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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

|[ X ] | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2005 | 
|----- | ------------------------------------------------------------------------------------------------------------------------------- | 

or

|[    ] | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
          SECURITIES EXCHANGE ACT OF 1934 | 
|------ | -------------------------------------------------------------------------------------------------- | 

| | For the transition period from _________ to ___________
Commission File Number:
1-13792 | 
| | --------------------------------------------------------------------------------------- | 

________________________

Systemax Inc.
(Exact name of registrant as specified in its charter)

|Delaware
(State or other jurisdiction of
incorporation or organization) | 11-3262067
(I.R.S. Employer
Identification No.)
|----------------------------------------------------------------------- | -----------------------------------------------

11 Harbor Park Drive
Port Washington, New York 11050
(Address of principal executive offices, including zip code)

# Registrants
telephone number, including area code: (516) 608-7000

_____________________

# Securities registered
pursuant to Section 12(b) of the Act:

|Title of each class
Common Stock, par value $ .01 per share | Name of each exchange onwhich registered
New York Stock Exchange
|----------------------------------------------------------- | ----------------------------------------------------------------

# Securities registered pursuant
to Section 12(g) of the Act: NONE

_________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
          
          Yes [   ]
No [X]

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
             
       Yes [    ] No [X]

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 [   ] No [X]

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best knowledge of the registrant,
in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment of this Form 10-K. [X]

Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, or a non-accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Large accelerated filer [ ]
Accelerated filer [ ] Non-accelerated filer [X]

Indicate by check mark whether the registrant is a shell
company (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]

The aggregate market value of the voting stock held by
non-affiliates of the registrant as of June 30, 2005, which is the last business
day of the registrants most recently completed second fiscal quarter, was
approximately $63,158,000. For purposes of this computation, all executive
officers and directors of the Registrant and all parties to the Stockholders
Agreement dated as of June 15, 1995 have been deemed to be affiliates. Such
determination should not be deemed to be an admission that such persons are, in
fact, affiliates of the Registrant.

The
number of shares outstanding of the registrants common stock as of July 31,
2006 was 35,021,391 shares.

Documents incorporated by reference: None.

---

# Explanatory Note

| | The filing of this Annual Report on Form 10-K was delayed because of the
extensive additional work necessary to complete our previously-announced
restatement of our Consolidated Financial Statements for the year ended December
31, 2004 and the need to engage a new independent registered public accounting
firm as a result of the resignation of Deloitte & Touche LLP. The
restatement is set forth in our amendment to our 2004 Annual Report on
Form 10-K/A, filed on November 22, 2005. The Consolidated Balance Sheet as
of December 31, 2004, the Consolidated Statements of Operations,
Shareholders Equity and Cash Flows for the years ended December 31,
2004 and 2003 and the Selected Financial Data for the years ended December 31,
2004, 2003, 2002 and 2001 in Item 6 in this report are presented as previously
restated. For information on the restatement and the impact of the restatement
on our financial statements we refer you to Item 8, Financial
Statements and Supplementary Data, Note 2, Restatement of
Previously Filed Financial Statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

TABLE OF CONTENTS

|Part I
   Item 1. | Business | 2
|----------------- | -------- | -

| | General
Recent Developments
Products
Sales and Marketing
Customer Service, Order Fulfillment and Support
Suppliers
Research and Development
Competition and Other Market Factors
Employees
Environmental Matters
Financial Information About Foreign and Domestic Operations
Available Information | 2
3
3
4
5
6
6
6
7
7
7
8
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------

|Item 1A.  
   Item 1B.
   Item 2. 
   Item 3. 
   Item 4. 
Part II 
   Item 5. 
   Item 6. 
   Item 7. 
   Item 7A.
   Item 8. 
   Item 9. 
   Item 9A.
   Item 9B.
Part III 
   Item 10.
   Item 11.
   Item 12.
   Item 13.
   Item 14.
Part IV 
   Item 15. | Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchase
      of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors and Executive Officers of the Registrant
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
Certain Relationships and Related Transactions
Principal Accountant Fees and Services
Exhibits, Financial Statements and Schedules
Signatures | 9
15
15
15
17
18
19
20
30
31
31
31
34
34
36
38
39
40
41
45
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------

PART I

Unless otherwise indicated, all references herein to
Systemax Inc. (sometimes referred to as Systemax, the
Company or we) include its subsidiaries.

Forward Looking Statements

This report contains forward looking statements
within the meaning of that term in the Private Securities Litigation Reform Act
of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934). Additional written or oral forward looking
statements may be made by the Company from time to time, in filings with the
Securities and Exchange Commission or otherwise. Statements contained in this
report that are not historical facts are forward looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward looking statements may include, but are not limited
to, projections of revenue, income or loss and capital expenditures, statements
regarding future operations, financing needs, compliance with financial
covenants in loan agreements, plans for acquisition or sale of assets or
businesses and consolidation of operations of newly acquired businesses, and
plans relating to products or services of the Company, assessments of
materiality, predictions of future events and the effects of pending and
possible litigation, as well as assumptions relating to the foregoing. In
addition, when used in this discussion, the words anticipates,
believes, estimates, expects,
intends, and plans and variations thereof and similar
expressions are intended to identify forward looking statements.

Forward looking statements are inherently subject
to risks and uncertainties, some of which cannot be predicted or quantified
based on current expectations. Consequently, future events and results could
differ materially from those set forth in, contemplated by, or underlying the
forward looking statements contained in this report. Statements in this report,
particularly in Item 1. Business, Item 1A. Risk Factors,
Item 3. Legal Proceedings, Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations,
and the Notes to Consolidated Financial Statements describe certain factors,
among others, that could contribute to or cause such differences.

# Item 1. Business.

# General

Systemax is a direct marketer of brand name and private
label products. Our operations are organized in two primary reportable business
segments  Computer Products and Industrial Products. Computer Products
includes personal desktop computers (PCs), notebook computers,
computer related products and other consumer electronics products which are
marketed in North America and Europe. We assemble our own PCs and sell them
under the trademarks Systemax and Ultra. In addition, we market and
sell computers manufactured by other leading companies. Computers and computer
related products accounted for 92% of our net sales in 2005. Our Industrial
Products segment sells a wide array of material handling equipment, storage
equipment and consumable industrial items in North America. Industrial products
accounted for 8% of our net sales in 2005. In both of these product groups we
offer our customers a broad selection of products, prompt order fulfillment and
extensive customer service. We also participate in the emerging market for
on-demand, web-based business software applications through the marketing of our
PCS Profitability Suite of hosted software. See Note 12 to the
consolidated financial statements included in Item 15 of this Form 10-K for
additional financial information about our business segments as well as
information about our geographic operations.

The
Company was incorporated in Delaware in 1995. Certain predecessor businesses which now
constitute part of the Company have been in business since 1955. Our headquarters office
is located at 11 Harbor Park Drive, Port Washington, New York.

# Recent Developments

Upgrade of Credit Facility

On October 27, 2005, we increased our committed
revolving credit facility from $70 million to an aggregate amount of up to $120
million. The enhanced facility is with a group of financial institutions and
certain additional lenders with JP Morgan Chase serving as Agent. This facility
also replaced a £15 million United Kingdom facility and a £5 million
term loan in the United Kingdom. The facility has a five year maturity and will
be available to the Company, its domestic subsidiaries and its United Kingdom
subsidiary. Borrowings under the facility are secured principally by accounts
receivable, inventory and certain other assets.

Change in Independent Registered Public Accountants

On November 7, 2005, our independent
registered public accountants, Deloitte & Touche LLP, notified us that they
would not stand for re-appointment as the Companys independent registered
public accountant for the year ended December 31, 2005. On December 9, 2005, the
Company engaged Ernst & Young LLP as its independent registered public
accounting firm to audit the Companys consolidated financial statements as
of and for the year ended December 31, 2005.

Restatement of Financial Statements

On May 11, 2005, we announced that we would
restate our previously issued consolidated financial statements for the year
ended December 31, 2004 following the discovery of certain errors in accounting
for inventory at our Tiger Direct, Inc. subsidiary. In connection with this
restatement, the Company filed an amended Form 10-K for the year ended December
31, 2004 with the Securities and Exchange Commission on November 22, 2005. The
consolidated financial statements included herein and all related information
for the periods affected have been restated to reflect the corrections.

Restructuring Activities

We continued to address the pressures of
competitive markets with the identification of opportunities for cost savings.
In early 2005, we announced that we were taking steps to increase the efficiency
and profitability of our European operations, including combining certain back
office operations in the United Kingdom, to provide better customer service and
reduce costs. These actions resulted in the elimination of approximately 240
positions and are expected to result in approximately $6.0 million in annual
savings.

# Products

We offer more than 100,000 brand name and
private label products. We endeavor to expand and keep current the breadth of
our product offerings in order to fulfill the increasingly wide range of product
needs of our customers.

Our computer sales include Systemax PCs as well as
offerings of other brand name PCs, servers and notebook computers. Computer
related products include supplies such as laser printer toner cartridges and ink
jet printer cartridges; media such as recordable disks and magnetic tape
cartridges; peripherals such as hard disks, CD-ROM and DVD drives, printers and
scanners; memory upgrades; data communication and networking equipment;
monitors; digital cameras; plasma and LCD TVs, MP3 and DVD players, PDAs
and packaged software.

We assemble our Systemax brand PCs in our
297,000 square foot, ISO-9000-certified facility in Fletcher, Ohio. We purchase
components and subassemblies from suppliers in the United States as well as
overseas. Certain parts and components for our PCs are obtained from a limited
group of suppliers. We also utilize licensed technology and computer software in
the assembly of our PCs. For a discussion of risks associated with these
licenses and suppliers, see Item 1A, Risk Factors.

Our industrial products include storage
equipment such as wire and metal shelving, bins and lockers; light material
handling equipment such as hand carts, forklifts and hand trucks; ladders,
furniture, small office machines and related supplies; and consumable industrial
products such as first aid items, safety items, protective clothing and OSHA
compliance items.

We began to market our ProfitCenter
Software suite of business applications in 2004. ProfitCenter
Software is a web-based application which is delivered as an on-demand
service over the internet. The product helps companies automate and manage their
entire customer life-cycle across multiple sales channels (internet, call
centers, outside salespersons, etc.). We have not recognized any revenues for
this service to date.

Computer and computer-related products
accounted for 92% and industrial products accounted for 8% of our net sales for
each of the three years ended December 31, 2005, 2004 and 2003.

# Sales and Marketing

We market our products to both business
customers and individual consumers. Our business customers include large
businesses (customers with more than 1,000 employees), small and mid-sized
businesses (customers with 20 to 1,000 employees), educational organizations and
government entities. We have invested consistently and aggressively in
developing a proprietary customer and prospect database. We consider our
business customers to be the various individuals who work within an organization
rather than the business location itself.

We have established a three-pronged system of
direct marketing to business customers, consisting of relationship marketers,
catalog mailings and propriety internet web sites, the combination of which is
designed to maximize sales. Our relationship marketers focus their efforts on
our business customers by establishing a personal relationship between such
customers and a Systemax account manager. The goal of the relationship marketing
sales force is to increase the purchasing productivity of current customers and
to actively solicit newly targeted prospects to become customers. With access to
the records we maintain of historical purchasing patterns, our relationship
marketers are prompted with product suggestions to expand customer order values.
In the United States, we also have the ability to provide such customers with
electronic data interchange (EDI) ordering and customized billing
services, customer savings reports and stocking of specialty items specifically
requested by these customers. Our relationship marketers efforts are
supported by frequent catalog mailings and e-mail campaigns designed to generate
inbound telephone sales, and our interactive websites, which allow customers to
purchase products directly over the Internet. We believe that the integration of
these three marketing methods enables us to more thoroughly penetrate our
business and government customer base. Increased internet exposure can lead to
more internet-related sales and can also generate more inbound telephone sales;
just as catalog mailings which feature our websites can result in greater
internet-related sales.

Our growth in net sales continues to be
supported by strong growth in sales to individual consumers, particularly
through e-commerce means. To reach our consumer audience, we use methods such as
website campaigns, banner ads and e-mail campaigns. We are able to monitor and
evaluate the results of our various advertising campaigns to enable us to
execute them in a cost-effective manner. We combine our use of e-commerce
initiatives with catalog mailings, which generate calls to inbound sales
representatives. These sales representatives use our information systems to
fulfill orders and explore additional customer product needs. Sales to consumers
are generally fulfilled from our own stock, requiring us to carry more inventory
than we would for our business customers. We also periodically take advantage of
attractive product pricing by making opportunistic bulk inventory purchases with
the objective of turning them quickly into sales. We have also successfully
increased our sales to individual consumers by using retail outlet stores. We
currently have seven such retail locations in North America, which are located
in or near one of our existing sales and distribution centers, thereby
minimizing our operating costs. We presently plan to add two more retail
locations in 2006.

E-commerce

The
worldwide growth in active internet users has made e-commerce a significant opportunity
for sales growth. In 2005 we had approximately $650 million in internet-related sales, an
increase of $135 million, or 26%, from 2004. E-commerce sales represented 30.7% of total
revenue in 2005, compared to 26.7% in 2004. The increase in our internet sales enables us
to leverage our advertising spending, allowing us to reduce our printed catalog costs
while maintaining customer contact.

We currently operate multiple e-commerce sites,
including www.systemaxpc.com, www.tigerdirect.com,
www.globalcomputer.com, www.misco.co.uk,
www.hcsmisco.fr, www.misco.de and
www.globalindustrial.co, and we continually upgrade the capabilities
and performance of these web sites. Our internet sites feature on-line catalogs of
thousands of products, allowing us to offer a wider variety of computer and industrial
products than our printed catalogs. Our customers have around-the-clock, on-line access to
purchase products and we have the ability to create targeted promotions for our
customers interests. Many of our internet sites also permit customers to purchase
build to order PCs configured to their own specifications.

In
addition to our own e-commerce web sites, we have partnering agreements with several of
the largest internet shopping and search engine providers who feature our products on
their web sites or provide click-throughs from their sites directly to ours.
These arrangements allow us to expand our customer base at an economical cost.

Catalogs

We currently produce a total of 22 full-line
and targeted specialty catalogs in North America and Europe under distinct
titles. Our portfolio of catalogs includes such established brand names as
TigerDirect.com, Global Computer Supplies,
Misco®, HCS Misco, Global Industrial,
ArrowStar and 06. Full-line computer product catalogs
offer products such as PCs, notebooks, peripherals, computer components,
magnetic media, data communication, networking and power protection equipment,
ergonomic accessories, furniture and software. Full-line industrial product
catalogs offer products such as material handling products and industrial
supplies. Specialty catalogs contain more focused product offerings and are
targeted to individuals most likely to purchase from such catalogs. We mail
catalogs to both businesses and consumers. In the case of business mailings, we
mail our catalogs to many individuals at a single business location, providing
us with multiple points-of-entry. Our in-house staff designs all of our
catalogs. In-house catalog production helps reduce overall catalog expense and
shortens catalog production time. This allows us the flexibility to alter our
product offerings and pricing and to refine our catalog formats more quickly.
Our catalogs are printed by third parties under fixed pricing arrangements. The
commonality of certain core pages of our catalogs also allows for economies in
catalog production.

As
noted above, the increase in our internet sales allowed us to reduce the distribution of
our catalogs to 66 million, which was 26% fewer than in the prior year. We mailed
approximately 45 million catalogs in North America, a 12% reduction from last year and
approximately 21 million catalogs, or 44% fewer than 2004, were distributed in Europe.

# Customer Service, Order
Fulfillment and Support

We
generally provide toll-free telephone number access to our customers. Certain of our
domestic call centers are linked to provide telephone backup in the event of a disruption
in phone service. In addition to telephone orders, we also receive orders by mail, fax,
electronic data interchange and on the internet.

A
large number of our products are carried in stock, and orders for such products are
fulfilled on a timely basis directly from our distribution centers, typically on the day
the order is received. We operate out of multiple sales and distribution facilities in
North America and Europe. The locations of our distribution centers enable us to provide
our customers next day or second day delivery. Orders are generally shipped by United
Parcel Service in the United States and by similar national small package delivery
services in Europe as well as by various freight lines and local carriers. The locations
of our distribution centers in Europe have enabled us to market into four additional
countries with limited incremental investment. We maintain relationships with a number of
large distributors in North America and Europe that also deliver products directly to our
customers.

We
provide extensive technical telephone support to our Systemax brand PC customers. We
maintain a database of commonly asked questions for our technical support representatives,
enabling them to respond quickly to similar questions. We conduct regular on-site training
seminars for our sales representatives to help ensure that they are well trained and
informed regarding our latest product offerings.

# Suppliers

We
purchase the majority of our products and components directly from manufacturers and large
wholesale distributors. For the year ended December 31, 2005, no vendor accounted for more
than 10% of our purchases. For the year ended December 31, 2004, Tech Data Corporation
accounted for 12.2% and Ingram Micro Inc. accounted for 10.4% of our purchases. For the
year ended December 31, 2003, Tech Data Corporation accounted for 14.7% and Ingram Micro
Inc. accounted for 10.3% of our purchases. The loss of either of these vendors, or any
other key vendors, could have an adverse effect on us.

Certain
private label products are manufactured by third parties to our specifications. Many of
these private label products have been designed or developed by our in-house research and
development teams. See Research and Development.

# Research and Development

Our
research and development teams design and develop products for our private label
offerings. The individuals responsible for research and development have backgrounds in
engineering and industrial design.

This
in-house capability provides important support to the private label offerings. Products
designed include PCs, servers, furniture, ergonomic monitor support arms, printer and
monitor stands, power supplies and other durable computer related products, storage racks
and shelving systems, various stock and storage carts, work benches, plastic bins and shop
furniture. We own the tooling for many of these products, including plastic bins, computer
accessories, furniture and metal alloy monitor arms. See Research and Development
Costs in Footnote 1 to the Consolidated Financial Statements for further
information.

# Competition and Other
Market Factors

Computers and Computer Related Products

The
North American and European computer markets are highly competitive, with many U.S., Asian
and European companies vying for market share. There are few barriers of entry to the PC
market, with PCs being sold through the direct market channel, mass merchants, over the
internet and by computer and office supply superstores.

Timely
introduction of new products or product features are critical elements to remaining
competitive in the PC market. Other competitive factors include product performance,
quality and reliability, technical support and customer service, marketing and
distribution and price. Some of our competitors have stronger brand-recognition, broader
product lines and greater financial, marketing, manufacturing and technological resources
than us. Additionally, our results could also be adversely affected should we be unable to
maintain our technological and marketing arrangements with other companies, such as
Microsoft®, Intel® and Advanced Micro Devices®.

The
North American computer related products market is highly fragmented and characterized by
multiple channels of distribution including direct marketers, local and national retail
computer stores, computer resellers, mass merchants, computer and office supply
superstores and internet-based resellers. In Europe, our major competitors are
regional or country-specific retail and direct-mail distribution companies and
internet-based resellers.

With
conditions in the market for computer related products remaining highly competitive,
continued reductions in retail prices may adversely affect our revenues and profits.
Additionally, we rely in part upon the introduction of new technologies and products by
other manufacturers in order to sustain long-term sales growth and profitability. There is
no assurance that the rapid rate of such technological advances and product development
will continue.

Industrial Products

The
market for the sale of industrial products in North America is highly fragmented and is
characterized by multiple distribution channels such as retail outlets, small dealerships,
direct mail distribution, internet-based resellers and large warehouse stores. We also
face competition from manufacturers own sales representatives, who sell industrial
equipment directly to customers, and from regional or local distributors. Many high volume
purchasers, however, utilize catalog distributors as their first source of product. In the
industrial products market, customer purchasing decisions are primarily based on price,
product selection, product availability, level of service and convenience. We believe that
direct marketing via catalog, the internet and sales representatives is an effective and
convenient distribution method to reach mid-sized facilities that place many small orders
and require a wide selection of products. In addition, because the industrial products
market is highly fragmented and generally less brand oriented, it is well suited to
private label products.

# Employees

As
of December 31, 2005, we employed a total of 2,850 employees, including 2,730 full-time
and 121 part-time employees, of whom 1,764 were in North America and 1,086 were in Europe.

# Environmental Matters

Under
various national, state and local environmental laws and regulations in North America and
Europe, a current or previous owner or operator (including the lessee) of real property
may become liable for the costs of removal or remediation of hazardous substances at such
real property. Such laws and regulations often impose liability without regard to fault.
We lease most of our facilities. In connection with such leases, we could be held liable
for the costs of removal or remedial actions with respect to hazardous substances.
Although we have not been notified of, and are not otherwise aware of, any material
environmental liability, claim or non-compliance, there can be no assurance that we will
not be required to incur remediation or other costs in connection with environmental
matters in the future.

# Financial Information
About Foreign and Domestic Operations

We conduct our business in North
America (the United States and Canada) and Europe. Approximately 37.5% of our
net sales for the year ended December 31, 2005 were made by subsidiaries located
outside of the United States. For information pertaining to our international
operations, see Note 12, Segment and Related Information, to the
consolidated financial statements included in Item 15 of this Form 10-K. The
following sets forth selected information with respect to our operations in
those two geographic markets (in thousands):

|                              | Europe | North America | Total
|----------------------------- | ------ | ------------- | -----
|                              |        |               |      
|2005 Net sales                |        | $694,637      |      
|Income (loss) from operations |        | $(4,603       | )    
|Identifiable assets           |        | $142,174      |      
|                              |        |               |      
|2004 
Net sales               |        | $695,695      |      
|Income (loss) from operations |        | $(12,376      | )    
|Identifiable assets           |        | $169,912      |      
|                              |        |               |      
|2003 
Net sales               |        | $631,048      |      
|Income (loss) from operations |        | $(5,251       | )    
|Identifiable assets           |        | $140,319      |      

See Item 7, Managements Discussions
and Analysis of Financial Condition and Results of Operations, for further
information with respect to our operations.

# Available Information

We
maintain an internet web site at www.systemax.com. We file reports with the
Securities and Exchange Commission and make available free of charge on or through this
web site our annual reports on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K, including all amendments to those reports. These are available as
soon as is reasonably practicable after they are filed with the SEC. All reports mentioned
above are also available from the SECs web site (www.sec.gov). The
information on our web site is not part of this or any other report we file with, or
furnish to, the SEC.

Our
Board of Directors has adopted the following corporate governance documents with respect
to the Company (the Corporate Governance Documents):

| | 



 | Corporate Ethics Policy for officers, directors and employees
Charter for the Audit Committee of the Board of Directors
Charter for the Compensation Committee of the Board of Directors
Charter for the Nominating/Corporate Governance Committee of the Board of Directors
Corporate Governance Guidelines and Principles
| | --------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In accordance with the corporate
governance rules of the New York Stock Exchange, each of the Corporate
Governance Documents is available on our Company web site
(www.systemax.com) or can be obtained by writing to Systemax Inc.,
Attention: Board of Directors (Corporate Governance), 11 Harbor Park Drive, Port
Washington, NY 11050.

# Item 1A. Risk Factors.

There are a number of factors and variables
described below that may affect our future results of operations and financial
condition. Other factors of which we are currently not aware or that we
currently deem immaterial may also affect our results of operations and
financial position.

# Risks Related to Our
Industry

| |  | Economic conditions have affected and could continue to adversely affect our
revenues and profits.
Both we and our customers are subject to global political, economic and market
conditions, including inflation, interest rates, energy costs, the impact of
natural disasters, military action and the threat of terrorism. Our consolidated
results of operations are directly affected by economic conditions in North
America and Europe. We may experience a decline in sales as a result of poor
economic conditions and the lack of visibility relating to future orders. Our
results of operations depend upon, among other things, our ability to maintain
and increase sales volumes with existing customers, our ability to attract new
customers and the financial condition of our customers. A decline in the economy
that adversely affects our customers, causing them to limit or defer their
spending, would likely adversely affect us as well. We cannot predict with any
certainty whether we will be able to maintain or improve upon historical sales
volumes with existing customers, or whether we will be able to attract new
customers.
In response to economic and market conditions, from time to time we have
undertaken initiatives to reduce our cost structure where appropriate. The
initiatives already implemented as well as any future workforce and facilities
reductions undertaken may not be sufficient to meet the changes in economic and
market conditions and to achieve future profitability. In addition, costs
actually incurred in connection with our restructuring actions may be higher
than our estimates of such costs and/or may not lead to the anticipated cost
savings.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Increased costs associated with corporate governance compliance may impact our
results of operations.
As a public company, we incur significant legal, accounting and other expenses
that we would not incur as a private company. In addition, the Sarbanes-Oxley
Act of 2002, as well as rules subsequently implemented by the Securities and
Exchange Commission and listing requirements subsequently adopted by the New
York Stock Exchange in response to Sarbanes-Oxley, have required changes in
corporate governance practices of public companies. These developments have
already substantially increased our legal compliance, auditing and financial
reporting costs and made them more time consuming. We anticipate that the impact
of Section 404 of the Sarbanes-Oxley Act, if and when it fully applies to us,
will further increase these costs and make some activities more time consuming.
These developments may make it more difficult and more expensive for us to
obtain directors and officers liability insurance and we may be
required to accept reduced coverage or incur substantially higher costs to
obtain coverage, possibly making it more difficult for us to attract and retain
qualified members of our board of directors, particularly to serve on our audit
committee. We presently cannot estimate the timing or magnitude of additional
costs we may incur as a result of the implementation of Section 404 of the
Sarbanes-Oxley Act; however, to the extent these costs are significant, our
general and administrative expenses are likely to increase as a percentage of
revenue and our results of operations will be negatively impacted.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Competitive pressures could harm our revenue and gross margin.
We may not be able to compete effectively with current or future competitors.
The markets for our products and services are intensely competitive and subject
to constant technological change. We expect this competition to further
intensify in the future. Competitive factors include price, availability,
service and support. We compete with a wide variety of other resellers and
retailers, as well as manufacturers. Some of our competitors are larger
companies with greater financial, marketing and product development resources
than ours. In addition, new competitors may enter our markets. This may place us
at a disadvantage in responding to competitors pricing strategies,
technological advances and other initiatives, resulting in our inability to
increase our revenues or maintain our gross margins in the future.
In many cases our products compete directly with those offered by other
manufacturers and distributors. If any of our competitors were to develop
products or services that are more cost-effective or technically superior,
demand for our product offerings could decrease. 
Our margins are also dependent on the mix of products we sell and could be
adversely affected by a continuation of our customers shift to
lower-priced products.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | State and local sales tax collection may affect demand for our products.
Our United States subsidiaries collect and remit sales tax in states in which
the subsidiaries have physical presence or in which we believe nexus exists
which obligates us to collect sales tax. Other states may, from time to time,
claim that we have state-related activities constituting a sufficient nexus to
require such collection. Additionally, many other states seek to impose sales
tax collection obligations on companies that sell goods to customers in their
state, or directly to the state and its political subdivisions, even without a
physical presence. Such efforts by states have increased recently, as states
seek to raise revenues without increasing the tax burden on residents. We rely,
as do other direct mail retailers, on United States Supreme Court decisions
which hold that, without Congressional authority, a state may not enforce a
sales tax collection obligation on a company that has no physical presence in
the state and whose only contacts with the state are through the use of
interstate commerce such as the mailing of catalogs into the state and the
delivery of goods by mail or common carrier. We cannot predict whether the
nature or level of contacts we have with a particular state will be deemed
enough to require us to collect sales tax in that state nor can we be assured
that Congress or individual states will not approve legislation authorizing
states to impose tax collection obligations on all direct mail and/or e-commerce
transactions. A successful assertion by one or more states that we should
collect sales tax on the sale of merchandise could result in substantial tax
liabilities related to past sales and would result in considerable
administrative burdens and costs for us and may reduce demand for our products
from customers in such states when we charge customers for such taxes.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Business disruptions could adversely impact our revenue and financial condition.
It is our policy to insure for certain property and casualty risks consisting
primarily of physical loss to property, business interruptions resulting from
property losses, workers compensation, comprehensive general liability,
and auto liability. Insurance coverage is obtained for catastrophic property and
casualty exposures as well as those risks required to be insured by law or
contract. Although we believe that our insurance coverage is reasonable,
significant events such as acts of war and terrorism, economic conditions,
judicial decisions, legislation, natural disasters and large losses could
materially affect our insurance obligations and future expense.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Changes in financial accounting standards may affect our results of operations.
A change in accounting standards or practices can have a significant effect on
our reported results of operations. New accounting pronouncements and
interpretations of existing accounting rules and practices have occurred and may
occur in the future. Changes to existing rules, such as the adoption of
Statement of Financial Accounting Standard 123R (SFAS 123R),
Share-based Payment, may adversely affect our reported financial
results. SFAS 123R will require that we measure all stock-based compensation
awards using a fair value method and record such expense, which may be
significant, in our results of operations.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Risks Related to Our
Company

| |  | If we are unable to attain effective internal controls or remediate the existing
material weaknesses in  our internal controls over financial reporting, we may not
be able to report our financial results  timely or accurately and our business
could suffer.
We currently have material weaknesses in internal controls over financial
reporting. We previously have had material weaknesses in internal controls over
financial reporting which resulted in our filing restated consolidated financial
statements for the years ended December 31, 2004 and 2003. We are not yet
subject to the internal controls certification and attestation requirements of
Section 404 of the Sarbanes-Oxley Act of 2002 because we are not an
accelerated filer (the market value of the public float of our
shares was less than $75 million at the end of our second fiscal quarters of
2005 and 2006). Based on SEC implementing regulations in effect as of June 30,
2006, we will not be required to satisfy the Section 404 requirements until at least
our annual report for the fiscal year ending December 31, 2007, depending on the
timing and scope of the final SEC rules implementing Section 404 for
non-accelerated filers. 
We have begun the process of documenting and evaluating our systems of internal
control over financial reporting. As a result of the ongoing evaluation of our
internal control over financial reporting we cannot be assured that significant
deficiencies or material weaknesses would not be required to be reported in the
future. We have identified a number of deficiencies in our internal control over
financial reporting. We are working to implement remedial measures which include
enhancements to eliminate these deficiencies. If we are not able to implement
the requirements of Section 404 in a timely manner or with inadequate
compliance, we might be subject to regulatory sanctions and we might suffer a
loss of public confidence in our reported financial information. Any such action
could adversely affect our business and our financial results.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We have not filed our required financial reports on a timely basis, which could affect
the trading of  our stock.
We have been late in the filing of our 2005 quarterly and annual reports
required under the Securities Exchange Act of 1934. We expect that the first two
quarterly reports for 2006 will also be filed late. Failure to file our annual
report on a timely basis could result in the de-listing of the Companys
common stock by the New York Stock Exchange. If we do not file our required
annual and quarterly financial statements in the prescribed time frames we would
also be ineligible to file certain registration statements and could be subject
to SEC enforcement action.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our success is dependent upon the availability of credit and
financing.
We require significant levels of capital in our business to finance accounts
receivable and inventory. We maintain credit facilities in the United States and
in Europe to finance increases in our working capital if available cash is
insufficient. The amount of credit available to us at any point in time may be
adversely affected by the quality or value of the assets collateralizing these
credit lines. In addition, if we are unable to renew or replace these facilities
at maturity our liquidity and capital resources may be adversely affected.
However, we have no reason to believe that we will not be able to renew or
replace our facilities when they reach maturity.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We have substantial international operations and we are exposed to fluctuations in
currency exchange  rates and political uncertainties.
We operate internationally and as a result, we are subject to risks associated
with doing business globally. Risks inherent to operating overseas include:
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 


 | Changes in a country's economic or political conditions
Changes in foreign currency exchange rates
Difficulties with staffing and managing international operations
Unexpected changes in regulatory requirements
| | ------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | For example, we currently have operations located in nine countries outside the
United States, and non-U.S. sales (Europe and Canada) accounted for 37.5% of our
revenue during 2005. To the extent the U.S. dollar strengthens against the Euro
and British pound, our European revenues and profits will be reduced when
translated into U.S. dollars.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Sales to individual consumers exposes us to credit card fraud, which could adversely
affect our  business.
Failure to adequately control fraudulent credit card transactions could increase
our expenses. Increased sales to individual consumers, which are more likely to
be paid for using a credit card, increases our exposure to fraud. We employ
technology solutions to help us detect the fraudulent use of credit card
information. However, if we are unable to detect or control credit card fraud,
we may in the future suffer losses as a result of orders placed with fraudulent
credit card data, which could adversely affect our business.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We are exposed to inventory risks.
A substantial portion of our inventory is subject to risk due to technological
change and changes in market demand for particular products. If we fail to
manage our inventory of older products we may have excess or obsolete inventory.
We may have limited rights to return purchases to certain suppliers and we may
not be able to obtain price protection on these items. The elimination of
purchase return privileges and lack of availability of price protection could
lower our gross margin or result in inventory write-downs.
We also take advantage of attractive product pricing by making opportunistic
bulk inventory purchases; any resulting excess and/or obsolete inventory that we
are not able to re-sell could have an adverse impact on our results of
operations. Any inability to make such bulk inventory purchases may
significantly impact our sales and profitability.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our income tax rate and the value of our deferred tax assets are subject to
change.
Changes in our income tax expense due to changes in the mix of U.S. and non-U.S.
revenues and profitability, changes in tax rates or exposure to additional
income tax liabilities could affect our profitability. We are subject to income
taxes in the United States and various foreign jurisdictions. Our effective tax
rate could be adversely affected by changes in the mix of earnings in countries
with differing statutory tax rates, changes in the valuation of deferred tax
assets and liabilities, changes in tax laws or by material audit assessments.
The carrying value of our deferred tax assets, which are primarily in the United
States and the United Kingdom, is dependent on our ability to generate future
taxable income in those jurisdictions. Our United Kingdom deferred tax assets
currently have a full valuation allowance. In addition, the amount of income
taxes we pay is subject to ongoing audits in various jurisdictions and a
material assessment by a tax authority could affect our profitability.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our reliance on information and communications technology requires significant
expenditures and entails risk.
We rely on a variety of information and telecommunications systems in our
operations. Our success is dependent in large part on the accuracy and proper
use of our information systems, including our telecommunications systems. To
manage our growth, we continually evaluate the adequacy of our existing systems
and procedures. We anticipate that we will regularly need to make capital
expenditures to upgrade and modify our management information systems, including
software and hardware, as we grow and the needs of our business change. The
occurrence of a significant system failure, electrical or telecommunications
outages or our failure to expand or successfully implement new systems could
have a material adverse effect on our results of operations.
Our information systems networks, including our web sites, and applications
could be adversely affected by viruses or worms and may be vulnerable to
malicious acts such as hacking. Although we take preventive measures, these
procedures may not be sufficient to avoid harm to our operations, which could
have an adverse effect on our results of operations.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We are dependent on third-party suppliers.
We purchase a significant portion of our computer products from major
distributors such as Tech Data Corporation and Ingram Micro Inc. and
directly from large manufacturers such as Hewlett Packard and Acer, who may
deliver those products directly to our customers. These relationships enable us
to make available to our customers a wide selection of products without having
to maintain large amounts of inventory. The termination or interruption of our
relationships with any of these suppliers could materially adversely affect our
business.
Our PC products contain electronic components, subassemblies and software that
in some cases are supplied through sole or limited source third-party suppliers,
some of which are located outside of the U.S. Although we do not anticipate any
problems procuring supplies in the near-term, there can never be any assurance
that parts and supplies will be available in a timely manner and at reasonable
prices. Any loss of, or interruption of supply, from key suppliers may require
us to find new suppliers. This could result in production or development delays
while new suppliers are located, which could substantially impair operating
results. If the availability of these or other components used in the
manufacture of our products was to decrease, or if the prices for these
components were to increase significantly, operating costs and expenses could be
adversely affected.
We purchase a number of our products from vendors outside of the United States.
Difficulties encountered by one or several of these suppliers could halt or
disrupt production and delay completion or cause the cancellation of our orders.
Delays or interruptions in the transportation network could result in loss or
delay of timely receipt of product required to fulfill customer orders.
Many product suppliers provide us with co-op advertising support in exchange for
featuring their products in our catalogs and on our internet sites. Certain
suppliers provide us with other incentives such as rebates, reimbursements,
payment discounts, price protection and other similar arrangements. These
incentives are offset against cost of goods sold or selling, general and
administrative expenses, as applicable. The level of co-op advertising support
and other incentives received from suppliers may decline in the future, which
could increase our cost of goods sold or selling, general and administrative
expenses and have an adverse effect on results of operations and cash flows.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We may encounter risks in connection with sales of our web-hosted software
application.
In 2004 we introduced our web-based and hosted, on-demand software suite of
products, marketed as ProfitCenter Software. We have a limited operating history
with this type of product offering and may encounter risks inherent in the
software industry, including but not limited to:
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 






 | Errors or security flaws in our product
Technical difficulties which we can not resolve on a timely or cost-effective basis,
Inability to provide the level of service we commit to
Inability to deliver product upgrades and enhancements
Delays in development
Inability to hire and retain qualified technical personnel
Impact of privacy laws on the use of our product
Exposure to claims of infringement of intellectual property rights
| | --------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Restrictions and covenants in our credit facility may limit our ability to enter
into certain transactions.
Our United States/United Kingdom combined revolving credit agreement contains
covenants restricting or limiting our ability to, among other things:
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 


 | incur additional debt
create or permit liens on assets
make capital expenditures or investments
pay dividends
| | ------- | -------------------------------------------------------------------------------------------------------------

| |  | If
we fail to comply with the covenants and other requirements set forth in the agreement, we
will have to negotiate a waiver agreement with the lenders. Failure to enter into such a
waiver agreement could adversely affect the availability of financing to us which could
materially impact our operations.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other factors that may affect our future
results of operations and financial condition include, but are not limited to,
unanticipated developments in any one or more of the following areas, as well as
other factors which may be detailed from time to time in our Securities and
Exchange Commission filings:

| | 






 | the effect on us of volatility in the price of paper and periodic increases in postage rates
significant changes in the computer products retail industry, especially relating to the distribution
and sale of such products
timely availability of existing and new products
risks involved with e-commerce, including possible loss of business and customer
dissatisfaction if outages or other computer-related problems should preclude customer
access to us
risks associated with delivery of merchandise to customers by utilizing common delivery
services such as the United States Postal Service and United Parcel Service, including
possible strikes and contamination
borrowing costs or availability
pending or threatened litigation and investigations
the availability of key personnel
| | --------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Readers
are cautioned not to place undue reliance on any forward looking statements contained in
this report, which speak only as of the date of this report. We undertake no obligation to
publicly release the result of any revisions to these forward looking statements that may
be made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unexpected events.

# Item 1B. Unresolved
Staff Comments.

None.

# Item 2. Properties.

Our primary facilities, which are leased except where otherwise indicated,
are as follows:

|Facility                                        | Location | Approximate
Square Feet      | Expiration of
Lease
|----------------------------------------------- | -------- | ---------------------------- | -------------------
|Headquarters, Sales and Distribution Center (1) |          | Port Washington, NY          |                    
|Sales and Distribution Center                   |          | Buford, GA                   |                    
|Sales and Distribution Center                   |          | Naperville, IL               |                    
|PC Assembly, Sales and Distribution Center      |          | Fletcher, OH                 |                    
|Sales and Administrative Center                 |          | Miami, FL                    |                    
|Distribution Center                             |          | Las Vegas, NV                |                    
|Sales Center                                    |          | Markham, Ontario             |                    
|Sales and Distribution Center                   |          | Verrieres le Buisson, France |                    
|Sales and Distribution Center                   |          | Frankfurt, Germany           |                    
|Sales and Distribution Center                   |          | Madrid, Spain                |                    
|Sales and Distribution Center                   |          | Milan, Italy                 |                    
|Sales and Distribution Center                   |          | Greenock, Scotland           |                    
|European Headquarters and Sales Center          |          | Wellingborough, England      |                    
|Sales Center                                    |          | Amstelveen, Netherlands      |                    
|Sales and Distribution Center                   |          | Lidkoping, Sweden            |                    

|(1) | For information about this facility, leased from related parties, see
Item 13-Certain Relationships and Related Transactions
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(2) | Terminable upon two months prior written notice.
|--- | ------------------------------------------------

We also lease space for other smaller offices and retail stores in the
United States, Canada and Europe and certain additional facilities leased by the Company
are subleased to others.

For further information regarding our lease obligations, see Note 11 to
the Consolidated Financial Statements.

# Item 3. Legal
Proceedings.

Beginning on May 24, 2005, three shareholder derivative
lawsuits were filed, one in the United States District Court for the Eastern
District of New York and two in the Supreme Court of New York, County of Nassau,
against various officers and directors of the Company and naming the Company as a
nominal defendant in connection with the Company's restatements of its fiscal
year 2003 and 2004 financial statements. The defendants and the Company denied
all of the allegations of wrongdoing contained in the complaints. On May 16,
2006, the parties entered into a stipulation of settlement of this case. By
order dated July 6, 2006 the United States District Court for the Eastern
District of New York approved the settlement and dismissed the federal complaint
with prejudice. Pursuant to the settlement the defendants are released from
liability and the Company will adopt certain corporate governance principles
including the appointment of a lead independent director to, among other things,
assist the Board of Directors in assuring compliance with and implementation of
the Company's corporate governance policies and pay $300,000 of the legal fees
of the plaintiffs. The plaintiffs were directed by the U.S. District Court to
move to dismiss the state court actions.

The governance changes detailed in the settlement
agreement include the following:

| |  | The Company will create the new position of Lead Independent Director, to be elected by
the independent directors. The Lead Independent Director will serve on the Executive
Committee and be responsible for coordinating the activities of the independent directors
including developing the agenda for and moderating sessions of the independent directors,
advising as to an appropriate board meeting schedule, providing input on board and
committee meeting agendas, advising as to the flow of information to the independent
directors, recommending the retention of consultants who report directly to the Board,
assisting the Board and officers in assuring compliance with and implementation of the
Companys corporate governance policies and being principally responsible for
recommending revisions to such policies.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Boards independent directors shall meet separately in executive sessions,
chaired by the Lead Independent Director, at least quarterly.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

| |  | Directors standing for re-election at the next annual meeting shall be required to receive
a majority of the votes cast to retain their positions on the Board.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Nominating & Corporate Governance Committee and the Compensation Committee shall
be comprised exclusively of independent directors by the end of 2006.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Audit Committee shall conduct a re-proposal for the Companys independent
auditors at least once every five years. The Companys independent auditors shall not
provide any consulting services except for tax consulting services. The Audit Committee
shall review the appropriateness and accounting treatment of all related party
transactions, including corporate acquisitions and sales of assets of greater than
$300,000. The Companys Directors of Internal Audit shall report directly to the
Companys Chief Financial Officer and the Audit Committee at least four times per
fiscal year, or more often as necessary.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Other matters include limitations on other boards on which the CEO can serve, committee
authorization to independently engage consultants, minimum numbers of meetings for certain
committees, and maintenance and circulation of Board and committee minutes.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Systemax
is a party to various other pending legal proceedings and disputes arising in the normal
course of business, including those involving commercial, employment, tax and intellectual
property related claims, none of which, in managements opinion, is anticipated to
have a material adverse effect on our consolidated financial statements.

Item 4. Submission of Matters to a Vote of Security Holders.

The 2005 annual meeting of the stockholders of the Company was held on
December 29, 2005. Each of the seven candidates for the position of director (Richard
Leeds, Bruce Leeds, Robert Leeds, Gilbert Fiorentino, Robert D. Rosenthal, Stacy S. Dick
and Ann R. Leven) was re-elected.

The matters voted upon at the meeting and the number of votes cast for,
against or withheld (including abstentions) as to each matter, including nominees for
office, are as follows:

| | 1. | Director election:
| | -- | ------------------

| | Richard Leeds | For: 30,438,954
Withhold Authority: 3,430,024
| | ------------- | ---------------------------------------------

| | Robert Leeds | For: 30,679,223
Withhold Authority: 3,189,755
| | ------------ | ---------------------------------------------

| | Bruce Leeds | For: 30,439,414
Withhold Authority: 3,429,564
| | ----------- | ---------------------------------------------

| | Gilbert Fiorentino | For: 30,684,705
Withhold Authority: 3,184,277
| | ------------------ | ---------------------------------------------

| | Robert D. Rosenthal | For: 31,399,183
Withhold Authority: 2,469,795
| | ------------------- | ---------------------------------------------

| | Stacy S. Dick | For: 31,398,983
Withhold Authority: 2,469,995
| | ------------- | ---------------------------------------------

| | Ann R. Leven | For: 31,541,128
Withhold Authority: 2,237,850
| | ------------ | ---------------------------------------------

| | 2. | Approval of the Restricted Stock Unit Agreement between the Company and Gilbert Fiorentino:
| | -- | -------------------------------------------------------------------------------------------

| | For: 28,026,436
Against: 2,329,012
Abstain: 9,998
| | -------------------------------------------------

| | 3. | Approval of the Company's 2005 Employee Stock Purchase Plan:
| | -- | ------------------------------------------------------------

| | For: 29,801,967
Against: 331,422
Abstain: 232,057
| | -------------------------------------------------

PART II

# Item 5. Market for
Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
EquitySecurities.

Systemax
common stock is traded on the New York Stock Exchange under the symbol SYX.
The following table sets forth the high and low closing sales price of our common stock as
reported on the New York Stock Exchange for the periods indicated.

| | 2005           | High  | Low  
| | -------------- | ----- | -----
| | First quarter  | $7.60 | $5.16
| | Second quarter | 7.68  | 5.58 
| | Third quarter  | 7.40  | 6.51 
| | Fourth quarter | 7.35  | 5.65 

| | 2004           | High  | Low  
| | -------------- | ----- | -----
| | First quarter  | $7.95 | $4.88
| | Second quarter | 6.70  | 5.01 
| | Third quarter  | 6.68  | 5.32 
| | Fourth quarter | 7.34  | 5.65 

On July 31, 2006, the last reported sale price of our
common stock on the New York Stock Exchange was $8.03 per share. As of July 31,
2006, we had 241 shareholders of record.

We
have not paid any dividends since our initial public offering and anticipate
that all of our cash provided by operations in the foreseeable future will be
retained for the development and expansion of our business, and therefore do not
anticipate paying dividends on our common stock in the foreseeable future.

# Item 6. Selected
Financial Data.

The
following selected financial information is qualified by reference to, and should be read
in conjunction with, the Companys Consolidated Financial Statements and the notes
thereto, and Managements Discussion and Analysis of Financial Condition and
Results of Operations contained elsewhere in this report. The selected statement of
operations data for the years ended December 31, 2005, 2004 and 2003 and the selected
balance sheet data as of December 31, 2005 and 2004 are derived from the audited
consolidated financial statements which are included elsewhere in this report. The
selected balance sheet data as of December 31, 2003, 2002 and 2001 and the selected
statement of operations data for the years ended December 31, 2002 and 2001 are derived
from the audited consolidated financial statements of the Company which are not included
in this report.

|                                                                | Years Ended December 31
(In millions, except per common share data
and number of catalog titles) |          |          |          |         
|--------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | -------- | -------- | -------- | --------
|
|Statement of Operations Data:                                   |                                                                                                  |          |          |          |         
|Net sales                                                       | $2,115.5                                                                                         | $1,928.1 | $1,655.7 | $1,551.9 | $1,550.8
|Gross profit                                                    | $307.3                                                                                           | $286.5   | $264.9   | $266.3   | $275.7  
|Selling, general & administrative expenses                      | $268.3                                                                                           | $260.1   | $251.5   | $256.1   | $271.6  
|Restructuring and other charges                                 | $4.2                                                                                             | $7.4     | $1.7     | $17.3    | $2.8    
|Income (loss) from operations                                   | $34.8                                                                                            | $19.0    | $9.2     | $(7.0)   | $2.5    
|Provision (benefit) for income taxes                            | $21.4                                                                                            | $6.4     | $4.4     | $(0.8)   | $(.1)   
|Income (loss) before cumulative effect of change in accounting 
|principle, net of tax                                           | $11.4                                                                                            | $10.2    | $3.2     | $(7.4)   | --      
|Cumulative effect of change in accounting principle, net of tax | --                                                                                               | --       | --       | $(51.0)  | --      
|Net income (loss)                                               | $11.4                                                                                            | $10.2    | $3.2     | $(58.4)  | --      
|Net income (loss) per common share, basic:                     
|Income (loss) before cumulative effect of change in accounting 
|principle, net of tax                                           | $.33                                                                                             | $.30     | $.09     | $(.21)   | --      
|Cumulative effect of change in accounting principle, net of tax | --                                                                                               | --       | --       | $(1.50)  | --      
|Net income (loss) per common share                              | $.33                                                                                             | $.30     | $.09     | $(1.71)  | --      
|Net income (loss) per common share, diluted:                   
|Income (loss) before cumulative effect of change in accounting 
|principle, net of tax                                           | $.31                                                                                             | $.29     | $.09     | $(.21)   | --      
|Cumulative effect of change in accounting principle, net of tax | --                                                                                               | --       | --       | $(1.50)  | --      
|Net income (loss) per common share                              | $.31                                                                                             | $.29     | $.09     | $(1.71)  | --      
|Weighted average common shares outstanding:                    
|Basic                                                           | 34.6                                                                                             | 34.4     | 34.2     | 34.1     | 34.1    
|Diluted                                                         | 36.5                                                                                             | 35.5     | 34.9     | 34.1     | 34.1    
|                                                               
|Selected Operating Data:                                       
|Orders entered                                                  | 6.2                                                                                              | 5.2      | 4.4      | 4.0      | 4.0     
|Number of catalogs distributed                                  | 66                                                                                               | 88       | 97       | 106      | 126     
|Number of catalog titles                                        | 22                                                                                               | 22       | 30       | 37       | 38      
|                                                               
|Balance Sheet Data:                                            
|Working capital                                                 | $169.8                                                                                           | $148.0   | $144.1   | $132.0   | $101.5  
|Total assets                                                    | $504.5                                                                                           | $483.2   | $445.3   | $436.6   | $452.6  
|Short-term debt                                                 | $26.8                                                                                            | $25.0    | $20.8    | $21.2    | $2.8    
|Long-term debt, excluding current portion                       | $8.0                                                                                             | $8.6     | $18.4    | $17.5    | --      
|Shareholders' equity                                            | $232.8                                                                                           | $222.6   | $208.6   | $200.6   | $253.1  

* As previously restated  see Note 2 to the consolidated financial
statements.

Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations.

# Overview

We
are a direct marketer of brand name and private label products. Our operations are
organized in two primary reportable segments  Computer Products and Industrial
Products. Our Computer Products segment markets personal desktop computers, notebook
computers and computer related products in North America and Europe. We assemble our own
PCs and sell them under our own trademarks, which we believe gives us a competitive
advantage. We also sell personal computers manufactured by other leading companies, such
as Hewlett Packard, E-Machines and Sony. Our Industrial Products segment markets material
handling equipment, storage equipment and consumable industrial items in North America. We
offer more than 100,000 products and continuously update our product offerings to address
the needs of our customers, which include large, mid-sized and small businesses,
educational and government entities as well as individual consumers. We reach customers by
multiple channels, utilizing relationship marketers, e-commerce web sites, mailed
catalogues and retail outlet stores. We also participate in the emerging market for
on-demand, web-based software applications through the marketing of our PCS Profitability
Suite of hosted software, which we began during 2004, and in which we have
not yet recognized any revenues and have incurred considerable losses to date. Computers
and computer related products account for 92% of our net sales, and, as a result, we are
dependent on the general demand for information technology products.

The
market for computer products is subject to intense price competition and is characterized
by narrow gross profit margins. The North American industrial products market is highly
fragmented and we compete against multiple distribution channels. Distribution of
information technology and our industrial products is working capital intensive, requiring
us to incur significant costs associated with the warehousing of many products, including
the costs of leasing warehouse space, maintaining inventory and inventory management
systems, and employing personnel to perform the associated tasks. We supplement our
on-hand product availability by maintaining relationships with major distributors and
manufacturers, utilizing a combination of stocking and drop-shipment fulfillment.

The
primary component of our operating expenses historically has been employee related costs,
which includes items such as wages, commissions, bonuses, and employee benefits. We have
made substantial reductions in our workforce and closed or consolidated several facilities
over the past several years. In response to poor economic conditions in the United States,
we implemented a plan in the first quarter of 2004 to streamline our United States
computer business. This plan consolidated duplicative back office and warehouse
operations, which resulted in annual savings of approximately $8 million excluding
severance and other restructuring costs of approximately $3 million, which were recognized
in fiscal 2004. With evidence of a prolonged economic downturn in Europe, we took measures
to align our cost structure with expected potentially lower revenues and decreasing gross
margins, initiating several cost reduction plans there during 2004 and 2005. Actions taken
in 2005 to increase efficiency and profitability in our European operations resulted in
the elimination of approximately 240 positions, and are expected to result in
approximately $6.0 million in annual savings excluding severance and restructuring costs
of approximately $3.7 million, which were recognized in fiscal 2005. Our restructuring
actions and other cost savings measures implemented over the last several years resulted
in reducing our consolidated selling, general and administrative expenses from 16.5% of
net sales in 2002 to 12.7% of net sales in 2005. We will continue to monitor our costs and
evaluate the need for additional actions.

The
discussion of our results of operations and financial condition that follows will provide
information that will assist in understanding our financial statements and information
about how certain accounting principles and estimates affect the consolidated financial
statements. This discussion should be read in conjunction with the consolidated financial
statements included herein.

# Highlights from 2005

| |  | Sales increase of 9.7% to $2.1 billion from $1.9 billion in 2004
| | - | ----------------------------------------------------------------

| |  | Continued growth (26%) in e-commerce sales
| | - | ------------------------------------------

| |  | Decrease of selling, general and administrative expense to 12.7% of net sales
from 13.5% of net sales in 2004
| | - | -------------------------------------------------------------------------------------------------------------

| |  | Increase in income from operations of $15.8 million or 83.2%
| | - | ------------------------------------------------------------

| |  | Successful restructuring of our European operations
| | - | ---------------------------------------------------

| |  | Expansion of our revolving credit agreement to $120 million to cover our United
States and United Kingdom needs
| | - | ---------------------------------------------------------------------------------------------------------------

# Results of Operations

We had net income of $11.4 million for the year ended
December 31, 2005, $10.2 million for the year ended December 31, 2004 and $3.2
million for the year ended December 31, 2003.

The
following table represents our consolidated statement of operations data expressed as a
percentage of net sales for our three most recent fiscal years:

|                                             | 2005   | 2004   | 2003  
|-------------------------------------------- | ------ | ------ | ------
|Net sales                                    | 100.0% | 100.0% | 100.0%
|Gross profit                                 | 14.5%  | 14.9%  | 16.0% 
|Selling, general and administrative expenses | 12.7%  | 13.5%  | 15.2% 
|Restructuring and other charges              | 0.2%   | 0.4%   | 0.1%  
|Goodwill impairment                          |        |        | 0.2%  
|Income from operations                       | 1.6%   | 1.0%   | 0.6%  
|Interest expense                             | 0.1%   | 0.2%   | 0.1%  
|Provision for income taxes                   | 1.0%   | 0.3%   | 0.3%  
|Net income                                   | 0.5%   | 0.5%   | 0.2%  

NET SALES

Net
sales were $2.12 billion for the year ended December 31, 2005, an increase of 9.7% from
$1.93 billion for the year ended December 31, 2004. Net sales in 2005 included
approximately $650 million of internet-related sales, an increase of $135 million, or 26%,
from 2004. North American sales increased to $1.42 billion, a 15.3% increase from last
years $1.23 billion. The increase in North American sales resulted primarily from
growth in both our computer and computer-related products and our industrial products.
Sales in our computer products segment increased 15.3% to $1.25 billion from $1.08 billion
in 2004. This increase was largely a result of our successful internet-based marketing
initiatives directed primarily at our consumer customers as reflected by an increase in
our internet-related sales of approximately $100 million. Although our internet-related
sales are not exclusively made to consumers, we believe that a large majority of these
sales are made to consumers. We continued to see strong growth in our industrial product
sales in 2005. Sales of industrial products increased 15.2% to $174.6 million from $151.6
million last year, representing 12% of the overall increase in North American sales.
European sales, stated in US dollars, decreased 0.2% to $694.6 million for 2005
(representing 32.8% of worldwide sales) compared to $695.7 million (representing 36.1% of
worldwide sales) in the year-ago period. Movements in foreign exchange rates positively
impacted European sales for 2005 by approximately $5.8 million. If currency exchange rates
for 2004 had prevailed in 2005, however, European sales would have decreased 1.0% from the
prior year. Continued weakness in demand for information technology products from business
customers in Europe and the effect of exchange rate movements on product pricing in
certain European markets for products whose cost is U.S. dollar based, resulted in
decreased local currency denominated sales.

Some
European economies began to recover during 2005 and we saw our sales begin to improve in
those markets as measured in local currencies. However, on a combined basis, our European
sales as measured in local currencies declined in 2005. The table below reflects European
sales for the three years as reported in this report at then-current exchange rates and at
constant (2003) exchange rates (in millions):

|                                      | 2005   | 2004   | 2003  
|------------------------------------- | ------ | ------ | ------
|European sales as reported            | $694.6 | $695.7 | $631.0
|European sales at 2003 exchange rates | $616.7 | $626.1 | $631.0

Net
sales were $1.93 billion for the year ended December 31, 2004, an increase of 16.5% from
$1.66 billion for the year ended December 31, 2003. Net sales in 2004 included
approximately $515 million of internet-related sales, an increase of $131 million, or 34%,
from 2003. North American sales increased to $1.23 billion, a 20.3% increase from $1.02
billion in 2003. The increase in North American sales resulted primarily from growth in
both our computer and computer-related products and our industrial products. Sales of
computer and computer-related products increased 21.1% to $1.08 billion from $893 million
in 2003. This increase was largely a result of our successful internet-based marketing
initiatives directed primarily at our consumer customers and reflected by an increase in
our internet-related sales of approximately $109 million. Although our internet-related
sales are not exclusively made to consumers, we believe that a large majority of these
sales are made to consumers. With the United States economy improving after several years
of softness, we also had strong growth in our industrial product sales in 2004. Sales of
industrial products increased 14.9% to $151.6 million from $131.9 million last year,
representing 9% of the overall increase in North American sales. European sales, stated in
US dollars, increased 10.2% to $695.7 million for 2004 (representing 36.1% of worldwide
sales) compared to $631.0 million (representing 38.1% of worldwide sales) in 2003.
Movements in foreign exchange rates positively impacted European sales for 2004 by
approximately $70.0 million. If currency exchange rates for 2003 had prevailed in 2004,
however, European sales would have decreased 1.1% from the prior year. Continued weakness
in demand for information technology products from business customers in Europe and the
effect of exchange rate movements on product pricing in certain European markets for
products whose cost is U.S. dollar based, resulted in decreased local currency denominated
sales.

GROSS PROFIT

Gross
profit, which consists of net sales less product cost, shipping, assembly and certain
distribution center costs, was $307.3 million, or 14.5% of net sales, for the year ended
December 31, 2005, compared to $286.5 million or 14.9% of net sales in 2004 and $264.9
million, or 16.0% of net sales, in 2003. Our gross profit ratio declined in 2005 primarily
as a result of approximately $7 million of increased costs for warehouse staff and
supplies related to increased activity levels from the prior year. These increased costs
were partially offset by favorable changes in product mix. Improvement in our gross profit
ratio in North America was partially offset by a continued decline in our gross profit
ratio in Europe. Our gross profit ratio declined in 2004 from 2003 as a result of
increased pricing pressures on our computer business both in North America and Europe. The
decline was partially offset by improved margins on industrial products.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling,
general and administrative expenses totaled $268.3 million, or 12.7% of net sales, for the
year ended December 31, 2005, $260.1 million, or 13.5% of net sales, for 2004, and $251.5
million, or 15.2% of net sales, in 2003. Selling, general and administrative expenses
increased $8.2 million, or 3.2%, in 2005 from a year ago as a result of $3.8 million of
increased credit card fees related to the increased sales volume, increased legal and
professional fees of $2.0 million related to the restatement of the 2004 and 2003
financial statements and $3.8 million of increased foreign exchange expenses. These
increases were partially offset by increased funding of advertising expenses from vendors.
The increase from 2003 to 2004 of $8.7 million, or 3.4%, resulted from approximately $10
million of increased costs in Europe from the effects of changes in foreign exchange rates
and $4 million of higher credit card processing fees from the higher sales volume in 2004.
The increase was partially offset through restructuring actions taken, reducing our
employee count in the United States and lowering salary expense and related benefit costs
by $6 million in 2004.

RESTRUCTURING AND OTHER CHARGES

During
the year ended December 31, 2005, we incurred $4.2 million of restructuring and other
charges. These costs were primarily related to further restructuring actions undertaken in
Europe during the year as a result of continuing decline in profitability. The costs were
comprised primarily of staff severance expense related to the elimination of approximately
240 positions, which is expected to result in approximately $6.0 million in future annual
savings.

We
incurred $7.4 million of restructuring and other charges in 2004. In the first quarter of
2004 we implemented a plan to streamline the activities of our United States computer
businesses back office and warehouse operations, resulting in the elimination of
approximately 200 jobs. We incurred $3.7 million of restructuring costs associated with
this plan, including $3.2 million for staff severance and benefits for terminated
employees and $0.5 million of non-cash costs for impairment of the carrying value of fixed
assets. We recorded $0.6 million of additional costs in 2004 related to facility exit
costs for our 2003 plan to consolidate United States warehouse locations. We also
implemented several cost reduction plans in Europe during 2004, including a consolidation
of United Kingdom sales offices which resulted in the elimination of 50 jobs. We incurred
$2.5 million of restructuring charges for facility exit costs and workforce reductions in
connection with these actions and $0.5 million of additional costs resulting from
adjustments to our estimates of lease and contract termination costs for our 2002 plan to
consolidate our United Kingdom operations.

In
2003, we had $1.7 million of restructuring and other charges. In the fourth quarter of
2003 we implemented a plan to consolidate the warehousing facilities in our United States
computer business. We recorded $713,000 of costs related to this plan in the fourth
quarter, including $233,000 of non-cash costs for impairment of the carrying value of
fixed assets and $480,000 of charges for other exit costs. During the fourth quarter of
fiscal 2003 we recorded $2.2 million of additional costs, net of reductions, as a charge
to operations for our 2002 United Kingdom consolidation plan. These charges consisted of
$1.6 million of other restructuring activities as we adjusted the original estimates of
lease and contract termination costs and $600,000 of additional non-cash asset
impairments, related to buildings vacated. The restructuring costs incurred in 2003 were
partially offset by a $1.3 million reversal of a previously recorded liability which was
no longer required as a result of our settlement of litigation with a software developer
in August 2003.

During
the second quarter of 2003, we purchased the minority ownership of our Netherlands
subsidiary for approximately $2.6 million, pursuant to the terms of the original purchase
agreement. All of the purchase price was attributable to goodwill and, as a result of an
impairment analysis, was written off in accordance with Statement of Financial Accounting
Standards 142, Goodwill and Other Intangible Assets.

INCOME (LOSS) FROM OPERATIONS

We
had income from operations of $34.8 million in 2005, $19.0 million in 2004 and $9.2
million in 2003. Income from operations for the year ended December 31, 2005 included
restructuring and other charges of $4.2 million. For the year ended December 31, 2004,
restructuring charges of $7.4 million were included in income from operations. Results in
2003 include restructuring and other charges of $1.7 million and a goodwill impairment
charge of $2.6 million.

Income
from operations in North America was $39.4 million for the year ended December 31, 2005,
$31.4 million in 2004 and $14.5 million in 2003. We had losses from operations in Europe
for the year ended December 31, 2005 of $4.6 million, in 2004 of $12.4 million and in 2003
of $5.3 million. Declining gross profit margin and increased selling, general and
administrative expenses resulted in our implementation of the previously described
restructuring activities in Europe.

INTEREST AND OTHER INCOME AND INTEREST EXPENSE

Interest
expense was $2.7 million in 2005, $3.1 million in 2004 and $2.3 million in 2003. Interest
expense decreased in 2005 as a result of decreased short-term borrowings in the United
Kingdom. The increased expense in 2004 resulted from increased short-term borrowings under
our United Kingdom facility. Interest and other income, net was $0.7 million in 2005, $0.6
million in 2004 and $0.8 million in 2003.

INCOME TAXES

Our
income tax provisions were $21.4 million for the year ended December 31, 2005, $6.4
million for 2004 and $4.4 million for 2003. The effective rates were 65.2% in 2005, 38.5%
in 2004 and 57.6% in 2003. The effective tax rate in 2005 increased as a result of our
establishing valuation allowances for approximately $10 million related to carryforward
losses and deferred tax assets in the United Kingdom. These valuation allowances were
recorded as a result of the Companys evaluation of its United Kingdom tax position
in accordance with the provisions of SFAS 109, Accounting for Income Taxes.
The Companys United Kingdom subsidiary has recorded historical losses and has been
affected by restructuring and other charges in recent years. These losses and the loss
incurred in the current year represented evidence for management to estimate that a full
valuation allowance for the net deferred tax asset was necessary under SFAS 109. If the
Company is able to realize any of these deferred tax assets in the future, the provision
for income taxes will be reduced by a release of the corresponding valuation allowance.
The effective rate in 2005 also was unfavorably impacted by increased state and local
taxes and losses in other foreign jurisdictions for which no tax benefit has been
recognized. These increases were partially offset by an income tax benefit of $2.7 million
we recorded in the fourth quarter of 2005 resulting from a favorable decision we received
for a petition we submitted in connection with audit assessments made in 2002 and 2004 in
a foreign jurisdiction. The tax rate in 2004 was higher than the United States statutory
rate of 35% primarily due to losses in foreign jurisdictions for which we recognized no
tax benefit and losses in a foreign jurisdiction where the benefit rate is lower than the
rate in the United States. The effective tax rate in 2003 was adversely affected by the
goodwill impairment write-off, which is not tax deductible. State and local taxes in the
United States did not increase the effective tax rates in 2004 or 2003 as a result of the
utilization of carryforward losses for which valuation allowances were previously
provided.

For
the years ended December 31, 2005, 2004 and 2003, we have not recognized certain foreign
tax credits, certain state deferred tax assets in the United States and certain benefits
on losses in foreign tax jurisdictions due to our inability to carry such credits and
losses back to prior years and our determination that it was more likely than not that we
would not generate sufficient future taxable income to realize these assets. Accordingly,
valuation allowances were recorded against the deferred tax assets associated with those
items. If we are able to realize all or part of these deferred tax assets in future
periods, it will reduce our provision for income taxes by a release of the corresponding
valuation allowance.

NET INCOME

As
a result of the above, net income was $11.4 million, or $.33 per basic share and $.31 per
diluted share, for the year ended December 31, 2005, was $10.2 million, or $.30 per basic
share and $.29 per diluted share, for the year ended December 31, 2004 and was $3.2
million, or $.09 per basic and diluted share, for the year ended December 31, 2003.

# Seasonality

Net
sales have historically been modestly weaker during the second and third quarters as a
result of lower business activity during those months. The following table sets forth the
net sales, gross profit and income (loss) from operations for each of the quarters since
January 1, 2004 (amounts in millions).

|                               | March 31 | June 30 | September 30 | December 31
|------------------------------ | -------- | ------- | ------------ | -----------
|2005                           |          |         |              |            
|Net sales                      | $538     | $506    | $489         | $583       
|Percentage of year's net sales | 25.4%    | 23.9%   | 23.1%        | 27.6%      
|Gross profit                   | $80      | $71     | $70          | $86        
|Income from operations         | $5       | $3      | $8           | $18        
|2004                           |          |         |              |            
|Net sales                      | $485     | $433    | $458         | $552       
|Percentage of year's net sales | 25.1%    | 22.5%   | 23.8%        | 28.6%      
|Gross profit                   | $76      | $68     | $71          | $71        
|Income from operations         | $7       | $2      | $4           | $6         

# Financial Condition,
Liquidity and Capital Resources

Liquidity
is the ability to generate sufficient cash flows to meet obligations and commitments from
operating activities and the ability to obtain appropriate financing and to convert into
cash those assets that are no longer required to meet existing strategic and financing
objectives. Therefore, liquidity cannot be considered separately from capital resources
that consist of current and potentially available funds for use in achieving long-range
business objectives and meeting debt service commitments. Currently, our liquidity needs
arise primarily from working capital requirements and capital expenditures.

Our
working capital was $169.8 million at December 31, 2005, an increase of $21.8 million from
$148.0 million at the end of 2004. This was due principally to a $34.7 million increase in
cash and a $5.3 million increase in accounts receivable offset by a $5.9 million increase
in accounts payable, a $1.8 million increase in short-term borrowings, a $3.2 million
increase in accrued expense and other current liabilities, a $3.3 million decrease in
inventories and a $4.0 million decrease in prepaid expenses and other current assets. The
$3.3 million decrease in our inventories was comprised of a $6.2 million decrease in our
European inventories, which have been lowered in response to continuing weakness in those
markets and declined in dollar terms as a result of changes in exchange rates. This
decrease was partially offset by a $3.0 million increase in industrial products
inventories resulting from increased sourcing of these products from Asia for which we
have to compensate for longer lead times. Our computer products inventories in North
America remained even with the prior years level. Inventory turnover declined
slightly from 10 to 9.3 times, as improvement in Europe resulting from decreased inventory
was not enough to offset higher average inventories during the year in North America. The
increase in accounts receivable occurred in North America, resulting from our increased
sales. This also increased our North American days of sales outstanding from 13 days to 14
days. Accounts receivable in Europe decreased as a result of limited sales growth and
changes in exchange rates. We expect that future accounts receivable and inventory
balances will fluctuate with the mix of our net sales between consumer and business
customers, as well as geographic regions.

We
maintain our cash and cash equivalents primarily in money market funds or their
equivalent. As of December 31, 2005, all of our investments mature in less than three
months. Accordingly, we do not believe that our investments have significant exposure to
interest rate risk.

Our
cash balance increased $34.7 million to $70.9 million during the year ended December 31,
2005. Net cash provided by operating activities was $35.0 million for the year ended
December 31, 2005 and $12.8 million for the year ended December 31, 2004 and net cash used
in operating activities was $6.6 million in 2003. The increase in cash provided by
operating activities in 2005 of $22.2 million resulted from a $10.4 million increase in
net income adjusted by other non-cash items, such as depreciation expense, and a decrease
of $11.9 million in cash used for changes in our working capital accounts. The $19.4
million increase in cash provided by operating activities in 2004 resulted from an
increase in cash provided by net income adjusted by other non-cash items, such as
depreciation expense, and a decrease in cash used for changes in our working capital
accounts. Cash provided by net income and other non-cash items was $27.2 million in 2004,
an increase of $5.5 million, compared to $21.7 million in 2003, and was primarily
attributable to the $7.0 million increase in net income. The cash used for changes in our
working capital accounts, which were discussed in the working capital comments above, was
$14.5 million in 2004 compared to $28.3 million in 2003.

We
used cash of $5.8 million during 2005 and $8.3 million during 2004 in investing
activities, principally for the purchase of property, plant and equipment. Capital
expenditures in both 2005 and 2004 included upgrades and enhancements to our information
and communications systems hardware and facilities costs for the opening of additional
retail outlet stores in North America. During 2003, $9.7 million of cash was used in
investing activities, principally $7.1 million for the purchase of property, plant and
equipment and $2.6 million for the acquisition of the minority interest in our Netherlands
subsidiary. The capital expenditures in 2003 included upgrades and enhancements to our
information and communications systems hardware and facilities costs for the opening of
several retail outlet stores. We anticipate no major capital expenditures in 2006 and will
fund any capital expenditures out of cash from operations and borrowings under our credit
lines.

Net
cash of $4.7 million was provided by financing activities for the year ended December 31,
2005, primarily as a result of an increase in our short-term borrowings in Europe. Net
cash of $6.8 million was used in financing activities in 2004, primarily for the repayment
of short and long-term borrowings. Net cash of $3.8 million was used in financing
activities in 2003, primarily to repay short and long-term obligations.

We
amended our $70 million secured United States revolving credit agreement in October 2005
to increase the amount available to $120 million (which may be increased by up to an
additional $30 million, subject to certain conditions), increase the number of lenders
participating and to provide for borrowings by both our United States and United Kingdom
businesses. The upgraded facility expires in October 2010. Borrowings under the agreement
are subject to borrowing base limitations of up to 85% of eligible accounts receivable and
40% of qualified inventories and are secured by accounts receivable, inventories and
certain other assets. The undrawn availability under the facility may not be less than $15
million until the last day of any month in which the availability net of outstanding
borrowings is at least $70 million. The revolving credit agreement requires that we
maintain a minimum level of availability. If such availability is not maintained, we will
then be required to maintain a fixed charge coverage ratio (as defined). The agreement
contains certain other covenants, including restrictions on capital expenditures and
payments of dividends. We were in compliance with all of the covenants as of December 31,
2005. We were not in compliance with the financial reporting requirements regarding timely
filing of our financial statements under the agreement for periods subsequent to December
31, 2005 for which the lenders have approved a waiver. As of December 31, 2005,
availability under the facility was $97.6 million. There were outstanding advances of
$21.8 million (all in the United Kingdom) and outstanding letters of credit of $14.6
million as of December 31, 2005.

In
connection with the amendment to our revolving credit agreement in October 2005, we
terminated our £15 million multi-currency credit facility with a financial
institution in the United Kingdom, which was available to our United Kingdom subsidiaries.
We also paid off the remaining £4.6 million balance on our United Kingdom term loan,
which we had entered into in 2002 to finance the construction of our United Kingdom
headquarters.

Our
Netherlands subsidiary has a 5 million ($5.9 million at the December 31, 2005
exchange rate, which exchange rate applies to all other Euro denominated amounts below)
credit facility. Borrowings under the facility are secured by the subsidiarys
accounts receivable and are subject to a borrowing base limitation of 85% of the eligible
accounts. At December 31, 2005 there were 3.8 million ($4.4 million) of borrowings
outstanding under this line with interest payable at a rate of 5.0%. The facility expires
in November 2006.

In
April 2002 we entered into a ten year, $8.4 million mortgage loan on our Suwanee, Georgia
distribution facility. The mortgage had monthly principal and interest payments of $62,000
through May 2012, with a final additional principal payment of $6.4 million at maturity in
May 2012. The mortgage loan bore interest at 7.04% and was collateralized by the
underlying land and building. During the first quarter of fiscal 2006, we sold this
facility and repaid the remaining balance on the loan. The facility was replaced by a
larger, leased distribution center in a near-by area.

We
are obligated under non-cancelable operating leases for the rental of most of our
facilities and certain of our equipment which expire at various dates through 2026. We
currently lease our New York facility from an entity owned by Richard Leeds, Robert Leeds
and Bruce Leeds, the Companys three principal shareholders and senior executive
officers. The annual rental totals $612,000 and the lease expires in 2007. We have
sublease agreements for unused space we lease in Compton, California and Wellingborough,
England. In the event a sublessee is unable to fulfill its obligations, we would be
responsible for rent due under the lease. However, we expect the sublessees will fulfill
their obligations under the leases.

Following
is a summary of our contractual obligations for future principal payments on our debt,
minimum rental payments on our non-cancelable operating leases and minimum payments on our
other purchase obligations at December 31, 2005 (in thousands):

|                               | 2006    | 2007     | 2008     | 2009     | 2010   | After
2010
|------------------------------ | ------- | -------- | -------- | -------- | ------ | ----------
|Contractual Obligations:      
|Payments on debt obligations  
|(including interest)           | $26,937 | $    738 | $    739 | $    738 | $  738 | $ 7,322   
|Payments on capital lease     
|obligations                    | 387     | 299      | 126     
|Payments on non-cancelable    
|operating leases, net of      
|subleases                      | 7,597   | 9,200    | 8,819    | 8,443    | 6,348  | 55,160    
|Purchase and other obligations
|                               | 4,074   | 2,869    | 1,733    | 1,191    | 1,169  | 2,836     
|                               |         |          |          |          |        |           
|Total contractual obligations  | $38,995 | $13,106  | $11,417  | $10,372  | $8,255 | $65,318   
|                               |         |          |          |          |        |           

Our
purchase and other obligations include $0.6 million of inventory purchases under
outstanding letters of credit from overseas vendors which expire during 2006. The balance
consists primarily of certain employment agreements and service agreements.

In
addition to the contractual obligations noted above, we had $14.0 million of standby
letters of credit outstanding as of December 31, 2005.

Our
operating results have generated cash flow which, together with borrowings under our debt
agreements, has provided sufficient capital resources to finance working capital and cash
operating requirements, fund capital expenditures, and fund the payment of interest on
outstanding debt. Our primary ongoing cash requirements will be to finance working
capital, fund the payment of principal and interest on indebtedness and fund capital
expenditures. We believe future cash flows from operations and availability of borrowings
under our lines of credit will be sufficient to fund ongoing cash requirements.

We
are party to certain litigation, the outcome of which we believe, based on discussions
with legal counsel, will not have a material adverse effect on our consolidated financial
statements.

# Off-Balance Sheet
Arrangements

We have not created, and are not party to, any special-purpose or off-balance sheet
entities for the purpose of raising capital, incurring debt or operating our business. We
do not have any arrangements or relationships with entities that are not consolidated into
the financial statements that are reasonably likely to materially affect our liquidity or
the availability of capital resources.

# Critical Accounting
Policies and Estimates

Our
significant accounting policies are described in Note 1 to the consolidated financial
statements. The policies below have been identified as critical to our business operations
and understanding the results of operations. Certain accounting policies require the
application of significant judgment by management in selecting the appropriate assumptions
for calculating financial estimates. By their nature, these judgments are subject to an
inherent degree of uncertainty, and as a result, actual results could differ from those
estimates. These judgments are based on historical experience, observation of
trends in the industry, information provided by customers and information available from
other outside sources, as appropriate. Management believes that full consideration has
been given to all relevant circumstances that we may be subject to, and the consolidated
financial statements of the Company accurately reflect managements best estimate of
the consolidated results of operations, financial position and cash flows of the Company
for the years presented. Actual results may differ from these estimates under different
conditions or assumptions.

Revenue Recognition. We recognize product sales when persuasive
evidence of an order arrangement exists, delivery has occurred, the sales price is fixed
or determinable and collectibility is reasonably assured. Generally, these criteria are
met at the time of receipt by customers when title and risk of loss both are transferred.
Sales are shown net of returns and allowances, rebates and sales incentives. Reserves for
estimated returns and allowances are provided when sales are recorded, based on historical
experience and current trends.

Accounts Receivable and Allowance for Doubtful Accounts. We record
an allowance for doubtful accounts to reflect our estimate of the collectibility of our
trade accounts receivable. We evaluate the collectibility of accounts receivable based on
a combination of factors, including an analysis of the age of customer accounts and our
historical experience with accounts receivable write-offs. The analysis also includes the
financial condition of a specific customer or industry, and general economic conditions.
In circumstances where we are aware of customer charge-backs or a specific customers
inability to meet its financial obligations, a specific reserve for bad debts applicable
to amounts due to reduce the net recognized receivable to the amount management reasonably
believes will be collected is recorded. In those situations with ongoing discussions, the
amount of bad debt recognized is based on the status of the discussions. While bad debt
allowances have been within expectations and the provisions established, there can be no
guarantee that we will continue to experience the same allowance rate we have in the past.

Inventories. We value our inventories at the lower of cost or
market, cost being determined on the first-in, first-out method. Reserves for
excess and obsolete or unmarketable merchandise are provided based on historical
experience, assumptions about future product demand and market conditions. If
market conditions are less favorable than projected or if technological
developments result in accelerated obsolescence, additional write-downs may be
required. While obsolescence and resultant markdowns have been within
expectations, there can be no guarantee that we will continue to experience the
same level of markdowns we have in the past.

Long-lived Assets. Management exercises judgment in evaluating our
long-lived assets for impairment. We believe we will generate sufficient undiscounted cash
flow to more than recover the investments made in property, plant and equipment. Our
estimates of future cash flows involve assumptions concerning future operating performance
and economic conditions. While we believe that our estimates of future cash flows are
reasonable, different assumptions regarding such cash flows could materially affect our
evaluations

Income Taxes. We are subject to taxation from federal, state and
foreign jurisdictions and the determination of our tax provision is complex and requires
significant management judgment. Management judgment is also applied in the determination
of deferred tax assets and liabilities and any valuation allowances that might be required
in connection with our ability to realize deferred tax assets.

Since we conduct operations internationally, our effective tax rate has
and will continue to depend upon the geographic distribution of our pre-tax income or
losses among locations with varying tax rates and rules. As the geographic mix of our
pre-tax results among various tax jurisdictions changes, the effective tax rate may vary
from period to period. We are also subject to periodic examination from domestic and
foreign tax authorities regarding the amount of taxes due. These examinations include
questions regarding the timing and amount of deductions and the allocation of income among
various tax jurisdictions. We have established, and periodically reevaluate, an estimated
income tax reserve on our consolidated balance sheet to provide for the possibility of
adverse outcomes in income tax proceedings. While management believes that we have
identified all reasonably identifiable exposures and that the reserve we have established
for identifiable exposures is appropriate under the circumstances, it is possible that
additional exposures exist and that exposures may be settled at amounts different than the
amounts reserved.

We account for income taxes in accordance with Statement of Financial
Accounting Standards 109, Accounting for Income Taxes, which requires that
deferred tax assets and liabilities be recognized for the effect of temporary differences
between the book and tax bases of recorded assets and liabilities. The realization of net
deferred tax assets is dependent upon our ability to generate sufficient future taxable
income. Where it is more likely than not that some portion or all of the deferred tax
asset will not be realized, we have provided a valuation allowance. If the realization of
those deferred tax assets in the future is considered more likely than not, an adjustment
to the deferred tax assets would increase net income in the period such determination is
made. In the event that actual results differ from these estimates or we adjust these
estimates in future periods, an adjustment to the valuation allowance may be required,
which could materially affect our consolidated financial position and results of
operations.

Restructuring charges. We have taken restructuring actions, and may
commence further restructuring activities which result in recognition of restructuring
charges. These actions require management to make judgments and utilize significant
estimates regarding the nature, timing and amounts of costs associated with the activity.
When we incur a liability related to a restructuring action, we estimate and record all
appropriate expenses, including expenses for severance and other employee separation
costs, facility consolidation costs (including estimates of sublease income), lease
cancellations, asset impairments and any other exit costs. Should the actual amounts
differ from our estimates, the amount of the restructuring charges could be impacted,
which could materially affect our consolidated financial position and results of
operations.

# Recent Accounting
Developments

In
November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 151, Inventory Costs,
an amendment of ARB No. 43, Chapter 4. SFAS 151 clarifies that abnormal inventory
costs such as costs of idle facilities, excess freight and handling costs, and wasted
materials (spoilage) are required to be recognized as current period charges. SFAS 151
also requires that the allocation of fixed production overheads to the costs of conversion
be based on the normal capacity of the production facility. The provisions of SFAS 151
will be effective for fiscal years beginning after June 15, 2005 and is required to be
adopted by the Company in the first quarter of fiscal 2006. The Company does not expect
that the adoption will have a material impact on the Companys consolidated financial
position or results of operations.

In
December 2004, the FASB issued SFAS 123 (revised 2004) (SFAS 123R), Share-Based
Payment. SFAS 123R replaced SFAS 123, Accounting for Stock-Based
Compensation, and superseded Accounting Principles Board Opinion 25,
Accounting for Stock Issued to Employees. SFAS 123R requires the recognition
of compensation cost relating to share-based payment transactions, including employee
stock options, in financial statements. That cost will be measured based on the fair value
of the equity or liability instruments issued. SFAS 123R provides alternative methods of
adoption which include prospective application and a modified retroactive application.
SFAS 123(R) also requires the benefits of tax deductions in excess of recognized
compensation expense to be reported as a financing cash flow, rather than as an operating
cash flow as prescribed under current accounting rules. The Company is required to adopt
the provisions of SFAS 123R effective as of the beginning of its first quarter in 2006.
The Company is evaluating the available alternatives of adoption of SFAS 123R. The Company
currently accounts for share-based payments using APB Opinion 25s intrinsic value
method and recognizes no compensation expense for employee stock options as permitted
under SFAS 123. See Stock-based Compensation, above, for the effect on
reported net income if we had accounted for our stock-based compensation plans using the
fair value recognition provisions of SFAS 123. The actual effects of adopting SFAS 123R
will depend on numerous factors, including the amounts of share-based payments granted in
the future, the valuation model we use and estimated forfeiture rates. The Company has not
made any modifications to its stock-based compensation plans as a result of the issuance
of SFAS 123R. The Company believes the adoption of SFAS 123R will not have a material
effect on its consolidated financial statements.

In
March 2005, the Securities and Exchange Commission (SEC) released SEC Staff
Accounting Bulletin (SAB) 107, Share-Based Payment. SAB 107
provides the SEC staffs position regarding the application of SFAS No. 123R and
certain SEC rules and regulations, and also provides the staffs views regarding the
valuation of share-based payments for public companies. The Company will adopt SAB 107 in
connection with its adoption of SFAS 123R. The Company is currently reviewing the effects,
if any, that the application of SAB 107 will have on the Companys consolidated
financial position and results of operations.

In
May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections (SFAS 154) which replaces Accounting Principles Board
Opinion No. 20 Accounting Changes and SFAS No. 3, Reporting Accounting
Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28. SFAS 154
changes the requirements for the accounting for and reporting of a change in accounting
principle. Previously, most voluntary changes in accounting principles required
recognition of a cumulative effect adjustment within net income of the period of the
change. SFAS 154 requires retrospective application to prior periods financial
statements, unless it is impracticable to determine either the period-specific effects or
the cumulative effect of the change. SFAS 154 also applies to changes required by an
accounting pronouncement in the rare case that the pronouncement does not contain specific
transition provisions. This statement also carries forward the guidance from APB
No. 20 regarding the correction of an error and changes in accounting estimates. SFAS
154 is effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The Company does not believe the adoption of SFAS 154
will have a material effect on its consolidated financial position, results of operations
or cash flows.

In
June 2005, the FASB issued FSP FAS 143-1, Accounting for Electronic Equipment Waste
Obligations (FSP FAS 143-1) to address the accounting for obligations
associated with a European Unions Directive on Waste Electrical and Electronic
Equipment (the Directive). The Directive, enacted in 2003, requires EU-member
countries to adopt legislation to regulate the collection, treatment, recovery and
environmentally sound disposal of electrical and electronic waste equipment. The Directive
distinguishes between products put on the market after August 13, 2005 (new
waste) and products put on the market on or before that date (historical
waste). FSP FAS 143-1 addresses the accounting for historical waste only and will be
applied the later of the first reporting period ending after June 8, 2005 or the date of
the adoption of the law by the applicable EU-member country. The adoption of FSP FAS 143-1
did not have a material impact on the Companys consolidated financial position or
results of operations for the EU-member countries which have adopted the law.

In
October 2005, the FASB issued FSP FAS 13-1, Accounting for Rental Costs Incurred
During a Construction Period, (FSP FAS 13-1) which requires the
expensing of rental costs associated with ground or building operating leases that are
incurred during the construction period. FSP FAS 13-1 is effective in the first reporting
period beginning after December 15, 2005. The Company does not expect that this
pronouncement will have a material effect on its financial position or results of
operations.

# Item 7A. Quantitative
and Qualitative Disclosure About Market Risk.

We
are exposed to market risks, which include changes in U.S. and international interest
rates as well as changes in currency exchange rates (principally Pounds Sterling, Euros
and Canadian Dollars) as measured against the U.S. Dollar and each other.

The
translation of the financial statements of our operations located outside of the United
States is impacted by movements in foreign currency exchange rates. Changes in currency
exchange rates as measured against the U.S. dollar may positively or negatively affect
sales, gross margins, operating expenses and retained earnings as expressed in U.S.
dollars. Sales would have fluctuated by approximately $72 million and income from
operations would have fluctuated by approximately $0.2 million if average foreign exchange
rates changed by 10% in 2005. We have limited involvement with derivative financial
instruments and do not use them for trading purposes. We may enter into foreign currency
options or forward exchange contracts aimed at limiting in part the impact of certain
currency fluctuations, but as of December 31, 2005 we had no outstanding forward exchange
contracts.

Our
exposure to market risk for changes in interest rates relates primarily to our variable
rate debt. Our variable rate debt consists of short-term borrowings under our credit
facilities. As of December 31, 2005, the balance outstanding on our variable rate debt was
approximately $26.2 million. A hypothetical change in average interest rates of one
percentage point is not expected to have a material effect on our financial position,
results of operations or cash flows over the next fiscal year.

# Item 8. Financial
Statements and Supplementary Data.

The
information required by Item 8 of Part II is incorporated herein by reference to the
Consolidated Financial Statements filed with this report; see Item 15 of Part IV.

Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.

None.

# Item 9A. Controls and
Procedures.

Disclosure Controls and
Procedures

The
Company establishes and maintains disclosure controls and procedures that are designed to
provide reasonable assurance that information required to be disclosed by the Company in
the reports it files under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and
forms. Disclosure controls are also designed to provide reasonable assurance that such
information is accumulated and reported to management, including the Chief Executive
Officer and the Chief Financial Officer, to allow timely decisions regarding required
disclosure.

Our
management, including our CEO and CFO, does not expect that our disclosure controls and
procedures will prevent all errors and all fraud. A control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in control
systems, misstatements due to error or fraud may occur and not be detected. These
limitations include the circumstances that breakdowns can occur as a result of error or
mistake, the exercise of judgment by individuals or that controls can be circumvented by
acts of misconduct. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

As
of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including the Chief Executive
Officer and the Chief Financial Officer, of the effectiveness of the design and the
operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15
and 15d-15 of the Securities Exchange Act of 1934.

Based on their evaluation, as of December 31,
2005, the Chief Executive Officer and the Chief Financial Officer, have
concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)
were not effective to ensure that the information required to be disclosed by us
in this annual report on Form 10-K was recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms.
This conclusion is based on our identification of three material weaknesses in
our internal controls over financial reporting as of December 31, 2005. The
material weaknesses are:

| |  | We do not maintain sufficiently and adequately trained personnel resources at certain
locations outside of the Companys corporate headquarters with the requisite
knowledge and financial reporting expertise to execute a timely financial closing process,
address non-routine accounting issues that arise in the normal course of the
Companys operations and ensure the timely and accurate preparation of interim and
annual financial statements.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We have insufficient processes to effectively prepare timely account reconciliations and
analyses with thorough documentation and substantiation of certain general ledger accounts
resulting in a number of audit adjustments required to be recorded after being identified
by our independent registered public accountants.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We have inadequately designed processes to properly estimate certain liability
accounts related to inventory purchases at our Tiger Direct subsidiary. The
processes lack sufficient internal controls to accurately record, reconcile and
review such transactions.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our independent registered public accounting firm has issued a material
weakness letter to the Company which addresses these material weaknesses. These matters
have been discussed among management, the audit committee and our independent registered
public accountants. We are in the process of addressing the remediation of these issues.

As
a result of this determination and as part of the work undertaken in connection with this
report, we have applied compensating procedures and processes as necessary to ensure the
reliability of our financial reporting. Accordingly, management believes, based on its
knowledge, that (i) this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which they were made, not misleading with respect to the period
covered by this report and (ii) the financial statements, and other financial information
included in this report, fairly reflect the form and substance of transactions and fairly
present in all material respects our financial condition, results of operations and cash
flows as at, and for, the periods presented in this report.

Material Weaknesses
Reported for the Years Ended December 31, 2004 and December 31, 2003

As
reported in our amended Annual Reports on Form 10-K/A for the years ended December 31,
2004 and December 31, 2003, management was unable to conclude that the Companys
internal controls over financial reporting were then effective, as a result of material
weaknesses resulting from the ineffectiveness of internal controls over inventory in our
United Kingdom and Tiger Direct subsidiaries. We are continuing to evaluate and test the
steps taken to improve the effectiveness of our internal controls over financial reporting
and we implemented the following changes to further address our material weaknesses:

During
2005, we implemented a number of remediation measures to address the material weakness
related to inventory at our United Kingdom subsidiary. These measures included:

| |  | Modification of our internal procedures to more accurately identify the types of
inventory transactions processed
| | - | -----------------------------------------------------------------------------------------------------------------

| |  | Implementation of additional system reporting to provide more details to enhance
the inventory reconciliation process
| | - | ---------------------------------------------------------------------------------------------------------------------

| |  | Addition of management-level reviews to support the reconciliation process
| | - | --------------------------------------------------------------------------

| |  | Implementation of additional review procedures to test cut-off accuracy.
| | - | ------------------------------------------------------------------------

During
2005, we also implemented remediation measures to address the material weakness related to
inventory at our Tiger Direct subsidiary. These measures included:

| |  | Modification of our internal information technology control procedures to help ensure the
accurate compilation of inventory at the end of each financial period
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Conducting of more frequent physical inventory counts (at least once per quarter) during
the last three quarters of fiscal 2005
| | - | -------------------------------------------------------------------------------------------------------------------------------

| |  | Preparation and analysis of detailed monthly inventory reconciliations, which is supported
by additional management review
| | - | --------------------------------------------------------------------------------------------------------------------------

| |  | Implementation of additional review procedures to test cut-off accuracy
| | - | -----------------------------------------------------------------------

| |  | Hiring of a new person to fill a senior managerial position overseeing the
subsidiarys accounting staff and also increasing the subsidiarys accounting
staff.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

While
progress is being made to remediate the material weaknesses identified, we are continuing
to monitor these processes to further improve our procedures as may be necessary.

Our
former independent registered public accounting firm, Deloitte & Touche LLP, issued a
material weakness letter to the Company which addressed both the weaknesses at the
Companys United Kingdom subsidiary and inadequate oversight and control activities
on the part of senior management of the Company over its remote subsidiaries. These
matters were discussed in detail among management, the audit committee and our former
independent registered public accountants.

Section 404 of the
Sarbanes-Oxley Act

We
are not yet subject to the internal controls certification and attestation requirements of
Section 404 of the Sarbanes-Oxley Act of 2002 because we are not an accelerated filer.
Based on SEC implementing regulations in effect as of June 30, 2006, at the end of fiscal
year 2007 Section 404 of the Sarbanes-Oxley Act of 2002 will require that management
provide an assessment of the effectiveness of the Companys internal control over
financial reporting and that the Companys independent registered public accounting
firm will be required to audit that assessment.

We
are continuing to work to achieve compliance with the requirements of Section 404. We have
dedicated substantial time and resources to documentation and review of our procedures,
including the hiring of additional internal audit staff in both the United States and in
Europe. We will also evaluate the need to engage outside consultants to assist us. We have
not completed this process or its assessment, due to the complexities of our decentralized
structure and the number of accounting systems in use. We have not completed our
assessment of our internal control over financial reporting. In addition to the two
material weaknesses as of December 31, 2005 discussed under the caption Disclosure
Controls and Procedures, we have identified a number of internal control significant
deficiencies, including controls in the information technology area, that may affect the
timeliness and accuracy of recording transactions and which, individually or in the
aggregate, could become material weaknesses in future periods if not remediated. While the
Company does not believe that the following are currently material weaknesses, they are
designated as significant deficiencies as of December 31, 2005:

| |  | The disparate operating and financial information systems used at certain of our
locations have inherent limitations resulting in a control environment heavily
reliant upon manual review procedures and adjustments. These deficiencies
include inadequate or lack of systems interfaces and the preparation of numerous
manual journal entries.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Internal control deficiencies in the information technology area include lack of
adequate general controls. We lack program change and project management
controls, have inadequate segregation of duties between information technology
department development and production functions, need formal information
technology strategic planning, need formal documentation of information security
procedures, need security around user rights to certain application systems and
need to implement formal help desk procedures.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
have a significant amount of work to do to remediate the items we have identified. In the
course of completing our evaluation and testing we may identify further deficiencies and
weaknesses that will need to be addressed and will require remediation. We may not be able
to correct all such internal control deficiencies in a timely manner and may find that a
material weakness or weaknesses continues to exist. As a result, management may not be
able to issue an unqualified opinion on the effectiveness of the Companys internal
control over financial reporting as of December 31, 2007, if required.

Changes in Internal
Controls Over Financial Reporting

Our
management is not aware of any changes in internal control over financial reporting that
occurred during the quarter ended December 31, 2005 that materially affected, or were
reasonably likely to materially affect, our internal control over financial reporting.

# Item 9B. Other
Information.

None.

# PART III

# Item 10. Directors and
Executive Officers of the Registrant.

Directors

Set
forth below is biographical information for each Director of the Company, as of
May 31, 2006.

Richard
Leeds, age 46, has served as Chairman and Chief Executive Officer of the Company since
April 1995. From April 1995 to February 1996 Mr. Leeds also served as Chief Financial
Officer of the Company. Mr. Leeds joined the Company in 1982 and since 1984 has served in
various executive capacities. Mr. Leeds graduated from New York University in 1982 with a
B.S. in Finance. Richard Leeds is the brother of Bruce and Robert Leeds.

Bruce
Leeds, age 51, has served as Vice Chairman since April 1995. Mr. Leeds served as President
of International Operations from 1990 until March 2005. Mr. Leeds joined the Company after
graduating from Tufts University in 1977 with a B.A. in Economics and since 1982 has
served in various executive capacities.

Robert
Leeds, age 51, has served as Vice Chairman since April 1995. Mr. Leeds served as President
of Domestic Operations from April 1995 until March 2005. Since 1982 Mr. Leeds has served
in various executive capacities with the Company. Mr. Leeds graduated from Tufts
University in 1977 with a B.S. in Computer Applications Engineering and joined the Company
in the same year.

Gilbert
Fiorentino, age 46, has served as a Director of the Company since May 25, 2004. Mr.
Fiorentino is President and Chief Executive Officer of Tiger Direct Inc., a company he
founded in 1988. Tiger Direct became a wholly owned subsidiary of the Company in 1996. Mr.
Fiorentino graduated with honors in 1981 from the University of Miami with a BS degree in
Economics and graduated in 1984 from the University of Miami Law School. He was an Adjunct
Professor of Business Law at the University of Miami from 1985 through 1994.

Robert
D. Rosenthal, age 57, has served as a Director of the Company since July 1995. Mr.
Rosenthal is Chairman and Chief Executive Officer of First Long Island Investors, Inc.,
which he co-founded in 1983. From July 1971 until September 1983, Mr. Rosenthal held
increasingly responsible positions at Entenmanns Inc., eventually becoming Executive
Vice President and Chief Operating Officer. Mr. Rosenthal is a 1971 cum laude
graduate of Boston University and a 1974 graduate of Hofstra University Law School.

Stacy S. Dick, age 49, has served as a Director of the
Company since November 1995. Mr. Dick became a Managing Director of Rothschild
Inc. in January 2004 and has served as an executive officer of other entities
controlled by Rothschild family interests since March 2001. From August 1998 to
March 2001 Mr. Dick was a principal of Evercore Partners, an investment banking
firm. From 1996 until 1998, Mr. Dick was Executive Vice President of Tenneco
Inc. Mr. Dick graduated from Harvard University with an AB degree magna cum
laude in 1978 and a Ph.D. in Business Economics in 1983. He has served as an
adjunct professor of finance at the Stern School of Business (NYU) since
2004.

Ann
R. Leven, age 65, has served as a Director of the Company since May 2001. Ms. Leven served
as Treasurer and Chief Fiscal Officer of the National Gallery of Art in Washington D.C.
from December 1990 to October 1999. From August 1984 to December 1990 she was Chief
Financial Officer of the Smithsonian Institution. Ms. Leven has been a Director of the
Delaware Investments Family of Mutual Funds since September 1989. From December 1999
to May 2003 Ms. Leven was a Director of Recoton Corporation. From 1975 to 1993 Ms. Leven
taught business strategy and administration at the Columbia University Graduate School of
Business. She received an M.B.A. degree from Harvard University in 1964.

Each
director serves for a term of one year and until his or her successor has been duly
elected and qualified.

Executive Officers

Set
forth below is biographical information for each executive officer of the Company who is
not also a Director, as of May 31, 2006.

Steven
M. Goldschein, age 60, joined the Company in December 1997 and was appointed Senior Vice
President and Chief Financial Officer of the Company in January 1998. From 1982 through
December 1997 Mr. Goldschein was Vice President-Administration and Chief Financial Officer
of Lambda Electronics Inc. From 1980 through 1982 he was that companys Corporate
Controller. Mr. Goldschein is a 1968 graduate of Michigan State University and a certified
public accountant in New York.

Michael
J. Speiller, age 52, has been Vice President and Controller since October 1998. From
December 1997 through September 1998 Mr. Speiller was Vice President and Chief Financial
Officer of Lambda Electronics Inc. From 1982 through 1997 he was Vice President and
Controller of Lambda Electronics Inc. From 1980 through 1982 he was a divisional
controller for that company. Prior to that he was an auditor with the accounting firm of
Ernst & Young. Mr. Speiller graduated in 1976 with a B.S. degree in Public Accounting
from the State University of New York at Albany and is a certified public accountant in
New York.

Curt
S. Rush, age 52, has been General Counsel to the Company since September 1996
and was appointed Secretary of the Company in October 1996. Prior to joining the
Company, Mr. Rush was employed from 1993 to 1996 as Corporate Counsel to Globe
Communications Corp. and from 1990 to 1993 as Corporate Counsel to the Image
Bank, Inc. Prior to that he was a corporate attorney with the law firms of
Shereff, Friedman, Hoffman & Goodman and Schnader, Harrison, Segal &
Lewis in their New York offices. Mr. Rush graduated from Hunter College in 1981
with a B.A. degree in Philosophy and graduated with honors from Brooklyn Law
School in 1984, where he was Second Circuit Review Editor of the Law Review. He
was admitted to the Bar of the State of New York in 1985.

Audit Committee

The
members of the Audit Committee are Stacy S. Dick, Robert D. Rosenthal and Ann R. Leven.
Mr. Dick is the current Chairman of the Committee. All of the members of the Audit
Committee are non-management directors (i.e. they are neither officers nor employees of
the Company). In the judgment of the Board of Directors, each of the members of the Audit
Committee meets the standards for independence required by the rules of the Securities and
Exchange Commission and New York Stock Exchange. In addition, the Board of Directors has
determined that each of the members of the Audit Committee is an audit committee
financial expert as defined by regulations of the Securities and Exchange
Commission.

# Item 11. Executive
Compensation.

The
following table sets forth the compensation earned by the Chief Executive
Officer (CEO) and the four most highly compensated executive
officers other than the CEO (the "Named Executive Officers") for the years ended
December 31, 2003, 2004 and 2005.

| | Summary Compensation Table
| | --------------------------

|                                     |      | Annual Compensation (1) | Long-term
Compensation
|------------------------------------ | ---- | ----------------------- | ----------------------
|
|Richard Leeds                        | 2005 | 401,092                 | 500,000               
|Chairman and Chief Executive Officer | 2004 | 403,348                 | 250,000               
|                                     | 2003 | 378,101                 | 75,000                
|                                    
|Bruce Leeds                          | 2005 | 389,881                 | 250,000               
|Vice Chairman and President of       | 2004 | 403,348                 | --                    
|International Operations             | 2003 | 378,101                 | 75,000                
|                                    
|Robert Leeds                         | 2005 | 389,881                 | 250,000               
|Vice Chairman and President of       | 2004 | 403,348                 | --                    
|Domestic Operations                  | 2003 | 378,101                 | 75,000                
|                                    
|Gilbert Fiorentino                   | 2005 | 446,808                 | 500,000               
|President and CEO of                 | 2004 | 400,000                 | 250,000               
|Tiger Direct Inc. (2)               
|                                    
|Steven M. Goldschein                 | 2005 | 403,248                 | 75,000                
|Senior Vice President and Chief      | 2004 | 396,193                 | 40,000                
|Financial Officer                    | 2003 | 371,157                 | 30,000                

|(1) | The Company provides automobile and gasoline allowances, insurance coverage and
matching 401(k) contributions, where applicable, which in the aggregate do not
exceed the lesser of $50,000 or 10 percent of each individuals annual
salary and bonus.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Mr. Fiorentino was not considered an executive officer of the Company until
2004.
|--- | ---------------------------------------------------------------------------------

# Option Grants in Last
Fiscal Year

No options were granted to any of the Named
Executive Officers.

# Aggregated Option
Exercises in Last Fiscal Year and
Fiscal Year-End Option
Values

The following table sets forth certain information regarding
option exercises and year-end option values for the Named Executive
Officers:

|Name                  | Shares
Acquired
on
Exercise(#) | Value
Realized($) | Number of
Securities
Underlying
Unexercised
Options at
December 31, 2005
(#) Exercisable/
Unexercisable | Value of
Unexercised
In-the-Money
Options at
December 31, 2005
Exercisable/
Unexercisable
|--------------------- | ------------------------------ | ----------------- | ------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------
|
|Richard Leeds         | -                              | -                 | --                                                                                                      | --                                                                                       
|Bruce Leeds           | -                              | -                 | -                                                                                                       | -                                                                                        
|Robert Leeds          | -                              | -                 | -                                                                                                       | -                                                                                        
|Gilbert Fiorentino    | -                              | -                 | 348,334/339,999                                                                                         | $1,133,000/$1,128,000                                                                    
|Steven  M. Goldschein | -                              | -                 | 141,667/13,333                                                                                          | $400,000/$60,000                                                                         

Equity Compensation Plans

The
following table sets forth information as of December 31, 2005 regarding the
Companys existing compensation plans and individual compensation arrangements
pursuant to which its equity securities are authorized for issuance to employees and
non-employees (such as Directors, consultants, advisors, vendors, customers, suppliers or
lenders) in exchange for consideration in the form of goods or services.

|Plan category                 | (a)
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights | (b)
Weighted-average exercise
price of outstanding
options, warrants and
rights | (c)
Number of securities
remaining for future
issuance under equity
compensation plans
(excluding securities
reflected in column (a))
|----------------------------- | ----------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------
|
|Equity compensation plans    
|approved by security         
|holders                       | 3,657,419                                                                                       | $2.80                                                                           | 3,785,322                                                                                                                            
|Equity compensation plans not
|approved by  security        
|holders                       | -                                                                                               | -                                                                               | -                                                                                                                                    
|Total                         | 3,657,419                                                                                       | $2.80                                                                           | 3,785,322                                                                                                                            

Compensation of Directors

The
Companys policy is not to pay compensation to Directors who are also employees of
the Company. Each non-employee Director is currently paid a fee of $25,000 per year and
$2,000 for each meeting of the Board of Directors and each committee meeting in which the
Director participates. In addition, the Chairman of the Audit Committee of the Board of
Directors receives an additional $5,000 per year. The non-employee Directors of the
Company also are each entitled to receive, annually, an option to purchase 2,000 shares of
Common Stock pursuant to the Companys 1995 Stock Option Plan for Non-Employee
Directors. The options to purchase 2,000 shares of Common Stock pursuant to this plan for
2005 were received by each of the non-employee Directors in early 2006 as a result of the
postponement of the Annual Meeting of Shareholders until the end of December 2005.

The
Company plans to increase the compensation paid to non-employee directors effective on the
date following the 2006 Annual Stockholders Meeting. Each non-employee director will
then receive annual compensation as follows: $50,000 per year as base compensation, $5,000
per year per Board committee membership, $10,000 per year additional compensation paid to
each committee chair, and an annual Company stock grant equal to $25,000. The shares will
be restricted from sale for two years. In addition the Company plans to make each
non-employee director a one-time stock option grant of 5,000 shares of Company stock. The
restricted stock and stock option grants will be subject to stockholder approval of the
Companys 2006 Stock Plan for Non-Employee Directors at the 2006 Annual
Stockholders Meeting.

Compensation Committee Interlocks and Insider Participation

The
members of the Companys Compensation Committee for fiscal 2005 were Robert Leeds,
Robert D. Rosenthal and Stacy S. Dick. Other than Robert Leeds, no member of the
Compensation Committee is employed by the Company. No Director of the Company served
during the last completed fiscal year as an executive officer of any entity whose
compensation committee (or other comparable committee, or the Board, as appropriate)
included an executive officer of the Company. There are no interlocks as
defined by the Securities and Exchange Commission.

Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.

The
following table provides certain information regarding the beneficial ownership
(1) of the Companys Common Stock as of July 31, 2006 by
(i) each of the Companys Directors and officers listed in the summary
compensation table, (ii) all current Directors and executive officers as a
group and (iii) each person known to the Company to be the beneficial owner
of 5% or more of any class of the Companys voting securities.

|Directors and Executive Officers                      | Amount and Nature of
Beneficial Ownership (a) | Percent of Class | 
|----------------------------------------------------- | --------------------------------------------- | ---------------- | 
|Richard Leeds (2) (11)                                | 10,234,087                                    | 29.4%           
|Bruce Leeds (3) (11)                                  | 15,050,947                                    | 43.2%           
|Robert Leeds (4) (11)                                 | 15,050,947                                    | 43.2%           
|Gilbert Fiorentino (5)                                | 481,668                                       | 1.4%            
|Stacy S. Dick (6)                                     | 15,000                                        | *               
|Robert D. Rosenthal (7)                               | 39,000                                        | *               
|Ann R. Leven (8)                                      | 9,000                                         | *               
|Steven M. Goldschein (9)                              | 156,000                                       | *               
|All current  Directors and executive  officers of the
|Company (10 persons)                                  | 25,331,794                                    | 71.3%           
|                                                     
|Other Beneficial Owners of 5% or More of the         
|Company's Voting Stock                               
|Dimensional Fund Advisors Inc. (10)                   | 1,946,618                                     | 5.6%            
|1299 Ocean Ave. 11th Floor                           
|Santa Monica, CA 90401                               

* less than 1%

(a) Amounts listed below may include shares held in trusts or partnerships which
are counted in more than one individuals total.

|(1) | As used in this table beneficial ownership means the sole or shared
power to vote or direct the voting or to dispose or direct the disposition of
any security. A person is deemed as of any date to have beneficial
ownership of any security that such person has a right to acquire within
60 days after such date. Any security that any person named above has the right
to acquire within 60 days is deemed to be outstanding for purposes of
calculating the ownership percentage of such person, but is not deemed to be
outstanding for purposes of calculating the ownership percentage of any other
person. Unless otherwise stated, each person owns the reported shares directly
and has the sole right to vote and determine whether to dispose of such shares.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes 6,923,590 shares owned directly by Mr. Leeds. Also includes 1,838,583
shares owned by a limited partnership of which Richard Leeds is the general
partner, 977,114 shares owned by irrevocable trusts for the benefit of his
brothers children for which Richard Leeds acts as co-trustee and 494,800
shares owned by a limited partnership in which Richard Leeds has an indirect
pecuniary interest.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes 269,149 shares owned directly by Mr. Leeds and 6,654,941 shares owned
by the Bruce Leeds 2005 Irrevocable Trust. Also includes 6,654,943 shares owned
by an irrevocable trust for the benefit of Robert Leeds for which Bruce Leeds
acts as trustee, 977,114 shares owned by irrevocable trusts for the benefit of
his brothers children for which Bruce Leeds acts as co-trustee and 494,800
shares owned by a limited partnership in which Bruce Leeds has an indirect
pecuniary interest.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes 269,149 shares owned directly by Mr. Leeds and 6,654,943 shares owned
by the Robert Leeds 2005 Irrevocable Trust. Also includes 6,654,941 shares owned
by an irrevocable trust for the benefit of Bruce Leeds for which Robert Leeds
acts as trustee, 977,114 shares owned by irrevocable trusts for the benefit of
his brothers children for which Robert Leeds acts as co-trustee and
494,800 shares owned by a limited partnership in which Robert Leeds has an
indirect pecuniary interest.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes options to acquire 381,668 shares that are currently exercisable
pursuant to the terms of the Companys 1995 and 1999 Long-Term Stock
Incentive Plan. Does not include 200,000 restricted stock units that vested on
May 31, 2005 awarded pursuant to an agreement with the Company that Mr.
Fiorentino elected to defer receipt of as allowed for under the agreement.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Includes options to acquire a total of 14,500 shares that are exercisable
immediately pursuant to the terms of the Companys 1995 Stock Plan for
Non-Employee Directors
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Includes options to acquire a total of 25,000 shares that are exercisable
immediately pursuant to the terms of the Companys 1995 Stock Plan for
Non-Employee Directors.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Includes options to acquire a total of 8,000 shares that are exercisable
immediately pursuant to the terms of the Companys 1995 Stock Plan for
Non-Employee Directors.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Includes options to acquire 40,000 shares that are currently exercisable
pursuant to the terms of the Companys 1995 and 1999 Long-Term Stock
Incentive Plan.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | As disclosed by Dimensional Fund Advisors Inc. in an SEC Schedule 13G filing
dated December 31, 2005.
|---- | -----------------------------------------------------------------------------------------------------

|(11) | Address for each of these individuals is c/o Systemax Inc., 11 Harbor Park
Drive, Port Washington, NY 11050.
|---- | ------------------------------------------------------------------------------------------------------------

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Companys
officers and Directors and persons who own more than ten percent of a registered class of
the Companys equity securities to file reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, Directors and ten-percent
stockholders are required by SEC regulation to furnish the Company with copies of all
Section 16(a) forms they file. Based solely on its review of the copies of Section 16(a)
forms received by it, or written representations from certain reporting persons, the
Company believes that all such filing requirements for the year ended December 31, 2005
were complied with.

# Item 13. Certain
Relationships and Related Transactions.

Leases

The
Company currently leases its facility in Port Washington, NY from Addwin Realty
Associates, an entity owned by Richard Leeds, Bruce Leeds and Robert Leeds, Directors of
the Company and the Companys three senior executive officers and principal
stockholders. Rent expense under this lease totaled $612,000 for the year ended December
31, 2005. The Company believes that these payments were no higher than would be paid to an
unrelated lessor for comparable space.

Stockholders Agreement

Certain
members of the Leeds family (including Richard Leeds, Bruce Leeds and Robert Leeds) and
Leeds family trusts entered into a Stockholders Agreement pursuant to which the
parties to such agreement agreed to vote in favor of the nominees of the Board of
Directors designated by the holders of a majority of shares of Common Stock held by such
stockholders at the time of the Companys initial public offering of Common Stock. In
addition, such agreement prohibits the sale of the shares without the consent of the
holders of a majority of the shares held by all parties to such agreement, subject to
certain exceptions, including sales pursuant to an effective registration statement and
sales made in accordance with Rule 144. Such agreement also grants certain drag-along
rights in the event of the sale of all or a portion of the shares held by holders of a
majority of the shares. As of December 31, 2005, the parties to the Stockholders Agreement
beneficially owned 24,777,000 shares of Common Stock subject to such agreement
(constituting approximately 71% of the Common Stock outstanding).

Pursuant
to the Stockholders Agreement, the Company granted to the then existing stockholders party
to such agreement demand and incidental, or piggy-back, registration rights
with respect to the shares. The demand registration rights generally provide that the
holders of a majority of the shares may require, subject to certain restrictions regarding
timing and number of shares, that the Company register under the Securities Act all or
part of the Shares held by such stockholders. Pursuant to the incidental registration
rights, the Company is required to notify such stockholders of any proposed registration
of the shares under the Securities Act and if requested by any such stockholder to include
in such registration any number of shares of shares held by it subject to certain
restrictions. The Company has agreed to pay all expenses and indemnify any selling
stockholders against certain liabilities, including under the Securities Act, in
connection with registrations of shares pursuant to such agreement.

Related Business

Richard Leeds and Robert Leeds are minority owners of a
wholesale business that sells certain products to mass merchant customers. These
products are, in some instances, similar to the type of products sold by the
Company. The Company believes that the sales volume of competitive products made
by this wholesale business was not significant. In 2005 the Company sold
approximately $27,000 in merchandise to this business. The Company believes
these sales were made on an arms-length basis and were not in competition with
the Companys business.

Related Insurance Broker

The
son of Bruce Leeds, the Company's Vice Chairman, is an employee in training at
an insurance brokerage firm that has represented the Company since January 2006.
The brokerage firm has earned approximately $300,000 in commissions from the
Company as of this date. The Company believes that its agreement with this
insurance brokerage firm was made on an arms-length basis.

Corporate Ethics Policy

The
Company has adopted a Corporate Ethics Policy (revised as of March 30, 2005) that applies
to all employees of the Company including the Companys Chief Executive Officer,
Chief Financial Officer and Controller, its principal accounting officer. The Corporate
Ethics Policy is designed to deter wrongdoing and to promote honest and ethical conduct,
compliance with applicable laws and regulations, full and accurate disclosure of
information requiring public disclosure and the prompt reporting of Policy violations. The
Companys Corporate Ethics Policy (as amended), annexed as an exhibit to the
Companys report on Form 8-K date March 30, 2005, is available on the Companys
website (www.systemax.com) and can obtained by writing to Systemax Inc., Attention: Board
of Directors (Corporate Governance), 11 Harbor Park Drive, Port Washington, NY 11050.

# Item 14. Principal
Accounting Fees and Services.

Ernst
& Young LLP replaced Deloitte & Touche LLP as our independent registered public
accountants in December 2005. The following are the fees billed by Ernst & Young LLP
and Deloitte & Touche LLP for services rendered during the fiscal years ended December
31, 2004 and 2005:

Audit and Audit-related Fees

Ernst
& Young billed the Company $2,585,000 for professional services rendered for the audit
of the Companys annual financial statements for the fiscal year ended December 31,
2005 and its reviews of the financial statements included in the Companys Forms 10-Q
for that fiscal year.

Deloitte
& Touche billed the Company $1,868,000 for professional services rendered for the
audit, including the restatement, of the Companys annual financial statements for
the fiscal year ended December 31, 2004 and its reviews of the financial statements
included in the Companys Forms 10-Q for that fiscal year.

Tax Fees

Tax
fees included services for international tax compliance, planning and advice. Deloitte
& Touche LLP billed the Company for professional services rendered for tax compliance,
planning and advice for the fiscal year ended December 31, 2005 an aggregate of $116,000.
The aggregate fees billed by Deloitte & Touche for such services for the prior fiscal
year were $79,000.

All Other Fees

Other
fees of $5,000 were billed by Ernst & Young for the year ended December 31, 2005. No
other fees were billed by the Companys independent registered public accountants for
the year ended December 31, 2004.

The
Audit Committee is responsible for approving every engagement of Ernst & Young to
perform audit or non-audit services on behalf of the Company or any of its subsidiaries
before Ernst & Young is engaged to provide those services. The Audit Committee of the
Board of Directors has reviewed the services provided to the Company by Ernst & Young
LLP and believes that the non-audit/review services it has provided are compatible with
maintaining the auditors independence.

Stockholder
ratification of the selection of Ernst & Young LLP as the Companys independent
public accountants is not required by the Companys By-Laws or other applicable legal
requirement. However, the Board is submitting the selection of Ernst & Young LLP to
the stockholders for ratification as a matter of good corporate practice. If the
stockholders fail to ratify the selection, the Audit Committee will reconsider whether or
not to retain that firm. Even if the selection is ratified, the Audit Committee at its
discretion may direct the appointment of a different independent accounting firm at any
time during the year if it determines that such a change would be in the best interests of
the Company and its stockholders.

# PART IV

# Item 15. Exhibits,
Financial Statements and Schedules.

| |  | 1. | The Consolidated Financial Statements of Systemax Inc: | Reference
| |  | -- | ------------------------------------------------------ | ---------

| | Report of Ernst & Young, LLP, Independent
   Registered Public Accounting Firm | 46
| | ------------------------------------------------------------------------------ | --

| | Report of Deloitte & Touche, LLP, Independent
   Registered Public Accounting Firm | 47
| | ---------------------------------------------------------------------------------- | --

| | Consolidated Balance Sheets as of December 31, 2005 and
   December 31, 2004 (as previously restated) | 48
| | ----------------------------------------------------------------------------------------------------- | --

| | Consolidated Statements of Operations for the years ended
   December 31, 2005, 2004 (as previously restated)
   and 2003 (as previously restated) | 49
| | -------------------------------------------------------------------------------------------------------------------------------------------------- | --

| | Consolidated Statements of Shareholders' Equity for the
   Years ended December 31, 2005, 2004 (as previously
   restated) and 2003 (as previously restated) | 50
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | --

| | Consolidated Statements of Cash Flows for the years ended
   December 31, 2005, 2004 (as previously restated)
   and 2003 (as previously restated) | 51
| | -------------------------------------------------------------------------------------------------------------------------------------------------- | --

| | Notes to Consolidated Financial Statements | 52 - 64
| | ------------------------------------------ | -------

| | 2. | Financial Statement Schedules:
The following financial statement schedule is filed as part of this report and
should be read together with our consolidated financial statements:
          
Schedule II - Valuation and Qualifying Accounts
Schedules not included with this additional financial data have been omitted
because they are not applicable or the required information is shown in the
Consolidated Financial Statements or Notes thereto.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Exhibits:
| | -- | ---------

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

| | 3.1 | Composite Certificate of Incorporation of Registrant, as amended (incorporated
by reference to the Companys annual report on Form 10-K for the year ended
December 31, 2001)
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.2 | By-laws of Registrant (incorporated by reference to the Company's registration
statement on Form S-1) (Registration No. 33-92052)
| | --- | ---------------------------------------------------------------------------------------------------------------------------------

| | 4.1 | Stockholders Agreement (incorporated by reference to the Company's quarterly
report on Form 10-Q for the quarterly period ended September 30, 1995)
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.1 | Form of 1995 Long-Term Stock Incentive Plan* (incorporated by
reference to the Companys registration statement on Form S-1)
(Registration No. 333-1852)
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.2 | Form of 1999 Long-Term Stock Incentive Plan as amended* (incorporated
by reference to the Companys report on Form 8-K dated May 20, 2003)
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------

| | 10.3 | Lease Agreement dated September 20, 1988 between the Company and Addwin Realty
Associates (Port Washington facility) (incorporated by reference to the
Companys registration statement on Form S-1) (Registration No. 33-92052)
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.4 | Amendment to Lease Agreement dated September 29, 1998 between the Company and
Addwin Realty Associates (Port Washington facility) (incorporated by reference
to the Companys annual report on Form 10-K for the year ended December 31,
1998)
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.5 | Lease Agreement dated as of July 17, 1997 between the Company and South Bay
Industrials Company (Compton facility) (incorporated by reference to the
Companys annual report on Form 10-K for the year ended December 31, 1997)
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.6 | Build-to-Suit Lease Agreement dated April, 1995 among the Company, American
National Bank and Trust Company of Chicago (Trustee for the original landlord)
and Walsh, Higgins & Company (Contractor) (Naperville Illinois
Facility Lease) (incorporated by reference to the Companys
registration statement on Form S-1) (Registration No. 33-92052)
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.7 | Lease Agreement dated September 17, 1998 between Tiger Direct, Inc. and Keystone
Miami Property Holding Corp. (Miami facility) (incorporated by reference to the
Company's quarterly report on Form 10-Q for the quarterly period ended September
30, 1998)
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.8 | Royalty Agreement dated June 30, 1986 between the Company and Richard Leeds,
Bruce Leeds and Robert Leeds, and Addendum thereto (incorporated by reference to
the Companys registration statement on Form S-1) (Registration No.
33-92052)
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.9 | Form of 1995 Stock Plan for Non-Employee Directors* (incorporated by
reference to the Companys registration statement on Form S-1)
(Registration No. 333-1852)
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.10 | Consulting Agreement dated as of January 1, 1996 between the Company and Gilbert
Rothenberg* (incorporated by reference to the Companys
registration statement on Form S-1) (Registration No. 333-1852)
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.11 | Separation Agreement and General Release between the Company and Robert Dooley,
dated March 5, 2004* (incorporated by reference to the Companys
annual report on Form 10-K for the year ended December 31, 2004)
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.12 | Employment Agreement dated as of December 12, 1997 between the Company and
Steven M. Goldschein* (incorporated by reference to the
Companys annual report on Form 10-K for the year ended December 31, 1997)
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.13 | Promissory Note of Systemax Suwanee LLC, dated as of April 18, 2002 payable to
the order of New York Life Insurance Company in the original principal sum of
$8,400,000 (incorporated by reference to the Companys quarterly report on
Form 10-Q for the quarterly period ended March 31, 2002)
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.14 | Deed to Secure Debt, Assignment of Leases and Rents and Security Agreement,
dated as of April 18, 2002 from Systemax Suwanee LLC to New York Life Insurance
Company (incorporated by reference to the Companys quarterly report on
Form 10-Q for the quarterly period ended March 31, 2002)
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.15 | Employment Agreement entered into on October 12, 2004 but effective as of June
1, 2004 between the Company and Gilbert Fiorentino* (incorporated by
reference to the Companys report on Form 8-K dated October 12, 2004)
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.16 | Restricted Stock Unit Agreement entered into on October 12, 2004 but effective
as of June 1, 2004 between the Company and Gilbert Fiorentino*
(incorporated by reference to the Companys report on Form 8-K dated
October 12, 2004)
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.17 | Amended and Restated Credit Agreement, dated as of October 27, 2005, between JP
Morgan Chase Bank, N.A. and affiliates, General Electric Capital Corporation,
and GMAC Commercial Finance LLC (as Lenders) with the Company and certain
subsidiaries of the Company (as Borrowers) (the Amended and Restated JP
Morgan Chase Loan Agreement) (incorporated by reference to the
Companys report on Form 8-K dated October 27, 2005)
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.18 | Amendment No. 1, dated as of December 19, 2005, to the Amended and Restated JP
Morgan Chase Loan Agreement
| | ----- | ----------------------------------------------------------------------------------------------------------

| | 10.19 | Lease agreement, dated December 8, 2005, between the Company and Hamilton
Business Center, LLC (Buford, Georgia facility)
| | ----- | -------------------------------------------------------------------------------------------------------------------------

| | 10.20 | First Amendment, dated as of June 12, 2006, to the Lease Agreement between the
Company and Hamilton Business Center, LLC (Buford, Georgia facility)
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.21 | First Amendment, dated as of February 1, 2006, to the Naperville Illinois
Facility Lease between the Company and Ambassador Drive LLC (current landlord)
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.22 | Agreement of Purchase and Sale, dated December 9, 2005, between the Company (as
Seller) and Hewlett Packard Company (as Buyer) (Suwanee, Georgia facility)
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | 14 | Corporate Ethics Policy for Officers, Directors and Employees (revised as of
March 30, 2005) (incorporated by reference to the Companys report on Form
8-K dated March 30, 2005)
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 21 | Subsidiaries of the Registrant
| | -- | ------------------------------

| | 23.1 | Consent of experts and counsel: Consent of Deloitte & Touche LLP
| | ---- | ----------------------------------------------------------------

| | 23.2 | Consent of experts and counsel: Consent of Ernst & Young LLP
| | ---- | ------------------------------------------------------------

| | 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
| | ---- | ------------------------------------------------------------------------------------------------------

| | 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
| | ---- | ------------------------------------------------------------------------------------------------------

| | 32.1 | Certification of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
| | ---- | ------------------------------------------------------------------------------------------------------

| | 32.2 | Certification of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
| | ---- | ------------------------------------------------------------------------------------------------------

| | 99.1 | Charter of the Audit Committee of the Companys Board of Directors, as
revised February 28, 2003 (incorporated by reference to the Companys
annual report on Form 10-K for the year ended December 31, 2002)
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 99.2 | Charter of the Compensation Committee of the Companys Board of Directors,
as approved February 28, 2003 (incorporated by reference to the Companys
annual report on Form 10-K for the year ended December 31, 2002)
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 99.3 | Charter of the Nominating/Corporate Governance Committee of the Companys
Board of Directors, as approved February 28, 2003 (incorporated by reference to
the Companys annual report on Form 10-K for the year ended December 31,
2002)
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

*   Management contract or compensatory plan or arrangement

SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) 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.

| | SYSTEMAX INC.By: /s/ RICHARD LEEDS
Richard Leeds
Chairman and Chief Executive Officer
Date: August 29, 2006
| | -----------------------------------------------------------------------------------------------------------

Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.

|Signature               | Title                                             | Date           
|----------------------- | ------------------------------------------------- | ---------------
|                       
|/s/ RICHARD LEEDS       | Chairman and Chief Executive Officer              | August 29, 2006
|Richard Leeds           | (Principal Executive Officer)                    
|                       
|/s/ BRUCE LEEDS         | Vice Chairman                                     | August 29, 2006
|Bruce Leeds            
|                       
|/s/ ROBERT LEEDS        | Vice Chairman                                     | August 29, 2006
|Robert Leeds           
|                       
|/s/ STEVEN GOLDSCHEIN   | Senior Vice President and Chief Financial Officer | August 29, 2006
|Steven Goldschein       | (Principal Financial Officer)                    
|                       
|/s/ MICHAEL J. SPEILLER | Vice President and Controller                     | August 29, 2006
|Michael J. Speiller     | (Principal Accounting Officer)                   
|                       
|/s/ GILBERT FIORENTINO  | Director                                          | August 29, 2006
|Gilbert Fiorentino     
|                       
|/s/ ROBERT D. ROSENTHAL | Director                                          | August 29, 2006
|Robert D. Rosenthal    
|                       
|/s/ STACY DICK          | Director                                          | August 29, 2006
|Stacy Dick             
|                       
|/s/ ANN R. LEVEN        | Director                                          | August 29, 2006
|Ann R. Leven           

REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

Shareholders and Board of Directors of Systemax Inc.:

We have audited the accompanying consolidated balance sheet of Systemax
Inc. as of December 31, 2005, and the related consolidated statements of operations, cash
flows, and shareholders equity for the year then ended. Our audit also included the
2005 financial statement schedule listed in the accompanying index in Item 15. These
financial statements and schedule are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements and schedule
based on our audit.

We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an audit of
the Companys internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Systemax Inc. at December
31, 2005, and the consolidated results of its operations and its cash flows for the year
then ended, in conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related 2005 financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material respects the
information set forth therein.

ERNST & YOUNG LLP

New York, New York
May 26, 2006

REPORT OF DELOITTE & TOUCHE, LLP, INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Shareholders and Board of Directors of SYSTEMAX INC.:

We have audited the accompanying consolidated balance sheet of Systemax
Inc. and subsidiaries (the Company) as of December 31, 2004,and the
related consolidated statements of operations, shareholders equity, and cash flows
for each of the two years in the period ended December 31, 2004.  Our audits also
included the financial statement schedule listed in the Index at Item 15 for each of the
two years in the period ended December 31, 2004.  These financial statements and
financial statement schedule are the responsibility of the Companys
management.  Our responsibility is to express an opinion on the financial statements
and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States).  Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances but not for the
purpose of expressing an opinion on the effectiveness of the Companys internal
control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Systemax Inc. and subsidiaries at
December 31, 2004, and the results of their operations and their cash flows for each of
the two years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.  Also, in our opinion,
such financial statement schedule for each of the two years in the period ended December
31, 2004, when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, the
accompanying consolidated financial statements had been restated.

DELOITTE & TOUCHE LLP
New York, New York
April 13, 2005 (November 17, 2005 as to the effects of the restatement discussed in Note 2)

SYSTEMAX INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
(IN THOUSANDS, except for share data)

|                                                                                     | 2005 | 2004
As previously
restated - see
Note 2
|------------------------------------------------------------------------------------ | ---- | ----------------------------------------
|ASSETS:                                                                              |      |                                         
|CURRENT ASSETS:                                                                      |      |                                         
|Cash and cash equivalents                                                            |      |                                         
|Accounts receivable, net of allowances of $12,508 (2005) and $11,318 (2004)          |      |                                         
|Inventories, net                                                                     |      |                                         
|Prepaid expenses and other current assets                                            |      |                                         
|Deferred income tax assets, net                                                      |      |                                         
|                                                                                     |      |                                         
|Total current assets                                                                 |      |                                         
|                                                                                    
|PROPERTY, PLANT AND EQUIPMENT, net                                                   |      |                                         
|DEFERRED INCOME TAX ASSETS, net                                                      |      |                                         
|OTHER ASSETS                                                                         |      |                                         
|                                                                                     |      |                                         
|TOTAL                                                                                |      |                                         
|                                                                                     |      |                                         
|LIABILITIES AND SHAREHOLDERS' EQUITY:                                                |      |                                         
|CURRENT LIABILITIES:                                                                 |      |                                         
|Short-term borrowings, including current portions of long-term debt                  |      |                                         
|Accounts payable                                                                     |      |                                         
|Accrued expenses and other current liabilities                                       |      |                                         
|                                                                                     |      |                                         
|Total current liabilities                                                            |      |                                         
|                                                                                     |      |                                         
|                                                                                    
|LONG-TERM DEBT                                                                       |      |                                         
|OTHER LIABILITIES                                                                    |      |                                         
|                                                                                    
|COMMITMENTS AND CONTINGENCIES                                                        |      |                                         
|                                                                                    
|SHAREHOLDERS' EQUITY:                                                                |      |                                         
|Preferred stock, par value $.01 per share, authorized 25 million shares, issued none |      |                                         
|Common stock, par value $.01 per share, authorized 150 million shares, issued        |      |                                         
|38,231,990 shares; outstanding 34,761,174 (2005) and 34,432,799 (2004) shares        |      |                                         
|Additional paid-in capital                                                           |      |                                         
|Accumulated other comprehensive income, net of tax                                   |      |                                         
|Retained earnings                                                                    |      |                                         
|Common stock in treasury at cost - 3,470,816 (2005) and 3,799,191 (2004) shares      |      |                                         
|                                                                                     |      |                                         
|Unearned restricted stock compensation                                               |      |                                         
|                                                                                     |      |                                         
|Total shareholders' equity                                                           |      |                                         
|                                                                                     |      |                                         
|TOTAL                                                                                |      |                                         
|                                                                                     |      |                                         

See notes to consolidated financial statements.

SYSTEMAX INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(IN THOUSANDS, except per common share amounts)

|                                                      |            |            |           
|----------------------------------------------------- | ---------- | ---------- | ----------
|                                                      | 2005       | 2004*      | 2003*     
|                                                      |            |            |           
|Net sales                                             | $2,115,518 | $1,928,147 | $1,655,736
|Cost of sales                                         | 1,808,231  | 1,641,681  | 1,390,840 
|                                                      |            |            |           
|Gross profit                                          | 307,287    | 286,466    | 264,896   
|Selling, general and administrative expenses          | 268,327    | 260,111    | 251,460   
|Restructuring and other charges                       | 4,151      | 7,356      | 1,726     
|Goodwill impairment                                   |            |            | 2,560     
|                                                      |            |            |           
|Income from operations                                | 34,809     | 18,999     | 9,150     
|Interest and other income, net                        | (735)      | (630)      | (755)     
|Interest expense                                      | 2,670      | 3,073      | 2,344     
|                                                      |            |            |           
|Income before income taxes                            | 32,874     | 16,556     | 7,561     
|Provision for income taxes                            | 21,433     | 6,368      | 4,354     
|                                                      |            |            |           
|Net income                                            | $11,441    | $10,188    | $3,207    
|                                                      |            |            |           
|Net income per common share, basic:                   | $.33       | $.30       | $.09      
|                                                      |            |            |           
|Net income per common share, diluted:                 | $.31       | $.29       | $.09      
|                                                      |            |            |           
|Weighted average common and common equivalent shares:
|Basic                                                 | 34,646     | 34,373     | 34,164    
|                                                      |            |            |           
|Diluted                                               | 36,488     | 35,489     | 34,880    
|                                                      |            |            |           

* As previously restated  see Note 2.

See notes to consolidated financial statements.

SYSTEMAX INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(IN THOUSANDS)

|                             | Common
Number
of Shares
Out-
standing | Stock
Amount | Additional
Paid-in
Capital | Retained
Earnings | Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax | Treasury
Stock,
At Cost | Unearned
Restricted Stock
Compensation | Comprehensive
Income (Loss),
Net of Tax
|---------------------------- | ------------------------------------- | ------------ | -------------------------- | ----------------- | --------------------------------------------------------- | ----------------------- | -------------------------------------- | ---------------------------------------
|Balances, January 1, 2003*   |                                       | 34,104       |                            | $382              |                                                           | $176,743                |                                        | $74,091                                
|Change in cumulative         |                                      
|translation adjustment       |                                       |              |                            |                   |                                                           |                         |                                        |                                        
|Exercise of stock options    |                                       | 184          |                            |                   |                                                           | (1,740                  | )                                      |                                        
|Tax benefit of employee      |                                      
|stock plans                  |                                       |              |                            |                   |                                                           | 340                     |                                       
|Net income*                  |                                       |              |                            |                   |                                                           |                         |                                        | 3,207                                  
|                             |                                       |              |                            |                   |                                                           |                         |                                        |                                        
|Total comprehensive income * |                                       |              |                            |                   |                                                           |                         |                                        |                                        
|                             |                                       |              |                            |                   |                                                           |                         |                                        |                                        
|Balances, December 31,       |                                      
|2003*                        |                                       | 34,288       |                            | 382               |                                                           | 175,343                 |                                        | 77,298                                 
|Change in cumulative         |                                      
|translation adjustment       |                                       |              |                            |                   |                                                           |                         |                                        |                                        
|Exercise of stock options    |                                       | 145          |                            |                   |                                                           | (631                    | )                                      |                                        
|Tax benefit of employee      |                                      
|stock plans                  |                                       |              |                            |                   |                                                           | 188                     |                                       
|Grant of restricted stock    |                                      
|units                        |                                       |              |                            |                   |                                                           | 5,740                   |                                        |                                        
|Amortization of unearned     |                                      
|restricted stock             |                                      
|compensation                 |                                       |              |                            |                   |                                                           |                         |                                        |                                        
|Net income*                  |                                       |              |                            |                   |                                                           |                         |                                        | 10,188                                 
|                             |                                       |              |                            |                   |                                                           |                         |                                        |                                        
|Total comprehensive income*  |                                       |              |                            |                   |                                                           |                         |                                        |                                        
|                             |                                       |              |                            |                   |                                                           |                         |                                        |                                        
|Balances, December 31,       |                                      
|2004*                        |                                       | 34,433       |                            | 382               |                                                           | 180,640                 |                                        | 87,486                                 
|Change in cumulative         |                                      
|translation adjustment       |                                       |              |                            |                   |                                                           |                         |                                        |                                        
|Exercise of stock options    |                                       | 328          |                            |                   |                                                           | (3,078                  | )                                      |                                        
|Tax benefit of employee      |                                      
|stock plans                  |                                       |              |                            |                   |                                                           | 12                      |                                       
|Amortization of unearned     |                                      
|restricted stock             |                                      
|compensation                 |                                       |              |                            |                   |                                                           |                         |                                        |                                        
|Net income                   |                                       |              |                            |                   |                                                           |                         |                                        | 11,441                                 
|                             |                                       |              |                            |                   |                                                           |                         |                                        |                                        
|Total comprehensive income   |                                       |              |                            |                   |                                                           |                         |                                        |                                        
|                             |                                       |              |                            |                   |                                                           |                         |                                        |                                        
|Balances, December 31, 2005  |                                       | 34,761       |                            | $382              |                                                           | $177,574                |                                        | $98,927                                
|                             |                                       |              |                            |                   |                                                           |                         |                                        |                                        

* As previously restated  see Note 2.

See notes to consolidated financial statements.

SYSTEMAX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(IN THOUSANDS)

|                                                                         |  |         |  
|------------------------------------------------------------------------ |  | ------- | -
|                                                                         |  | 2005    |  
|CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:                   | 
|Net income                                                               |  | $11,441 |  
|Adjustments to reconcile net income to net cash provided by (used in)    | 
|operating activities:                                                    | 
|Depreciation and amortization, net                                       |  | 9,994   |  
|Loss on dispositions and abandonment                                     |  | 1,279   |  
|Provision (benefit) for deferred income taxes                            |  | 6,228   |  
|Provision for returns and doubtful accounts                              |  | 7,620   |  
|Compensation expense related to equity compensation plans                |  | 1,004   |  
|Tax benefit of employee stock plans                                      |  | 12      |  
|Goodwill impairment                                                      |  |         |  
|Changes in operating assets and liabilities:                             | 
|Accounts receivable                                                      |  | (24,088 | )
|Inventories                                                              |  | (857    | )
|Prepaid expenses and other current assets                                |  | 1,389   |  
|Income taxes payable/receivable                                          |  | 527     |  
|Accounts payable, accrued expenses and other current liabilities         |  | 20,430  |  
|                                                                         |  |         |  
|Net cash provided by (used in) operating activities                      |  | 34,979  |  
|                                                                         |  |         |  
|CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:                   | 
|Investments in property, plant and equipment                             |  | (5,896  | )
|Proceeds from disposals of property, plant and equipment                 |  | 103     |  
|Purchase of minority interest                                            |  |         |  
|                                                                         |  |         |  
|Net cash used in investing activities                                    |  | (5,793  | )
|                                                                         |  |         |  
|CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:                   | 
|Proceeds (repayments) of borrowings from banks                           |  | 13,889  |  
|Repayments of long-term debt and capital lease obligations               |  | (9,978  | )
|Issuance of common stock                                                 |  | 780     |  
|                                                                         |  |         |  
|Net cash provided by (used in) financing activities                      |  | 4,691   |  
|                                                                         |  |         |  
|EFFECTS OF EXCHANGE RATES ON CASH                                        |  | 791     |  
|                                                                         |  |         |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                     |  | 34,668  |  
|CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR                            |  | 36,257  |  
|                                                                         |  |         |  
|CASH AND CASH EQUIVALENTS - END OF YEAR                                  |  | $70,925 |  
|                                                                         |  |         |  
|Supplemental disclosures:                                                | 
|Interest paid                                                            |  | $2,498  |  
|                                                                         |  |         |  
|Income taxes paid                                                        |  | $15,522 |  
|                                                                         |  |         |  
|Supplemental disclosures of non-cash investing and financing activities: | 
|Acquisitions of equipment through capital leases                         |  | --      |  
|                                                                         |  |         |  
|Deferred stock-based compensation related to restricted unit stock       | 
|granted                                                                  |  | --      |  
|                                                                         |  |         |  

* As previously restated  see Note 2.

See notes to consolidated financial statements

SYSTEMAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------

| | Principles of Consolidation  The accompanying consolidated
financial statements include the accounts of Systemax Inc. and its wholly-owned
subsidiaries (collectively, the Company or Systemax).
All significant intercompany accounts and transactions have been eliminated in
consolidation. The Company began consolidating a 50%-owned joint venture in the
first quarter of 2004 in accordance with Financial Accounting Standards Board
Interpretation 46 (Revised) (FIN 46R), Consolidation of
Variable Interest Entities. The Company previously used the equity method
of accounting for this investment. The results of operations of this investee
are not material to the consolidated results of operations of the Company.Use of Estimates In Financial Statements  The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.Fiscal Year  The Companys fiscal year ends on December
31. The Companys North American computer business follows a fiscal year
that ends on the last Saturday of the calendar year. Normally each fiscal year
consists of 52 weeks, but every five or six years, their fiscal year consists of
53 weeks, which was the case in 2005. The sales recorded in the additional week
of 2005 represented less than one percent of the years sales. Fiscal years
2004 and 2003 consisted of 52 weeks for this business.Foreign Currency Translation  The financial statements of
the Companys foreign entities are translated into U.S. dollars, the
reporting currency, using year-end exchange rates for balance sheet items and
average exchange rates for the statement of operations items. The translation
differences are recorded as a separate component of shareholders equity.Cash and Cash Equivalents  The Company considers amounts
held in money market accounts and other short-term investments, including
overnight bank deposits, with an original maturity date of three months or less
to be cash equivalents.Inventories  Inventories consist primarily of finished goods
and are stated at the lower of cost or market value. Cost is determined by using
the first-in, first-out method. Allowances are maintained for obsolete,
slow-moving and non-saleable inventory.Property, Plant and Equipment  Property, plant and equipment
is stated at cost. Depreciation of furniture, fixtures and equipment, including
equipment under capital leases, is on the straight-line or accelerated method
over their estimated useful lives ranging from three to ten years. Depreciation
of buildings is on the straight-line method over estimated useful lives of 30 to
50 years. Leasehold improvements are amortized over the lesser of the useful
lives or the term of the respective leases.Capitalized Software Costs  The Company capitalizes
purchased software ready for service and capitalizes software development costs
incurred on significant projects from the time that the preliminary project
stage is completed and management commits to funding a project until the project
is substantially complete and the software is ready for its intended use.
Capitalized costs include materials and service costs and payroll and
payroll-related costs. Capitalized software costs are amortized using the
straight-line method over the estimated useful life of the underlying system,
generally five years.Goodwill The cost in excess of fair value of net assets of
businesses acquired is recorded in the consolidated balance sheets as
Goodwill. In accordance with Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets, goodwill is no longer amortized, but is to be tested for
impairment annually or when facts and circumstances indicate goodwill may be
impaired.Evaluation of Long-lived Assets  Long-lived assets are
evaluated for recoverability in accordance with SFAS 144, Accounting for
the Impairment or Disposal of Long-lived Assets, whenever events or
changes in circumstances indicate that an asset may have been impaired. In
evaluating an asset for recoverability, the Company estimates the future cash
flows expected to result from the use of the asset and eventual disposition. If
the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, an impairment loss,
equal to the excess of the carrying amount over the fair market value of the
asset is recognized.Product Warranties  Provisions for estimated future expenses
relating to product warranties for the Companys assembled PCs are recorded
as cost of sales when revenue is recognized. Liability estimates are determined
based on management judgment considering such factors as the number of units
sold, historical and anticipated rates of warranty claims and the likely current
cost of corrective action.Income Taxes  Deferred tax assets and liabilities are
recognized for the expected tax consequences of temporary differences between
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax laws and rates. Valuation allowances are provided for deferred
tax assets to the extent it is more likely than not that deferred tax assets
will not be recoverable against future taxable income.Revenue Recognition and Accounts Receivable  The Company
recognizes sales of products, including shipping revenue, when persuasive
evidence of an order arrangement exists, delivery has occurred, the sales price
is fixed or determinable and collectibility is reasonably assured. Generally,
these criteria are met at the time the product is received by the customers when
title and risk of loss have transferred. Allowances for estimated subsequent
customer returns, rebates and sales incentives are provided when revenues are
recorded. Costs incurred for the shipping and handling of its products are
recorded as cost of sales. Revenue from extended warranty and support contracts
on the Companys assembled PCs is deferred and recognized over the contract
period.
Accounts receivable are shown in the consolidated balance sheets net of
allowances for doubtful collections and subsequent customer returns. The changes
in these allowance accounts are summarized as follows (in thousands):
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                           | Years ended December 31,
|-------------------------- | ------------------------
|                           |                         
|                           |                         
|Balance, beginning of year |                         
|Charged to expense         |                         
|Deductions                 |                         
|                           |                         
|Balance, end of year       |                         
|                           |                         

| | Advertising Costs  Advertising costs, consisting primarily
of catalog preparation, printing and postage expenditures, are amortized over
the period of catalog distribution during which the benefits are expected,
generally one to six months. Expenditures relating to television and local radio
advertising are expensed in the period the advertising takes place.
Net advertising expenses of $39.4 million in 2005, $43.8 million in 2004 and
$43.7 million in 2003 are included in the accompanying Consolidated Statements
of Operations. The Company utilizes advertising programs to support vendors,
including catalogs, internet and magazine advertising, and receives payments and
credits from vendors, including consideration pursuant to volume incentive
programs and cooperative marketing programs. The Company follows the provisions
of Emerging Issues Task Force (EITF) Issue No. 02-16,
Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor. EITF 02-16 requires that consideration received
from vendors, such as advertising support funds, be accounted for as a reduction
of cost of sales unless certain conditions are met showing that the funds are
used for specific, incremental, identifiable costs, in which case the
consideration is accounted for as a reduction in the related expense category,
such as advertising expense. The amount of vendor consideration recorded as a
reduction of selling, general and administrative expenses totaled $39.1 million
for the year ended December 31, 2005, $34.1 million for the year ended December
31, 2004 and $38.1 million for the year ended December 31, 2003.
Prepaid expenses at December 31, 2005 and 2004 include deferred advertising
costs of $5.0 million and $5.6 million, respectively, which are reflected as an
expense during the periods benefited, typically the subsequent fiscal quarter.Research and Development Costs  Costs incurred in connection
with research and development are expensed as incurred. Such expenses were
approximately $488,000 for the year ended December 31, 2005, $411,000 for the
year ended December 31, 2004 and $800,000 for the year ended December 31, 2003.Derivative Financial Instruments  In accordance with the
provisions of SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, all of the Companys derivative financial
instruments are recognized as either assets or liabilities in the consolidated
balance sheets based on their fair values. Changes in the fair values are
reported in earnings or other comprehensive income depending on the use of the
derivative and whether it qualifies for hedge accounting. Derivative instruments
are designated and accounted for as either a hedge of a recognized asset or
liability (fair value hedge) or a hedge of a forecasted transaction (cash flow
hedge). For derivatives designated as effective cash flow hedges, changes in
fair values are recognized in other comprehensive income. Changes in fair values
related to fair value hedges as well as the ineffective portion of cash flow
hedges are recognized in earnings.
The Company does not use derivative instruments for speculative or trading
purposes. Derivative instruments may be used to manage exposures related to
changes in foreign currency exchange rates and interest rate risk on variable
rate indebtedness.Net Income Per Common Share  The Company calculates net
income per share in accordance with SFAS 128, Earnings Per Share.
Net income per common share-basic was calculated based upon the weighted average
number of common shares outstanding during the respective periods presented. Net
income per common share-diluted was calculated based upon the weighted average
number of common shares outstanding and included the equivalent shares for
dilutive securities outstanding during the respective periods except in loss
periods, where the effect is anti-dilutive. The dilutive effect of outstanding
options issued by the Company is reflected in net income per share 
diluted using the treasury stock method. Under the treasury stock method,
options will only have a dilutive effect when the average market price of common
stock during the period exceeds the exercise price of the options. Equivalent
common shares of 842,000 in 2005, equivalent common shares of 1,116,000 in 2004
and equivalent common shares of 715,000 in 2003 were included for the diluted
calculation. The weighted average number of stock options outstanding excluded
from the computation of diluted earnings per share was 503,000 in 2005, 587,000
in 2004 and 697,000 in 2003 due to their antidilutive effect.Comprehensive Income)  Comprehensive income consists of net
income and foreign currency translation adjustments and is included in the
Consolidated Statements of Shareholders Equity. Comprehensive income was
$8,414,000 in 2005, $12,175,000 in 2004 and $7,270,000 in 2003.Stock-based Compensation  The Company has three stock-based
compensation plans, two of which are for employees, consultants and advisors and
the third of which is for non-employee directors, which are more fully described
in Note 9. The Company has elected to follow the accounting provisions of
Accounting Principles Board (APB) Opinion 25, Accounting for
Stock Issued to Employees for stock-based compensation and to provide the
pro forma disclosures required under SFAS 148, Accounting for Stock-based
Compensation  Transition and Disclosure. No stock-based employee
compensation cost is reflected in net income (loss), as all options granted
under the plans have an exercise price equal to the market value of the
underlying stock on the date of grant. The following table illustrates the
effect on net income and earnings per share had compensation costs of the plans
been determined under a fair value alternative method as stated in SFAS 123,
Accounting for Stock-Based Compensation (in thousands, except per
share data):
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                           |         |         |       
|---------------------------------------------------------- | ------- | ------- | ------
|                                                           | 2005    | 2004    | 2003  
|                                                           |         |         |       
|Net income - as reported                                   | $11,441 | $10,188 | $3,207
|Add: Stock-based employee compensation expense included in
|reported net income, net of related tax effects            | 647     | 886    
|Deduct: Stock-based employee compensation expense         
|determined under fair value based method, net of          
|related tax effects                                        | 915     | 1,295   | 544   
|                                                           |         |         |       
|Pro forma net income                                       | $11,173 | $9,779  | $2,663
|                                                           |         |         |       
|Basic net income per common share:                        
|Net income - as reported                                   | $.33    | $.30    | $.09  
|                                                           |         |         |       
|Net income - pro forma                                     | $.32    | $.28    | $.08  
|                                                           |         |         |       
|Diluted net income per common share:                      
|Net income - as reported                                   | $.31    | $.29    | $.09  
|                                                           |         |         |       
|Net income - pro forma                                     | $.31    | $.28    | $.08  
|                                                           |         |         |       

| | The fair value of options granted was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
| | -------------------------------------------------------------------------------------------------------------------------------------------------

|                        |       |       |      
|----------------------- | ----- | ----- | -----
|                        | 2005  | 2004  | 2003 
|Expected dividend yield | 0%    | 0%    | 0%   
|Risk-free interest rate | 4.5%  | 5.5%  | 5.9% 
|Expected volatility     | 79.0% | 46.0% | 76.0%
|Expected life in years  | 5.20  | 2.36  | 2.41 

| | The weighted average remaining contractual life of the stock options outstanding
was 6.7 years at December 31, 2005, 7.4 years at December 31, 2004 and 7.7 years
at December 31, 2003.Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) 151,
Inventory Costs, an amendment of ARB No. 43, Chapter 4. SFAS 151
clarifies that abnormal inventory costs such as costs of idle facilities, excess
freight and handling costs, and wasted materials (spoilage) are required to be
recognized as current period charges. SFAS 151 also requires that the allocation
of fixed production overheads to the costs of conversion be based on the normal
capacity of the production facility. The provisions of SFAS 151 will be
effective for fiscal years beginning after June 15, 2005 and is required to be
adopted by the Company in the first quarter of fiscal 2006. The Company does not
expect that the adoption will have a material impact on the Companys
consolidated financial position or results of operations.
In December 2004, the FASB issued SFAS 123 (revised 2004) (SFAS 123R),
Share-Based Payment. SFAS 123R replaced SFAS 123, Accounting
for Stock-Based Compensation, and superseded Accounting Principles Board
Opinion 25, Accounting for Stock Issued to Employees. SFAS 123R
requires the recognition of compensation cost relating to share-based payment
transactions, including employee stock options, in financial statements. That
cost will be measured based on the fair value of the equity or liability
instruments issued. SFAS 123R provides alternative methods of adoption which
include prospective application and a modified retroactive application. SFAS
123(R) also requires the benefits of tax deductions in excess of recognized
compensation expense to be reported as a financing cash flow, rather than as an
operating cash flow as prescribed under current accounting rules. The Company is
required to adopt the provisions of SFAS 123R effective as of the beginning of
its first quarter in 2006. The Company is evaluating the available alternatives
of adoption of SFAS 123R. The Company currently accounts for share-based
payments using APB Opinion 25s intrinsic value method and recognizes no
compensation expense for employee stock options as permitted under SFAS 123. See
Stock-based Compensation above for the effect on reported net income
if we had accounted for our stock-based compensation plans using the fair value
recognition provisions of SFAS 123. The actual effects of adopting SFAS 123R
will depend on numerous factors, including the amounts of share-based payments
granted in the future, the valuation model we use and estimated forfeiture
rates. The Company has not made any modifications to its stock-based
compensation plans as a result of the issuance of SFAS 123R. The Company
believes the adoption of SFAS 123R will not have a material effect on its
consolidated financial statements.
In March 2005, the Securities and Exchange Commission released SEC Staff
Accounting Bulletin (SAB) 107, Share-Based Payment. SAB
107 provides the SEC staffs position regarding the application of SFAS
No. 123R and certain SEC rules and regulations, and also provides the
staffs views regarding the valuation of share-based payments for public
companies. The Company will adopt SAB 107 in connection with its adoption of
SFAS 123R. The Company is currently reviewing the effects, if any, that the
application of SAB 107 will have on the Companys consolidated financial
position and results of operations.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections (SFAS 154), which replaces Accounting Principles
Board Opinion No. 20, Accounting Changes, and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements-An Amendment
of APB Opinion No. 28. SFAS 154 changes the requirements for the
accounting for and reporting of a change in accounting principle. Previously,
most voluntary changes in accounting principles required recognition of a
cumulative effect adjustment within net income of the period of the change. SFAS
154 requires retrospective application to prior periods financial
statements, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. SFAS 154 also applies to changes
required by an accounting pronouncement in the rare case that the pronouncement
does not contain specific transition provisions. This statement also carries
forward the guidance from APB No. 20 regarding the correction of an error
and changes in accounting estimates. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The Company does not believe the adoption of SFAS 154 will have a
material effect on its consolidated financial position, results of operations or
cash flows.
In June 2005, the FASB issued FSP FAS 143-1, Accounting for Electronic
Equipment Waste Obligations (FSP FAS 143-1), to address the
accounting for obligations associated with a European Unions Directive on
Waste Electrical and Electronic Equipment (the Directive). The
Directive, enacted in 2003, requires EU-member countries to adopt legislation to
regulate the collection, treatment, recovery and environmentally sound disposal
of electrical and electronic waste equipment. The Directive distinguishes
between products put on the market after August 13, 2005 (new waste)
and products put on the market on or before that date (historical
waste). FSP FAS 143-1 addresses the accounting for historical waste only
and will be applied the later of the first reporting period ending after June 8,
2005 or the date of the adoption of the law by the applicable EU-member country.
The adoption of FSP FAS 143-1 did not have a material impact on the
Companys consolidated financial position or results of operations for the
EU-member countries which have adopted the law.
In October 2005, the FASB issued FSP FAS 13-1, Accounting for Rental Costs
Incurred During a Construction Period (FSP FAS 13-1), which
requires the expensing of rental costs associated with ground or building
operating leases that are incurred during the construction period. FSP FAS 13-1
is effective in the first reporting period beginning after December 15, 2005.
The Company does not expect that this pronouncement will have a material effect
on its consolidated financial position or results of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | RESTATEMENT OF PREVIOUSLY FILED FINANCIAL STATEMENTS
|-- | ----------------------------------------------------

| | Subsequent to the issuance of the Companys consolidated financial
statements in its Form 10-K for the year ended December 31, 2004, the Company
discovered errors related to accounting for inventory at its Tiger Direct, Inc.
subsidiary. These errors had the effect of misstating the value of inventory and
certain vendor-related liabilities as of December 31, 2004 and overstating net
income for the year ended December 31, 2004. Such errors did not have any impact
on the consolidated financial statements for any previous years. For the year
ended December 31, 2004, an error was also corrected in the presentation of the
Consolidated Statement of Cash Flows related to activity in the allowances for
doubtful accounts and subsequent customer returns. The restatement affected cash
flows provided by operations but did not affect previously reported net cash
flows for the restated period or future periods.
The Company restated its presentation of long-term debt to classify its entire
United Kingdom term loan payable as of December 31, 2004 as current, as it was
not in compliance with the financial covenants.
The restated results also include changes resulting from a correction in the
application of the Companys revenue recognition policy. The Company
determined during its internal review of 2004 results that a change in its
revenue recognition policy for sales of product was required in order to comply
with Staff Accounting Bulletin No. 104 Revenue Recognition (SAB
104), as interpreted by the SEC Staff. Based on the Companys practices
with respect to its terms of shipment, revenue that had been recognized at time
of shipment based upon FOB shipping point terms should have been recognized at
time of receipt by customers, when title and risk of loss both transferred. The
effect of this change resulted in a restatement of the results of operations for
the years ended December 31, 2004 and 2003 and the balance sheet as of December
31, 2004.
As a result, the accompanying financial statements for the years ended December
31, 2004 and 2003 have been restated from the amounts previously reported to
properly reflect these items. A summary of the significant effects of the
restatement is as follows (in thousands, except per share data):
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                          |                              |            
|--------------------------------------------------------- | ---------------------------- | -----------
|As of December 31, 2004:                                  | As Previously
      Reported | As Restated
|                                                         
|Accounts receivable, net                                  | $153,724                     | $137,706   
|Inventories, net                                          | 176,227                      | 192,774    
|Prepaid expenses and other current assets                 | 24,888                       | 22,096     
|Deferred income tax assets, net                           | 8,812                        | 9,594      
|Total current assets                                      | 399,908                      | 398,427    
|Deferred income tax assets - noncurrent, net              | 18,268                       | 18,645     
|TOTAL ASSETS                                              | 484,300                      | 483,196    
|Short-term  borrowings,  including  current  portions  of
|long-term debt                                            | (16,560)                     | (25,020)   
|Accounts payable                                          | (161,864)                    | (165,761)  
|Accrued expense and other current liabilities             | (60,756)                     | (59,639)   
|Total current liabilities                                 | (239,180)                    | (250,420)  
|Long-term debt                                            | (17,099)                     | (8,639)    
|Additional paid in capital                                | (180,530)                    | (180,640)  
|Accumulated other comprehensive income, net of tax        | (4,093)                      | (3,920)    
|Retained earnings                                         | (91,307)                     | (87,486)   
|Total shareholders' equity                                | (226,516)                    | (222,632)  
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                | (484,300)                    | (483,196)  

|                                      |                        |             |                        |            
|------------------------------------- | ---------------------- | ----------- | ---------------------- | -----------
|Years ended December 31,:             | 2004                   | 2003       
|                                     
|                                      | As previously
reported | As restated | As previously
reported | As restated
|                                     
|Net sales                             | $1,927,835             | $1,928,147  | $1,657,778             | $1,655,736 
|Cost of sales                         | 1,637,452              | 1,641,681   | 1,392,745              | 1,390,840  
|Gross profit                          | 290,383                | 286,466     | 265,033                | 264,896    
|Income from operations                | 22,916                 | 18,999      | 9,287                  | 9,150      
|Income before income taxes            | 20,473                 | 16,556      | 7,698                  | 7,561      
|Provision for income taxes            | 7,923                  | 6,368       | 4,352                  | 4,354      
|Net income                            | 12,550                 | 10,188      | 3,346                  | 3,207      
|                                     
|Net income per common share, basic:   | $.37                   | $.30        | $.10                   | $.09       
|Net income per common share, diluted: | $.35                   | $.29        | $.10                   | $.09       

| | The Company also previously restated its segment disclosures for the years ended
December 31, 2004 and 2003  see Note 12.
| | --------------------------------------------------------------------------------------------------------------------------

|3. | PROPERTY, PLANT AND EQUIPMENT
|-- | -----------------------------

| | Property, plant and equipment, net consists of the following (in thousands):
| | ----------------------------------------------------------------------------

|                                                                     |  | 
|-------------------------------------------------------------------- |  | 
|                                                                     |  | 
|                                                                     |  | 
|Land and buildings                                                   |  | 
|Furniture and  fixtures,  office,  computer and other  equipment and |  | 
|software                                                             |  | 
|Leasehold improvements                                               |  | 
|                                                                     |  | 
|                                                                     |  | 
|Less accumulated depreciation and amortization                       |  | 
|                                                                     |  | 
|Property, plant and equipment, net                                   |  | 
|                                                                     |  | 

| | Included in property, plant and equipment are assets under capital leases,
         as follows (in thousands):
| | --------------------------------------------------------------------------------------------------------------

|                                                             |  | 
|------------------------------------------------------------ |  | 
|                                                             |  | 
|                                                             |  | 
|Furniture and fixtures, office, computer and other equipment |  | 
|Less: Accumulated amortization                               |  | 
|                                                             |  | 
|                                                             |  | 
|                                                             |  | 

|4. | RELATED PARTY TRANSACTIONS
|-- | --------------------------

| | The Company leased its headquarters office/warehouse facility from affiliates
during the years ended December 31, 2005, December 31, 2004 and December 31,
2003 (see Note 11). Rent expense under the lease aggregated $612,000 in each of
those years. The Company believes that these payments were no higher than would
be paid to an unrelated lessor for comparable space.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | CREDIT FACILITIES
|-- | -----------------

| | In October 2005 the Company amended and restated its $70,000,000 revolving
credit agreement with a group of financial institutions to increase the amount
available to $120,000,000 (which may be increased by up to $30 million, subject
to certain conditions) and to provide for borrowings by the Companys
United States and United Kingdom subsidiaries. The borrowings are secured by all
of the domestic and United Kingdom accounts receivable, the domestic inventories
of the Company, the Companys United Kingdom headquarters building and the
Companys shares of stock in its domestic and United Kingdom subsidiaries.
The credit facility expires and outstanding borrowings thereunder are due on
October 26, 2010. The borrowings under the agreement are subject to borrowing
base limitations of up to 85% of eligible accounts receivable and up to 40% of
qualified inventories. The interest on outstanding advances is payable monthly,
at the Companys option, at the agent banks base rate (7.25% at
December 31, 2005) plus 0.25% or the banks daily LIBOR rate (4.9% at
December 31, 2005) plus 1.25% to 2.25%. The undrawn availability under the
facility may not be less than $15 million until the last day of any month in
which the availability net of outstanding borrowings is at least $70 million.
The facility also calls for a commitment fee payable quarterly in arrears of
0.375% of the average daily unused portions of the facility. The revolving
credit agreement requires that a minimum level of availability be maintained. If
such availability is not maintained, the Company will be required to maintain a
fixed charge coverage ratio (as defined). The agreement contains certain other
covenants, including restrictions on capital expenditures and payments of
dividends. The Company was in compliance with all of the covenants as of
December 31, 2005. The Company was not in compliance with the financial
reporting requirements regarding timely filing of the Companys financial
statements under the agreement for periods subsequent to December 31, 2005 for
which the lenders have approved a waiver. As of December 31, 2005, availability
under the agreement was $97.6 million and there were outstanding advances of
$21.8 million (all in the United Kingdom) and outstanding letters of credit of
$14.6 million. Under the previous facility, as of December 31, 2004 availability
under the agreement was $54.6 million and there were outstanding letters of
credit of $9.1 million. There were no outstanding advances as of December 31,
2004.
In connection with the amendment to its revolving credit agreement, the Company
terminated its £15,000,000 multi-currency credit facility with a United
Kingdom financial institution in October 2005. The facility was available to the
Companys United Kingdom subsidiaries and at December 31, 2004 there were
£5.3 million ($10.0 million at the December 31, 2004 exchange rate) of
borrowings outstanding under this line with interest payable at a rate of 5.87%.
The Companys Netherlands subsidiary maintains a 5 million ($5.9
million at the December 31, 2005 exchange rate) credit facility with a local
financial institution. Borrowings under the facility are secured by the
subsidiarys accounts receivable and are subject to a borrowing base
limitation of 85% of the eligible accounts. At December 31, 2005 there were
3.8 million ($4.4 million) of borrowings outstanding under this line with
interest payable at a rate of 5.0%. At December 31, 2004 there were 3.5
million ($4.8 million at the December 31, 2004 exchange rate) of borrowings
outstanding under this line with interest payable at a rate of 5.0%. The
facility expires in November 2006.
The weighted average interest rate on short-term borrowings was 6.4% in 2005,
6.0% in 2004 and 5.2% in 2003.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. | ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|-- | ----------------------------------------------

| | Accrued expenses and other current liabilities consist of the following (in
thousands):
| | ---------------------------------------------------------------------------------------

|                              |  | 
|----------------------------- |  | 
|                              |  | 
|                              |  | 
|Payroll and employee benefits |  | 
|Income taxes payable          |  | 
|Other                         |  | 
|                              |  | 
|                              |  | 
|                              |  | 

|7. | LONG-TERM DEBT
|-- | --------------

| | Long-term debt consists of (in thousands):
| | ------------------------------------------

|                                        |  | 
|--------------------------------------- |  | 
|                                        |  | 
|                                        |  | 
|Mortgage note payable (a)               |  | 
|Term loan payable (b)                   |  | 
|Capitalized equipment lease obligations |  | 
|                                        |  | 
|                                        |  | 
|Less: current portion                   |  | 
|                                        |  | 
|                                        |  | 
|                                        |  | 

| | (a) | Mortgage note payable. The Company had a ten year, $8.4 million mortgage loan on
its Georgia distribution facility. The mortgage had monthly principal and
interest payments of $62,000 through May 2012, with a final additional principal
payment of $6.4 million at maturity in May 2012. The mortgage bore interest at
7.04% and was collateralized by the underlying land and building. In March 2006,
the Company sold its Georgia distribution facility and repaid the remaining
balance on the mortgage (see Note 14).
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Term loan payable. The Company had a term loan agreement which was used to
finance the construction of its United Kingdom facility and which was secured by
the underlying land and building. The loan was repaid in November 2005 in
connection with the amendment and restatement of the Companys revolving
credit facility. The term loan agreement contained certain financial and other
covenants related to the Companys United Kingdom subsidiaries, with which
the Company was not in compliance as of December 31, 2004. As a result, the
Company classified the entire obligation as current as of December 31, 2004.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The aggregate maturities of long-term debt outstanding at December 31, 2005 are
as follows (in thousands):
| | ----------------------------------------------------------------------------------------------------------

|           |  |  |      |  |  |     
|---------- |  |  | ---- |  |  | ----
|           |  |  | 2006 |  |  | 2007
|Maturities |  |  | $574 |  |  | $505

|8. | RESTRUCTURING AND OTHER CHARGES
|-- | -------------------------------

| | The Company periodically assesses its operations to ensure that they are
efficient, aligned with market conditions and responsive to customer needs.
During the years ended December 31, 2005, 2004 and 2003, management approved and
implemented restructuring actions which included workforce reductions and
facility consolidations. The following table summarizes the amounts recognized
by the Company as restructuring and other charges for the periods presented (in
thousands):
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                |        |        |        
|----------------------------------------------- | ------ | ------ | -------
|Years ended December 31,                        | 2005   | 2004   | 2003   
|2004 United States streamlining plan            | $122   | $3,743
|2003 United States warehouse consolidation plan |        | 642    | $713   
|2002 United Kingdom consolidation plan          | (93)   | 467    | 2,173  
|Litigation settlements (recoveries)             | 300    |        | (1,272)
|Other severance and exit costs                  | 3,822  | 2,504  | 112    
|                                                |        |        |        
|Total restructuring and other charges           | $4,151 | $7,356 | $1,726 
|                                                |        |        |        

| | 2004 United States Streamlining Plan
In the first quarter of 2004, the Company implemented a plan to streamline the
back office and warehousing operations in its United States computer businesses.
The Company recorded $3.7 million of costs related to this plan, including $3.2
million for severance and benefits for approximately 200 terminated employees
and $483,000 of non-cash costs for impairment of the carrying value of fixed
assets.2003 United States Warehouse Consolidation Plan
In the fourth quarter of 2003, the Company implemented a plan to consolidate the
warehousing facilities in its United States computer supplies business. The
Company recorded $122,000 of additional severance costs in 2005 and $642,000 of
additional exit costs in 2004 related to this plan.2002 United Kingdom Consolidation Plan
In 2002 the Company implemented a restructuring plan to consolidate the
activities of three United Kingdom locations into a new facility constructed for
the Company. During the year ended December 31, 2003, the Company recorded
$2,173,000 of additional exit costs related to this plan. During the year ended
December 31, 2004, the Company recorded $467,000 of additional exit costs
related to this plan.Other Severance and Exit Costs
The Company recorded restructuring costs of $3.7 million during 2005 and $2.5
million during 2004 in Europe in connection with workforce reductions and
facility exit costs. In 2005, these costs were comprised of employee severance
costs. In 2004, these costs were comprised of $1.8 million of employee severance
costs and $0.7 million of other exit costs, primarily asset write-downs.
The following table summarizes the components of the accrued restructuring
charges and the movements within these components during the years ended
December 31, 2005 and 2004 (in thousands). The balance of the restructuring
reserves is included in the Consolidated Balance Sheets within accrued expenses
and other current liabilities.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                              |  |  |  
|----------------------------- |  |  | -
|                              |  |  |  
|                              |  |  |  
|                              |  |  |  
|Balance as of January 1, 2004 |  |  | $
|Charged to expense in 2004    |  |  |  
|Amounts utilized              |  |  |  
|                              |  |  |  
|Balance at December 31, 2004  |  |  |  
|Charged to expense in 2005    |  |  |  
|Amounts utilized              |  |  |  
|                              |  |  |  
|Balance at December 31, 2005  |  |  | $
|                              |  |  |  

| | Litigation Settlements
In May 2006 the Company entered into a stipulation of settlement with all of the
plaintiffs who had filed derivative complaints in 2005 alleging misconduct in
connection with the Company's restatement of its 2004 financial results (see
Note 11).
In August 2003 the Company settled litigation with a software developer and
reversed a previously recorded liability of $1.3 million which was no longer
needed (see Note 11).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|9. | SHAREHOLDERS' EQUITY
|-- | --------------------

| | As required by law, certain foreign subsidiaries must retain a percentage of
shareholders' capital in the respective company. Accordingly, a portion of
retained earnings is restricted and not available for distribution to
shareholders. Such amounts at December 31, 2005 and 2004 were not material.Stock Option Plans - The Company has three fixed option plans
which reserve shares of common stock for issuance to key employees, directors,
consultants and advisors to the Company. The following is a description of these
plans:The 1995 Long-term Stock Incentive Plan - This plan, adopted in
1995, allows the Company to issue qualified, non-qualified and deferred
compensation stock options, stock appreciation rights, restricted stock and
restricted unit grants, performance unit grants and other stock based awards
authorized by the Compensation Committee of the Board of Directors. Options
issued under this plan expire ten years after the options are granted and
generally become exercisable ratably on the third, fourth, and fifth anniversary
of the grant date. A maximum total number of 2.0 million shares may be granted
under this plan of which a maximum of 800,000 shares may be of restricted stock
and restricted stock units. No award can be granted under this plan after
December 31, 2005. A total of 1,331,190 options were outstanding under this plan
as of December 31, 2005.The 1995 Stock Option Plan for Non-Employee Directors - This plan,
adopted in 1995, provides for automatic awards of non-qualified options to
directors of the Company who are not employees of the Company or its affiliates.
All options granted under this plan will have a ten year term from grant date
and are immediately exercisable. A maximum of 100,000 shares may be granted for
awards under this plan. This plan will terminate the day following the 2006
annual shareholders meeting. A total of 52,000 options were outstanding under
this plan as of December 31, 2005.The 1999 Long-term Stock Incentive Plan, as amended ("1999 Plan")
- This plan was adopted on October 25, 1999 with substantially the same terms
and provisions as the 1995 Long-term Stock Incentive Plan. A maximum of 5.0
million shares may be granted under this plan. The maximum number of shares
granted per type of award to any individual may not exceed 1,500,000 in any
calendar year and 3,000,000 in total. No award shall be granted under this plan
after December 31, 2009. Restricted stock grants and common stock awards reduce
stock options otherwise available for future grant. A total of 1,274,229 options
were outstanding under this plan as of December 31, 2005.
The following table reflects the plan activity for the years ended December 31, 2005, 2004 and 2003:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               |  | 
|------------------------------ |  | 
|                               |  | 
|                               |  | 
|Outstanding, January 1, 2003   |  | 
|Granted                        |  | 
|Exercised                      |  | 
|Cancelled                      |  | 
|                               |  | 
|Outstanding, December 31, 2003 |  | 
|Granted                        |  | 
|Exercised                      |  | 
|Cancelled                      |  | 
|                               |  | 
|Outstanding, December 31, 2004 |  | 
|Granted                        |  | 
|Exercised                      |  | 
|Cancelled                      |  | 
|                               |  | 
|Outstanding, December 31, 2005 |  | 
|                               |  | 

| | The following table summarizes information for the three years ended December
31, 2005 concerning currently outstanding and exercisable options:
| | ------------------------------------------------------------------------------------------------------------------------------------------------

|                                 | 2005 | 2004 | 2003
|-------------------------------- | ---- | ---- | ----
|
|Outstanding at beginning of year |      |      |     
|Granted                          |      |      |     
|Exercised                        |      |      |     
|Cancelled                        |      |      |     
|                                 |      |      |     
|Outstanding at end of year       |      |      |     
|                                 |      |      |     
|                                
|Options exercisable at year end  |      |      |     
|Weighted average fair value per  |      |     
|option granted during the year   |      |      |     

| | As of December 31, 2005:
| | ------------------------

|Range of
Exercise
Price | Number
Outstanding | Weighted-Average
Remaining
Contractual Life | Weighted-Average
Exercise
Price | Number
Exercisable | Weighted-Average
Exercise
Price
|----------------------- | ------------------ | ------------------------------------------- | ------------------------------- | ------------------ | -------------------------------
|$ 1.76 to $ 5.00        | 1,518,502          | 6.51                                        | $2.12                           | 1,237,940          | $2.20                          
|$5.01 to $15.00         | 1,110,217          | 7.20                                        | $6.04                           | 624,515            | $6.48                          
|$15.01 to $18.41        | 28,700             | 1.28                                        | $17.72                          | 28,700             | $17.72                         
|                        |                    |                                             |                                 |                    |                                
|$1.76 to $18.41         | 2,657,419          | 6.74                                        | $3.93                           | 1,891,155          | $3.85                          
|                        |                    |                                             |                                 |                    |                                

| | During the year ended December 31, 2004, the Company granted 1,000,000
restricted stock units under the 1999 Plan to a key employee who is also a
Company director. A restricted stock unit represents the right to receive a
share of the Companys common stock. The restricted stock units vest at the
rate of 20% on May 31, 2005 and 10% per year on April 1, 2006 and each year
thereafter. The restricted stock units have none of the rights as other shares
of common stock until common stock is distributed, other than rights to cash
dividends. Compensation expense for restricted stock awards is recognized based
on the intrinsic value method defined by APB 25. The total market value of the
shares granted has been recorded as Unearned Restricted Stock
Compensation and is reported as a separate component in the consolidated
statements of shareholders equity and is being expensed over the vesting
period.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10. | INCOME TAXES
|--- | ------------

| | The components of income (loss) before income taxes are as follows (in
thousands):
| | ----------------------------------------------------------------------------------

|Years Ended December 31 | 2005 | 2004 | 2003
|----------------------- | ---- | ---- | ----
|United States           |      |      | $   
|Foreign                 |      |      |     
|                        |      |      |     
|Total                   |      |      | $   
|                        |      |      |     

| | The provision (benefit) for income taxes consists of the following (in
thousands):
| | ----------------------------------------------------------------------------------

|Years Ended December 31 | 2005 | 2004 | 2003
|----------------------- | ---- | ---- | ----
|Current:                |      |      |     
|Federal                 |      |      | $   
|State                   |      |      |     
|Foreign                 |      |      |     
|                        |      |      |     
|Total current           |      |      |     
|                        |      |      |     
|Deferred:               |      |     
|Federal                 |      |      |     
|State                   |      |      |     
|Foreign                 |      |      |     
|                        |      |      |     
|Total deferred          |      |      |     
|                        |      |      |     
|TOTAL                   |      |      | $   
|                        |      |      |     

| | Income taxes are accrued and paid by each foreign entity in accordance with
applicable local regulations.
A reconciliation of the difference between the income tax expense (benefit) and
the computed income tax expense based on the Federal statutory corporate rate is
as follows (in thousands):
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Years Ended December 31                             | 2005 | 2004 | 2003
|--------------------------------------------------- | ---- | ---- | ----
|Income tax at Federal statutory rate                |      |      | $   
|State and local income taxes (benefits) and         |      |     
|changes in valuation allowances, net of             |      |      |     
|federal tax benefit                                 |      |     
|Foreign taxes at rates different from the U.S. rate |      |      |     
|Changes in valuation allowances for foreign         |      |     
|deferred tax assets                                 |      |      |     
|Non-deductible goodwill impairment                  |      |      |     
|Tax credits                                         |      |      |     
|Adjustment for prior year taxes                     |      |      |     
|Other items, net                                    |      |      |     
|                                                    |      |      |     
|                                                    |      |      | $   
|                                                    |      |      |     

| | The deferred tax assets (liabilities) are comprised of the following (in
thousands):
| | ------------------------------------------------------------------------------------

|                                            | 2005 | 2004
|------------------------------------------- | ---- | ----
|Current:                                    |      |     
|Deductible assets                           |      |     
|Accrued expenses and other liabilities      |      |     
|Non-deductible assets                       |      |     
|Other                                       |      |     
|Valuation allowances                        |      |     
|                                            |      |     
|Total current                               |      |     
|                                            |      |     
|Non-current:                                |      |     
|Net operating loss and credit carryforwards |      |     
|Foreign currency translation adjustments    |      |     
|Accelerated depreciation                    |      |     
|Intangible and other assets                 |      |     
|Other                                       |      |     
|Valuation allowances                        |      |     
|                                            |      |     
|Total non-current                           |      |     
|                                            |      |     
|TOTAL                                       |      |     
|                                            |      |     

| | The Company has not provided for federal income taxes applicable to the
undistributed earnings of its foreign subsidiaries of $12.4 million as of
December 31, 2005, since these earnings are indefinitely reinvested. The Company
has foreign net operating loss carryforwards which expire from 2006 through 2020
except for carryforwards in the United Kingdom and the Netherlands, which have
no expiration. In accordance with SFAS 109 Accounting for Income
Taxes, the Company records these benefits as assets to the extent that
utilization of such assets is more likely than not; otherwise, a valuation
allowance has been recorded. The Company has also provided valuation allowances
for certain state deferred tax assets and net operating loss carryforwards where
it is not likely they will be realized.
In the fourth quarter of 2005, the Company recorded a valuation allowance of
$10.2 million related to carryforward losses and deferred tax assets in the
United Kingdom. The Companys United Kingdom subsidiary had recorded losses
and has been affected by restructuring activities in recent years. These losses
and the loss incurred for the year ended December 31, 2005 represented evidence
for management estimate that a full valuation allowance for the net deferred tax
assets was necessary under SFAS 109. In the fourth quarter of 2005, the Company
also recorded an income tax benefit of $2.7 million as a result of a favorable
decision received in connection with a petition submitted in connection with
audit assessments made in 2002 and 2004 in a foreign jurisdiction.
As of December 31, 2005 the valuation allowances of $15.3 million include $11.1
million related to net operating loss carryforwards and $2.3 million for other
deductible temporary differences in foreign jurisdictions and $1.5 million for
state net operating loss carryforwards and $0.4 million for other state
deductible temporary differences. During the year ended December 31, 2005
valuation allowances increased $5,551,000 as a result of additional losses
incurred in foreign and state jurisdictions, net of reductions resulting from
changes in deferred tax assets due to changes in tax laws. Valuation allowances
decreased $1,301,000 in 2005 for carryforward losses utilized for which
valuation allowances had been previously provided. During the year ended
December 31, 2004 valuation allowances increased $1,373,000 as a result of
additional losses incurred and decreased $3,968,000 for carryforward losses and
tax credits utilized for which valuation allowances had been previously
provided.
The Company is routinely audited by federal, state and foreign tax authorities
with respect to its income taxes. The Company regularly reviews and evaluates
the likelihood of audit assessments and believes it has adequately accrued for
exposures for tax liabilities resulting from future tax audits. To the extent
the Company would be required to pay amounts in excess of reserves or prevail on
matters for which accruals have been established, the Companys effective
tax rate in a given period may be materially impacted. The Companys
federal income tax returns for fiscal years 2000 through 2004 are currently
being audited by the Internal Revenue Service. Although proposed adjustments
have not been received for these years and the outcome of in-progress tax audits
is always uncertain, management believes the ultimate outcome of the audit will
not have a material adverse impact on the Companys consolidated financial
statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|11. | COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
|--- | --------------------------------------------

| | Leases  The Company is obligated under operating lease
agreements for the rental of certain office and warehouse facilities and
equipment which expire at various dates through September 2026. The Company
currently leases one facility in New York from an entity owned by the
Companys three principal shareholders and senior executive officers (see
Note 4). The Company also acquires certain computer and communications equipment
pursuant to capital lease obligations.
At December 31, 2005, the future minimum annual lease payments for capital
leases and related and third-party operating leases were as follows (in
thousands):
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                             | Capital
Leases | Third Party
Operating
Leases | Related
Party
Operating
Lease | Total
|-------------------------------------------- | -------------- | ---------------------------- | ----------------------------- | -----
|2006                                         |                |                              | $                             | 387  
|2007                                         |                |                              |                               | 299  
|2008                                         |                |                              |                               | 126  
|2009                                         |                |                              |                               |      
|2010                                         |                |                              |                               |      
|2011-2015                                    |                |                              |                               |      
|2016-2020                                    |                |                              |                               |      
|Thereafter                                   |                |                              |                               |      
|                                             |                |                              |                               |      
|Total minimum lease payments                 |                |                              |                               | 812  
|Less: sublease rental income                 |                |                              |                               |      
|                                             |                |                              |                               |      
|Lease obligation net of subleases            |                |                              |                               | 812  
|                                             |                |                              |                               |      
|Less amount representing interest            |                |                              |                               | 13   
|                                             |                |                              |                               |      
|Present value of minimum capital lease       |                |                             
|payments (including current portion of $387) |                |                              | $                             | 799  
|                                             |                |                              |                               |      

| | Annual rent expense aggregated approximately $10,272,000, including $612,000 to
related parties, for 2005, $7,887,000, including $612,000 to related parties,
for 2004 and $7,693,000, including $612,000 to related parties, for 2003. Rent
expense for 2005 is net of sublease income of $848,000.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Litigation  Beginning on May 24, 2005, three shareholder
derivative lawsuits were filed, one in the United States District Court for the
Eastern District of New York and two in the Supreme Court of New York, County of
Nassau, against various officers and directors of the Company and naming the
Company as a nominal defendant in connection with the Companys
restatements of its fiscal year 2003 and 2004 financial statements. The
defendants and the Company denied all of the allegations of wrongdoing contained
in the complaints. On May 16, 2006, the parties entered into a stipulation of
settlement of this case. By order dated July 6, 2006 the United States District
Court for the Eastern District of New York approved the settlement and dismissed
the federal complaint with prejudice. Pursuant to the settlement the defendants
are released from liability and the Company will adopt certain corporate
governance principles including the appointment of a lead independent director
to, among other things, assist the Board of Directors in assuring compliance
with and implementation of the Company's corporate governance policies and pay
$300,000 of the legal fees of the plaintiffs. The plaintiffs were directed by
the U.S. District Court to move to dismiss the state court actions.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In August 2003 the Company entered into a settlement agreement with a software
developer of a new customer order management software system that was being
written for the Companys internal use. The specific terms of the
settlement agreement are confidential; however, none of the terms had a material
effect on the business or the consolidated financial statements of the Company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company has also been named as a defendant in other lawsuits in the normal
course of its business, including those involving commercial, tax, employment
and intellectual property related claims. Based on discussions with legal
counsel, management believes the ultimate resolution of these lawsuits will not
have a material effect on the Companys consolidated financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Contingency  The Company is required to collect sales tax on
certain of its sales. In accordance with current laws, approximately 17% of the
Companys 2005 domestic sales, 17% of the Companys 2004 domestic
sales and 16% of the 2003 domestic sales were subject to sales tax. Changes in
law could require the Company to collect sales tax in additional states and
subject the Company to liabilities related to past sales.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Employee Benefit Plans  The Companys U.S. subsidiaries
participate in a defined contribution 401(k) plan covering substantially all
U.S. employees. Employees may invest 1% or more of their eligible compensation,
limited to maximum amounts as determined by the Internal Revenue Service. The
Company provides a matching contribution to the plan, determined as a percentage
of the employees contributions. Aggregate expense to the Company for
contributions to such plans was approximately $455,000 in 2005, $436,000 in 2004
and $408,000 in 2003.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Foreign Exchange Risk Management  The Company has no
involvement with derivative financial instruments and does not use them for
trading purposes. The Company may enter into foreign currency options or forward
exchange contracts to hedge certain foreign currency transactions. The intent of
this practice would be to minimize the impact of foreign exchange rate movements
on the Companys operating results. As of December 31, 2005, the Company
had no outstanding forward exchange contracts.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fair Value of Financial Instruments  Financial instruments
consist primarily of investments in cash and cash equivalents, trade accounts
receivable, accounts payable and debt obligations. The Company estimates the
fair value of financial instruments based on interest rates available to the
Company and by comparison to quoted market prices. At December 31, 2005 and
2004, the carrying amounts of cash and cash equivalents, accounts receivable,
income taxes receivable and payable and accounts payable are considered to be
representative of their respective fair values due to their short-term nature.
The carrying amounts of the notes payable to banks and the term loan payable are
considered to be representative of their respective fair values as their
interest rates are based on market rates. The estimated fair value of the
Companys mortgage loan payable was $8.8 million at December 31, 2005 and
$9.0 million at December 31, 2004.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Concentration of Credit Risk  Financial instruments that
potentially subject the Company to concentrations of credit risk consist of
cash, cash equivalents and accounts receivable. The Companys excess cash
balances are invested with high credit quality issuers. Concentrations of credit
risk with respect to accounts receivable are limited due to the large number of
customers and their geographic dispersion comprising the Companys customer
base. The Company also performs on-going credit evaluations and maintains
allowances for potential losses as warranted.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12. | SEGMENT AND RELATED INFORMATION
|--- | -------------------------------

| | The
Company operates in one primary business as a reseller of business products to commercial
and consumer users. The Company operates and is internally managed in two operating
segments, Computer Products and Industrial Products. The Company has also separately
disclosed its costs associated with the development of the Companys new web-hosted
software application, for which no revenues have been recognized. The Companys chief
operating decision-maker is the Companys Chief Executive Officer. The Company
evaluates segment performance based on income from operations before net interest, foreign
exchange gains and losses, restructuring and other charges and income taxes. Corporate
costs not identified with the disclosed segments and restructuring and other charges are
grouped as Corporate and other expenses. The chief operating decision-maker
reviews assets and makes capital expenditure decisions for the Company on a consolidated
basis only. The accounting policies of the segments are the same as those of the Company
described in Note 1. 
Financial information relating to the Companys operations by reportable
segment was as follows (in thousands):
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               | Year Ended December 31,
|------------------------------ | -----------------------
|
|Net Sales:                     |                        
|Computer products              |                        
|Industrial products            |                        
|                               |                        
|Consolidated                   |                        
|                               |                        
|Depreciation Expense:          |                        
|Computer products              |                        
|Industrial products            |                        
|Software application           |                        
|Corporate                      |                        
|                               |                        
|Consolidated                   |                        
|                               |                        
|Income (Loss) from Operations: |                        
|Computer products              |                        
|Industrial products            |                        
|Software application           |                        
|Corporate and other expenses   |                        
|                               |                        
|Consolidated                   |                        
|                               |                        

Financial information relating to the
Companys operations by geographic area was as follows (in thousands):

|                    | Year Ended December 31,
|------------------- | -----------------------
|
|Net Sales:          |                        
|United States:      |                        
|Industrial products |                        
|Computer products   |                        
|                    |                        
|United States total |                        
|Other North America |                        
|Europe              |                        
|                    |                        
|Consolidated        |                        
|                    |                        

|                                          | Dec 31, 2005 | Dec 31, 2004
|----------------------------------------- | ------------ | ------------
|Long-lived Assets:                        |              |             
|North America - principally United States |              | $31,435     
|Europe                                    |              | 25,824      
|                                          |              |             
|Consolidated                              |              | $57,259     
|                                          |              |             

Net sales are attributed to countries based
on location of selling subsidiary.

* As previously restated  see Note 2.

|13. | BUSINESS COMBINATIONS AND GOODWILL
During the second quarter of 2003, the Company purchased the minority ownership
of its Netherlands subsidiary pursuant to the terms of the original purchase
agreement for approximately $2.6 million. All of the purchase price was
attributable to goodwill and, as a result of an impairment analysis, was written
off in accordance with SFAS 142 during that quarter.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|14. | SUBSEQUENT EVENTS
In December 2005, the Company entered into an agreement to sell its Suwanee,
Georgia distribution facility. The transaction closed in March 2006 and, as a
result, the Company repaid its mortgage note (see Note 7). The Company realized
a gain of approximately $7 million, net of a prepayment penalty on the mortgage,
which will be recognized in the Companys first quarter 2006 consolidated
financial statements.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15. | QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data is as follows (in thousands, except for per share
amounts):
|--- | -------------------------------------------------------------------------------------------------------------------------

|                             | First Quarter | Second Quarter | Third Quarter | Fourth Quarter
|---------------------------- | ------------- | -------------- | ------------- | --------------
|2005:                        |               |                |               |               
|Net sales                    |               | $537,908       |               | $506,142      
|Gross profit                 |               | $79,775        |               | $71,365       
|Net income                   |               | $2,638         |               | $1,522        
|Net income per common share: |              
|Basic                        |               | $.08           |               | $.04          
|Diluted                      |               | $.07           |               | $.04          

|                                           |  |          |  |         
|------------------------------------------ |  | -------- |  | --------
|2004: (as previously restated-see Note 2): |  |          |  |         
|Net sales                                  |  | $484,507 |  | $433,267
|Gross profit                               |  | $76,440  |  | $67,527 
|Net income                                 |  | $3,690   |  | $62     
|Net income per common share:               | 
|Basic                                      |  | $.11     |  | $.--    
|Diluted                                    |  | $.10     |  | $.--    

* * * * * * *

SYSTEMAX INC.

SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

For the years ended December 31:
(in thousands)

|Description                                            | Balance at
Beginning of
Period | Charged to
Expenses | Write-offs | Other  | Balance at
End of Period
|------------------------------------------------------ | ------------------------------ | ------------------- | ---------- | ------ | ------------------------
|                                                       |                                |                     |            |        |                         
|Allowance for sales returns and doubtful accounts
2005 |                                | $11,318             |            | $7,316 |                         
|2004                                                   |                                | $10,000             |            | $5,079 |                         
|2003                                                   |                                | $11,275             |            | $3,906 |                         
|                                                       |                                |                     |            |        |                         
|Reserve for excess and obsolete inventory
2005         |                                | $12,633             |            | $1,519 |                         
|2004                                                   |                                | $9,022              |            | $8,065 |                         
|2003                                                   |                                | $8,262              |            | $5,318 |                         
|                                                       |                                |                     |            |        |                         
|Allowance for deferred tax assets
2005                 |                               
|Current                                                |                                | $413                |            | $114   |                         
|Noncurrent (1)                                         |                                | $10,643             |            | $5,828 |                         
|2004                                                   |                               
|Current                                                |                                | $698                |            |        |                         
|Noncurrent                                             |                                | $12,953             |            | $1,147 |                         
|2003                                                   |                               
|Current                                                |                                | $1,570              |            |        |                         
|Noncurrent                                             |                                | $12,705             |            | $785   |                         
|                                                       |                                |                     |            |        |                         
|Product warranty provisions
2005                       |                                | $2,011              |            | $21    |                         
|2004                                                   |                                | $2,642              |            | $168   |                         
|2003                                                   |                                | $2,849              |            | $473   |                         

|(1) | Charges to expense are net of reductions resulting from changes in deferred tax
assets due to changes in tax laws.
|--- | ------------------------------------------------------------------------------------------------------------------

EXHIBIT INDEX

| | No. | Description
| | --- | -----------

# 

| | 10.18 | Amendment No. 1, dated as of December 19, 2005, to the Amended and Restated ,
dated as of October 27, 2005, between JP Morgan Chase Bank, N.A. and affiliates,
General Electric Capital Corporation, and GMAC Commercial Finance LLC (as
Lenders) with the Company and certain subsidiaries of the Company (as Borrowers)
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.19 | Lease agreement, dated December 8, 2005, between the Company and Hamilton
Business Center, LLC (Buford, Georgia facility)
| | ----- | -------------------------------------------------------------------------------------------------------------------------

| | 10.20 | First Amendment, dated as of June 12, 2006, to the Lease Agreement between the
Company and Hamilton Business Center, LLC (Buford, Georgia facility)
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.21 | First Amendment, dated as of February 1, 2006, to the Naperville Illinois Facility Lease
between the Company and Ambassador Drive LLC (current landlord)
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.22 | Agreement of Purchase and Sale, dated December 9, 2005, between the Company (as Seller)
and Hewlett Packard Company (as Buyer) (Suwanee, Georgia facility)
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | 21 | Subsidiaries of the Registrant
| | -- | ------------------------------

| | 23.1 | Consent of experts and counsel: Consent of Deloitte & Touche LLP
| | ---- | ----------------------------------------------------------------

| | 23.2 | Consent of experts and counsel: Consent of Ernst & Young LLP
| | ---- | ------------------------------------------------------------

| | 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
| | ---- | ------------------------------------------------------------------------------------------------------

| | 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
| | ---- | ------------------------------------------------------------------------------------------------------

| | 32.1 | Certification of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
| | ---- | ------------------------------------------------------------------------------------------------------

| | 32.2 | Certification of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
| | ---- | ------------------------------------------------------------------------------------------------------