primarily due to the negative impact of foreign currency fluctuations during the 2007 nine month period that created alternative purchasing channels for certain customers, which did not occur in 2008.

     Service Fee Revenue. Service fee revenue for the three and nine months ended September 30, 2008 included increased service fees generated from the impact of new service contract relationships that were added in 2007, benefits from incremental project work and a modified contract with an existing client. The change in service fee revenue is shown below ($ millions):

		Three				Nine
		Months				Months
Period ended September 30, 2007		$	18.4			$	53.0
New service contract relationships, including certain incremental projects under new contracts			2.0				5.1
Change in existing client service fees and certain incremental projects with existing clients			3.6				9.8
Terminated clients not included in 2008 revenue			(1.1	)			(2.9	)
Period ended September 30, 2008		$	22.9			$	65.0

     Cost of Product Revenue. The gross margin for eCOST was $2.2 million or 9.2% of product revenue in the three months ended September 30, 2008 and $2.4 million or 8.8% of product revenue during the comparable period of 2007. eCOST gross margin was $6.3 million or 8.5% of product revenue in the nine months ended September 30, 2008 and $6.4 million or 8.4% of product revenue during the comparable period of 2007. The increase in gross margin is primarily due to a shift in product sales to the higher margin business to consumer channel.

     Supplies Distributors cost of product revenue decreased by $2.7 million, or 5.0%, to $51.6 million in the three months ended September 30, 2008, primarily as a result of decreased product sales. The resulting gross profit margin was $3.8 million or 6.9% of product revenue for the three months ended September 30, 2008 and $4.0 million or 6.9% of product revenue for the comparable 2007 period.

     Supplies Distributors cost of product revenue increased by $3.0 million, or 1.8%, to $165.1 million in the nine months ended September 30, 2008, primarily as a result of increased product sales. The resulting gross profit margin was $12.7 million or 7.1% of product revenue for the nine months ended September 30, 2008 and $12.6 million or 7.2% of product revenue for the comparable 2007 period. The gross profit margin in each of the nine month periods ended September 30, 2008 and 2007 includes the impact of certain incremental inventory cost reductions.

     Cost of Service Fee Revenue. The increase in gross profit as a percentage of service fees to 31.9% in the three months ended September 30, 2008 from 29.8% in same period of 2007 is primarily due to the impact of certain existing client projects and the impact of a modified contract with an existing client.

     The increase in gross profit as a percentage of service fees to 31.4% in the nine months ended September 30, 2008 from 27.9% in same period of 2007 is primarily due to the impact of certain existing client projects and the impact of a modified contract with an existing client. We expect 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, 2008 increased $1.8 million to $12.7 million from the same 2007 period. Operating expenses were $37.0 million for the nine months ended September 30, 2008, or 10.9% of total net revenues, as compared to $33.3 million, or 10.2% of total net revenues, for the nine months ended September 30, 2007. The increase is primarily due to certain personnel related expenses and the prior year results benefitting from a favorable impact of exchange rates on certain intercompany balances.

     Income Taxes. We recorded a tax provision associated primarily with state income taxes and our subsidiary Supplies Distributors’ Canadian and European operations. A valuation allowance has been provided for the majority of our net deferred tax assets as of September 30, 2008 and December 31, 2007, which are primarily related to our net operating loss carryforwards, and certain foreign deferred tax assets.