Liquidity and Capital Resources

     Net cash provided by operating activities was $2.5 million for the year ended December 31, 2006 and primarily consisted of a decrease in inventories of $2.9 million, a decrease in accounts receivable of $1.7 million and a decrease in restricted cash of $0.8 million. These sources of cash were offset by a $2.6 million decrease in accounts payable, accrued expenses and other liabilities and a decrease in net income, as adjusted for non-cash items of $0.2 million.

     Net cash provided by operating activities was $0.8 million for the year ended December 31, 2005 and primarily resulted from increases in income, as adjusted for non-cash items, of $5.4 million and accounts payable, accrued expenses and other liabilities of $2.5 million, partially offset by increases in accounts receivable of $4.5 million, prepaid expenses, other receivables and other assets of $1.8 million and an increase in inventories of $0.8 million.

     Net cash used in investing activities was $4.4 million for the year ended December 31, 2006 and consisted primarily of capital expenditures of $4.0 million and cash paid to acquire eCOST, net of cash acquired, of $1.3 million, partially offset by a decrease in restricted cash of $0.9 million.

     Net cash used in investing activities for the year ended December 31, 2005 totaled $2.8 million, resulting from capital expenditures of $3.9 million offset by a decrease in restricted cash of $1.1 million.

     Capital expenditures have historically consisted primarily of additions to upgrade our management information systems and general expansion of 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 that our total investment in upgrades and additions to facilities and information technology services for the upcoming twelve months will be approximately $6 million to $9 million, although additional capital expenditures may be necessary to support the infrastructure requirements of new clients as well as the eCOST infrastructure. To maintain our current operating cash position, a portion of these expenditures may be financed through debt, operating or capital leases or additional equity. We may elect to modify or defer a portion of such anticipated investments in the event that we do not achieve the revenue necessary to support such investments.

     Net cash provided by financing activities was $3.3 million for the year ended December 31, 2006 primarily representing $4.9 million of net proceeds on issuance of common stock pursuant to a private placement transaction and $1.0 million of net proceeds on debt partially offset by payments on capital leases of $1.5 million and an increase in restricted cash of $1.1 million.

     Net cash provided by financing activities was approximately $2.1 million for the year ended December 31, 2005, primarily representing $1.2 million of proceeds from debt and $2.1 million of proceeds from the issuance of common stock pursuant to our employee stock purchase and stock option programs and warrant exercises partially offset by $1.2 million of payments on our capital lease obligations.

     Our liquidity has been negatively impacted as a result of the merger with eCOST. During 2005 and 2006, eCOST experienced a significant net usage of cash primarily due to losses incurred. As a result, during the process of transitioning and integrating the eCOST operations, we have had to support eCOST’s cash needs to help it achieve a stabilized operational position. The amount of further cash needed to support eCOST operations will depend upon the financing available as well as eCOST’s ability to improve its financial results.

     We currently expect that eCOST, as part of a combined company, should achieve annual recurring cost savings of approximately $4 million to $5 million, dependent upon sales volumes, as compared to pre-merger levels. These savings result from, among other things, the reduction of certain overhead expenses, changes in corporate infrastructure and reduced freight costs, although there can be no assurance that these cost savings will be achieved. As we have essentially completed the integration of eCOST into our infrastructure, we have begun to realize the benefits of many of these expected cost savings. Additionally we expect improvements in eCOST profitability in 2007 and beyond as a result of planned efforts to increase sales, improve product mix and improved operational efficiencies.