##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-Q



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Quarterly Report Pursuant to Section
13 or 15(d)

of the Securities Exchange Act of 1934



For the three months ended June 30, 2004



Commission File Number 0-14371



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COMPUCOM SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 38-2363156                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|7171 Forest Lane, Dallas, TX                                   |  | 75230                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             



Registrants
telephone number, including area code: (972) 856-3600



---



Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes  x    No ̈



The number
of shares of the Registrants common stock outstanding as of August 5, 2004 was 50,348,699 shares.



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##### Table of Contents

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Index



|         |  |                                                                                                   |  |     
|-------- |  | ------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                   |  | Page
|PART I.  |  | FINANCIAL INFORMATION                                                                             |  |     
|         |  |                                                                                                  
|Item 1.  |  | Financial Statements (unaudited)                                                                  |  |     
|         |  |                                                                                                  
|         |  | Condensed Consolidated Balance Sheets June 30, 2004 and December 31, 2003                         |  | 3   
|         |  |                                                                                                  
|         |  | Condensed Consolidated Statements of Operations Three and six months ended June 30, 2004 and 2003 |  | 4   
|         |  |                                                                                                  
|         |  | Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2004 and 2003           |  | 5   
|         |  |                                                                                                  
|         |  | Notes to Condensed Consolidated Financial Statements                                              |  | 6   
|         |  |                                                                                                  
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations             |  | 15  
|         |  |                                                                                                  
|Item 3.  |  | Quantitative and Qualitative Disclosure About Market Risk                                         |  | 23  
|         |  |                                                                                                  
|Item 4.  |  | Controls and Procedures                                                                           |  | 24  
|         |  |                                                                                                  
|PART II. |  | OTHER INFORMATION                                                                                 |  |     
|         |  |                                                                                                  
|Item 1.  |  | Legal Proceedings                                                                                 |  | 24  
|         |  |                                                                                                  
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                                  |  | 25  



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands)

(unaudited)



|                                           |  |              |         |                  |   |        
|------------------------------------------ |  | ------------ | ------- | ---------------- | - | -------
|                                           |  | June 30,2004 |         | December 31,2003
|Assets                                     |  |              |         |                  |   |        
|Current assets:                            |  |              |         |                  |   |        
|Cash and cash equivalents                  |  | $            | 115,704 |                  | $ | 81,145 
|Receivables, net                           |  |              | 159,810 |                  |   | 213,119
|Inventories                                |  |              | 20,571  |                  |   | 35,612 
|Other                                      |  |              | 3,579   |                  |   | 4,252  
|                                           |  |              |         |                  |   |        
|Total current assets                       |  |              | 299,664 |                  |   | 334,128
|                                           |  |             
|Property and equipment, net                |  |              | 18,249  |                  |   | 19,134 
|                                           |  |             
|Goodwill and other intangibles, net        |  |              | 71,981  |                  |   | 106,925
|Other                                      |  |              | 7,855   |                  |   | 533    
|                                           |  |              |         |                  |   |        
|Total assets                               |  | $            | 397,749 |                  | $ | 460,720
|                                           |  |              |         |                  |   |        
|Liabilities and Stockholders Equity       |  |              |         |                  |   |        
|Current liabilities:                       |  |              |         |                  |   |        
|Accounts payable                           |  | $            | 93,530  |                  | $ | 105,344
|Accrued liabilities                        |  |              | 52,793  |                  |   | 81,800 
|                                           |  |              |         |                  |   |        
|Total current liabilities                  |  |              | 146,323 |                  |   | 187,144
|                                           |  |             
|Deferred income tax liability              |  |              |        |                  |   | 2,008  
|                                           |  |             
|Stockholders equity:                      |  |              |         |                  |   |        
|Preferred stock                            |  |              | 15,000  |                  |   | 15,000 
|Common stock                               |  |              | 503     |                  |   | 501    
|Additional paid-in capital                 |  |              | 78,910  |                  |   | 78,015 
|Retained earnings                          |  |              | 157,013 |                  |   | 178,052
|                                           |  |              |         |                  |   |        
|Total stockholders equity                 |  |              | 251,426 |                  |   | 271,568
|                                           |  |              |         |                  |   |        
|Total liabilities and stockholders equity |  | $            | 397,749 |                  | $ | 460,720
|                                           |  |              |         |                  |   |        



See accompanying notes to condensed
consolidated financial statements.



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(unaudited)



|                                                                       |  |                            |         |                           |      |   |         |  |   |         |   |  |   |        
|---------------------------------------------------------------------- |  | -------------------------- | ------- | ------------------------- | ---- | - | ------- |  | - | ------- | - |  | - | -------
|                                                                       |  | Three months endedJune 30, |         | Six months ended June 30,
|                                                                       |  | 2004                       |         |                           | 2003 |   | 2004    |  |   | 2003   
|Revenue:                                                               |  |                            |         |                           |      |   |         |  |   |         |   |  |   |        
|Product                                                                |  | $                          | 260,949 |                           |      | $ | 304,731 |  | $ | 481,737 |   |  | $ | 562,149
|Service                                                                |  |                            | 80,999  |                           |      |   | 72,997  |  |   | 160,229 |   |  |   | 145,876
|                                                                       |  |                            |         |                           |      |   |         |  |   |         |   |  |   |        
|Total revenue                                                          |  |                            | 341,948 |                           |      |   | 377,728 |  |   | 641,966 |   |  |   | 708,025
|                                                                       |  |                            |         |                           |      |   |         |  |   |         |   |  |   |        
|Cost of revenue:                                                       |  |                            |         |                           |      |   |         |  |   |         |   |  |   |        
|Product                                                                |  |                            | 244,757 |                           |      |   | 285,215 |  |   | 451,687 |   |  |   | 520,833
|Service                                                                |  |                            | 54,993  |                           |      |   | 48,892  |  |   | 108,044 |   |  |   | 99,198 
|                                                                       |  |                            |         |                           |      |   |         |  |   |         |   |  |   |        
|Total cost of revenue                                                  |  |                            | 299,750 |                           |      |   | 334,107 |  |   | 559,731 |   |  |   | 620,031
|                                                                       |  |                            |         |                           |      |   |         |  |   |         |   |  |   |        
|Gross margin                                                           |  |                            | 42,198  |                           |      |   | 43,621  |  |   | 82,235  |   |  |   | 87,994 
|                                                                       |  |                            |         |                          
|Operating expenses:                                                    |  |                            |         |                           |      |   |         |  |   |         |   |  |   |        
|Selling                                                                |  |                            | 10,773  |                           |      |   | 10,328  |  |   | 21,741  |   |  |   | 20,987 
|Service                                                                |  |                            | 9,723   |                           |      |   | 8,863   |  |   | 19,150  |   |  |   | 18,114 
|General and administrative                                             |  |                            | 13,602  |                           |      |   | 14,746  |  |   | 27,036  |   |  |   | 29,362 
|Depreciation and amortization                                          |  |                            | 3,407   |                           |      |   | 4,138   |  |   | 6,821   |   |  |   | 8,318  
|Fees and expenses associated with Platinum Equity, LLC proposed merger |  |                            | 1,886   |                           |      |   |        |  |   | 1,886   |   |  |   |       
|Loss from impairment of goodwill                                       |  |                            | 33,418  |                           |      |   |        |  |   | 33,418  |   |  |   |       
|                                                                       |  |                            |         |                           |      |   |         |  |   |         |   |  |   |        
|Total operating expenses                                               |  |                            | 72,809  |                           |      |   | 38,075  |  |   | 110,052 |   |  |   | 76,781 
|                                                                       |  |                            |         |                           |      |   |         |  |   |         |   |  |   |        
|Earnings (loss) from operations                                        |  |                            | (30,611 | )                         |      |   | 5,546   |  |   | (27,817 | ) |  |   | 11,213 
|                                                                       |  |                            |         |                          
|Financing expenses (income), net                                       |  |                            | (93     | )                         |      |   | 86      |  |   | (156    | ) |  |   | 171    
|                                                                       |  |                            |         |                           |      |   |         |  |   |         |   |  |   |        
|Earnings (loss) before income taxes                                    |  |                            | (30,518 | )                         |      |   | 5,460   |  |   | (27,661 | ) |  |   | 11,042 
|                                                                       |  |                            |         |                          
|Income taxes (benefit)                                                 |  |                            | (8,215  | )                         |      |   | 2,184   |  |   | (7,072  | ) |  |   | 4,417  
|                                                                       |  |                            |         |                           |      |   |         |  |   |         |   |  |   |        
|Net earnings (loss)                                                    |  | $                          | (22,303 | )                         |      | $ | 3,276   |  | $ | (20,589 | ) |  | $ | 6,625  
|                                                                       |  |                            |         |                           |      |   |         |  |   |         |   |  |   |        
|Earnings (loss) per common share:                                      |  |                            |         |                           |      |   |         |  |   |         |   |  |   |        
|Basic                                                                  |  | $                          | (0.45   | )                         |      | $ | 0.06    |  | $ | (0.42   | ) |  | $ | 0.13   
|Diluted                                                                |  | $                          | (0.45   | )                         |      | $ | 0.06    |  | $ | (0.42   | ) |  | $ | 0.12   
|                                                                       |  |                            |         |                          
|Average common shares outstanding:                                     |  |                            |         |                           |      |   |         |  |   |         |   |  |   |        
|Basic                                                                  |  |                            | 50,201  |                           |      |   | 49,389  |  |   | 50,168  |   |  |   | 49,349 
|Diluted                                                                |  |                            | 50,201  |                           |      |   | 51,096  |  |   | 50,168  |   |  |   | 51,090 



See accompanying notes to condensed
consolidated financial statements.



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)



|                                                                                                     |  |                           |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                     |  | Six months ended June 30, |        
|                                                                                                     |  | 2004                      |         |   | 2003 |  
|Cash flows from operating activities:                                                                |  |                           |         |   |      |   |         |  
|Net earnings (loss)                                                                                  |  | $                         | (20,589 | ) |      | $ | 6,625   |  
|Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: |  |                           |         |   |      |   |         |  
|Depreciation and amortization                                                                        |  |                           | 6,821   |   |      |   | 8,318   |  
|Deferred income taxes                                                                                |  |                           | (9,623  | ) |      |   | 1,906   |  
|Loss from impairment of goodwill                                                                     |  |                           | 33,418  |   |      |   |        |  
|Changes in assets and liabilities:                                                                   |  |                           |         |   |      |   |         |  
|Receivables                                                                                          |  |                           | 52,681  |   |      |   | (6,014  | )
|Inventories                                                                                          |  |                           | 15,041  |   |      |   | (1,115  | )
|Other current assets                                                                                 |  |                           | 917     |   |      |   | (1,191  | )
|Accounts payable                                                                                     |  |                           | (11,814 | ) |      |   | 15,564  |  
|Accrued liabilities and other                                                                        |  |                           | (28,306 | ) |      |   | (20,391 | )
|                                                                                                     |  |                           |         |   |      |   |         |  
|Net cash provided by operating activities                                                            |  |                           | 38,546  |   |      |   | 3,702   |  
|                                                                                                     |  |                           |         |   |      |   |         |  
|Cash flows from investing activities:                                                                |  |                           |         |   |      |   |         |  
|Capital expenditures                                                                                 |  |                           | (4,434  | ) |      |   | (4,105  | )
|                                                                                                     |  |                           |         |   |      |   |         |  
|Net cash used in investing activities                                                                |  |                           | (4,434  | ) |      |   | (4,105  | )
|                                                                                                     |  |                           |         |   |      |   |         |  
|Cash flows from financing activities:                                                                |  |                           |         |   |      |   |         |  
|Issuance of common stock                                                                             |  |                           | 897     |   |      |   | 785     |  
|Preferred stock dividends                                                                            |  |                           | (450    | ) |      |   | (450    | )
|                                                                                                     |  |                           |         |   |      |   |         |  
|Net cash provided by financing activities                                                            |  |                           | 447     |   |      |   | 335     |  
|                                                                                                     |  |                           |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                                                 |  |                           | 34,559  |   |      |   | (68     | )
|Cash and cash equivalents at beginning of period                                                     |  |                           | 81,145  |   |      |   | 128,039 |  
|                                                                                                     |  |                           |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                                           |  | $                         | 115,704 |   |      | $ | 127,971 |  
|                                                                                                     |  |                           |         |   |      |   |         |  



See accompanying notes to condensed
consolidated financial statements.



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements

June 30, 2004

(unaudited)



|(1) | General
|--- | -------



These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and the summary of
significant accounting policies and notes thereto included in the 2003 Annual Report on Form 10-K for CompuCom Systems, Inc. (CompuCom or the Company). The information furnished is unaudited but reflects all adjustments,
consisting only of normal recurring accruals, which are in the opinion of management necessary for a fair presentation of the results for these interim periods. Interim results are not necessarily indicative of results expected for future interim
periods or for the year ending December 31, 2004.



|(2) | Proposed Merger Agreement with Platinum Equity, LLC
|--- | ---------------------------------------------------



On May 27, 2004, CompuCom entered into an Agreement and Plan of Merger (the Merger Agreement) with CHR Holding Corporation
(Parent) and CHR Merger Corporation (Merger Subsidiary) pursuant to which, on the effective date of the merger, each outstanding share of Company common stock would be converted into the right to receive $4.60 in cash,
without interest, and each outstanding share of Company preferred stock would be converted into the right to receive $10.00 per share plus accumulated dividends. In addition, option holders with an exercise price less than $4.60 would be entitled to
receive an amount equal to $4.60 minus the exercise price per share, multiplied by the number of shares subject to the option. Upon consummation of the merger, the Company would be a wholly owned subsidiary of Parent, which in turn is an affiliate
of Platinum Equity, LLC (Platinum).



In connection
with the proposed merger, the Company recorded a loss from impairment of goodwill of $33.4 million in the second quarter 2004 (see Footnote 6). This loss was related to a write-off of a portion of goodwill associated with the Companys product
business. In addition, in the second quarter 2004, the Company recognized fees and expenses associated with the proposed merger of $1.9 million.



|(3) | Contingencies
|--- | -------------



On May 28, 2004, June 1, 2004 and June 10, 2004, three substantially similar complaints were filed in the Chancery Court of the State of Delaware by
purported stockholders of the Company allegedly on behalf of a class of holders of the Companys common stock. By order dated July 22, 2004, these three actions were consolidated for all purposes. On July 27, 2004, plaintiffs filed an amended
class action complaint under the caption of one of the three actions (the Amended Complaint) that names as defendants the Company, its directors, and Safeguard Scientifics, Inc. (Safeguard). The Amended Complaint alleges that
the Company, its directors, and Safeguard breached fiduciary duties in connection with the merger agreement described in the Companys press release of May 28, 2004 and aided and abetted one another in the course of committing the alleged
breach. Among other things, the Amended Complaint alleges that the defendants failed to obtain the best transaction reasonably available and diverted merger consideration from the Companys minority stockholders to Safeguard and the
Companys directors and certain of its officers. It is also alleged that the Company failed to disclose, or only partially disclosed, certain matters in the Companys proxy statement.



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements

June 30, 2004

(unaudited)



The Amended Complaint seeks (i) an injunction against the proposed
transaction, (ii) an order invalidating the proposed transaction in the event it is consummated, (iii) an order directing the Companys directors to obtain a transaction that is in the best interests of all of its shareholders and to disclose
all material information to shareholders in connection with any transaction; and (iv) the imposition of a constructive trust, in favor of plaintiffs, upon any benefits improperly received by defendants.



On July 27, 2004, plaintiffs filed a motion for expedited proceedings and
discovery in connection with the injunctive relief sought and requested that a preliminary injunction hearing be held before August 19, 2004, the date of the special meeting of the stockholders of the Company. Defendants filed their opposition to
the motion on July 28, 2004. On July 29, 2004, the Court denied the motion.



CompuCom is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, these matters are not material.



|(4) | Earnings (loss) per share
|--- | -------------------------



In accordance with Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, basic earnings (loss) per
common share have been computed based on net earnings (loss) after preferred stock dividend requirements and the weighted average number of common shares outstanding during each period. Diluted earnings (loss) per common share assumes conversion of
dilutive convertible securities into common stock at the later of the beginning of the period or date of issuance and includes the add-back of related dividends, as required. Diluted earnings (loss) per common share also assumes the exercise of all
options with an exercise price below the average market price of the Companys stock, at the later of the beginning of the period or date of issuance, regardless of whether the options are vested or not. Earnings (loss) per common share have
been computed as follows (in thousands, except per share amounts):



|                                      |  |                                  |         |   |                                |        |     |   |      |                  |  |   |                      |   |     |        |  |   |      |  
|------------------------------------- |  | -------------------------------- | ------- | - | ------------------------------ | ------ | --- | - | ---- | ---------------- |  | - | -------------------- | - | --- | ------ |  | - | ---- | -
|                                      |  | Three months ended June 30, 2004 |         |   | Six months ended June 30, 2004 |       
|                                      |  | Loss (Numerator)                 |         |   | Shares (Denominator)           |        | EPS |   |      | Loss (Numerator) |  |   | Shares (Denominator) |   | EPS |       
|Net loss                              |  | $                                | (22,303 | ) |                                |        |     |   |      |                  |  | $ | (20,589              | ) |     |        |  |   |      |  
|Less: Preferred stock dividends       |  |                                  | (225    | ) |                                |        |     |   |      |                  |  |   | (450                 | ) |     |        |  |   |      |  
|                                      |  |                                  |         |   |                                |        |     |   |      |                  |  |   |                      |   |     |        |  |   |      |  
|Basic and Diluted EPS                 |  |                                  |         |   |                                |        |     |   |      |                  |  |   |                      |   |     |        |  |   |      |  
|                                      |  |                                  |         |   |                                |       
|Loss available to common shareholders |  | $                                | (22,528 | ) |                                | 50,201 |     | $ | (.45 | )                |  | $ | (21,039              | ) |     | 50,168 |  | $ | (.42 | )
|                                      |  |                                  |         |   |                                |        |     |   |      |                  |  |   |                      |   |     |        |  |   |      |  



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements

June 30, 2004

(unaudited)



|                                          |  |                                  |       |                                |                      |        |     |   |                      |  |   |                      |   |     |        |  |   |    
|----------------------------------------- |  | -------------------------------- | ----- | ------------------------------ | -------------------- | ------ | --- | - | -------------------- |  | - | -------------------- | - | --- | ------ |  | - | ---
|                                          |  | Three months ended June 30, 2003 |       | Six months ended June 30, 2003
|                                          |  | Earnings (Numerator)             |       |                                | Shares (Denominator) |        | EPS |   | Earnings (Numerator) |  |   | Shares (Denominator) |   | EPS
|Net earnings                              |  | $                                | 3,276 |                                |                      |        |     |   |                      |  | $ | 6,625                |   |     |        |  |   |    
|Less: Preferred stock dividends           |  |                                  | (225  | )                              |                      |        |     |   |                      |  |   | (450                 | ) |     |        |  |   |    
|                                          |  |                                  |       |                                |                      |        |     |   |                      |  |   |                      |   |     |        |  |   |    
|Basic EPS                                 |  |                                  |       |                                |                      |        |     |   |                      |  |   |                      |   |     |        |  |   |    
|Earnings available to common shareholders |  |                                  | 3,051 |                                |                      | 49,389 |     | $ | .06                  |  |   | 6,175                |   |     | 49,349 |  | $ | .13
|                                          |  |                                  |       |                                |                      |       
|Effect of dilutive securities             |  |                                  |       |                                |                      |        |     |   |                      |  |   |                      |   |     |        |  |   |    
|Stock options                             |  |                                  |       |                                |                      | 1,707  |     |   |                      |  |   |                      |   |     | 1,741  |  |   |    
|                                          |  |                                  |       |                                |                      |        |     |   |                      |  |   |                      |   |     |        |  |   |    
|                                          |  |                                  |       |                                |                      |       
|Diluted EPS                               |  |                                  |       |                                |                      |        |     |   |                      |  |   |                      |   |     |        |  |   |    
|Earnings available + assumed conversions  |  | $                                | 3,051 |                                |                      | 51,096 |     | $ | .06                  |  | $ | 6,175                |   |     | 51,090 |  | $ | .12
|                                          |  |                                  |       |                                |                      |        |     |   |                      |  |   |                      |   |     |        |  |   |    



CompuCom has excluded
7,662,961 and 7,722,454 shares from its calculations of diluted earnings per share for the three and six months ended June 30, 2004, respectively, and has excluded 3,968,648 and 3,974,368 shares from its calculations of diluted earnings per share
for the three and six months ended June 30, 2003, respectively, as they are considered anti-dilutive.



|(5) | Stock-Based Compensation
|--- | ------------------------



CompuCom uses the intrinsic-value method as provided by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
in accounting for its various fixed stock option plans and its employee stock purchase plan (ESPP) and provides pro forma disclosures of the compensation expense determined under the fair value provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. Accordingly, CompuCom did not recognize compensation expense upon the issuance of its
stock options because the option terms were fixed and the exercise price equaled the market price of CompuComs common stock on the date of grant.



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements

June 30, 2004

(unaudited)



The following table displays the effect on net earnings (loss) and earnings
(loss) per share had the fair value method been applied during each period presented (in thousands, except per share data):



|                                                                                |  |                            |         |   |      |   |      
|------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ---- | - | -----
|                                                                                |  | Three months endedJune 30,
|                                                                                |  | 2004                       |         |   | 2003
|Net earnings (loss) as reported                                                 |  | $                          | (22,303 | ) |      | $ | 3,276
|Stock-based compensation excluded from reported net earnings (loss), net of tax |  |                            | 339     |   |      |   | 503  
|                                                                                |  |                            |         |   |      |   |      
|Pro forma net earnings (loss)                                                   |  | $                          | (22,642 | ) |      | $ | 2,773
|                                                                                |  |                            |         |   |      |   |      
|Basic earnings (loss) per share         As reported                             |  | $                          | (0.45   | ) |      | $ | 0.06 
|Pro forma                                                                       |  | $                          | (0.46   | ) |      | $ | 0.05 
|                                                                                |  |                           
|Diluted earnings (loss) per share      As reported                              |  | $                          | (0.45   | ) |      | $ | 0.06 
|Pro forma                                                                       |  | $                          | (0.46   | ) |      | $ | 0.05 
|                                                                                | 
|                                                                                |  | Six months endedJune 30,  
|                                                                                |  | 2004                       |         |   | 2003
|Net earnings (loss) as reported                                                 |  | $                          | (20,589 | ) |      | $ | 6,625
|Stock-based compensation excluded from reported net earnings (loss), net of tax |  |                            | 592     |   |      |   | 915  
|                                                                                |  |                            |         |   |      |   |      
|Pro forma net earnings (loss)                                                   |  | $                          | (21,181 | ) |      | $ | 5,710
|                                                                                |  |                            |         |   |      |   |      
|Basic earnings (loss) per share         As reported                             |  | $                          | (0.42   | ) |      | $ | 0.13 
|Pro forma                                                                       |  | $                          | (0.43   | ) |      | $ | 0.11 
|                                                                                |  |                           
|Diluted earnings (loss) per share      As reported                              |  | $                          | (0.42   | ) |      | $ | 0.12 
|Pro forma                                                                       |  | $                          | (0.43   | ) |      | $ | 0.10 



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Notes to Condensed Consolidated Financial Statements

June 30, 2004

(unaudited)

|(6) | Goodwill and Intangible Assets
|--- | ------------------------------



The Company reviews goodwill for impairment annually or whenever events or changes in circumstances indicate the carrying value of an asset may not be
recoverable, in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.



In connection with the proposed merger with Platinum Equity, LLC, which was announced during the second quarter of 2004, a possible impairment of the
carrying value of goodwill was indicated as the announced purchase price was less than the book value of the Company. Accordingly, the Company performed the two step testing requirements of SFAS No. 142. In the first step, the Company compared the
fair value of each reporting unit to its carrying value. Fair value was determined using the income approach. This calculation resulted in an indication of impairment in the Companys product reporting unit. The Company then performed the
second step and determined the implied fair value of the product reporting units goodwill was less than its carrying value. As a result, the Company recorded a loss from impairment of goodwill of $33.4 million during the second quarter of
2004.



The following is a summary of changes in the carrying
amount of goodwill by segment for the six months ended June 30, 2004:



|                                 |  |                |         |   |         |   |        |  |   |         |  
|-------------------------------- |  | -------------- | ------- | - | ------- | - | ------ |  | - | ------- | -
|                                 |  | (in thousands) |        
|                                 |  | Product        |         |   | Service |   | Total  | 
|Balance at December 31, 2003     |  | $              | 67,406  |   |         | $ | 34,847 |  | $ | 102,253 |  
|Loss from impairment of goodwill |  |                | (33,418 | ) |         |   |       |  |   | (33,418 | )
|                                 |  |                |         |   |         |   |        |  |   |         |  
|Balance at June 30, 2004         |  | $              | 33,988  |   |         | $ | 34,847 |  | $ | 68,835  |  
|                                 |  |                |         |   |         |   |        |  |   |         |  



Intangible assets
with definite useful lives are amortized over their respective estimated useful lives to their estimated residual values. The following table provides a summary of CompuComs intangible assets with definite useful lives as of June 30, 2004 and
December 31, 2003 (in thousands):



|                 |  |                    |  |                    |        |                         |   |        |  |   |      
|---------------- |  | ------------------ |  | ------------------ | ------ | ----------------------- | - | ------ |  | - | -----
|                 |  |                    |  | June 30, 2004     
|                 |  | AmortizationPeriod |  | GrossCarryingValue |        | AccumulatedAmortization |   | Net   
|Customer-related |  | 6 11 years        |  | $                  | 15,467 |                         | $ | 12,666 |  | $ | 2,801
|Contract-related |  | 24 36  months     |  |                    | 2,840  |                         |   | 2,495  |  |   | 345  
|                 |  |                    |  |                    |        |                         |   |        |  |   |      
|Total            |  |                    |  | $                  | 18,307 |                         | $ | 15,161 |  | $ | 3,146
|                 |  |                    |  |                    |        |                         |   |        |  |   |      



|                 |  |                    |  |                    |        |                         |   |        |  |   |      
|---------------- |  | ------------------ |  | ------------------ | ------ | ----------------------- | - | ------ |  | - | -----
|                 |  |                    |  | December 31, 2003 
|                 |  | AmortizationPeriod |  | GrossCarryingValue |        | AccumulatedAmortization |   | Net   
|Customer-related |  | 6 11 years        |  | $                  | 15,467 |                         | $ | 11,480 |  | $ | 3,987
|Contract-related |  | 24 36 months      |  |                    | 2,840  |                         |   | 2,155  |  |   | 685  
|                 |  |                    |  |                    |        |                         |   |        |  |   |      
|Total            |  |                    |  | $                  | 18,307 |                         | $ | 13,635 |  | $ | 4,672
|                 |  |                    |  |                    |        |                         |   |        |  |   |      



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Notes to Condensed Consolidated Financial Statements

June 30, 2004

(unaudited)



Amortization expense related to intangible assets with definite useful lives
was $0.8 million and $1.5 million for the three and six months ended June 30, 2004, respectively, and $0.8 million and $1.6 million for the three and six months ended June 30, 2003, respectively. The following table provides estimated amortization
expense related to intangible assets with definite useful lives for each of the years in the five year period ending December 31, 2008 and thereafter (in thousands):



|                    |  |   |      
|------------------- |  | - | -----
|Remainder of 2004   |  | $ | 968  
|2005                |  |   | 579  
|2006                |  |   | 246  
|2007                |  |   | 246  
|2008                |  |   | 246  
|2009 and thereafter |  |   | 861  
|                    |  |   |      
|                    |  | $ | 3,146
|                    |  |   |      

|(7) | Segment Information
|--- | -------------------



CompuCom defines its operations as two distinct businesses - 1) product - which primarily consists of multi-vendor procurement services and support for a
wide array of technologies, including personal computer products, certain Unix-based systems, servers, networking and storage products, peripherals, software-related products and licenses, and mobile and wireless computing devices and 2) service -
which is composed of various offerings. IT Outsourcing services (ITO) include infrastructure management services consisting of the following: multi-vendor hardware and software support/deployment/migration, help desk, remote network
management, IT asset management and software patch management. IT Consulting and Systems Integration (IT Consulting) services includes the design, development, and integration of complex applications including application design and
development, project management, application development staffing and testing, and technical event management. Other offerings include complex configuration and imaging, vendor warranty contracts, software licensing management fees, and services
provided in support of certain manufacturers direct fulfillment initiatives. CompuCom measures segment earnings as operating earnings, defined as income before financing expenses, net and income taxes. All significant inter-segment activity
has been eliminated.



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements

June 30, 2004

(unaudited)



Three Months Ended June 30, 2004



|                                 |  |         |         |   |         |   |        |  |   |         |  
|-------------------------------- |  | ------- | ------- | - | ------- | - | ------ |  | - | ------- | -
|Operating Results                |  | Product |         |   | Service |   | Total  | 
|(in thousands)                   |  |         |         |   |         |   |        | 
|Revenues                         |  | $       | 260,949 |   |         | $ | 80,999 |  | $ | 341,948 |  
|Gross margin                     |  |         | 16,192  |   |         |   | 26,006 |  |   | 42,198  |  
|Operating earnings (loss)        |  |         | (36,233 | ) |         |   | 5,622  |  |   | (30,611 | )
|Financing expenses, net          |  |         |         |   |         |   |        |  |   | (93     | )
|                                 |  |         |         |   |         |   |        |  |   |         |  
|Loss before income taxes         |  |         |         |   |         |   |        |  | $ | (30,518 | )
|                                 |  |         |         |   |         |   |        |  |   |         |  
|Three Months Ended June 30, 2003 | 
|Operating Results                |  | Product |         |   | Service |   | Total  | 
|(in thousands)                   |  |         |         |   |         |   |        | 
|Revenues                         |  | $       | 304,731 |   |         | $ | 72,997 |  | $ | 377,728 |  
|Gross margin                     |  |         | 19,516  |   |         |   | 24,105 |  |   | 43,621  |  
|Operating earnings (loss)        |  |         | (1,001  | ) |         |   | 6,547  |  |   | 5,546   |  
|Financing expenses, net          |  |         |         |   |         |   |        |  |   | 86      |  
|                                 |  |         |         |   |         |   |        |  |   |         |  
|Earnings before income taxes     |  |         |         |   |         |   |        |  | $ | 5,460   |  
|                                 |  |         |         |   |         |   |        |  |   |         |  



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements

June 30, 2004

(unaudited)



Six Months Ended June 30, 2004



|                               |  |         |         |   |         |   |         |  |   |         |  
|------------------------------ |  | ------- | ------- | - | ------- | - | ------- |  | - | ------- | -
|Operating Results              |  | Product |         |   | Service |   | Total   | 
|(in thousands)                 |  |         |         |   |         |   |         | 
|Revenues                       |  | $       | 481,737 |   |         | $ | 160,229 |  | $ | 641,966 |  
|Gross margin                   |  |         | 30,050  |   |         |   | 52,185  |  |   | 82,235  |  
|Operating earnings (loss)      |  |         | (40,642 | ) |         |   | 12,825  |  |   | (27,817 | )
|Financing expenses, net        |  |         |         |   |         |   |         |  |   | (156    | )
|                               |  |         |         |   |         |   |         |  |   |         |  
|Loss before income taxes       |  |         |         |   |         |   |         |  | $ | (27,661 | )
|                               |  |         |         |   |         |   |         |  |   |         |  
|                              
|Six Months Ended June 30, 2003 | 
|Operating Results              |  | Product |         |   | Service |   | Total   | 
|(in thousands)                 |  |         |         |   |         |   |         | 
|Revenues                       |  | $       | 562,149 |   |         | $ | 145,876 |  | $ | 708,025 |  
|Gross margin                   |  |         | 41,316  |   |         |   | 46,678  |  |   | 87,994  |  
|Operating earnings             |  |         | 394     |   |         |   | 10,819  |  |   | 11,213  |  
|Financing expenses, net        |  |         |         |   |         |   |         |  |   | 171     |  
|                               |  |         |         |   |         |   |         |  |   |         |  
|Earnings before income taxes   |  |         |         |   |         |   |         |  | $ | 11,042  |  
|                               |  |         |         |   |         |   |         |  |   |         |  



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements

June 30, 2004

(unaudited)



|(8) | Financing Arrangements
|--- | ----------------------



At June 30, 2004, CompuCom had financing arrangements which total $75 million, consisting of a $50 million receivable securitization facility
(Securitization) and a $25 million working capital line of credit (Revolver). Consistent with its financing requirements, CompuCom did not renew the Revolver in July 2004.



The Securitizations pricing is based on a designated short-term
interest rate plus an agreed upon spread. The Securitization allows CompuCom to sell, on an ongoing basis, its trade accounts receivable (receivables) to a consolidated, wholly-owned bankruptcy-remote special purpose subsidiary (the
SPS). The risk that CompuCom bears from bad debt losses on receivables sold is addressed in its allowance for doubtful accounts. The SPS has sold and, subject to certain conditions, may from time to time sell, an undivided ownership
interest in the pool of purchased receivables to financial institutions. As collections reduce receivable balances sold, CompuCom may sell interests in new receivables to bring the amount available up to the maximum allowed. The sales are reflected
as reductions of Receivables in the Condensed Consolidated Balance Sheets and are included in the net cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows. The proceeds from the sale of receivables are used
primarily to fund working capital requirements. CompuCom retains the portion of the sold receivables that are in excess of the amounts outstanding, referred to as retained interest. The carrying amount of CompuComs retained interest, which
approximates fair value because of the short term nature of the receivables, is reflected in Receivables in the Condensed Consolidated Balance Sheets. CompuCom is retained as servicer of the receivables; however, the cost of servicing is not
material. Discounts associated with the sale of receivables totaled $0.1 million and $0.2 million for the three and six months ended June 30, 2004, respectively, and $0.4 and $0.7 million for the three and six months ended June 30, 2003,
respectively, and are included in Financing expenses, net on the Condensed Consolidated Statements of Operations. Amounts outstanding as sold receivables as of June 30, 2004 consisted of one $10 million certificate with an October 2005 maturity
date.



The Revolver was not renewed in July 2004. No amounts
were outstanding under the Revolver as of June 30, 2004 and December 31, 2003. Both the Securitization and the Revolver require CompuCom to maintain compliance with selected financial covenants.



Interest income of $0.2 million and $0.4 million was earned during the three
and six months ended June 30, 2004, respectively and $0.3 million and $0.6 million was earned during the three and six months ended June 30, 2003, respectively. Interest income is included in Financing expenses, net, on the Condensed Consolidated
Statements of Operations.



|(9) | Reclassifications
|--- | -----------------



Certain prior year amounts have been reclassified to conform to the current year presentation.



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

|
|

Managements Discussion and Analysis of Financial Condition and Results of Operations

June 30, 2004



Founded in 1987, CompuCom Systems, Inc. (CompuCom) is a national leader in helping companies plan, implement and manage multi-vendor, industry
standard computing environments. Our integrated portfolio of service and product offerings help clients reduce the costs, complexities, obstacles and risks associated with new technology adoption and acquisition, operational transition and on-going
management of their information systems.



Our discussion and
analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates
on historical experience and on other relevant assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.



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|
|

Managements Discussion and Analysis of Financial Condition and Results of Operations

June 30, 2004



Results of Operations



The following table shows our total revenue, gross margin and gross margin percentage by revenue source. Operating expenses, financing expenses, income taxes and net
earnings (loss) are shown as a percentage of total revenue for the three and six months ended June 30, 2004 and 2003 (in thousands):

|                                                                       |  |                    |         |    |                  |   |         |              |  |   |              |    |  |   |         |  
|---------------------------------------------------------------------- |  | ------------------ | ------- | -- | ---------------- | - | ------- | ------------ |  | - | ------------ | -- |  | - | ------- | -
|                                                                       |  | Three months ended |         |    | Six months ended |  
|                                                                       |  | June 30,2004       |         |    | June 30,2003     |   |         | June 30,2004 |  |   | June 30,2003 |   
|Revenue:                                                               |  |                    |         |    |                  |   |         |              |  |   |              |    |  |   |         |  
|Product                                                                |  | $                  | 260,949 |    |                  | $ | 304,731 |              |  | $ | 481,737      |    |  | $ | 562,149 |  
|Service                                                                |  |                    | 80,999  |    |                  |   | 72,997  |              |  |   | 160,229      |    |  |   | 145,876 |  
|                                                                       |  |                    |         |    |                  |   |         |              |  |   |              |    |  |   |         |  
|Total revenue                                                          |  | $                  | 341,948 |    |                  | $ | 377,728 |              |  | $ | 641,966      |    |  | $ | 708,025 |  
|                                                                       |  |                    |         |    |                  |   |         |              |  |   |              |    |  |   |         |  
|Gross margin:                                                          |  |                    |         |    |                  |   |         |              |  |   |              |    |  |   |         |  
|Product                                                                |  | $                  | 16,192  |    |                  | $ | 19,516  |              |  | $ | 30,050       |    |  | $ | 41,316  |  
|Service                                                                |  |                    | 26,006  |    |                  |   | 24,105  |              |  |   | 52,185       |    |  |   | 46,678  |  
|                                                                       |  |                    |         |    |                  |   |         |              |  |   |              |    |  |   |         |  
|Total gross margin                                                     |  | $                  | 42,198  |    |                  | $ | 43,621  |              |  | $ | 82,235       |    |  | $ | 87,994  |  
|                                                                       |  |                    |         |    |                  |   |         |              |  |   |              |    |  |   |         |  
|Gross margin percentage:                                               |  |                    |         |    |                  |   |         |              |  |   |              |    |  |   |         |  
|Product                                                                |  |                    | 6.2     | %  |                  |   | 6.4     | %            |  |   | 6.2          | %  |  |   | 7.3     | %
|Service                                                                |  |                    | 32.1    | %  |                  |   | 33.0    | %            |  |   | 32.6         | %  |  |   | 32.0    | %
|                                                                       |  |                    |         |    |                  |   |         |              |  |   |              |    |  |   |         |  
|Total gross margin percentage                                          |  |                    | 12.3    | %  |                  |   | 11.5    | %            |  |   | 12.8         | %  |  |   | 12.4    | %
|                                                                       |  |                    |         |   
|Operating expenses:                                                    |  |                    |         |    |                  |   |         |              |  |   |              |    |  |   |         |  
|Selling                                                                |  |                    | 3.1     | %  |                  |   | 2.7     | %            |  |   | 3.4          | %  |  |   | 3.0     | %
|Service                                                                |  |                    | 2.8     | %  |                  |   | 2.3     | %            |  |   | 3.0          | %  |  |   | 2.6     | %
|General and administrative                                             |  |                    | 4.0     | %  |                  |   | 3.9     | %            |  |   | 4.2          | %  |  |   | 4.1     | %
|Depreciation and amortization                                          |  |                    | 1.0     | %  |                  |   | 1.1     | %            |  |   | 1.0          | %  |  |   | 1.2     | %
|Fees and expenses associated with Platinum Equity, LLC proposed merger |  |                    | 0.6     | %  |                  |   |        |              |  |   | 0.3          | %  |  |   |        |  
|Loss from impairment of goodwill                                       |  |                    | 9.8     | %  |                  |   |        |              |  |   | 5.2          | %  |  |   |        |  
|                                                                       |  |                    |         |    |                  |   |         |              |  |   |              |    |  |   |         |  
|Total operating expenses                                               |  |                    | 21.3    | %  |                  |   | 10.0    | %            |  |   | 17.1         | %  |  |   | 10.9    | %
|                                                                       |  |                    |         |    |                  |   |         |              |  |   |              |    |  |   |         |  
|Earnings (loss) from operations                                        |  |                    | (9.0    | )% |                  |   | 1.5     | %            |  |   | (4.3         | )% |  |   | 1.5     | %
|                                                                       |  |                    |         |   
|Financing expenses, net                                                |  |                    | 0.1     | %  |                  |   |        |              |  |   |             |    |  |   |        |  
|                                                                       |  |                    |         |    |                  |   |         |              |  |   |              |    |  |   |         |  
|Earnings (loss) before income taxes                                    |  |                    | (8.9    | )% |                  |   | 1.5     | %            |  |   | (4.3         | )% |  |   | 1.5     | %
|Income taxes (benefit)                                                 |  |                    | (2.4    | )% |                  |   | 0.6     | %            |  |   | (1.1         | )% |  |   | 0.6     | %
|                                                                       |  |                    |         |    |                  |   |         |              |  |   |              |    |  |   |         |  
|Net earnings (loss)                                                    |  |                    | (6.5    | )% |                  |   | 0.9     | %            |  |   | (3.2         | )% |  |   | 0.9     | %
|                                                                       |  |                    |         |    |                  |   |         |              |  |   |              |    |  |   |         |  



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Managements Discussion and Analysis of Financial Condition and Results of Operations



Proposed Merger Agreement with Platinum Equity, LLC



On May 27, 2004, CompuCom entered into an Agreement and Plan of Merger (the
Merger Agreement) with CHR Holding Corporation (Parent) and CHR Merger Corporation (Merger Subsidiary) pursuant to which, on the effective date of the merger, each outstanding share of Company common stock would
be converted into the right to receive $4.60 in cash, without interest, and each outstanding share of Company preferred stock would be converted into the right to receive $10.00 per share plus accumulated dividends. In addition, option holders with
an exercise price less than $4.60 would be entitled to receive an amount equal to $4.60 minus the exercise price per share, multiplied by the number of shares subject to the option. Upon consummation of the merger, the Company would be a wholly
owned subsidiary of Parent, which in turn is an affiliate of Platinum Equity, LLC (Platinum).



In connection with the proposed merger, we recorded a loss from impairment of goodwill of $33.4 million in the second quarter 2004. This loss was related
to a write-off of a portion of goodwill associated with our product business. In addition, in the second quarter 2004, we recognized fees and expenses of $1.9 million associated with the proposed merger.



Comparison of the Quarter Ended June 30, 2004 to the Quarter Ended June 30, 2003



Product revenue primarily consists of hardware products and
software-related products and licenses. Hardware products include multi-vendor procurement services and support for a wide array of technologies, including personal computer products, certain Unix-based systems, servers, networking and storage
products, peripherals, and mobile and wireless computing devices. Software-related products and licenses revenues that are included in total product revenue consist of sales to our clients for which we serve as a reseller of the software-related
product or license. Alternatively, software-related products and licenses may be sold to our clients directly by the software vendor. In these cases, we serve as an advisor to the client and receive a fee for the services we provide. Software fee
revenues are included in service revenue.



Product revenue
decreased 14.4% to $260.9 million in the second quarter of 2004 from $304.7 million in the second quarter of 2003. The hardware portion of total product revenue decreased 10.6% to $187.3 million in the second quarter of 2004 from $209.4 million in
the second quarter of 2003. This decline in hardware revenue was primarily the result of lower sales generated by our large enterprise account base, as well as lower sales to the federal government. The software portion of total product revenue
decreased 22.7% to $73.7 million in the second quarter 2004 from $95.3 million in the second quarter 2003. The decline in software license revenue was primarily the result of the shift to a greater mix of software licenses sold for which we record a
fee rather than gross revenue. On a sequential basis, product revenue increased 18.2%, in line with seasonal trends, as the first quarter is typically the lowest revenue quarter in the year. Although the majority of the sequential revenue growth can
be attributed to higher software sales, hardware sales also increased in both the commercial and federal client base.



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Managements Discussion and Analysis of Financial Condition and Results of Operations



Product gross margin is the difference between product revenue and the cost
of that product revenue. The cost of product revenue consists primarily of the price CompuCom pays to acquire the product from the vendor. Product gross margin, both in absolute dollars and as a percentage of product revenue, is generally impacted
by a number of factors including, but not limited to, pricing, the relative mix of the types of hardware products being sold, the relative mix of hardware sales to software license sales, as well as various volume incentive programs provided by our
suppliers. These factors may result in material fluctuations between periods. Product gross margin as a percentage of product revenue declined to 6.2% in the second quarter of 2004 from 6.4% in the second quarter of 2003. We believe this decline was
primarily due to continued pricing pressure in our large enterprise account base, partially offset by an increase in volume incentive dollars received from suppliers, the reduction in lower margin sales to the federal government, and a decline in
the mix of lower margin software revenue relative to total product revenue. Sequentially, product gross margins were relatively consistent. Due to economic and competitive conditions, we may experience continued pressure on both product revenue and
product gross margin, the result of which may be to report both lower product revenue and gross margin dollars, as well as a lower gross margin percentage when compared to the comparable prior year period or previous quarter.



Service revenue is composed of various offerings. Our IT Outsourcing services
(ITO) include infrastructure management services consisting of the following: multi-vendor hardware and software support/deployment/migration, help desk, remote network management, IT asset management and software patch management. Our
IT Consulting and Systems Integration (IT Consulting) services includes the design, development, and integration of complex applications including application design and development, project management, application development staffing
and testing, and technical event management. Other offerings include complex configuration and imaging, vendor warranty contracts, and software licensing management fees. Service revenue reflects revenue generated by the actual performance of
specific services and does not include product sales.



Service
revenue increased 11.0% to $81.0 million for the second quarter of 2004 from $73.0 million for the second quarter of 2003. This increase was primarily related to increased demand for our application development staffing and testing services and ITO
services, partially offset by a decrease in services provided to the federal government. Sequentially, service revenue increased approximately 2.2% primarily due to growth in our application development staffing and testing services.



Service gross margin is the difference between service revenue and the cost
of that service revenue. Service gross margin, both in absolute dollars and as a percentage of service revenue, is generally impacted by a number of factors including pricing, utilization, and the relative mix of our service offerings at any point
in time. These factors may result in material fluctuations between periods. Service gross margin as a percentage of service revenue for the quarter ended June 30, 2004 was 32.1% compared to 33.0% in the same period in 2003. This decline was
primarily a result of a higher mix of application development staffing and testing services, as well as lower gross margins in our ITO services. Sequentially, service gross margin as a percentage of service revenue decreased to 32.1% compared to
33.0%. The decline was primarily due a lower mix of software licensing fees, a higher mix of application development staffing and testing services, partially offset by higher gross margins in ITO services. Due to economic and competitive conditions,
we may experience continued pressure on both service revenue and service gross margin, the result of which may be to report lower service revenue and related service gross margin when compared to the comparable prior year period or previous quarter.



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Managements Discussion and Analysis of Financial Condition and Results of Operations



Selling expenses consist primarily of salary, commissions and benefits for
sales and sales-support personnel, along with other costs directly related to such personnel. Selling expenses increased $0.4 million for the three months ended June 30, 2004 as compared to the same period in the prior year. The increase in selling
expenses was primarily due to an increase in our personnel and related costs associated with our investment in the expansion and greater specialization of our sales force. Selling expenses as a percentage of revenue increased to 3.1% for the three
months ended June 30, 2004 from 2.7% for the same period a year ago. The increase in selling expenses as a percentage of revenue was primarily attributable to the decrease in total revenue over the comparable periods.



Service expenses consist primarily of salary and benefits cost for personnel
supporting the service business, along with other costs directly related to such personnel. Service expenses increased $0.9 million for the three months ended June 30, 2004 as compared to the same period in the prior year. The increase in service
expenses is primarily due to increased personnel-related costs associated with increased revenue in our application development and testing services. As a percentage of revenue, service expenses increased to 2.8% for the three months ended June 30,
2004 from 2.3% for the same period a year ago. The increase in service expenses as a percentage of revenue was attributable to both the decrease in total revenue over the comparable periods and the increase in service expenses.



General and administrative expenses consist principally of salary and benefit
costs for executive, operations, information services, and administrative personnel, along with certain infrastructure costs directly related to such personnel, professional services and other general corporate activities. General and administrative
expenses decreased $1.1 million for the three months ended June 30, 2004 as compared to the three months ended June 30, 2003. The decrease is reflective of our ongoing cost management efforts which primarily include certain infrastructure costs, in
particular occupancy-related expenses, as well as personnel-related costs. General and administrative expenses remained relatively flat as a percentage of revenue for the comparable periods. Operating expenses are reported net of reimbursements by
certain manufacturers for specific training, promotional and marketing programs. These reimbursements offset certain expenses incurred, and any cash paid in excess of the actual expense is recorded as a reduction of cost of sales.



Depreciation and amortization expense decreased approximately $0.7 million
for the quarter ended June 30, 2004 as compared to the quarter ended June 30, 2003. As a percentage of revenue, depreciation and amortization expense decreased from 1.1% to 1.0% during the same periods.



Financing expenses, net consists of both financing costs and interest earned
on available cash. For the quarter ended June 30, 2004, interest income earned from the investment of available cash exceeded financing expenses. This compares to net financing expense of $0.1 million incurred during the second quarter 2003. The
decrease in financing expenses, net was primarily due to the fourth quarter 2003 reduction in amounts utilized under our receivable securitization.



In connection with the proposed merger, we recorded a loss from impairment of goodwill of $33.4 million. This loss was related to a write-off of a portion
of goodwill associated with our product business. In addition, in the second quarter 2004, we recognized fees and expenses of $1.9 million associated with the proposed merger.



Income tax benefit was $8.2 million, or 26.9% of loss before income taxes for the second quarter of 2004. This compares to
income tax expense of $2.2 million, or 40.0% of earnings before income taxes for the second quarter of 2003. The difference in the tax rate as a percentage of earnings (loss) before income taxes was primarily due to the inability for tax purposes to
deduct a portion of the loss from goodwill impairment.



As a
result of the factors discussed above, CompuCom recorded a net loss for the quarter ended June 30, 2004 of $22.3 million. This compares to net earnings of $3.3 million for the quarter ended June 30, 2003.



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Managements Discussion and Analysis of Financial Condition and Results of Operations



Comparison of the Six Months Ended June 30, 2004 to the Six Months Ended June 30, 2003



Product revenue decreased 14.3% to $481.7 million in the six
months ended June 30, 2004 from $562.1 million in the six months ended June 30, 2003. The hardware portion of total product revenue decreased 13.6% to $359.7 million in the six months ended June 30, 2004 from $416.2 million in the six months ended
June 30, 2003. The decline in the hardware portion of total product revenue was primarily the result of lower sales generated by our large enterprise accounts, as well as lower sales to the federal government. The software portion of total product
revenue decreased 16.4% to $122.1 million in the six months ended June 30, 2004 from $145.9 million in the six months ended June 30, 2003. The decrease in software license revenue was primarily the result of the shift to a greater mix of software
licenses sold for which we record a fee rather than gross revenue.



Product gross margin dollars declined $11.3 million to $30.1 million in the six months ended June 30, 2004 from $41.3 million in the six months ended June 30, 2003. Product gross margin as a percentage of product revenue decreased to 6.2%
in the six months ended June 30, 2004 from 7.3% in the six months ended June 30, 2003. We believe the decline in product gross margin as a percentage of product revenue was primarily due to continued pricing pressure and lower volume incentive
dollars received from suppliers. These factors were partially offset by the decline in lower margin sales to the federal government, as well as a reduction in the mix of lower margin software revenue relative to total product revenue. Due to
economic and competitive conditions, we may experience continued pressure on both product revenue and product gross margin, the result of which may be to report both lower product revenue and gross margin dollars, as well as a lower gross margin
percentage when compared to the comparable prior year period.



Service revenue increased 9.8% to $160.2 million in the six months ended June 30, 2004 from $145.9 million in the six months ended June 30, 2003. This increase was primarily due to increases in our application development staffing and
testing services, ITO services, and fees earned from our software management services, partially offset by a decrease in services provided to the federal government.



Service gross margin dollars increased $5.5 million to $52.2 million in the six months ended June 30, 2004 from $46.7
million in the six months ended June 30, 2003. Service gross margin as a percentage of service revenue in the six months ended June 30, 2004 was 32.6% compared to 32.0% for the same period in 2003. The increase in service gross margin as a
percentage of service revenue was primarily the result of the increase in fees earned from our software management services and from the decrease in lower margin sales to the federal government, partially offset by an increase in the mix of
application development and testing services and competitive pricing pressures in our ITO services. We expect to experience continued pressure on both service revenue and service gross margin, the result of which may be to report lower service
revenue and related service gross margin when compared to the comparable prior year period or previous quarter.



Selling expenses increased $0.8 million in the six months ended June 30, 2004 as compared to the same period in the prior year. The increase in selling
expenses was primarily due to an increase in our personnel and related costs associated with our investment in the expansion and greater specialization of our sales force. Selling expenses as a percentage of revenue increased to 3.4% in the six
months ended June 30, 2004 from 3.0% for the same period a year ago. The increase in selling expenses as a percentage of revenue was primarily attributable to the decrease in total revenue over the comparable periods.



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Managements Discussion and Analysis of Financial Condition and Results of Operations



Service expenses increased $1.0 million in the six months ended June 30, 2004
as compared to the same period in the prior year. The increase in service expenses is primarily due to increased personnel-related and other costs associated with increased revenue in our application development and testing services. As a percentage
of revenue, service expenses increased to 3.0% in the six months ended June 30, 2004 from 2.6% for the same period a year ago. The increase in service expenses as a percentage of revenue was attributable to both the decrease in total revenue over
the comparable periods and the increase in service expenses.



General and administrative expenses decreased $2.3 million in the six months ended June 30, 2004 as compared to the six months ended June 30, 2003. The decrease is reflective of our ongoing cost management efforts which primarily include
certain infrastructure costs, in particular occupancy-related expenses, as well as personnel-related costs. General and administrative expenses remained relatively flat as a percentage of revenue for the comparable periods. Operating expenses are
reported net of reimbursements by certain manufacturers for specific training, promotional and marketing programs. These reimbursements offset certain expenses incurred, and any cash paid in excess of the actual expense is recorded as a reduction of
cost of sales.



Depreciation and amortization expense decreased
approximately $1.5 million in the six months ended June 30, 2004 as compared to the six months ended June 30, 2003. As a percentage of revenue, depreciation and amortization expense decreased from 1.2% to 1.0% during the same period.



Financing expenses, net consists of both financing costs and interest earned
on available cash. In the six months ended June 30, 2004, interest income earned from the investment of available cash exceeded financing expenses. This compares to net financing expense of $0.2 million incurred in the six months ended June 30,
2003. The decrease in financing expenses, net was primarily due to the fourth quarter 2003 reduction in amounts utilized under our receivable securitization.



In connection with the proposed merger, we recorded a loss from impairment of goodwill of $33.4 million. This loss was related to a write-off of a portion
of goodwill associated with our product business. In addition, in the second quarter 2004, we recognized fees and expenses of $1.9 million associated with the proposed merger.



Income tax benefit was $7.1 million, or 25.6% of loss before income taxes for the six months ended June 30, 2004. This
compares to income tax expense of $4.4 million, or 40.0% of earnings before income taxes for the six months ended June 30, 2003. The difference in the tax rate as a percentage of earnings (loss) before income taxes was primarily due to the inability
for tax purposes to deduct a portion of the loss from goodwill impairment.



As a result of the factors discussed above, CompuCom recorded net loss for the six months ended June 30, 2004 of $20.6 million. This compares to net earnings of $6.6 million for the six months ended June 30, 2003.



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Managements Discussion and Analysis of Financial Condition and Results of Operations



Liquidity and Capital Resources



Working capital at June 30, 2004 was $153.3 million compared to $147.0
million at December 31, 2003. The increase in working capital was the result of an increase in cash and cash equivalents and a decrease in current liabilities, partially offset by decreases in receivables and inventories. The declines in current
liabilities, receivables and inventories were all attributable to the decline in revenue in the second quarter of 2004 as compared to the fourth quarter of 2003.



Our liquidity is impacted by the dollar volume of certain manufacturers customer specific rebate programs. Under these
programs, we are required to pay a higher initial amount for product and then claim a rebate from the manufacturer to reduce the final cost. These rebates are then passed on to the customer in the form of a reduced sales price. The collection of
these rebates can take an extended period of time. Due to these programs, our initial cost for the product is often higher than the sales price we can obtain from our clients. These programs have been at times a material factor in our financing
needs. As of June 30, 2004 and December 31, 2003, we were owed approximately $7.0 million and $18.6 million, respectively, under these vendor rebate programs. These outstanding amounts are included as a reduction to Accounts payable on the Condensed
Consolidated Balance Sheets.



In addition, we participate in
certain programs provided by various suppliers that enable us to earn volume incentive dollars. These incentives are generally earned by achieving quarterly sales targets. The amounts earned under these programs are recorded as a reduction to cost
of goods sold and as Receivables on the Condensed Consolidated Balance Sheets. As of June 30, 2004 and December 31, 2003, CompuCom was owed approximately $3.6 million and $2.6 million, respectively, under these supplier incentive programs.



Our working capital requirements are generally funded through
financing arrangements and internally generated funds. As of June 30, 2004, our financing arrangements consisted of a $50 million receivable securitization facility (Securitization) and a $25 million working capital line of credit
(Revolver). Consistent with our financing requirements, we did not renew the Revolver in July 2004. The Securitizations pricing is based on a designated short-term interest rate plus an agreed upon spread. Amounts outstanding as
sold receivables as of June 30, 2004 consisted of one $10 million certificate with an October 2005 maturity date. As of June 30, 2004, there were no amounts outstanding under the Revolver. Both the Securitization and the Revolver require us to
maintain compliance with selected financial covenants.



Our
business is not capital asset intensive, and capital expenditures in any year normally would not be significant in relation to our overall financial position. Generally, our capital expenditures relate to our information technology hardware and
software and improvements in our distribution center. Capital expenditures were approximately $4.4 million for the six months ended June 30, 2004, as compared to $4.1 million for the same period in 2003. We currently expect capital expenditures of
approximately $2 million to $4 million in the remaining six months of 2004.



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Managements Discussion and Analysis of Financial Condition and Results of Operations



Contractual Obligations



Our contractual obligations consist of noncancelable operating leases for facilities and equipment, which expire at various
dates from 2004 to 2011, with the exception of the operating lease on our headquarters facility, which expires in 2019. Future minimum lease payments under noncancelable operating leases as of June 30, 2004 are as follows (in thousands):



|                    |  |   |       
|------------------- |  | - | ------
|Remainder of 2004   |  | $ | 3,958 
|2005                |  |   | 6,766 
|2006                |  |   | 5,233 
|2007                |  |   | 4,973 
|2008                |  |   | 4,978 
|2009 and thereafter |  |   | 43,786
|                    |  |   |       
|                    |  | $ | 69,694
|                    |  |   |       



Forward Looking Statements and
Risks



This document contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements may be identified by words such as will, believe,
anticipate, intend, estimate, expect, project and similar expressions. These forward-looking statements may involve known and unknown risks, and uncertainties, as well as assumptions that,
if they never materialize or prove incorrect, could cause the results of CompuCom Systems, Inc. and its subsidiaries to be materially different from those expressed or implied by such forward-looking statements. All statements other than statements
of historical fact are statements that could be deemed forward-looking statements, including statements concerning, among other things, our strategy, future operations, financial position, estimated revenues and gross margins, projected operating
expenses, prospects, plans and management objectives. Although we believe the expectations contained in the forward-looking statements are reasonable, we can give no assurance that the expectations will prove correct. In addition, the
forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, strategic investments or one-time events. As a result, readers should not place undue reliance on these forward-looking
statements. While it is difficult to identify each factor and event that could affect our results, there are a number of important factors that could cause actual results to differ materially from those indicated by the forward-looking statements,
and as a result could have an adverse impact on our business, financial condition and operating results. These factors include, but are not limited to, the matters set forth in our Annual Report on Form 10-K under the section Factors that
Could Affect CompuComs Future Results, as well as the risks and uncertainties set forth from time to time in CompuComs Securities and Exchange Commission reports filed after this report. CompuCom assumes no obligation and does not
intend to update these forward-looking statements.



Item 3. Quantitative and Qualitative Disclosure About Market Risk



We are exposed to interest rate risk primarily through our Securitization and Revolver. We utilize our Securitization and Revolver for our working capital and other borrowing needs. If our effective interest rate were
to increase by 100 basis points (1.00%), our annual financing expense would increase by approximately $0.1 million based on the average balances utilized under the Securitization and Revolver during the six months ended June 30, 2004.



Currently, we do not have any significant financial investments for trading
or other speculative purposes or to manage interest rate exposure.



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##### Table of Contents

Item 4. Controls and Procedures



As of
June 30, 2004, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based upon that evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective in enabling us to record, process,
summarize and report information required to be included in the periodic SEC filings within the required time period. There have been no significant changes in our internal controls or in other factors that could significantly affect internal
controls subsequent to the date we carried out our evaluation.



PART II. OTHER INFORMATION



Item 1. Legal Proceedings



On May 28,
2004, June 1, 2004 and June 10, 2004, three substantially similar complaints were filed in the Chancery Court of the State of Delaware by purported stockholders of the Company allegedly on behalf of a class of holders of the Companys common
stock. By order dated July 22, 2004, these three actions were consolidated for all purposes. On July 27, 2004, plaintiffs filed an amended class action complaint under the caption of one of the three actions (the Amended Complaint) that
names as defendants the Company, its directors, and Safeguard Scientifics, Inc. (Safeguard). The Amended Complaint alleges that the Company, its directors, and Safeguard breached fiduciary duties in connection with the merger agreement
described in the Companys press release of May 28, 2004 and aided and abetted one another in the course of committing the alleged breach. Among other things, the Amended Complaint alleges that the defendants failed to obtain the best
transaction reasonably available and diverted merger consideration from the Companys minority stockholders to Safeguard and the Companys directors and certain of its officers. It is also alleged that the Company failed to disclose, or
only partially disclosed, certain matters in the Companys proxy statement.



The Amended Complaint seeks (i) an injunction against the proposed transaction, (ii) an order invalidating the proposed transaction in the event it is consummated, (iii) an order directing the Companys directors
to obtain a transaction that is in the best interests of all of its shareholders and to disclose all material information to shareholders in connection with any transaction; and (iv) the imposition of a constructive trust, in favor of plaintiffs,
upon any benefits improperly received by defendants.



On July
27, 2004, plaintiffs filed a motion for expedited proceedings and discovery in connection with the injunctive relief sought and requested that a preliminary injunction hearing be held before August 19, 2004, the date of the special meeting of the
stockholders of the Company. Defendants filed their opposition to the motion on July 28, 2004. On July 29, 2004, the Court denied the motion.



We are involved in various other claims and legal actions arising in the ordinary course of business. In our opinion, these matters are not material.



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##### Table of Contents

Item 6. Exhibits and Reports on Form 8-K



|(a) | Exhibits
|--- | --------



See Exhibit Index on page 27.



|(b) | Reports on Form 8-K
|--- | -------------------



During the quarter ended June 30, 2004, we filed the following Current Reports on Form 8-K:



| | (i) | Current Report on Form 8-K filed on April 28, 2004 to report a press release announcing financial results for the quarter ended March 31, 2004.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | Current Report on Form 8-K filed on May 28, 2004 to report that we had entered into an Agreement and Plan of Merger with CHR Holding Corporation and CHR Merger Corporation,
affiliates of Platinum Equity, LLC.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | Current Report on Form 8-K filed on June 4, 2004 to report that, in connection with our merger agreement with affiliates of Platinum Equity, LLC, two substantially similar
complaints were filed in the Chancery Court of the State of Delaware by purported stockholders of CompuCom allegedly on behalf of a class of holders of the Companys common stock.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Signatures



Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.



|                     |  |                                          
|-------------------- |  | -----------------------------------------
|                     |  | COMPUCOM SYSTEMS, INC.                   
|                     |  | (Registrant)                             
|                     | 
|DATE: August 6, 2004 |  | /s/ J. Edward Coleman                    
|                     |  | J. Edward Coleman,                       
|                     |  | Chairman of the Board, President,        
|                     |  | Chief Executive Officer and Director     
|                     | 
|DATE: August 6, 2004 |  | /s/ M. Lazane Smith                      
|                     |  | M. Lazane Smith,                         
|                     |  | Senior Vice President, Finance, Chief    
|                     |  | Financial Officer, Secretary and Director



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



EXHIBIT INDEX



|            |  |                                                                                                                                                  
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                      
|2(a)        |  | Agreement and Plan of Merger, by and among CompuCom Systems, Inc., CHR Holding Corporation and CHR Merger Corporation, dated as of May 27, 2004 *
|            | 
|31(a)       |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                          
|            | 
|31(b)       |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                          
|            | 
|32(a)       |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                          
|            | 
|32(b)       |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                          

---

|* | Filed on May 28, 2004 as Exhibit 2.1 to the Companys Current Report on Form 8-K and incorporated herein by reference.
|- | ----------------------------------------------------------------------------------------------------------------------



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