• our reliance on the fees generated by the transaction volume or product sales of our clients;

• our reliance on our clients' projections or transaction volume or product sales;

• our dependence upon our agreements with International Business Machines Corporation ("IBM") and InfoPrint Solutions Company ("IPS"), a joint venture company owned by Ricoh and IBM;

• our dependence upon our agreements with our major clients;

• our client mix, their business volumes and the seasonality of their business;

• our ability to finalize pending contracts;

• the impact of strategic alliances and acquisitions;

• trends in e-commerce, outsourcing, government regulation both foreign and domestic and the market for our services;

• whether we can continue and manage growth;

• increased competition;

• our ability to generate more revenue and achieve sustainable profitability;

• effects of changes in profit margins;

• the customer and supplier concentration of our business;

• the reliance on third-party subcontracted services;

• the unknown effects of possible system failures and rapid changes in technology;

• foreign currency risks and other risks of operating in foreign countries;

• potential litigation;

• potential delisting;

• our dependency on key personnel;

• the impact of new accounting standards, and changes in existing accounting rules or the interpretations of those rules;

• our ability to raise additional capital or obtain additional financing;

• our ability and the ability of our subsidiaries to borrow under current financing arrangements and maintain compliance with debt covenants;

• relationship with and our guarantees of certain of the liabilities and indebtedness of our subsidiaries;

• taxation on the sale of our products;

• eCOST's ability to maintain existing and build new relationships with manufacturers and vendors and the success of its advertising and marketing efforts;

• eCOST's ability to increase its sales revenue and sales margin and improve operating efficiencies; and

• eCOST's ability to generate projected cash flows sufficient to cover the values of its intangible assets.

We have based these statements on our current expectations about future events. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee you that these expectations actually will be achieved. In addition, some forward-looking statements are based

upon assumptions as to future events that may not prove to be accurate. Therefore, actual outcomes and results may differ materially from what is expected or forecasted in such forward-looking statements. We undertake no obligation to update publicly any forward-looking statement for any reason, even if new information becomes available or other events occur in the future. Overview
We are an international provider of integrated eCommerce and business process outsourcing solutions to major brand name companies seeking to optimize their supply chain efficiencies and to extend their traditional business and e-commerce initiatives. Through our eCOST.com business unit, we are a leading multi-category online discount retailer of new, "close-out" and recertified brand-name merchandise. We derive our revenues from three business segments: as an eCommerce and business process outsourcer, a master distributor and an online discount retailer.
First, in our eCommerce and business process outsourcing segment we derive our revenues from a broad range of services, including professional consulting, technology collaboration, order management, managed web hosting and web development, the development of an eCommerce technology platform, customer relationship management, financial services including billing and collection services and working capital solutions, kitting and assembly services, information management and international fulfillment and distribution services. We offer our services as an integrated solution, which enables our clients to outsource their complete infrastructure needs to a single source and to focus on their core competencies. Our distribution services are conducted at warehouses that we lease or manage and include real-time inventory management and customized picking, packing and shipping of our clients' customer orders. We currently offer the ability to provide infrastructure and distribution solutions to clients that operate in a range of vertical markets, including technology manufacturing, computer products, cosmetics, fragile goods, contemporary home furnishings, apparel, aviation, telecommunications and consumer electronics, among others.
In this eCommerce and business process outsourcing segment, we do not own the underlying inventory or the resulting accounts receivable, but provide management services for these client-owned assets. We typically charge our service fee revenue on a cost-plus basis, a percent of shipped revenue basis or a per-transaction basis, such as a per-minute basis for web-enabled customer contact center services and a per-item basis for fulfillment services. Additional fees are billed for other services. We price our services based on a variety of factors, including the depth and complexity of the services provided, the amount of capital expenditures or systems customization required, the length of contract and other factors.
Many of our service fee contracts involve third-party vendors who provide additional services such as package delivery. The costs we are charged by these third-party vendors for these services are often passed on to our clients. Our billings for reimbursements of these and other 'out-of-pocket' expenses include travel, shipping and handling costs and telecommunication charges are included in pass-through revenue.
Our second business segment is a product revenue model. In this segment, we are a master distributor of product for IPS and certain other clients. In this capacity, we purchase, and thus own, inventory and recognize the corresponding product revenue. As a result, upon the sale of inventory, we own the accounts receivable. Freight costs billed to customers are reflected as components of product revenue. This business segment requires significant working capital requirements, for which we have senior credit facilities to provide for approximately $91 million of available financing.
Our third business segment is a web-commerce product revenue model focused on the sale of products to a broad range of consumer and small business customers. In this segment we operate as a multi-category online discount retailer of new, "close-out" and recertified brand-name merchandise. Our product line currently offers approximately 350,000 products in several primary merchandise categories, primarily including computers, networking, electronics and entertainment, TV's, plasmas and monitors, cameras and camcorders, memory and storage, "For the Home" and sports and leisure.
Growth is a key element to achieving our future goals, including achieving and maintaining sustainable profitability. Growth in our eCommerce and business process outsourcing segment is driven by two main elements: new client relationships and organic growth from existing clients. We focus our sales efforts on

larger contracts with brand-name companies within two primary target markets, online brands and retailers and technology manufacturers, which, by nature, require a longer duration to close but also have the potential to be higher-quality and longer duration engagements.
Growth within our product revenue business is primarily driven by our ability to attract new master distributor arrangements with IPS or other manufacturers and the sales and marketing efforts of the manufacturers and third party sales partners.
Growth within our web-commerce product revenue model is primarily driven by eCOST's ability to increase sales by generating organic growth, new customers and expand its product line.
We continue to monitor and control our costs to focus on profitability. While we are targeting our new service fee contracts to yield increased gross profit, we also expect to incur incremental investments to implement new contracts, investments in infrastructure and sales and marketing to support our targeted growth and increased public company professional fees.
Monitoring and controlling our expenditures and available cash balances continues to be a primary focus. Our cash and liquidity positions are important components of our financing of both current operations and our targeted growth.
Our expenses comprise primarily four categories: 1) cost of product revenue,
2) cost of service fee revenue, 3) cost of pass-through revenue and 4) operating expenses. Cost of product revenues - consists of the purchase price of product sold and freight costs, which are reduced by certain reimbursable expenses. These reimbursable expenses include pass-through customer marketing programs, direct costs incurred in passing on any price decreases offered by vendors to cover price protection and certain special bids, the cost of products provided to replace defective product returned by customers and certain other expenses as defined under the master distributor agreements. Vendor marketing programs, such as co-op advertising, also reduce cost of product revenue. Cost of service fee revenue - consists primarily of compensation and related expenses for our web-enabled customer contact center services, international fulfillment and distribution services and professional consulting services, and other fixed and variable expenses directly related to providing services under the terms of fee based contracts, including certain occupancy and information technology costs and depreciation and amortization expenses. Cost of pass-through revenue - the related reimbursable costs for pass-through expenditures are reflected as cost of pass-through revenue. Operating expenses - consist primarily of selling, general and administrative ("SG&A") expenses such as compensation and related expenses for sales and marketing staff, advertising, online marketing and catalog production, distribution costs (excluding freight) applicable to the Supplies Distributors and eCOST businesses, executive, management and administrative personnel and other overhead costs, including certain occupancy and information technology costs and depreciation and amortization expenses.

Results of Operations
For the Interim Periods Ended September 30, 2009 and 2008
   The following table sets forth certain historical financial information from
our unaudited interim condensed consolidated statements of operations expressed
as a percent of net revenues (in millions):

                                            Three Months Ended                                                  Nine Months Ended
                                               September 30,                                                      September 30,
                                                                % of Net Revenues                                                   % of Net Revenues
                        2009        2008        Change          2009          2008         2009         2008        Change          2009          2008
Revenues:
Product revenue,
net                    $ 65.7      $  79.1      $ (13.4 )          76.8 %       72.0 %    $ 197.5      $ 252.5      $ (55.0 )          76.9 %       74.4 %
Service fee revenue      13.1         22.9         (9.8 )          15.3 %       20.9 %       42.6         65.0        (22.4 )          16.6 %       19.2 %
Pass-through
revenue                   6.8          7.9         (1.1 )           7.9 %        7.1 %       16.8         21.6         (4.8 )           6.5 %        6.4 %

Total net revenues       85.6        109.9        (24.3 )         100.0 %      100.0 %      256.9        339.1        (82.2 )         100.0 %      100.0 %
Cost of Revenues
Cost of product
revenue (1)              59.6         73.1        (13.5 )          90.7 %       92.4 %      180.7        233.5        (52.8 )          91.5 %       92.5 %
Cost of service fee
revenue (2)               9.7         15.6         (5.9 )          73.7 %       68.1 %       30.4         44.5        (14.1 )          71.4 %       68.6 %
Pass-through cost
of revenue (3)            6.8          7.9         (1.1 )         100.0 %      100.0 %       16.8         21.6         (4.8 )         100.0 %      100.0 %

Total cost of
revenues                 76.1         96.6        (20.5 )          88.8 %       87.9 %      227.9        299.6        (71.7 )          88.7 %       88.4 %

Product revenue
gross profit              6.1          6.0          0.1             9.3 %        7.6 %       16.8         19.0         (2.2 )           8.5 %        7.5 %
Service fee gross
profit                    3.4          7.3         (3.9 )          26.3 %       31.9 %       12.2         20.5         (8.3 )          28.6 %       31.4 %
Pass-through gross
profit                      -            -            -               - %          - %          -            -            -               - %          - %

Total gross profit        9.5         13.3         (3.8 )          11.2 %       12.1 %       29.0         39.5        (10.5 )          11.3 %       11.6 %

Operating Expenses       10.0         12.7         (2.7 )          11.7 %       11.5 %       31.4         37.0         (5.6 )          12.2 %       10.9 %

Income from
operations               (0.5 )        0.6         (1.1 )         (0.4) %        0.6 %       (2.4 )        2.5         (4.9 )         (0.9) %        0.7 %
Interest expense,
net                       0.2          0.4          0.2             0.3 %        0.4 %        1.0          1.2          0.2             0.4 %        0.3 %

Income before
income taxes             (0.7 )        0.2         (0.9 )         (0.7) %        0.2 %       (3.4 )        1.3         (4.7 )         (1.3) %        0.4 %

Income tax expense,
net                       0.1          0.2          0.1             0.1 %        0.2 %        0.2          0.8          0.6             0.1 %        0.2 %

Net income (loss)      $ (0.8 )    $   0.0      $  (0.8 )         (0.8) %          - %    $  (3.6 )    $   0.5      $  (4.1 )         (1.4) %        0.2 %

(1) % of net revenues represents the percent of Product revenue, net.

(2) % of net revenues represents the percent of Service fee revenue.

(3) % of net revenues represents the percent of Pass-through revenue.

Product Revenue, net. eCOST product revenue was $20.6 million in the three months ended September 30, 2009, a 13.1% decrease as compared to $23.7 million in the comparable quarter of the prior year. The decrease is primarily due to a decline in sales in the business to consumer sales channel during the three month period compared to prior year primarily resulting from the impact of the global economic environment. eCOST product revenue was $61.8 million in the nine months ended September 30, 2009, a 17.3% decrease as compared to $74.7 million in the comparable quarter of the prior year. The decrease in the nine month period is primarily due to a decline in sales in the business to business channel resulting from the impact of the global economic environment as well as eCOST's reduced emphasis on this lower margin channel.
Supplies Distributors product revenue of $45.1 million decreased $10.3 million, or 18.6%, in the three months ended September 30, 2009 as compared to the same quarter of the prior year. Product revenue of $135.7 million decreased $42.1 million, or 23.7%, in the nine months ended September 30, 2009 as compared to the same period of the prior year. The decreases are primarily due to decreased sales volume resulting from the impact of the overall global economic pressures, inventory rationalization by customers, reduced IBM and IPS printer installations in certain categories as well as the negative impact of foreign exchange rates compared to the same three and nine month periods in the prior year. In addition, product revenue in the nine months ended September 30, 2009 was negatively impacted by a $1.4 million reduction of revenue resulting from a customer bankruptcy.

Service Fee Revenue. Service fee revenue of $13.1 million decreased $9.8 million, or 42.7%, in the three months ended September 30, 2009 as compared to the same quarter of the prior year. Service fee revenue of $42.6 million decreased $22.4 million, or 34.4%, in the nine months ended September 30, 2009 as compared to the same period of the prior year. The decrease in service fee revenue for the three and nine months ended September 30, 2009 is primarily due to the non-renewal of a certain U.S. government agency client relationship partially offset by increased service fees generated from the impact of new service contract relationships. The change in service fee revenue is shown below ($ millions):

                                                                   Three          Nine
                                                                  Months         Months
Period ended September 30, 2008                                   $  22.9        $  65.0
New service contract relationships, including certain
incremental projects under new contracts                              2.6            5.2
Change in existing client service fees                               (0.1 )        (25.8 )
Terminated clients                                                  (12.3 )         (1.8 )

Period ended September 30, 2009                                   $  13.1        $  42.6

The $22.7 million reduction of service fee revenue which resulted from the non-renewal of the U.S. government agency client is included in the existing client line item above for the nine month period as there was activity with this client in each of the nine month periods. For the three month period, the $10.3 million reduction of service fee revenue which resulted from the non-renewal is included in the terminated client line item.
Cost of Product Revenue. The gross margin for eCOST was $1.8 million or 9.0% of product revenue in the three months ended September 30, 2009 and $2.2 million or 9.2% of product revenue during the comparable period of 2008. The decline in gross margin is primarily due to the customer mix, which included a larger percentage of sales to the lower margin business-to-business segment during the three months ended September 30, 2009 compared to the same period last year.
The gross margin for eCOST was $5.9 million or 9.5% of product revenue in the nine months ended September 30, 2009 and $6.2 million or 8.5% of product revenue during the comparable period of 2008. The increase in gross margin percentage in the nine month period is primarily due to the customer mix, which included a larger percentage of sales to the higher margin business-to-consumer channel compared to the same period last year. We are targeting an increasing percentage of eCOST revenues to be generated from the business-to-consumer channel, yet we continue to strive to improve our product sales and gross margin in our business-to-business channel. We expect overall gross margin for eCOST in 2009 will continue to be higher than the prior year.
Supplies Distributors cost of product revenue decreased by $10.7 million, or 20.8%, to $40.9 million in the three months ended September 30, 2009 primarily as a result of decreased product sales. The resulting gross profit margin was $4.2 million, or 9.4% of product revenue, for the three months ended September 30, 2009 and $3.8 million, or 6.9% of product revenue, for the comparable 2008 period. The three month period ending September 30, 2009 includes the impact of certain incremental inventory cost related adjustments which are not expected to continue at the same rate in future periods.
Supplies Distributors cost of product revenue decreased by $40.3 million, or 23.7%, to $124.8 million in the nine months ended September 30, 2009 primarily as a result of decreased product sales. The resulting gross profit margin was $10.9 million, or 8.0% of product revenue, for the nine months ended September 30, 2009 and $12.7 million, or 7.1% of product revenue, for the comparable 2008 period. The 2008 and 2009 nine month periods include the impact of certain incremental inventory cost adjustments. The 2009 margin percentage reflects an increase due to incremental gross margin earned on product sales resulting from certain product price increases, which is partially offset by a reduction in revenue resulting from a customer bankruptcy during the first quarter of 2009.
Cost of Service Fee Revenue. Gross profit as a percentage of service fees was 26.3% in the three months ended September 30, 2009, compared to 31.9% in the same period of the prior year. Gross profit as a percentage of service fees was 28.6% in the nine months ended September 30, 2009, compared to 31.4% in the same period of the prior year. The margins in the prior year periods included the benefit of nine months of higher margin incremental project work associated with the U.S. government contract relationship that was not renewed and was completed in the second quarter of 2009.

We target to earn an overall average gross profit of 25-30% on existing and new service fee contracts, but we have and may continue to accept lower gross margin percentages on certain contracts depending on contract scope and other factors.
Operating Expenses. Operating expenses for the three months ended September 30, 2009 decreased $2.7 million to $10.0 million from $12.7 million in the same 2008 period. As a percentage of total net revenue, operating expenses were 11.7% in the three months ended September 30, 2009 and 11.5% in the comparable period.
Operating expenses for the nine months ended September 30, 2009 decreased $5.6 million to $31.4 million from $37.0 million in the same 2008 period. As a percentage of total net revenue, operating expenses were 12.2% in the nine months ended September 30, 2009 and 10.9% in the comparable period. The increase in percentage of total net revenue is primarily due to the reduction in total net revenues which decreased at a higher rate than the reduction in operating expenses. During the three and nine months ended September 30, 2009, we implemented certain cost reductions, primarily including personnel related adjustments, as a result of the lower service fee revenue and product revenue.
Income Taxes. We recorded a tax provision associated primarily with state income taxes and our subsidiary Supplies Distributors' Canadian and European operations. During the nine months ended September 30, 2009, we recognized a tax benefit relating to our adoption of a new transfer pricing policy between certain international subsidiaries. This policy adoption resulted from the completion of a transfer pricing study and its approval by appropriate tax regulators. A valuation allowance has been provided for the majority of our net deferred tax assets as of September 30, 2009 and December 31, 2008, which are primarily related to our net operating loss carryforwards, and certain foreign deferred tax assets. We expect that we will continue to record an income tax provision associated with state income taxes and Supplies Distributors' Canadian and European results of operations.
Liquidity and Capital Resources
Net cash provided by operating activities was $8.5 million for the nine months ended September 30, 2009, and primarily resulted from a $10.3 million decrease in accounts receivable, a decrease in inventories of $10.7 million and cash income before working capital changes of $2.4 million partially offset by a $13.5 million decrease in accounts payable, accrued expenses and other liabilities and a $1.5 million increase in prepaid expenses, other receivables and other assets.
Net cash provided by operating activities was $11.3 million for the nine months ended September 30, 2008, and primarily resulted from cash income before working capital changes of $6.8 million, a $5.6 million of increase in accounts payable, accrued expenses and other liabilities and a $7.1 million decrease in accounts receivable. These benefits were offset by a $3.1 million increase in prepaid expenses, other receivables and other assets and a $5.3 million increase in inventories.
Net cash used in investing activities for the nine months ended September 30, 2009 and 2008 totaled $3.5 million and $4.6 million, respectively, resulting primarily from capital expenditures.
Capital expenditures have historically consisted primarily of additions to upgrade our management information systems, development of customized technology solutions to support and integrate with our service fee clients, and general expansion and upgrades to our facilities, both domestic and foreign. We expect to incur capital expenditures to support new contracts and anticipated future growth opportunities. Based on our current client business activity and our targeted growth plans, we anticipate our total investment in upgrades and additions to facilities and information technology services for the upcoming twelve months will be approximately $3 to $5 million, although additional capital expenditures may be necessary to support the infrastructure requirements of new clients. To maintain our current operating cash position, a portion of these expenditures may be financed through client reimbursements, debt, operating or capital leases or additional equity. We may elect to modify or defer a portion of such anticipated investments in the event we do not obtain the financing or achieve the financial results necessary to support such investments.

Net cash used in financing activities was approximately $5.8 million for the nine months ended September 30, 2009, primarily representing payments on debt and capital lease obligations.
Net cash used in financing activities was approximately $6.2 million for the nine months ended September 30, 2008, primarily representing payments on debt . . .