service fee revenue for the three months ended March 31, 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
		Months
Period ended March 31, 2008		$	20.8
New service contract relationships, including certain incremental projects under new contracts			1.3
Change in existing client service fees			(4.1	)
Terminated clients not included in 2009 revenue			(0.9	)
Period ended March 31, 2009		$	17.1

     Cost of Product Revenue. The gross margin for eCOST was $2.1 million or 9.8% of product revenue in the three months ended March 31, 2009 and $2.2 million or 8.0% of product revenue during the comparable period of 2008. The increase in gross margin is primarily due to a shift in product sales to the higher margin business-to-consumer channel. As we continue to target an increasing percentage of eCOST revenues to be generated from the business-to-consumer channel, we expect overall gross margin for eCOST will continue to be higher than the prior year.

     Supplies Distributors cost of product revenue decreased by $16.3 million, or 28.0%, to $42.0 million in the three months ended March 31, 2009, primarily as a result of decreased product sales. The resulting gross profit margin was $3.4 million or 7.5% of product revenue for the three months ended March 31, 2009 and $4.1 million or 6.5% of product revenue for the comparable 2008 period. The increase in margin percentage is partially due to incremental gross margin earned on product sales resulting from certain product price increases and the impact of certain incremental inventory cost reductions, which were partially offset by the impact of a reduction in revenue arising from a customer bankruptcy during the quarter.

     Cost of Service Fee Revenue. Gross profit as a percentage of service fees was 33.9% in the three months ended March 31, 2009, relatively consistent with the 33.5% in the same period of the prior year. Both periods included the benefit of incremental project work from a U.S. government contract relationship that was not renewed and will be 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 March 31, 2009 decreased $1.6 million to $10.7 million from $12.3 million in the same 2008 period. As a percentage of total net revenue, operating expenses were 12.0% in the three months ended March 31, 2009 and 10.4% in the comparable period. The increase in percentage of total net sales is primarily due to the reduction in total net revenues and the impact of certain personnel related expenses. During the three months ended March 31, 2009, we implemented certain cost reductions to help reduce the impact of the lower service fee revenue.

     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 March 31, 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 $6.4 million for the three months ended March 31, 2009, and primarily resulted from cash income before working capital changes of $2.0 million and an $11.2 million decrease in accounts receivable, partially offset by a $6.9 million decrease in accounts payable, accrued expenses and other liabilities.