• Our financial structure, including our historical financial presentation;

• Our results of operations for the last three years;

• Our relationship with our subsidiaries Supplies Distributors and eCOST;

• Our liquidity and capital resources;

• The impact of seasonality, inflation and recently issued accounting standards on our financial statements; and

• Our critical accounting policies and estimates.

Forward-Looking Information
We have made forward-looking statements in this Report on Form 10-K. These statements are subject to risks and uncertainties, and there can be no guarantee that these statements will prove to be correct. Forward-looking statements include assumptions as to how we may perform in the future. When we use words like "seek," "strive," "believe," "expect," "anticipate," "predict," "potential," "continue," "will," "may," "could," "intend," "plan," "target" and "estimate" or similar expressions, we are making forward-looking statements. You should understand that the following important factors, in addition to the Risk Factors set forth above or elsewhere in this Report on Form 10-K, could cause our results to differ materially from those expressed in our forward-looking statements. These factors include:
• our ability to retain and expand relationships with existing clients and attract and implement new clients;

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

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

• potential litigation;

• impact of reverse stock split;

• 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 potential indemnification obligations to its former parent;

• 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 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. There may be additional risks that we do not currently view as material or that are not presently known. In evaluating these statements, you should consider various factors, including the risks set forth in the section entitled "Risk Factors."
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 also a leading multi-category online discount retailer of new, "close-out" and recertified brand-name merchandise. We derive our revenues from three business segments: 1) eCommerce and business process outsourcing, 2) a master distributor and 3) an online discount retailer.
First, in our eCommerce and business process outsourcing business 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 deployment 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 costs and other 'out-of-pocket' expenses include travel, shipping and handling costs and telecommunication charges and 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 $88 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 200,000 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 expanding 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.
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 revenue - 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. Monitoring and controlling our 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. In recent years we have added to our available cash and liquidity positions through various transactions.

• Each of our primary operating subsidiaries has one or more asset-based working capital financing agreements with various lenders.

• In 2005 and 2006, we raised approximately $6.1 million in net proceeds from the sale of approximately 1.1 million shares of common stock in private placements to certain investors.

Historical Financial Presentation
   As a result of our acquisition of eCOST.com in February 2006, we believe our
historical financial statements may not provide a meaningful comparison to our
current and future financial performance.
Results of Operations
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
   The following table discloses certain financial information for the periods
presented, expressed in terms of dollars, dollar change, percentage change and
as a percentage of total revenue (in millions).

                                                                                                    % of Total
                                                                    Change                            Revenue
                            2008             2007             $               %               2008              2007
Revenues:
Product revenue, net       $ 330.5          $ 339.5        $  (9.0 )            (2.6 )%         73.2 %            76.0 %
Service fee revenue           85.4             74.5           10.9              14.7 %          18.9 %            16.7 %
Pass-through revenue          35.9             32.8            3.1               9.4 %           7.9 %             7.3 %

Total net revenues           451.8            446.8            5.0               1.1 %         100.0 %           100.0 %

Cost of Revenues
Cost of product
revenue                      305.1            313.8           (8.7 )            (2.8 )%         92.3 %(1)         92.4 %(1)
Cost of service fee
revenue                       58.0             53.4            4.6               8.7 %          67.9 %(2)         71.7 %(2)
Pass-through cost of
revenue                       35.9             32.8            3.1               9.4 %         100.0 %(3)        100.0 %(3)

Total cost of
revenues                     399.0            400.0           (1.0 )            (0.3 )%         88.3 %            89.5 %

Product revenue gross
profit                        25.4             25.7           (0.3 )            (0.4 )%          7.7 %(1)          7.6 %(1)
Service fee gross
profit                        27.2             21.1            6.1              29.8 %          32.1 %(2)         28.3 %(2)
Pass-through gross
profit                           -                -              -                 - %             - %(3)            - %(3)

Total gross profit            52.8             46.8            6.0              13.0 %          11.7 %            10.5 %

Operating Expenses            66.1 (4)         45.0           21.1              46.9 %          14.6 %            10.1 %

Income (loss) from
operations                   (13.3 )            1.8          (15.1 )          (856.4 )%         (2.9 )%            0.4 %
Interest expense, net          1.6              2.4           (0.8 )           (33.3 )%          0.3 %             0.5 %


Income (loss) before
income taxes                 (14.9 )           (0.6 )        (14.3 )        (2,438.5 )%         (3.3 )%           (0.1 )%

Income tax expense,
net                            0.8              0.8              -               0.8 %           0.2 %             0.3 %

Net income (loss)          $ (15.7 )        $  (1.4 )      $ (14.3 )        (1,031.1 )%         (3.5 )%           (0.4 )%

(1) Represents the percent of Product revenue, net.

(2) Represents the percent of Service fee revenue.

(3) Represents the percent of Pass-through revenue.

(4) Includes a $16.3 million charge for goodwill and intangible asset impairment.

Product Revenue, net. eCOST product revenue was $99.8 million in 2008, a 4.1% decrease as compared to $104.1 million in the prior year. The decrease is primarily due to a decline in sales to its business to business ("B2B") channel during the 2008 period partially offset by an increase in its higher margin business to consumer ("B2C") sales channel. The B2C sales channel increase is primarily due to continued emphasis on growth through an expanded product line, improved service capabilities and enhanced website capabilities.

Supplies Distributors product revenue of $230.7 million decreased $4.6 million, or 2.0% in 2008 as compared to the prior year. This decrease is primarily due to decreased sales volume on certain products partially offset by the impact of foreign exchange rates.
We currently expect our 2009 annual product revenue to decline from 2008 due to eCOST's continued shift in focus from the B2B channel to the B2C channel as well as the impact of the current economic environment on both the eCOST and Supplies Distributor's segments.
Service Fee Revenue. The increase in service fee revenue for the years ended December 31, 2008 and 2007 reflects the favorable impact from new clients that were added in calendar year 2007 and 2008, benefits from incremental project work and a modified contract with an existing client. The change in service fee revenue, excluding pass-through revenue, is shown below ($ millions):

Year ended December 31, 2007                                                $ 74.5
New service contract relationships, including certain incremental
projects under new contracts                                                   7.1
Change in existing client service fees and certain incremental
projects with existing clients                                                 6.7
Terminated clients not included in 2008 revenue                               (2.9 )

Year ended December 31, 2008                                                $ 85.4

Based on historical activity and current projection of existing clients, including new clients signed in 2007 and 2008, and the non-renewal of a certain U.S. government agency client and certain other clients, we currently anticipate that 2009 service fee revenue will decline from 2008 service fee revenue levels.
Cost of Product Revenue. The gross margin for eCOST was $8.8 million or 8.8% of product revenue in 2008 and $8.9 million or 8.6% of product revenue during 2007. Gross margin for eCOST increased from the prior year primarily due to a shift in product sales to the higher margin B2C sales channel.
Supplies Distributors cost of product revenue decreased by $4.6 million, or 2.1%, to $214.1 million in 2008, primarily as a result of reduced product sales. The resulting gross profit margin was $16.7 million or 7.2% of product revenue for the year ended December 31, 2008 and $16.7 million or 7.1% of product revenue for 2007. The gross profit margin for the 2008 and 2007 periods include certain incremental inventory cost reductions.
Cost of Service Fee Revenue. The increase in gross profit as a percentage of service fees to 32.1% in 2008 from 28.3% in 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 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 increased by $21.1 million compared to 2007. Operating expenses were $66.1 million, or 14.6% of total net revenues in the 2008 period and $45.0 million, or 10.1% of total net revenues in the prior year. Operating expenses in 2008 include a goodwill and intangible asset impairment charge of $16.3 million resulting from our annual analysis required under accounting standards (see discussion below). Excluding the impact of the $16.3 million impairment charge for goodwill and intangible assets, operating expenses were 11.0% of total net revenues in the 2008 period. The remaining increase in operating expenses is primarily due to increased facility and personnel related expenses and the prior year results benefitting from the favorable impact of exchange rates on certain intercompany accounts.
In 2009, we intend to implement certain cost reductions to decrease operating expenses for certain of our facilities to correspond to our anticipated decline in revenue.
Impairment Charge for Goodwill and Identifiable Intangible Assets. As a result of the decline in our common stock price, our market capitalization plus an implied control premium fell significantly below the recorded value of our consolidated net assets as of December 31, 2008. In performing our annual impairment test, we used current market capitalization, control premiums, discounted cash flows and other factors as the best evidence of fair value.

The impairment test resulted in a reduction in value attributable to our goodwill and accordingly, we recorded an $11.8 million impairment charge against goodwill during 2008.
In connection with the goodwill impairment test, we determined that certain of our identifiable intangible assets were impaired. The determination was based on the carrying values exceeding the future undiscounted cash flows and fair value attributable to such intangible assets. As a result, we recorded an impairment charge of $4.5 million during 2008, which represents the difference between the estimated fair values of these long-lived assets and their carrying values. Fair values were determined based upon market conditions, the relief from royalty approach which utilized cash flow projections, and other factors.
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 December 31, 2008 and December 31, 2007, 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.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006 The following table discloses certain financial information for the periods presented, expressed in terms of dollars, dollar change, percentage change and as a percentage of total revenue (in millions).

                                                                                              % of Total
                                                                Change                          Revenue
                            2007           2006            $              %             2007              2006
Revenues:
Product revenue, net       $ 339.5        $ 333.3        $  6.2            1.9 %          76.0 %            78.8 %
Service fee revenue           74.5           67.1           7.4           11.1 %          16.7 %            15.8 %
Pass-through revenue          32.8           22.9           9.9           43.4 %           7.3 %             5.4 %

Total net revenues           446.8          423.3          23.5            5.6 %         100.0 %           100.0 %

Cost of Revenues
Cost of product
revenue                      313.8          311.4           2.4            0.8 %          92.4 %(1)         93.4 %(1)
Cost of service fee
revenue                       53.4           49.3           4.1            8.3 %          71.7 %(2)         73.5 %(2)
Pass-through cost of
revenue                       32.8           22.9           9.9           43.4 %         100.0 %(3)        100.0 %(3)

Total cost of
revenues                     400.0          383.6          16.4            4.3 %          89.5 %            90.6 %

Product revenue gross
profit                        25.7           21.9           3.8           17.2 %           7.6 %(1)          6.6 %(1)
Service fee gross
profit                        21.1           17.8           3.3           18.7 %          28.3 %(2)         26.5 %(2)
Pass-through gross
profit                           -              -             -              - %             - %(3)            - %(3)

Total gross profit            46.8           39.7           7.1           17.9 %          10.5 %             9.4 %

Operating Expenses            45.0           50.9          (5.9 )        (11.6 )%         10.1 %            12.0 %

Income (loss) from
operations                     1.8          (11.2 )        13.0          115.6 %           0.4 %            (2.6 )%
Interest expense, net          2.4            2.1           0.3           10.9 %           0.5 %            (0.5 )%


Income (loss) before
income taxes                  (0.6 )        (13.3 )        12.7          (95.6 )%         (0.1 )%           (3.1 )%

Income tax expense,
net                            0.8            1.2           0.4           30.8 %           0.3 %             0.3 %

Net income (loss)          $  (1.4 )      $ (14.5 )      $ 13.1           90.5 %          (0.4 )%           (3.4 )%

(1) Represents the percent of Product revenue, net.

(2) Represents the percent of Service fee revenue.

(3) Represents the percent of Pass-through revenue.

Product Revenue, net. eCOST product revenue was $104.1 million in 2007, a 17.9% increase as compared to $88.3 million in the prior year. Fiscal 2007 includes a full year of eCOST activity as compared to eleven months in 2006 following the acquisition of eCOST in February 2006.
Supplies Distributors product revenue of $235.4 million decreased $9.6 million, or 3.9% in 2007 as compared to the prior year. This decrease was primarily due to the decreased sales volume of certain products as a result of improvement in the products' useful lives, which slowed consumer's demand for replenishment, the impact of foreign currency fluctuations which created alternative purchasing channels for certain customers, and incremental vendor promotion activity in 2006, which did not occur in 2007.
Service Fee Revenue. The increase in service fee revenue for the year ended December 31, 2007 reflects the favorable impact from new clients that were added late in calendar year 2006 and increased project activity in 2007 as compared to 2006. The change in service fee revenue, excluding pass-through revenue, is . . .