies and features to improve our partners e-commerce businesses;
 
    
    enhance our customer care center capabilities to better serve customers needs and
increase customer care capacity;
 
    
    expand our marketing services business;
 
    
    increase our general and administrative functions to support our growing operations;
 
    
    continue our business development, sales and marketing activities; and
 
    
    make strategic or opportunistic acquisitions of complementary or new businesses or
assets or internally develop new business initiatives.
  Our substantial indebtedness could adversely affect our financial condition.
   
    
    increase our vulnerability to general adverse economic and industry conditions;
 
    
    limit our ability to obtain additional financing;
 
    
    require the dedication of a substantial portion of our cash flow from operations to the
payment of interest and principal on our indebtedness, thereby reducing the availability of
such cash flow to fund our growth strategy, working capital, capital expenditures and other
general corporate purposes;
 
    
    limit our flexibility in planning for, or reacting to, changes in our business and the
industry;
 
    
    place us at a competitive disadvantage relative to competitors with less debt; and
 
    
    make it difficult or impossible for us to pay the principal amount of the subordinated
convertible notes at maturity, thereby causing an event of default under the subordinated
convertible notes.
  35




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##### Table of Contents



Risks Related to 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.
   
 ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3: DEFAULTS UPON SENIOR SECURITIES.
  
 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS WHO ARE NOT ALSO DIRECTORS .
   No. of VotesName
    
    For
    
    
    WithholdMichael G. Rubin
    
    
    39,339,902
    
    
    
    4,944,226M. Jeffrey Branman
    
    
    39,340,848
    
    
    
    4,943,280Michael J. Donahue
    
    
    39,315,253
    
    
    
    4,968,875Ronald D. Fisher
    
    
    39,341,063
    
    
    
    4,943,065John A. Hunter
    
    
    38,889,874
    
    
    
    5,394,254Mark S. Menell
    
    
    39,341,392
    
    
    
    4,942,736Jeffrey F. Rayport
    
    
    38,970,967
    
    
    
    5,313,161Lawrence S. Smith
    
    
    44,112,935
    
    
    
    171,193Andrea M. Weiss
    
    
    39,320,196
    
    
    
    4,963,932
  36




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##### Table of Contents



No. of VotesFor
    
    Against
    
    
    Abstain
    
    
    Broker Non-Votes25,861,697
    
    
    14,516,373
    
    
    
    7,445
    
    
    
    3,898,614
  No. of VotesFor
    
    Against
    
    
    Abstain
    
    
    Broker Non-Votes39,780,249
    
    
    599,499
    
    
    
    5,767
    
    
    
    3,898,614
  No. of VotesFor
    
    Against
    
    
    Abstain43,896,192
    
    
    355,269
    
    
    
    32,668
 
 ITEM 5: OTHER INFORMATION.
  
 ITEM 6: EXHIBITS.
 10.1
    
    
    2005 Equity Incentive Plan, as amended (incorporated herein by reference from Appendix A to GSI Commerce,
Inc.s Definitive Proxy Statement on Schedule 14A filed with the Securities Exchange Commission on April 25,
2008).10.2
    
    
    GSI Commerce, Inc. Leadership Team Incentive Plan (incorporated herein by reference from Appendix B to GSI
Commerce, Inc.s Definitive Proxy Statement on Schedule 14A filed with the Securities Exchange Commission on
April 25, 2008).31.1
    
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 193431.2
    
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 193432.1
    
    
    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
  37




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##### Table of Contents



SIGNATURES
   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)  38




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description10.1
    
    
    2005 Equity Incentive Plan, as amended (incorporated herein by
reference from Appendix A to GSI Commerce, Inc.s Definitive Proxy
Statement on Schedule 14A filed with the Securities Exchange
Commission on April 25, 2008).10.2
    
    
    GSI Commerce, Inc. Leadership Team Incentive Plan (incorporated
herein by reference from Appendix B to GSI Commerce, Inc.s
Definitive Proxy Statement on Schedule 14A filed with the
Securities Exchange Commission on April 25, 2008).31.1
    
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 193431.2
    
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 193432.1
    
    
    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
  39