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 $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 provided by operating activities was $2.1 million for the nine months ended September 30, 2007, and primarily resulted from $5.3 million of benefit from net loss as adjusted for non-cash items, a $3.8 million decrease in inventory, a decrease in prepaid expenses, other receivables and other assets of $2.0 million and a $1.6 million decrease in accounts receivable partially offset by a decrease in accounts payable, accrued expenses and other liabilities of $10.0 million and an increase in restricted cash of $0.6 million.

     Net cash used in investing activities for the nine months ended September 30, 2008 and 2007 totaled $4.6 million and $2.8 million, respectively, resulting primarily from capital expenditures.

     Capital expenditures have historically consisted primarily of additions to upgrade our management information systems, 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 $4 to $7 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 we do not obtain the financing or achieve the financial results necessary to support such investments.

     Net cash used in financing activities was approximately $6.2 million for the nine months ended September 30, 2008, primarily representing $4.0 million of payments on debt, a $1.0 million increase in restricted cash and payments on capital leases of $1.4 million.

     Net cash used in financing activities was approximately $0.7 million for the nine months ended September 30, 2007, primarily representing $1.5 million of payments on capital leases partially offset by a $0.5 million decrease in restricted cash and $0.2 million of proceeds from debt.

     Our liquidity has been negatively impacted as a result of the merger with eCOST. eCOST has experienced a net usage of cash primarily due to losses incurred. As a result, PFSweb has had to support eCOST’s cash needs with the goal of achieving 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 continued ability to improve its financial results. eCOST’s results improved in 2007 and during the first nine months of 2008 and we currently expect continued improvement as a result of efforts to increase sales, improve product mix and further improve operational efficiencies.

     Our liquidity may also be negatively impacted by an expected decline in service fee revenue due to the current general economic decline as well as the nonrenewal of a large contract with an agency of the U.S. government. We currently intend to seek to offset the impact of lower service fee revenue by reducing variable costs and expenses and redeploying existing infrastructure to other client activities. No assurance can be given that we will be successful, in whole or in part, in such efforts, nor can any assurance be given that the decline in service fee revenue will not have a material adverse effect upon our business, financial condition or results of operations.