We have goodwill at our Guitar Center and direct response reporting units, which are also operating segments. We also have intangible assets primarily related to trademarks, customer relationships and favorable leases.

In performing the qualitative assessment of our Guitar Center reporting unit as of October 1, 2011, we considered macroeconomic conditions, industry and market conditions such as competition and the regulatory environment and entity-specific events that can affect the estimated fair value of a reporting unit. We determined that facts and circumstances did not indicate that the goodwill of the reporting unit was more likely than not impaired. Accordingly, we did not perform the quantitative goodwill impairment test for the Guitar Center reporting unit.

Our qualitative assessment of our direct response reporting unit as of October 1, 2011 initially indicated that its goodwill was not more likely than not impaired. Although operating results during the latter half of the third quarter began to show variations from management's expectations, we believed this was a temporary disruption due to the restructuring activities of 2011 (see Note 3) and the implementation of a new web interface for our Musician's Friend website.

Before concluding the goodwill impairment test of the direct response reporting unit as of October 1, 2011, revenue and operating income for the reporting unit began to fall significantly below management's expectations during the critical holiday selling season in November and December. We therefore determined it was appropriate to update our revenue and net cash flow projections and proceed to the two step goodwill impairment test and include updated information based on our fourth quarter results.

In performing step 1 of the goodwill impairment test of the direct response reporting unit, we used discount rates that ranged from 14.0% to 15.0% for the discounted cash flow analysis. In addition, we used the Gordon Growth Method, for which the terminal capitalization rates used ranged from 0.5% to 1.5%. In the market multiple analysis, we used multiples based on earnings before interest, taxes, depreciation and amortization that ranged from 3.5x to 4.5x. We equally weighted the discounted cash flow and market multiple analyses to determine the estimated fair value of the reporting unit. The results of the step 1 impairment test indicated that there was a potential impairment of goodwill, as the carrying amount of the reporting unit exceeded its estimated fair value.

Consequently, we performed step 2 of the goodwill impairment test for the direct response reporting unit. The step 2 analysis resulted in an impairment charge of $107.0 million, which represented the remaining goodwill carrying amount. The primary reason for the decrease in estimated fair value of the direct response reporting unit with respect to the market multiple analysisand discounted cash flow analyses was decreased cash flow projections for the reporting unit. We reduced our cash flow projections for the reporting unit due to revenue and operating income results that were significantly below management's expectations during the 2011 holiday selling season and uncertainty about how effectively the direct response reporting unit will emerge from the restructuring activities of 2011, our ability to optimize its new web platform and the extent to which intensifying e-commerce competition will continue to affect its operating results in future periods.

In 2010, the results of the step 1 process did not indicate a potential impairment of goodwill in the Guitar Center reporting unit or the direct response reporting unit, as the fair values of the reporting units exceeded their carrying amounts. As a result, we did not complete step 2 of the goodwill impairment test for either reporting unit. In performing the step 1 process in 2010, we used discount rates of that ranged from 11.0% to 14.0% and Gordon Growth terminal capitalization rates that ranged from 3.0% to 5.0%.

In 2009, the results of the step 1 process indicated that there was a potential impairment of goodwill in the Guitar Center reporting unit in 2009, as the carrying amounts of the reporting unit exceeded its estimated fair value.

Consequently, we performed the second step, or step 2, of the goodwill impairment test for the Guitar Center reporting unit in 2009. As a result of the step 2 analysis, we recorded goodwill impairment of $123.8 million at the Guitar Center reporting unit. The primary reason for the goodwill impairment was the general economic downturn that began to affect us in 2008. Based on a decline in sales compared to the preceding year and uncertainty about the recovery of the U.S. economy, particularly with respect to discretionary consumer spending, we revised our expectations about future revenue, which is a significant factor in the discounted cash flow analysis used to estimate the fair value of the Guitar Center reporting unit. In performing the step 1 and step 2 processes in 2009, we used discount rates ranged from 11.5% to 12.5% and Gordon Growth terminal capitalization rates used ranged from 3.0% to 5.0%.

In the first quarter of 2011, we reorganized our operating segments to emphasize a brand reporting structure. As a result of this change, the Guitar Center segment includes the sales and operating expenses of our Guitar Center online operations together with the sales and operating expenses of Guitar Center stores. Similarly, the Music & Arts segment includes the sales and operating expenses of our Music & Arts online operations with those of Music & Arts stores. We had previously reported the results of our Guitar Center and Music & Arts online operations with the direct response segment.

We reallocated goodwill at from the direct response segment to the Guitar Center segment based on the relative fair values of the www.guitarcenter.com and direct response components. We did not allocate any goodwill to the www.musicarts.com component, as its net sales and operating income were not material in relation to the direct response segment as a whole.

In determining the estimated fair values of the direct response and guitarcenter.com components, we used a market multiple and a discounted cash flow analysis, as used for the annual goodwill impairment test. We used discount rates of 12.5% to 14.0% for the discounted cash flow analysis as of January 1, 2011. In addition, we used the Gordon Growth Method, for which the terminal capitalization rates used ranged from 4.8% to 5.0%.

Based on the results of this analysis, we reallocated $61.8 million of goodwill from the direct response segment to the Guitar Center segment.

The following table presents an analysis of the changes in goodwill by segment (in thousands):

	Guitar Center			Direct Response			Total

Balance at December 31, 2009
Goodwill	$	644,393		$	170,718		$	815,111
Accumulated impairment losses		(123,804	)		(1,903	)		(125,707	)

		520,589			168,815			689,404

Goodwill impairment		—			—			—

Balance at December 31, 2010
Goodwill		644,393			170,718			815,111
Accumulated impairment losses		(123,804	)		(1,903	)		(125,707	)

		520,589			168,815			689,404

Reasssignment of goodwill upon change in operating segments		61,789			(61,789	)		—
Goodwill impairment		—			(107,026	)		(107,026	)

Balance at December 31, 2011
Goodwill		706,182			108,929			815,111
Accumulated impairment losses		(123,804	)		(108,929	)		(232,733	)

	$	582,378		$	—		$	582,378

We amortize intangible assets with finite useful lives over their estimated useful lives. We amortize customer relationships using an accelerated method based on expected customer attrition rates. Other intangible assets with finite useful lives are generally amortized using the straight-line method. Intangible assets with indefinite lives are not amortized but are subject to an annual impairment test.

The impairment test for indefinite-lived intangible assets involves a comparison of the estimated fair value of the intangible asset with its carrying amount. The estimated fair values of trademarks not subject to amortization are determined using a discounted cash flow analysis, specifically the relief-from-royalty method. This analysis resulted in an impairment of $32.5 million at our direct response segment in 2011 and $9.7 million at the Guitar Center segment in 2009.

The decline in fair value of our direct response trademarks in 2011 was due to changes in management's expectations about future operating results for our direct response segment. We significantly reduced our revenue and operating income projections for these brands due to revenue and operating income results that were significantly below management's expectations during the 2011 holiday selling season and uncertainty about the growth of these brands and the restructuring activities of 2011. The reduced projections prompted us to use a lower royalty rate in the discounted cash flow analysis. In addition, we used a higher discount rate, primarily in applying a size risk premium based on market observations for similarly-sized companies.

The decline in fair value of our Guitar Center trademarks in 2009 was due to changes in management's expectations about future operating results, primarily resulting from the economic downturn that began to impact us in 2008.

During 2011, we recognized an impairment charge of $13.5 million related to our direct response customer relationship intangible asset. Management determined that the carrying amount of the asset was not recoverable, primarily based on reduced revenue and operating income projections for our direct response segment. Because the direct response segment experienced a downward trend in revenue due to increasing competition and fell significantly below management's expectations during the holiday selling season in 2011, revenue and operating income projections for the segment were reduced accordingly.

We estimated the fair value of our direct response and customer relationship intangible assets using an income approach, specifically a discounted cash flow analysis. This approach uses unobservable inputs, including projected revenue and net cash flows related to our existing customer relationships, our estimates of future customer retention and our internal cost of capital.

The following is a summary of our intangible assets (dollars in thousands, life in years):

			December 31, 2011

	Weighted- Average Useful Life		Gross Carrying Amount		Accumulated Amortization			Total
Unamortized trademark		—	$	208,501	$	—		$	208,501
Amortized
Customer relationships		12.9		224,302		(125,049	)		99,253
Favorable lease terms		7.5		57,721		(45,436	)		12,285
Covenants not to compete		4.2		210		(209	)		1
Other		4.5		665		(565	)		100

Intangible assets, net			$	491,399	$	(171,259	)	$	320,140

			December 31, 2010

	Weighted- Average Useful Life		Gross Carrying Amount		Accumulated Amortization			Total
Unamortized trademark		—	$	240,804	$	—		$	240,804
Amortized
Customer relationships		12.3		303,400		(155,436	)		147,964
Favorable lease terms		7.5		57,721		(37,950	)		19,771
Covenants not to compete		4.2		210		(182	)		28
Other		4.5		665		(447	)		218

Intangible assets, net			$	602,800	$	(194,015	)	$	408,785

We include amortization of favorable leases in cost of goods sold, buying and occupancy. We include amortization of other intangible assets such as customer relationships and non-compete agreements in selling, general and administrative expenses.

Amortization expense included in cost of goods sold, buying and occupancy was $7.5 million in 2011 and $9.2 million in 2010.

Amortization expense included in selling, general and administrative expense was $35.4 million in 2011 and $40.9 million in 2010.

The estimated amortization expense related to intangible assets for each of the next five years and thereafter as of December 31, 2011 is as follows (in thousands):

Year

2012	$	28,977
2013		22,191
2014		16,351
2015		12,408
2016		9,640
Thereafter		22,072

Total	$	111,639