##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



---



FORM 10-Q



Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934



For
the three months ended June 30, 2003



Commission File
Number 0-14371



---



COMPUCOM SYSTEMS, INC.

(Exact name
of Registrant as specified in its charter)



|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 4, 2003 was 49,664,672 shares.



---



---

##### 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, 2003 and December 31, 2002                         |  | 3   
|         |  |                                                                                                  
|         |  | Condensed Consolidated Statements of Operations Three and six months ended June 30, 2003 and 2002 |  | 4   
|         |  |                                                                                                  
|         |  | Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2003 and 2002           |  | 5   
|         |  |                                                                                                  
|         |  | Notes to Condensed Consolidated Financial Statements                                              |  | 6   
|         |  |                                                                                                  
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations             |  | 14  
|         |  |                                                                                                  
|Item 3.  |  | Quantitative and Qualitative Disclosure About Market Risk                                         |  | 22  
|         |  |                                                                                                  
|Item 4.  |  | Controls and Procedures                                                                           |  | 22  
|         |  |                                                                                                  
|PART II. |  | OTHER INFORMATION                                                                                 |  |     
|         |  |                                                                                                  
|Item 1.  |  | Legal Proceedings                                                                                 |  | 23  
|         |  |                                                                                                  
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                                  |  | 23  



2



---

##### Table of Contents

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Condensed Consolidated Balance Sheets

(In thousands)

(unaudited)



|                                           |  | June 30,2003 |         | December 31,2002
|------------------------------------------ |  | ------------ | ------- | ----------------
|Assets                                     |  |              |         |                 
|Current assets:                            |  |              |         |                 
|Cash and cash equivalents                  |  | $            | 127,971 |                 
|Receivables, net                           |  |              | 152,746 |                 
|Inventories                                |  |              | 28,847  |                 
|Other                                      |  |              | 6,181   |                 
|                                           |  |              |         |                 
|Total current assets                       |  |              | 315,745 |                 
|                                           |  |             
|Property and equipment, net                |  |              | 21,948  |                 
|                                           |  |             
|Goodwill                                   |  |              | 102,253 |                 
|Intangible assets, net                     |  |              | 6,194   |                 
|Other                                      |  |              | 1,020   |                 
|                                           |  |              |         |                 
|Total assets                               |  | $            | 447,160 |                 
|                                           |  |              |         |                 
|Liabilities and Stockholders Equity       |  |              |         |                 
|Current liabilities:                       |  |              |         |                 
|Accounts payable                           |  | $            | 132,816 |                 
|Accrued liabilities                        |  |              | 50,893  |                 
|                                           |  |              |         |                 
|Total current liabilities                  |  |              | 183,709 |                 
|                                           |  |             
|Stockholders equity:                      |  |              |         |                 
|Preferred stock                            |  |              | 15,000  |                 
|Common stock                               |  |              | 495     |                 
|Additional paid-in capital                 |  |              | 76,004  |                 
|Retained earnings                          |  |              | 171,952 |                 
|                                           |  |              |         |                 
|Total stockholders equity                 |  |              | 263,451 |                 
|                                           |  |              |         |                 
|Total liabilities and stockholders equity |  | $            | 447,160 |                 
|                                           |  |              |         |                 



See accompanying notes
to condensed consolidated financial statements.



3



---

##### Table of Contents

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Condensed Consolidated Statements of Operations

Three and Six Months Ended June 30, 2003 and 2002

(In thousands, except per share amounts)

(unaudited)



|                                                                                                             |  | Three months ended June 30, |         | Six months ended June 30,
|------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------- | -------------------------
|                                                                                                             |  | 2003                        |         | 2002                     
|Revenue:                                                                                                     |  |                             |         |                          
|Product                                                                                                      |  | $                           | 304,731 |                          
|Service                                                                                                      |  |                             | 72,997  |                          
|                                                                                                             |  |                             |         |                          
|Total revenue                                                                                                |  |                             | 377,728 |                          
|                                                                                                             |  |                             |         |                          
|Cost of revenue:                                                                                             |  |                             |         |                          
|Product                                                                                                      |  |                             | 284,939 |                          
|Service                                                                                                      |  |                             | 48,892  |                          
|                                                                                                             |  |                             |         |                          
|Total cost of revenue                                                                                        |  |                             | 333,831 |                          
|                                                                                                             |  |                             |         |                          
|Gross margin                                                                                                 |  |                             | 43,897  |                          
|Operating expenses:                                                                                          |  |                             |         |                          
|Selling                                                                                                      |  |                             | 10,328  |                          
|Service                                                                                                      |  |                             | 8,863   |                          
|General and administrative                                                                                   |  |                             | 15,022  |                          
|Depreciation and amortization                                                                                |  |                             | 4,138   |                          
|                                                                                                             |  |                             |         |                          
|Total operating expenses                                                                                     |  |                             | 38,351  |                          
|                                                                                                             |  |                             |         |                          
|Earnings from operations                                                                                     |  |                             | 5,546   |                          
|Financing expenses, net                                                                                      |  |                             | 86      |                          
|                                                                                                             |  |                             |         |                          
|Earnings before income taxes and cumulative effect of a change in accounting principle for negative goodwill |  |                             | 5,460   |                          
|Income taxes                                                                                                 |  |                             | 2,184   |                          
|                                                                                                             |  |                             |         |                          
|Earnings before cumulative effect of a change in accounting principle for negative goodwill                  |  |                             | 3,276   |                          
|Cumulative effect of a change in accounting principle for negative goodwill, net of income taxes             |  |                             |        |                          
|                                                                                                             |  |                             |         |                          
|Net earnings                                                                                                 |  | $                           | 3,276   |                          
|                                                                                                             |  |                             |         |                          
|Basic earnings per common share:                                                                             |  |                             |         |                          
|Earnings before cumulative effect of a change in accounting principle for negative goodwill                  |  | $                           | 0.06    |                          
|Cumulative effect of a change in accounting principle for negative goodwill, net of income taxes             |  |                             |        |                          
|                                                                                                             |  |                             |         |                          
|Net earnings                                                                                                 |  | $                           | 0.06    |                          
|                                                                                                             |  |                             |         |                          
|Diluted earnings per common share:                                                                           |  |                             |         |                          
|Earnings before cumulative effect of a change in accounting principle for negative goodwill                  |  | $                           | 0.06    |                          
|Cumulative effect of a change in accounting principle for negative goodwill, net of income taxes             |  |                             |        |                          
|                                                                                                             |  |                             |         |                          
|Net earnings                                                                                                 |  | $                           | 0.06    |                          
|                                                                                                             |  |                             |         |                          
|Average common shares outstanding:                                                                           |  |                             |         |                          
|Basic                                                                                                        |  |                             | 49,389  |                          
|Diluted                                                                                                      |  |                             | 51,096  |                          



See accompanying notes
to condensed consolidated financial statements.



4



---

##### Table of Contents

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)



|                                                                                                 |  | Six months ended June 30, |        
|------------------------------------------------------------------------------------------------ |  | ------------------------- | -------
|                                                                                                 |  | 2003                      |        
|Cash flows from operating activities:                                                            |  |                           |        
|Net earnings                                                                                     |  | $                         | 6,625  
|Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:    |  |                           |        
|Cumulative effect of a change in accounting principle for negative goodwill, net of income taxes |  |                           |       
|Depreciation and amortization                                                                    |  |                           | 8,318  
|Deferred income taxes                                                                            |  |                           | 1,906  
|Changes in assets and liabilities:                                                               |  |                           |        
|Receivables                                                                                      |  |                           | (6,014 
|Inventories                                                                                      |  |                           | (1,115 
|Other current assets                                                                             |  |                           | (1,191 
|Accounts payable                                                                                 |  |                           | 15,564 
|Accrued liabilities and other                                                                    |  |                           | (20,391
|                                                                                                 |  |                           |        
|Net cash provided by (used in) operating activities                                              |  |                           | 3,702  
|                                                                                                 |  |                           |        
|Cash flows from investing activities:                                                            |  |                           |        
|Capital expenditures                                                                             |  |                           | (4,105 
|                                                                                                 |  |                           |        
|Net cash used in investing activities                                                            |  |                           | (4,105 
|                                                                                                 |  |                           |        
|Cash flows from financing activities:                                                            |  |                           |        
|Issuance of common stock                                                                         |  |                           | 785    
|Preferred stock dividends                                                                        |  |                           | (450   
|                                                                                                 |  |                           |        
|Net cash provided by financing activities                                                        |  |                           | 335    
|                                                                                                 |  |                           |        
|Net decrease in cash and cash equivalents                                                        |  |                           | (68    
|Cash and cash equivalents at beginning of period                                                 |  |                           | 128,039
|                                                                                                 |  |                           |        
|Cash and cash equivalents at end of period                                                       |  | $                         | 127,971
|                                                                                                 |  |                           |        



See accompanying notes
to condensed consolidated financial statements.



5



---

##### Table of Contents

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements

June 30, 2003

(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 2002 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, 2003.



|(2) |  | Contingencies
|--- |  | -------------



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.



|(3) |  | Earnings per share
|--- |  | ------------------



In accordance with Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, basic earnings per common share
have been computed based on net earnings after preferred stock dividend requirements and the weighted average number of common shares outstanding during each period. Diluted earnings 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 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 per common share have been computed as follows (in
thousands, except per share amounts):



|                                          |  | Three months ended June 30, 2003 |       | Six months ended June 30, 2003
|----------------------------------------- |  | -------------------------------- | ----- | ------------------------------
|                                          |  | Earnings(Numerator)              |       |                               
|Net earnings                              |  | $                                | 3,276 |                               
|Less: Preferred stock dividends           |  |                                  | (225  | )                             
|                                          |  |                                  |       |                               
|Basic EPS                                 |  |                                  |       |                               
|Earnings available to common stockholders |  |                                  | 3,051 |                               
|                                          |  |                                  |       |                               
|Effect of dilutive securities             |  |                                  |       |                               
|Stock options                             |  |                                  |       |                               
|                                          |  |                                  |       |                               
|Diluted EPS                               |  |                                  |       |                               
|Earnings available + assumed conversions  |  | $                                | 3,051 |                               
|                                          |  |                                  |       |                               



6



---

##### Table of Contents

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements

June 30, 2003

(unaudited)



|                                                                                                                             |  | Three months ended June 30, 2002 |       | Six months ended June 30, 2002
|---------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ----- | ------------------------------
|                                                                                                                             |  | Earnings(Numerator)              |       |                               
|Earnings before cumulative effect of a change in accounting principle for negative goodwill                                  |  | $                                | 4,719 |                               
|Less: Preferred stock dividends                                                                                              |  |                                  | (225  | )                             
|                                                                                                                             |  |                                  |       |                               
|Basic EPS                                                                                                                    |  |                                  |       |                               
|Earnings available to common stockholders before cumulative effect of a change in accounting principle for negative
goodwill |  |                                  | 4,494 |                               
|                                                                                                                             |  |                                  |       |                               
|Effect of dilutive securities                                                                                                |  |                                  |       |                               
|Stock options                                                                                                                |  |                                  |       |                               
|                                                                                                                             |  |                                  |       |                               
|Diluted EPS                                                                                                                  |  |                                  |       |                               
|Earnings available + assumed conversions                                                                                     |  | $                                | 4,494 |                               
|                                                                                                                             |  |                                  |       |                               



CompuCom 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, and has excluded 4,054,469 and 4,239,231 shares from its calculations of diluted earnings per share
for the three and six months ended June 30, 2002, respectively, as they are considered anti-dilutive.



|(4) |  | 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.



7



---

##### Table of Contents

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements

June 30, 2003

(unaudited)



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



|                                                                         |  |             |  | Three months ended June 30,
|------------------------------------------------------------------------ |  | ----------- |  | ---------------------------
|                                                                         |  |             |  | 2003                       
|Net earnings as reported                                                 |  |             |  | $                          
|Stock-based compensation excluded from reported net earnings, net of tax |  |             |  |                            
|                                                                         |  |             |  |                            
|Pro forma net earnings                                                   |  |             |  | $                          
|                                                                         |  |             |  |                            
|Basic earnings per share                                                 |  | As reported |  | $                          
|                                                                         |  | Pro forma   |  | $                          
|Diluted earnings per share                                               |  | As reported |  | $                          
|                                                                         |  | Pro forma   |  | $                          



|                                                                         |  |             |  | Six months ended June 30,
|------------------------------------------------------------------------ |  | ----------- |  | -------------------------
|                                                                         |  |             |  | 2003                     
|Net earnings as reported                                                 |  |             |  | $                        
|Stock-based compensation excluded from reported net earnings, net of tax |  |             |  |                          
|Pro forma net earnings                                                   |  |             |  | $                        
|Basic earnings per share                                                 |  | As reported |  | $                        
|                                                                         |  | Pro forma   |  | $                        
|Diluted earnings per share                                               |  | As reported |  | $                        
|                                                                         |  | Pro forma   |  | $                        



8



---

##### Table of Contents

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements

June 30, 2003

(unaudited)



|(5) |  | Goodwill and Intangible Assets
|--- |  | ------------------------------



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, 2003 and December 31, 2002 (in thousands):



|                 |  |                     |  | June 30, 2003       
|---------------- |  | ------------------- |  | --------------------
|                 |  | Amortization Period |  | Gross Carrying Value
|Customer-related |  | 6  11 years        |  | $                   
|Contract-related |  | 24  36 months      |  |                     
|                 |  |                     |  |                     
|Total            |  |                     |  | $                   
|                 |  |                     |  |                     
|                 |  |                    
|                 |  |                     |  | December 31, 2002   
|                 |  | Amortization Period |  | Gross Carrying Value
|Customer-related |  | 6  11 years        |  | $                   
|Contract-related |  | 24  36 months      |  |                     
|                 |  |                     |  |                     
|Total            |  |                     |  | $                   
|                 |  |                     |  |                     



Amortization expense
related to intangible assets with definite useful lives was $0.8 million and $1.6 million for the three and six months ended June 30, 2003, respectively, and $0.9 million and $1.8 million for the three and six months ended June 30, 2002,
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, 2007:



|Remainder of 2003   |  | $ | 1,522
|------------------- |  | - | -----
|2004                |  |   | 2,494
|2005                |  |   | 579  
|2006                |  |   | 246  
|2007 and thereafter |  |   | 1,353
|                    |  |   |      
|                    |  | $ | 6,194
|                    |  |   |      



In accordance with
SFAS No. 142, Goodwill and Other Intangible Assets, approximately $1.3 million of negative goodwill associated with the 2001 MicroAge Technology Services, L.L.C. acquisition was recognized on the Condensed Consolidated Statements of
Operations in the first quarter of 2002 as a cumulative effect of a change in accounting principle. There has been no change in the carrying amount of goodwill for the six months ended June 30, 2003.



9



---

##### Table of Contents

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements

June 30, 2003

(unaudited)



|(6) |  | Restructuring Charges
|--- |  | ---------------------



During the first quarter of 2000, CompuCom effected a restructuring plan designed to reduce its cost structure by closing its distribution facility
located in Houston, Texas, closing and consolidating three office facilities, and reducing its workforce. As a result, CompuCom recorded a restructuring charge of $5.2 million. During the fourth quarter of 1998, CompuCom recorded a $16.4 million
restructuring charge, primarily consisting of costs associated with the closing of facilities and disposing of related fixed assets as well as employee severance and benefits related to a reduction in workforce.



The following table provides a summary rollforward by category of the
activity in CompuComs restructuring accrual for the six months ended June 30, 2003 (in thousands):



|                        |  | Accrual at December 31, 2002 |       | Cash Payments |   |      | Accrual at June 30,2003
|----------------------- |  | ---------------------------- | ----- | ------------- | - | ---- | -----------------------
|Lease termination costs |  | $                            | 1,303 |               | $ | (318 | )                      
|                        |  |                              |       |               |   |      |                        



The remaining accrual
at June 30, 2003 is reflected in Accrued liabilities on CompuComs Condensed Consolidated Balance Sheet and relates to six leases for former office sites that have not been terminated, two of which have not been sublet. The Company believes the
restructuring accrual is adequate. Differences, if any, between the estimated amount accrued and actual amounts paid will be reflected in operating expenses in future periods.



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



CompuCom defines its operations as two distinct businesses1) product business (product), where revenue is primarily derived from the
sale of desktop, networking, storage, and mobile computing products, as well as peripherals and software-related products and licenses and 2) service business (service), which includes revenue primarily derived from application design,
development and maintenance, all aspects of desktop outsourcing, including field engineering, as well as help desk and LAN/WAN network outsourcing, configuration, asset tracking, software management, mobile computing services, IT consulting,
training, contract consulting, and services provided to support certain manufacturers direct fulfillment initiatives. CompuCom measures segment earnings as operating earnings, defined as income before restructuring charges, financing expenses
and income taxes. All significant inter-segment activity has been eliminated.





10



---

##### Table of Contents

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements

June 30, 2003

(unaudited)



Three Months Ended June 30, 2003



|Operating Results (in
thousands) |  | Product |         |   | Service |   | Total  | 
|-------------------------------- |  | ------- | ------- | - | ------- | - | ------ | 
|Revenues                         |  | $       | 304,731 |   |         | $ | 72,997 | 
|Gross margin                     |  |         | 19,792  |   |         |   | 24,105 | 
|Operating earnings (loss)        |  |         | (1,001  | ) |         |   | 6,547  | 
|Financing expenses, net          |  |         |         |   |         |   |        | 
|                                 |  |         |         |   |         |   |        | 
|Earnings before income taxes     |  |         |         |   |         |   |        | 
|                                 |  |         |         |   |         |   |        | 



Three Months Ended June 30, 2002



|Operating Results (in
thousands) |  | Product |         | Service |   | Total  | 
|-------------------------------- |  | ------- | ------- | ------- | - | ------ | 
|Revenues                         |  | $       | 350,290 |         | $ | 75,868 | 
|Gross margin                     |  |         | 26,279  |         |   | 27,975 | 
|Operating earnings               |  |         | 2,083   |         |   | 6,021  | 
|Financing expenses, net          |  |         |         |         |   |        | 
|                                 |  |         |         |         |   |        | 
|Earnings before income taxes     |  |         |         |         |   |        | 
|                                 |  |         |         |         |   |        | 



11



---

##### Table of Contents

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements

June 30, 2003

(unaudited)



Six Months Ended June 30, 2003



|Operating Results (in
thousands) |  | Product |         | Service |   | Total   | 
|-------------------------------- |  | ------- | ------- | ------- | - | ------- | 
|Revenues                         |  | $       | 562,149 |         | $ | 145,876 | 
|Gross margin                     |  |         | 41,911  |         |   | 46,678  | 
|Operating earnings               |  |         | 394     |         |   | 10,819  | 
|Financing expenses, net          |  |         |         |         |   |         | 
|                                 |  |         |         |         |   |         | 
|Earnings before income taxes     |  |         |         |         |   |         | 
|                                 |  |         |         |         |   |         | 



Six Months Ended June 30, 2002



|Operating Results (in
thousands)                                                                   |  | Product |         | Service |   | Total   | 
|-------------------------------------------------------------------------------------------------- |  | ------- | ------- | ------- | - | ------- | 
|Revenues                                                                                           |  | $       | 609,559 |         | $ | 143,547 | 
|Gross margin                                                                                       |  |         | 53,010  |         |   | 51,523  | 
|Operating earnings                                                                                 |  |         | 4,533   |         |   | 8,296   | 
|Financing expenses, net                                                                            |  |         |         |         |   |         | 
|                                                                                                   |  |         |         |         |   |         | 
|Earnings before income taxes and cumulative effect of a change in accounting for negative goodwill |  |         |         |         |   |         | 
|                                                                                                   |  |         |         |         |   |         | 



12



---

##### Table of Contents

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements

June 30, 2003

(unaudited)



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



At June 30, 2003, CompuCom had financing arrangements of $125 million, consisting of a $100 million receivable securitization (Securitization)
and a $25 million working capital line of credit (Revolver).



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 receivables 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, net on the Condensed Consolidated Balance Sheets and are included in the net cash provided by operating
activities on the Condensed Consolidated Statements of Cash Flows. The proceeds from the sale of receivables are used primarily to fund working capital requirements. Amounts outstanding and removed from the Condensed Consolidated Balance Sheet as
sold receivables as of June 30, 2003, consisted of two certificates totaling $60 million. Within the context of the Securitization, each certificate is issued from a separate facility, each facility set at $50 million. One $50 million facility, with
an October 2003 maturity date, has one certificate issued for $50 million. The other $50 million facility, with an October 2005 maturity date, has one certificate issued for $10 million. CompuCom retains the portion of the sold receivables that are
in excess of the amounts outstanding, referred to as retained. 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, net on 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 $0.4 million and $0.7 million for the three and six
months ended June 30, 2003, respectively, and $0.5 and $0.9 million for the three and six months ended June 30, 2002, respectively, and are included in Financing expenses, net on the Condensed Consolidated Statements of Operations.



The Revolver, which initially had a May 2002 maturity date but has been
extended to a September 2003 maturity date, bears interest at a rate of LIBOR plus an agreed-upon spread and is secured by a lien on CompuComs assets. CompuCom expects the Revolver to be renewed during the third quarter of 2003. Availability
under the Revolver is subject to a borrowing base calculation. As of June 30, 2003, availability under the Revolver was $25 million. No amounts were outstanding under the Revolver as of June 30, 2003, and December 31, 2002. Terms of the Revolver
limit the amounts available for capital expenditures and dividends. Both the Securitization and the Revolver require CompuCom to maintain compliance with selected financial covenants and ratios.



Interest income of $0.3 million and $0.6 million was earned during the three
and six months ended June 30, 2003, respectively, and $0.5 million and $1.1 million was earned during the three and six months ended June 30, 2002, respectively. Interest income is included in Financing expenses, net, on the Condensed Consolidated
Statements of Operations.



13



---

##### Table of Contents

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



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

June 30, 2003



Founded in 1987, CompuCom Systems, Inc., together with its
subsidiaries (CompuCom or the Company) is a leading provider of full life-cycle information technology (IT) solutions to large and medium-sized organizations throughout the United States. The Company offers its
clients a single-source for procuring, deploying, managing and supporting complex computing environments. Through its comprehensive portfolio of service and product offerings, CompuCom helps 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.



CompuComs discussion and analysis of its financial condition and results of operations are based upon CompuComs 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 CompuCom to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. CompuCom bases its 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.



14



---

##### Table of Contents

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



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

June 30, 2003



Results of Operations



The following table shows CompuComs total revenue, gross margin and gross margin percentage by revenue source. Operating expenses, financing expenses, income taxes, cumulative effect of a change in accounting
principle for negative goodwill, and net earnings are shown as a percentage of total revenue for the three and six months ended June 30, 2003 and 2002:



|                                                                                                             |  | Three months ended |         |   | Six months ended |  
|------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------- | - | ---------------- | -
|                                                                                                             |  | June 30,2003       |         |   | June 30,2002     |  
|Revenue:                                                                                                     |  |                    |         |   |                  |  
|Product                                                                                                      |  | $                  | 304,731 |   |                  | $
|Service                                                                                                      |  |                    | 72,997  |   |                  |  
|                                                                                                             |  |                    |         |   |                  |  
|Total revenue                                                                                                |  | $                  | 377,728 |   |                  | $
|                                                                                                             |  |                    |         |   |                  |  
|Gross margin:                                                                                                |  |                    |         |   |                  |  
|Product                                                                                                      |  | $                  | 19,792  |   |                  | $
|Service                                                                                                      |  |                    | 24,105  |   |                  |  
|                                                                                                             |  |                    |         |   |                  |  
|Total gross margin                                                                                           |  | $                  | 43,897  |   |                  | $
|                                                                                                             |  |                    |         |   |                  |  
|Gross margin percentage:                                                                                     |  |                    |         |   |                  |  
|Product                                                                                                      |  |                    | 6.5     | % |                  |  
|Service                                                                                                      |  |                    | 33.0    | % |                  |  
|                                                                                                             |  |                    |         |   |                  |  
|Total gross margin percentage                                                                                |  |                    | 11.6    | % |                  |  
|Operating expenses:                                                                                          |  |                    |         |   |                  |  
|Selling                                                                                                      |  |                    | 2.7     | % |                  |  
|Service                                                                                                      |  |                    | 2.3     | % |                  |  
|General and administrative                                                                                   |  |                    | 4.0     | % |                  |  
|Depreciation and amortization                                                                                |  |                    | 1.1     | % |                  |  
|                                                                                                             |  |                    |         |   |                  |  
|Total operating expenses                                                                                     |  |                    | 10.1    | % |                  |  
|                                                                                                             |  |                    |         |   |                  |  
|Earnings from operations                                                                                     |  |                    | 1.5     | % |                  |  
|Financing expenses, net                                                                                      |  |                    |        |   |                  |  
|                                                                                                             |  |                    |         |   |                  |  
|Earnings before income taxes and cumulative effect of a change in accounting principle for negative goodwill |  |                    | 1.5     | % |                  |  
|Income taxes                                                                                                 |  |                    | 0.6     | % |                  |  
|                                                                                                             |  |                    |         |   |                  |  
|Earnings before cumulative effect of a change in accounting principle for negative goodwill                  |  |                    | 0.9     | % |                  |  
|Cumulative effect of a change in accounting principle for negative goodwill, net of income taxes             |  |                    |        |   |                  |  
|                                                                                                             |  |                    |         |   |                  |  
|Net earnings                                                                                                 |  |                    | 0.9     | % |                  |  
|                                                                                                             |  |                    |         |   |                  |  



15



---

##### Table of Contents

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



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



Comparison of the Quarter Ended June 30, 2003 to
the Quarter Ended June 30, 2002



Product revenue is
primarily derived from the sale of hardware, which mainly includes desktop, networking, storage, and mobile computing products and peripherals. Also included in product revenue is the sale of software, which includes software-related products and
licenses. Product revenue declined 13.0% to $304.7 million in the second quarter of 2003 from $350.3 million in the second quarter of 2002. The decline in product revenue was principally driven from a decrease in the hardware portion of total
product revenue, which declined 19.7% to $209.4 million in the second quarter of 2003 from $260.9 million in the second quarter of 2002. This was partially offset by a 6.6% increase in the software portion of total product revenue to $95.3 million
in the second quarter 2003 from $89.4 million in the second quarter 2002. CompuCom believes economic conditions relative to technology procurement continue to hamper the demand for the products it sells mainly to its Fortune 1000 client base. As a
result, product purchases and IT projects continue to be delayed, downsized or cancelled. The increase in the software portion of total product revenue is primarily a result of the expansion of CompuComs product offerings and client base
relative to software. On a sequential basis, product revenue increased 18.4%. Although the majority of the sequential revenue growth can be attributed to higher software sales, hardware sales also slightly increased. While the Company considers the
increase in software sales to primarily be a normal, seasonal trend as the second quarter is typically the highest revenue quarter during the year for software sales, software sales were also positively impacted by the expansion of CompuComs
product offerings and client base.



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 dollars decreased $6.5 million to $19.8
million in the second quarter 2003 from $26.3 million in the second quarter 2002. Product gross margin as a percentage of product revenue decreased to 6.5% in the second quarter of 2003 from 7.5% in the second quarter of 2002 and from 8.6% in the
first quarter of 2003. CompuCom believes the decline in product gross margin as a percentage of product revenue on both a comparable prior year quarter and sequential quarter basis was primarily due to an increase in the mix of lower margin software
revenue relative to total product revenue, as well as a decrease in volume incentive dollars received from suppliers. Due to economic and competitive conditions, CompuCom expects to 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.



16



---

##### Table of Contents

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



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



Service revenue is primarily derived
from services directly related to the sale of product, such as configuration, vendor warranty contracts and services to support certain OEM product fulfillment programs, IT outsourcing services, such as desktop support, field engineering, and help
desk, as well as application development, systems integration, contract consulting and other consulting services. Service revenue reflects revenue generated by the actual performance of specific services and does not include product sales. Service
revenue decreased 3.8% to $73.0 million for the second quarter of 2003 from $75.9 million for the second quarter of 2002, and was slightly higher than the first quarter of 2003. Service gross margin as a percentage of service revenue for the second
quarter of 2003 was 33.0% compared to 36.9% for the same period in 2002. The decrease in service revenue and service gross margin for the second quarter of 2003 as compared to the same period in 2002 was primarily due to lower IT outsourcing revenue
and services revenue directly related to the sale of product. This decline in service revenue was partially offset by an increase in certain contract consulting services. Sequentially, service gross margin increased from 31.0% in the first quarter
of 2003 to 33.0% in the second quarter of 2003. This increase was primarily due to improved utilization in IT outsourcing services, partially offset by lower utilization in application development services due to a delay in the commencement of
certain projects. In addition, service gross margins were positively impacted by a decrease in relatively lower margin services to the federal government. CompuCom expects 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 consist primarily of salary, commissions and benefits for sales and sales-support personnel, along with
other costs directly related to such personnel. Selling expenses were $1.2 million lower for the three months ended June 30, 2003 as compared to the same period in the prior year. CompuCom attributes this decrease to its own cost management efforts,
primarily related to sales-support personnel and related costs, as well as to those costs that vary directly with revenue. Selling expenses as a percentage of revenue were flat during the same 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 decreased $2.2 million for the second quarter of 2003 as compared to the second quarter of 2002. As a percentage of revenue, service
expenses were 2.3% for the second quarter of 2003 as compared to 2.6% for the same period a year ago. The reduction was due primarily to CompuComs cost management efforts which include personnel-related costs, as well as certain infrastructure
costs, primarily telecommunications expense.



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, as well as
professional services and other general corporate activities. General and administrative expenses declined $3.8 million for the second quarter of 2003 as compared to the second quarter of 2002 and, as a percentage of revenue, dropped from 4.4% to
4.0% for the comparable periods. The decrease is reflective of CompuComs ongoing cost management efforts which primarily include personnel-related costs as well as certain occupancy-related expenses. Operating expenses are reported net of
reimbursements by certain manufacturers for specific training, promotional and marketing programs. These reimbursements offset certain expenses incurred.



Depreciation and amortization expense was approximately $0.5 million lower for the second quarter of 2003 as compared to the second quarter of 2002. As a
percentage of revenue, depreciation and amortization expense was flat during the same periods.



17



---

##### Table of Contents

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



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



Financing expenses, net declined
approximately $0.2 million for the quarter ended June 30, 2003 as compared to the same period in the prior year. This decrease was primarily due to lower effective interest rates in the second quarter of 2003 as compared to the second quarter of
2002. The decrease in financing expenses, net was partially offset by lower interest earned on available cash for the comparable periods, primarily as a result of a decline in interest rates.



As a result of the factors discussed above, CompuCom recorded net earnings
for the quarter ended June 30, 2003 of $3.3 million. This compares to net earnings of $4.7 million for the quarter ended June 30, 2002.



Comparison of the Six Months Ended June 30, 2003 to the Six Months Ended June 30, 2002



Product revenue declined 7.8% to $562.1 million in the six months ended June 30, 2003 from $609.6 million in the six months
ended June 30, 2002. The decrease consisted of a 12.8% decline in the hardware portion of total product revenue, partially offset by a 10.2% increase in the software portion of total product revenue. CompuCom believes economic conditions relative to
technology procurement continue to hamper the demand for the products it sells mainly to its Fortune 1000 client base. As a result, product purchases and IT projects continue to be delayed, downsized or cancelled. The increase in the software
portion of total product revenue is primarily a result of the expansion of CompuComs product offerings and client base relative to software.



Product gross margin as a percentage of product revenue decreased to 7.5% in the six months ended June 30, 2003 from 8.7% in the six months ended June 30,
2002. CompuCom believes the decrease in product gross margin as a percentage of product revenue was due to an increase in the mix of lower margin software revenue relative to total product revenue, as well as a decrease in volume incentive dollars
received from suppliers. Due to economic and competitive conditions, CompuCom expects to experience continued pressure on both product revenue and 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 1.6% to $145.9 million for the six months ended June 30, 2003 compared to $143.5 million for the six months ended June 30, 2002.
The higher service revenue was primarily due to increases in certain contract consulting services and services to the federal government, partially offset by decreases in IT outsourcing services and services directly related to the sale of product.
Service gross margin as a percentage of service revenue decreased for the six months ended June 30, 2003 to 32.0% from 35.9% for the same period in 2002. This decrease was primarily a result of lower higher-margin IT outsourcing services revenues
and product-related services and an increase in relatively lower-margin services to the federal government and certain contract consulting services. CompuCom expects 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 were $2.8 million lower for the six months ended June 30, 2003 as compared to the same period in the prior
year, resulting in selling expenses as a percentage of revenue declining to 3.0% for the six months ended June 30, 2003 from 3.2% for the same period a year ago. CompuCom attributes this decrease to its own cost management efforts, primarily related
to sales-support personnel and related costs, as well as to those costs that vary directly with revenue.



18



---

##### Table of Contents

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



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



Service expenses decreased $3.8
million for the six months ended June 30, 2003 as compared to the six months ended June 30, 2002. As a percentage of revenue, service expenses declined to 2.6% for the six months ended June 30, 2003 from 2.9% for the same period a year ago. The
decrease was due primarily to CompuComs cost management efforts which include personnel-related costs, as well as certain infrastructure cost reductions, primarily telecommunications expense.



General and administrative expenses decreased $6.5 million for the six months
ended June 30, 2003 as compared to the six months ended June 30, 2002, representing a decline in general and administrative expense as a percentage of revenue from 4.8% to 4.2%. The decrease is reflective of the Companys ongoing cost
management efforts which primarily include personnel-related costs and certain occupancy-related expenses.



Depreciation and amortization expense decreased approximately $1.2 million for the six months ended June 30, 2003 as compared to the six months ended June
30, 2002. As a percentage of revenue, depreciation and amortization expense declined from 1.3% for the six months ended June 30, 2002 to 1.2% for the six months ended June 30, 2003.



Financing expenses, net decreased approximately $0.4 million for the six months ended June 30, 2003 as compared to the same
period in the prior year, primarily due to lower effective interest rates. The decrease in financing expenses, net was partially offset by lower interest earned on available cash for the comparable periods, primarily as a result of a decline in
interest rates.



As a result of the factors discussed above,
CompuCom recorded net earnings for the six months ended June 30, 2003 of $6.6 million. This compares to net earnings before the cumulative effect of a change in accounting principle for negative goodwill of $7.4 million for the six months ended June
30, 2002.



Liquidity and Capital
Resources



Working capital at June 30, 2003 was $132.0
million compared to $121.0 million at December 31, 2002. The increase in working capital was primarily the result of a $6.0 million increase in receivables and a $4.7 million decrease in net current liabilities.



CompuComs liquidity is impacted by the dollar volume of certain
manufacturers customer specific rebate programs. Under these programs, CompuCom is required to pay a higher initial amount for the 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, CompuComs initial cost for the product is often higher than the sales price CompuCom can obtain
from its clients. These programs have been at times a material factor in CompuComs financing needs. As of June 30, 2003 and December 31, 2002, CompuCom was owed approximately $15.5 million and $18.5 million, respectively, under these vendor
rebate programs. These outstanding amounts are included as a reduction to Accounts payable on the Condensed Consolidated Balance Sheets and a reduction of Cost of revenue on the Condensed Consolidated Statements of Operations.



CompuCom participates in certain programs provided by various suppliers that
enable it 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 of cost of revenue when earned. The Company also receives
vendor reimbursements that offset certain training, promotional and marketing costs incurred by the Company. These amounts are recorded as Receivables on the Condensed Consolidated Balance Sheets, and any amounts received in excess of the actual
amounts incurred are recorded as a reduction of Cost of revenue on the Condensed Consolidated Statements of Operations. As of June 30, 2003 and December 31, 2002, CompuCom was owed approximately $3.8 million and $3.3 million, respectively, under
these supplier incentive programs.



19



---

##### Table of Contents

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



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



CompuComs working capital
requirements are generally funded through financing arrangements and internally generated funds. As of June 30, 2003, CompuComs financing arrangements consisted of a $100 million receivable securitization (Securitization) and a $25
million working capital line of credit (Revolver). 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, 2003 consisted of
two certificates totaling $60 million. Within the context of the Securitization, each certificate is issued from a separate facility, each facility set at $50 million. One $50 million facility, with an October 2003 maturity date, has one certificate
issued for $50 million. The other $50 million facility, with an October 2005 maturity date, has one certificate issued for $10 million. The Revolver, which initially had a May 2002 maturity date but has been extended to a September 2003 maturity
date, bears interest at a rate of LIBOR plus an agreed upon spread and is secured by a lien on CompuComs assets. CompuCom expects the Revolver to be renewed during the third quarter of 2003. Availability under the Revolver is subject to a
borrowing base calculation. As of June 30, 2003, availability under the Revolver was $25 million with no outstanding amounts. Terms of the Revolver limit the amounts available for capital expenditures and dividends. Both the Securitization and the
Revolver require CompuCom to maintain compliance with selected financial covenants and ratios.



CompuComs business is not capital asset intensive, and capital expenditures in any year normally would not be significant in relation to its overall financial position. Generally, the Companys capital
expenditures relate to its information technology hardware and software and improvements in its distribution center. Capital expenditures were $4.1 million for the six months ended June 30, 2003, as compared to $3.1 million for the same period in
2002. CompuCom currently expects capital expenditures of approximately $4 million to $6 million in the remaining six months of 2003.



Recent Accounting Pronouncements



In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 150,
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted
for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain
obligations that can be settled with shares of stock. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15,
2003. CompuCom does not expect SFAS No.150 to have a material effect on its financial condition or results of operations.



In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46 (FIN 46), Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable
interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15,
2003. CompuCom does not expect FIN 46 to have a material effect on its financial condition or results of operations.



20



---

##### Table of Contents

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



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



In November 2002, the FASBs
Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. CompuCom does not expect EITF Issue No.
00-21 to have a material effect on its financial condition or results of operations.



Forward Looking Statements and Risks



This document contains forward-looking statements within the meaning of the Securities Act of 1933 and 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. 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 or mergers and related integration, dispositions, joint ventures, strategic investments or one-time events. These forward-looking statements are subject to certain risks and uncertainties and a number of 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: our ability to grow product and
service revenue; declines in product revenue and product gross margin may occur and may be greater than anticipated; our ability to improve services gross margin dollars and services gross margin as a percentage of total gross margin; our ability to
find additional ways to leverage costs and reduce costs further, including financing costs; our ability to improve operational efficiency; our ability to win new clients; the expansion of the services the Company provides may not be as broad as the
Company currently expects or widely accepted by clients; the manufacturers who use the Companys direct services may elect not to use those services; our ability to retain key employees; our ability to accurately value acquired businesses; and
our ability to improve product and service gross margin and our balance sheet. Other factors that could cause actual results to differ include: the impact of competitive pricing and supply; manufacturers shift to direct fulfillment programs
may be more significant than anticipated; the long-term effect of the Hewlett Packard acquisition of Compaq; lower demand than anticipated for the products and services the Company sells; changes to suppliers pricing, price protection, rebate
and incentive programs; short-term interest rate fluctuations; general economic conditions including uncertainty created by military action; employee turnover; potential impact of litigation; the ability to collect trade and vendor accounts
receivable; the impact of certain business and economic factors on the valuation of certain investments in other businesses CompuCom has made or may make; and other uncertainties that may have an impact on future revenue and earnings as well as the
risks and uncertainties set forth from time to time in our other public reports and statements, including the risk factors set forth in our Annual Report on Form 10-K. As a result, readers should not place undue reliance on these forward-looking
statements.



21



---

##### Table of Contents

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Item 3. Quantitative and Qualitative Disclosure About Market Risk



CompuCom is exposed to interest rate risk primarily through its Securitization and Revolver. CompuCom utilizes its Securitization and Revolver for its
working capital and other borrowing needs. If CompuComs effective interest rate were to increase by 100 basis points (1.00%), CompuComs annual financing expense would increase by approximately $0.6 million based on the average balances
utilized under the Securitization and Revolver during the six months ended June 30, 2003.



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



Item 4. Controls and Procedures



As of June 30, 2003, CompuCom carried out an evaluation, under the supervision and with the participation of CompuComs management, including its President and Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of CompuComs disclosure controls and procedures. Based upon that evaluation, CompuComs President and Chief Executive Officer and Chief Financial Officer concluded that CompuComs disclosure controls and
procedures are effective in enabling it 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 CompuComs internal
controls or in other factors that could significantly affect internal controls subsequent to the date CompuCom carried out its evaluation.



22



---

##### Table of Contents

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



PART II. OTHER INFORMATION



Item 1. Legal Proceedings



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



|Item 6. |  | Exhibits and Reports on Form 8-K
|------- |  | --------------------------------



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



See Exhibit Index on page 25.



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



None



23



---

##### Table of Contents

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, 2003 |  | 
|                     |  | 
|                     |  | 



|                     |  | 
|-------------------- |  | 
|DATE: August 6, 2003 |  | 
|                     |  | 
|                     |  | 



24



---

##### Table of Contents

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



EXHIBIT INDEX



|ExhibitNo. |  | Description                                                            
|---------- |  | -----------------------------------------------------------------------
|           | 
|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



25