SECURITIES AND EXCHANGE COMMISSION 
 
                      Washington, D. C. 20549 
 
                              FORM 10-Q 
 
 
[ X ]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  
         EXCHANGE ACT OF 1934. 
 
         FOR THE QUARTERLY PERIOD ENDED   November 2, 1996  . 
 
                                    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 0-15991 
 
 
                     INTELLIGENT ELECTRONICS, INC. 
                     ----------------------------- 
       (Exact name of registrant as specified in its charter) 
 
 
           Pennsylvania                              23-2208404    
    ------------------------------              -------------------  
    (State or other jurisdiction of               (IRS Employer 
    incorporation or organization)              Identification No.) 
 
 
 
          411 Eagleview Boulevard, Exton, PA          19341 
       ------------------------------------------------------ 
       (Address of principal executive offices)    (Zip Code) 
 
 
                           (610) 458-5500 
        ---------------------------------------------------- 
        (Registrant's telephone number, including area code) 
 
 
Indicate by check mark whether the registrant (1) has filed all reports  
required to be filed by Section 13 or 15(d) of the Securities Exchange Act  
of 1934 during the preceding 12 months (or for such shorter period that the  
registrant was required to file such reports), and (2) has been subject to  
such filing requirements for the past 90 days. 
 
                Yes __X__             No _____ 
 
Indicate the number of shares outstanding of each of the issuer's classes  
of common stock, as of the latest practicable date: 35,609,877 shares of  
Common Stock, par value $0.01 per share were outstanding at December 6,  
1996. 
<PAGE>
 
 
 
             Intelligent Electronics, Inc. and Subsidiaries 
 
                                 INDEX 
 
 
                                                            Page No. 
 
PART I.     FINANCIAL INFORMATION 
 
Item 1.     Financial Statements 
 
 
            Consolidated Balance Sheets 
 
               November 2, 1996 and February 3, 1996               3 
 
 
            Consolidated Statements of Operations  
 
               Three and Nine Months Ended November 2, 1996 
                and October 28, 1995                                4 
 
 
            Consolidated Statements of Cash Flows  
 
               Three and Nine Months Ended November 2, 1996 
                and October 28, 1995                                5 
 
 
            Notes to Consolidated Financial Statements              6 
 
 
Item 2.     Management's Discussion and Analysis of Financial  
              Condition and Results of Operations                  10 
 
 
PART II.    OTHER INFORMATION 
 
Item 2.     Changes in Securities                                  13 
 
Item 4.     Submission of Matters to a Vote of Security Holders    15 
 
Item 6.     Exhibits and Reports on Form 8-K                       15 
 
 
SIGNATURES                                                         16 


<PAGE>
 
<TABLE> 
<CAPTION> 
PART I - FINANCIAL INFORMATION                                                FORM 10-Q 
 
                              INTELLIGENT ELECTRONICS, INC. and Subsidiaries 
                                          Consolidated Balance Sheets 
                                 (in thousands, except share-related data) 
 
 
                                                             November 2,       February 3, 
                                                                1996               1996 
                                                             -----------       ----------- 
                                                             (unaudited) 
                                            Assets 
 
Current assets: 
  <S>                                                        <C>  <C>          <C> <C> 
  Cash and cash equivalents                                  $    58,823       $   34,618 
  Accounts receivable, net                                       194,750          192,687 
  Inventory                                                      309,911          346,058 
  Prepaid expenses and other current assets                        5,621            3,411 
  Deferred income taxes                                           16,902           16,041 
                                                             -----------       ---------- 
   Total current assets                                          586,007          592,815 
  
Property and equipment                                            56,991           68,213 
Intangible assets, primarily goodwill, net                        84,808          155,390 
Other assets                                                      18,193           22,931 
                                                             -----------       ----------  
     Total assets                                            $   745,999       $  839,349 
                                                             ===========       ========== 
 
                            Liabilities and Shareholders' Equity 
 
Current liabilities: 
  Short-term debt                                            $     4,599       $    8,744 
  Accounts payable                                               485,257          508,747 
  Accrued liabilities                                             46,399           49,718 
                                                             -----------       ---------- 
   Total current liabilities                                     536,255          567,209 
                                                             -----------       ---------- 
 
Long-term debt                                                    58,531           80,025 
Other long-term liabilities                                       18,779           14,079 
 
Commitments and contingencies 
 
Minority interest                                                 10,440                - 
 
Shareholders' equity: 
  Preferred stock $50 par value per share: 
    Authorized 200,000 shares,  5,000 shares 
     issued and outstanding                                          250                - 
  Common stock $.01 par value per share: 
    Authorized 100,000,000 shares, 
      issued and outstanding: 
      40,939,936 and 39,910,649 shares                               409              399 
  Additional paid-in capital                                     266,320          224,260 
  Treasury stock                                                 (67,650)         (68,207) 
  Retained earnings (deficit)                                    (77,335)          21,584 
                                                              ----------       ----------  
   Total shareholders' equity                                    121,994          178,036 
                                                              ----------       ----------  
     Total liabilities and shareholders' equity               $  745,999       $  839,349 
                                                              ==========        ========= 
 
See accompanying notes to consolidated financial statements. 
</TABLE> 
<PAGE>
<TABLE><CAPTION> 
                                  INTELLIGENT ELECTRONICS, INC. and Subsidiaries             FORM 10-Q 
                                       Consolidated Statements of Operations 
                                       (in thousands, except per-share data) 
                                                    (unaudited) 
 
                                                     Three months ended           Nine months ended 
                                                   -----------------------     ------------------------ 
                                                   November 2,  October 28,    November 2,  October 28, 
                                                      1996         1995           1996         1995 
                                                   -----------  -----------    -----------  -----------    
<S>                                                 <C>          <C>           <C>          <C> 
Revenues                                            $  861,986   $ 944,223     $ 2,612,988  $ 2,653,276 
 
Cost of goods sold                                     831,968     895,796       2,491,081    2,540,136 
                                                    ----------   ---------     -----------  ----------- 
    Gross profit                                        30,018      48,427         121,907      113,140 
                                                    ----------   ---------     -----------  ----------- 
Operating expenses: 
  Selling, general and administrative expenses          52,784      55,432         138,329      112,483 
  Amortization of intangibles, primarily goodwill        2,279       2,132           7,063        4,718 
  Branch closure costs                                   9,790           -           9,790            - 
  Impairment losses                                     61,576           -          61,576            - 
                                                    ----------   ---------     -----------  ----------- 
    Total operating expenses                           126,429      57,564         216,758      117,201 
                                                    ----------   ---------     -----------  ----------- 
Loss from operations                                   (96,411)     (9,137)        (94,851)      (4,061) 
 
Other income (expense): 
  Investment and other income (expense), net               (96)        (27)           (528)       1,654 
  Interest expense                                      (3,039)     (2,502)        (10,043)      (3,882) 
                                                    ----------   ---------     -----------  ----------- 
Loss before income tax benefit, equity in 
   loss of affiliate and minority interest             (99,546)    (11,666)       (105,422)      (6,289) 
 
Income tax benefit                                      (6,116)     (3,814)         (6,532)        (790) 
                                                    ----------   ---------     -----------  ----------- 
Loss before equity in loss of affiliate 
  and minority interest                                (93,430)     (7,852)        (98,890)      (5,499) 
 
Equity in loss of affiliate                                  -      (5,681)              -       (9,078) 
                                                    ----------   ---------     -----------  ----------- 
Loss before minority interest                          (93,430)    (13,533)        (98,890)     (14,577) 
                                                    ----------   ---------     -----------  ----------- 
 
Minority interest                                          (10)          -             (10)           - 
                                                    ----------   ---------     -----------  ----------- 
Net loss                                            $  (93,440)  $ (13,533)    $   (98,900) $   (14,577) 
                                                    ==========   =========     ===========  =========== 
Loss per common share                               $    (2.62)  $   (0.40)    $     (2.79) $     (0.45) 
                                                    ==========   =========     ===========  =========== 
 
Dividends declared per share                        $     0.00   $    0.10     $      0.00  $      0.30 
                                                    ==========   =========     ===========  =========== 
Weighted average number of common shares 
  and share equivalents outstanding:                    35,599      33,947          35,498       32,213 
 
See accompanying notes to consolidated financial statements. 
</TABLE> 
<PAGE>
<TABLE>  
<CAPTION> 
                 INTELLIGENT ELECTRONICS, INC. and Subsidiaries                FORM 10-Q 
                     Consolidated Statements of Cash Flows 
                                (in thousands)  
                                 (unaudited) 
                                                                  Nine months ended  
                                                              ------------------------- 
                                                              November 2,   October 28, 
                                                                  1996         1995 
                                                              -----------   ----------- 
CASH FLOWS FROM OPERATING ACTIVITIES: 
    <S>                                                       <C>           <C> 
    Net loss                                                  $ (98,900)    $ (14,577) 
    Adjustments to reconcile net loss to net cash 
       provided by (used for) operating activities: 
      Depreciation and amortization                              21,222        13,193 
      Write-down of property and equipment                        1,384         7,978 
      Impairment losses                                          61,576             - 
      Branch closure costs                                        9,790             - 
      Deferred taxes                                               (861)       (3,544) 
      Provision for losses on trade receivables                   3,944         1,717 
      Provision for write-down of inventory                       9,335         5,615 
      Minority interest in net income of XLConnect                   10             - 
      Equity in loss of affiliate                                     -         9,078 
      Changes in assets and liabilities: 
        Accounts receivable                                      (1,492)      (25,184) 
        Inventory                                                27,456       (13,608) 
        Other current assets                                      2,951         2,456 
        Accounts payable                                        (25,149)      (20,738) 
        Accrued liabilities                                       1,006         3,758 
                                                              -----------   ----------- 
    Net cash provided by (used for) operating activities         12,272       (33,856) 
                                                              -----------   ----------- 
CASH FLOWS FROM INVESTING ACTIVITIES: 
    Sales and maturities of marketable securities                     -         4,500 
    Acquisition of property and equipment, net of disposals     (11,560)      (29,726) 
    Other                                                           (88)         (351) 
                                                              -----------   ----------- 
    Net cash used for investing activities                      (11,648)      (25,577) 
                                                              -----------   ----------- 
CASH FLOWS FROM FINANCING ACTIVITIES: 
    Proceeds from long-term debt                                      -        75,000 
    Repayment of long-term debt                                 (20,000)            - 
    Net repayments from working capital advances                 (6,271)            - 
    Proceeds from initial public offering of subsidiary          45,254             - 
    Net proceeds from sale of preferred stock and warrants        4,692             - 
    Cash dividends paid                                               -        (9,417) 
    Repayment of FNOW's bank debt                                     -       (50,009) 
    Proceeds from exercise of stock options                       1,981         2,990 
    Proceeds from employee stock purchase plan                      247             - 
    Reduction in capital lease obligations                       (2,322)          (82) 
                                                              -----------   ----------- 
    Net cash provided by financing activities                    23,581        18,482 
                                                              -----------   ----------- 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS             24,205       (40,951) 
 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                 34,618        69,027 
                                                              -----------   ----------- 
CASH AND CASH EQUIVALENTS AT END OF PERIOD                    $  58,823     $  28,076 
                                                              ===========   =========== 
 
See accompanying notes to consolidated financial statements. 
</TABLE> 
<PAGE>
               Intelligent Electronics, Inc. and Subsidiaries 
 
                 Notes to Consolidated Financial Statements  
 
              (Dollars in thousands, except share-related data) 
 
                                 (unaudited) 
 
(1)       Basis of Presentation 
          --------------------- 
The consolidated financial statement information included herein is  
unaudited but, in the opinion of management, reflects all adjustments,  
consisting of normal recurring adjustments and changes in accounting  
estimates, necessary for a fair statement of the results for the interim  
periods presented.  These financial statements should be read in  
conjunction with the audited financial statements and notes thereto  
included in the Company's Annual Report on Form 10-K for the year ended  
February 3, 1996.   
 
 
(2)     Acquisition of Businesses 
        ------------------------- 
On August 17, 1995, the Company acquired The Future Now, Inc. ("FNOW") by  
issuing 2,952,282 shares of its Common Stock (valued at $36,534, excluding  
acquisition-related costs of approximately $1,700) in exchange for all of  
the remaining shares (approximately 69%) of FNOW Common Stock not  
previously owned by the Company.  The acquisition was accounted for using  
the purchase method and, accordingly, the operating results of FNOW have  
been included in the consolidated operating results since the date of  
acquisition.   
 
Unaudited pro forma results of operations of the Company for the three and  
nine months ended October 28, 1995, assuming the FNOW acquisition was  
consummated on January 29, 1995, are as follows: 
 
                        Three months                Nine months 
                            ended                      ended 
                       October 28, 1995          October 28, 1995 
                       ----------------          ---------------- 
     Revenues             $ 949,775                 $2,769,567 
     Net loss               (17,040)                   (25,242) 
     Loss per share           (0.46)                     (0.72)      
 
Pro forma financial information presented above is not necessarily  
indicative of the results of operations that would have occurred had the  
acquisition taken place at the beginning of the period presented or of  
future results of operations of the combined companies. 
 
On October 23, 1996, the Company issued 807,415 shares of its Common Stock  
in exchange for all of the common stock of E-C Computer Technical Services,  
Inc. ("E-C"), a computer reseller.  The merger has been accounted for as a  
pooling of interests and accordingly, the Company's consolidated financial  
statements for the nine months ended November 2, 1996 have been restated to  
include the accounts and operations of E-C.  The merger with E-C did not  
have a material effect on the Company's results of operations or financial  
position. Therefore, the prior year's Consolidated Balance Sheet and  
Statements of Operations and Cash Flows have not been restated.   
 
 
(3)     Branch Closure Costs 
        -------------------- 
During the quarter ended November 2, 1996, the Company closed the Direct  
hardware sales portion of five branch locations.  Four of these branches  
were acquired from FNOW in December 1994 and one was acquired from FNOW in  
August 1995 when the Company purchased the remaining 69% of FNOW.  As a  
result of these closures, the Company recorded an $8 million charge  
relating to the allocable portion of goodwill for these locations.  In  
addition to the goodwill write-down, the Company also recorded a charge of  
approximately $1.8 million to reflect the write-off of property and  
equipment and remaining lease obligations related to these branches.     
  
 
(4)     Impairment Losses 
        ----------------- 
During the quarter ended November 2, 1996, a decision to adopt open- 
sourcing was made by two of the Company's largest vendors.  These vendors'  
products have represented approximately 31% to 40% of the Company's revenues  
during the last several years.  Under open-sourcing, franchisees and other  
resellers are no longer required to purchase product exclusively from the  
Company.  This change and a trend of declining sales, gross margins,  
earnings and cash flows in the Indirect Business caused the Company to  
undertake a review of its long-lived assets in this business unit.  As a  
result of this review, which was based on estimated future cash flows of  
the business, it was determined that certain assets were impaired.  The  
Company determined that the carrying value of its goodwill relative to the  
Indirect Business will not be recovered from future operations.   
Accordingly, this goodwill, amounting to approximately $55.5 million, was  
written-off as of November 2, 1996.  This goodwill was recorded in 1988 and  
1989 with the acquisitions of Entre Computer Centers, Inc. ("Entre") and  
Connecting Point of America, Inc. ("CPA"), respectively.  Both Entre and CPA  
had substantial franchise operations when they were acquired.  
 
Also, as a result of this review it was determined that certain technology  
investments will not be fully recovered from estimated future cash flows.   
The Company's configuration software, primarily consisting of licenses  
purchased from a third party in 1994 for the use of this system, was  
written down to its estimated recoverable value.  This write-down,  
approximating $6 million, was due to a continuing trend of expenses  
exceeding revenues in this portion of the business and the introduction of  
competitive technology available through the use of the Internet. 
 
 
(5)     Third Quarter of Fiscal 1996 Charges 
        ------------------------------------ 
During the quarter ended November 2, 1996, the Company recorded charges  
totaling approximately $21.7 million. Approximately $15.7 million of these  
charges were recorded as cost of sales and relate to the following.  During  
the quarter ended November 2, 1996, a major customer of the Direct  
Business' rental program announced the adoption of a new technology  
platform resulting in the reassessment by the Company of the estimated  
future revenue stream under this program.  This resulted in an estimated  
shortfall in future rental revenue compared to the Company's future related  
lease obligations of approximately $8 million.  In addition, the Company  
provided for changes in estimates for inventory reserves ($3.2 million) and  
vendor payables and receivable issues ($4.5 million) in the Direct  
Business.  Charges recorded as selling, general and administrative expenses  
consist of reserves for certain accounts receivable in the Indirect  
Business ($2.2 million) and write-offs for unutilized property and  
equipment and miscellaneous accruals totaling approximately $3.8 million.  
 
 
(6)     Credit Facilities 
        ----------------- 
In April 1996, the Company's $270 million financing agreement was replaced  
by a new financing agreement, as amended, which has an eighteen month term  
and is renewable thereafter for successive six-month periods with the  
consent of the lender and allows for total borrowings of up to $225  
million, subject to a borrowing base formula.  A portion of this facility  
is classified as long-term with a due date of April 5, 1998.  The remaining  
portion of the facility can be used for inventory financing, equipment  
financing and working capital purposes.  On November 1, 1996, the interest  
rate for the short and long-term portions of this agreement was lowered to  
prime plus 0.875% and prime plus 1.5%, respectively. This facility also  
imposes certain financial covenants relating to working capital, tangible  
net worth, long-term debt to tangible net worth and fixed charge coverage.  
The Company has obtained a waiver for non-compliance with one of these  
covenants as of November 2, 1996.  During the quarter ended November 2,  
1996, the Company reduced its long-term borrowing under this facility to  
$55 million. 
 
 
(7)     Initial Public Offering of XLConnect Solutions, Inc. 
        ---------------------------------------------------- 
On October 17, 1996, XLConnect Solutions, Inc. ("XLConnect"), formerly a  
wholly-owned subsidiary, completed an initial public offering of 3,330,000  
shares of its common stock at $15 per share, raising approximately $45.3  
million, net of offering costs.  As a result of this offering, the Company  
now owns 80.0% of XLConnect.  The net proceeds were primarily used by  
XLConnect to repay intercompany obligations to the Company.  The Company  
repaid $20 million of its long-term debt and used the remainder for working  
capital purposes. 
 
 
(8)     Preferred Stock 
        --------------- 
On October 16, 1996, the Company sold 5,000 shares of its Series B  
Convertible Preferred Stock ("Preferred Stock") and warrants to purchase  
225,000 shares of its Common Stock in a private placement for $5 million  
(approximately $4.7 million, net of fees and expenses).  In addition, the  
investor has agreed, subject to satisfaction of certain conditions  
including the effectiveness of a registration statement covering the resale  
of the Common Stock issuable upon the conversion of the Preferred Stock and  
the exercise of the warrants, to purchase an additional 10,000 shares of  
Preferred Stock and warrants to purchase 225,000 shares of Common Stock,  
for $10 million.  Assuming the sale of the additional shares of Preferred  
Stock and warrants (but not assuming any exercise of the warrants), the net  
proceeds to the Company from the private placement will be approximately  
$14.3 million after fees and expenses.   
 
The Preferred Stock is convertible into Common Stock at the option of the  
holder at a conversion ratio based on the average trading prices of the  
Company's Common Stock, but in any event not exceeding $9.175 per share  
(subject to anti-dilution adjustments), and converts automatically into  
Common Stock in five years.  The warrants sold on October 16, 1996 are  
exercisable for five years at an exercise price of $11.469 per share.  The  
warrants to be issued in connection with the issuance of the additional  
10,000 shares of Preferred Stock will have an exercise price based on the  
average trading prices of the Company's Common Stock prior to the issuance  
of the warrants. 
 
 
(9)       Common Stock Dividends 
          ---------------------- 
In the fourth quarter of fiscal 1995, the Board of Directors suspended the  
Company's quarterly dividend.  There is no assurance that the quarterly  
dividend will be resumed.  Any resumption will depend upon the Company's  
financial performance, capital requirements, financial condition and other  
relevant factors.  
 
On October 26, 1995, the Board of Directors declared a $0.10 per share cash  
dividend to shareholders of record on November 15, 1995, which was paid on  
December 1, 1995. 
 
On July 27, 1995, the Board of Directors declared a $0.10 per share cash  
dividend to shareholders of record on August 15, 1995, which was paid on  
September 1, 1995. 
 
 
(10)       Supplemental Cash Flow Information 
           ---------------------------------- 
Cash payments during the nine-month periods ended November 2, 1996 and  
October 28, 1995 included interest of $14,081 and $2,046, respectively, and  
income taxes of $155 and $2,633, respectively.   
 
During the quarter ended November 2, 1996, the Company entered into capital  
leases totaling $496 for computer equipment and services. 
 
 
(11)       Contingencies 
           ------------- 
In December 1994, several class action lawsuits were filed in the United  
States District Court for the Eastern District of Pennsylvania against the  
Company and certain directors and officers.  On February 13, 1996, the  
Court certified the class for these lawsuits as purchasers of Common Stock  
from January 29, 1991 through December 5, 1994.  These lawsuits have been  
consolidated with a class action lawsuit filed several years ago against  
the Company, certain directors and officers, and the Company's auditors in  
the United States District Court for the Eastern District of Pennsylvania.  
 A derivative lawsuit was also filed in December 1994 in the Court of  
Common Pleas of Philadelphia County against the Company and certain of its  
directors and officers.  These lawsuits allege violations of certain  
disclosure and related provisions of the federal securities laws and breach  
of fiduciary duties, including allegations relating to the Company's  
practices regarding vendor marketing funds, and seek damages in unspecified  
amounts as well as other monetary and equitable relief.  In addition, the  
Company is subject to a Securities and Exchange Commission investigation.   
The Company believes that all such allegations and lawsuits are without  
merit and is defending against them vigorously.  While management of the  
Company, based on its investigation of these matters and consultations with  
counsel, believes resolution of these matters will not have a material  
adverse effect on the Company's financial position, the ultimate outcome of  
these matters cannot presently be determined. 
 
In addition, the Company is involved in various litigation matters in the  
ordinary course of business.  The Company believes that it has meritorious  
defenses in and is vigorously defending against all such matters. 
 
During fiscal 1994, based in part on the advice of legal counsel, the  
Company established a reserve of $9 million in respect of all litigation  
matters, some of which has been used to pay legal fees and settle various  
claims and suits during fiscal 1995 and fiscal 1996.  Although the  
aggregate amount of the claims may exceed the amount of the reserve,  
management believes that the resolution of these matters will not have a  
material adverse effect on the Company's financial position. 
<PAGE>
 
Item 2.  Management's Discussion and Analysis of Financial Condition and  
         Results of Operations 
 
Results of Operations 
--------------------- 
The following table shows revenues by division for the indicated periods  
(in millions). 
 
<TABLE> 
<CAPTION> 
 
                                 Quarter ended               Nine months ended        
                             November 2,  October 28,    November 2,    October 28, 
                                1996          1995          1996           1995  
                             -----------  -----------    -----------   ------------ 
<S>                          <C>     <C>  <C>     <C>    <C>   <C>     <C>    <C> 
Indirect Business            $       798  $       863    $     2,406   $      2,537 
Direct Business                      194          180            616            260 
Intercompany eliminations *         (130)         (99)          (409)          (144)  
                             -----------  -----------    -----------   ------------ 
Total revenues               $       862  $       944    $     2,613   $      2,653 
                             ===========  ===========    ===========   ============ 
</TABLE> 
* Intercompany eliminations consist primarily of sales from the Indirect  
  Business to the Direct Business. 
  
Revenues decreased 9% for the quarter ended November 2, 1996 ("Q3 1996")  
compared to the quarter ended October 28, 1995 ("Q3 1995"). The decrease in  
revenues from Q3 1995 to Q3 1996 was primarily due to less revenues  
generated by the Company's Indirect Business (sales to resellers),  offset  
in part by increased revenues generated by the Company's Direct Business  
(the former operations of FNOW), which includes hardware sales and services  
to end users.  Revenues for the nine months ended November 2, 1996  
decreased slightly from the nine months ended October 28, 1995.  The  
decrease in revenues from the Indirect Business for the periods presented  
was due primarily to certain manufacturers' products being constrained in  
1996 and decreased sales to existing resellers as a result of open-sourcing  
and continued consolidation in the reseller channel.  The inclusion of the  
Direct Business for all three quarters in fiscal 1996 compared to only ten  
weeks in fiscal 1995 was the primary reason for the increase in revenues in  
the Direct Business.  
 
The following table shows gross margin as a percent of revenues by division  
for the indicated periods. 
 
<TABLE> 
<CAPTION> 
 
                                                                 Nine months ended   
                                                            November 2,     October 28,  
                                 Q3 1996       Q3 1995         1996             1995          
                                ---------     ---------     -----------     ----------- 
<S>                                <C>           <C>            <C>             <C> 
Indirect Business                  2.6%          3.5%           2.7%            3.3% 
Direct Business                    5.0          10.0            9.2            11.5   
                                ---------     ---------     -----------     ----------- 
Total gross margin percent         3.5%          5.1%           4.7%            4.3% 
                                =========     =========     ==========      =========== 
</TABLE> 
 
The decrease in gross margin percent for the Direct Business for Q3 1996  
and the nine months ended November 2, 1996 compared to the same periods  
last year was primarily due to approximately $15.7 million of charges  
recorded in Q3 1996.  During Q3 1996, a major customer of the Direct  
Business' rental program announced the adoption of a new technology  
platform resulting in the reassessment by the Company of the estimated  
future revenue stream under this program. This resulted in an estimated  
shortfall in future rental revenue compared to the Company's future related  
lease obligations of approximately $8 million.  In addition, charges for  
changes in estimates for inventory reserves ($3.2 million) and vendor  
payables and receivable issues ($4.5 million) in the Direct Business were  
also recorded.  Excluding these charges, the gross margin percent for the  
Direct Business for Q3 1996 and the nine months ended November 2, 1996  
would have been 13.1% and 11.8%, respectively, reflecting an increase in  
revenues from the services sector (XLConnect) of the Direct Business, which  
generates a higher gross margin percent.  In the Indirect Business,  
increased freight and configuration costs and continued competitive  
pressures were primarily responsible for the decline in gross margin  
percent for Q3 1996 and the nine months ended November 2, 1996 compared to  
the same periods last year.  Exclusive of the charges recorded in Q3 1996,  
consolidated gross margin percent would have been 5.3% for Q3 1996 and the  
nine months ended November 2, 1996.  These changes from the comparable  
periods of the prior year were primarily attributable to the higher  
proportion of total revenues generated by the Direct Business, resulting  
from the inclusion of the Direct Business, which realizes a higher gross  
margin percent, for all three quarters in the current fiscal year,  
partially offset by continued competitive pricing pressures in both the  
Indirect and Direct Businesses.  Competitive pressures and their impact on  
margins are expected to continue in the future. 
 
Selling, general and administrative expenses decreased to $52.8 million  
(6.1% of revenues) for Q3 1996 from $55.4 million (5.9% of revenues) for Q3  
1995.  In Q3 1995, charges of approximately $15 million were incurred,  
consisting primarily of severance costs in connection with a reduction in  
the Company's workforce and a charge related to certain management  
information systems projects.  In Q3 1996, charges of approximately $6.0  
million were recorded consisting of reserves for certain account receivable  
in the Indirect Business ($2.2 million) and unutilized property and  
equipment and miscellaneous accruals.  Excluding the charges, selling,  
general and administrative expenses would have been approximately $46.8  
million in Q3 1996 compared to approximately $40.4 million in Q3 1995,  
primarily as a result of higher support costs required in the Direct  
Business, which was included for the full quarter in Q3 1996 compared to  
only ten weeks in Q3 1995. 
 
For the nine months ended November 2, 1996, selling, general and  
administrative expenses increased to $138.3 million (5.3% of revenues)  
compared to $112.5 million (4.2% of revenues) for the same period last  
year.  After considering the charges booked in both Q3 1996 and Q3 1995  
discussed above, the primary reasons for the change were the inclusion of  
operating costs for the Direct Business for the full nine months of fiscal  
1996 compared to only ten weeks in fiscal 1995 and increased depreciation  
in the Indirect Business related to the implementation of certain  
management information systems, offset by the savings realized as a result  
of the workforce reductions which took place in Q3 1995.  Depreciation  
expense in the Indirect Business was $9.3 million for the nine months ended  
November 2, 1996 compared to $6.3 million for the nine months ended October  
28, 1995.  It is anticipated that the workforce reductions and other cost  
control measures implemented by the Company will somewhat mitigate the  
higher selling, general and administrative costs required to support the  
operations of the Direct Business.   
  
During the quarter ended November 2, 1996, the Company closed the Direct  
hardware sales portion of five branch locations.  Four of these branches  
were acquired from FNOW in December 1994 and one was acquired from FNOW in  
August 1995 when the Company purchased the remaining 69% of FNOW.  As a  
result of these closures, the Company recorded an $8 million charge  
relating to the allocable portion of goodwill for these locations.  In  
addition to the goodwill write-down, the Company also recorded a charge of  
approximately $1.8 million to reflect the write-off of property and  
equipment and remaining lease obligations related to these branches. 
 
During the quarter ended November 2, 1996, a decision to adopt open- 
sourcing was made by two of the Company's largest vendors.  These vendors'  
products have represented approximately 31% to 40% of the Company's revenues  
during the last several years.  Under open-sourcing, franchisees and other  
resellers are no longer required to purchase product exclusively from the  
Company.  This change and a trend of declining sales, gross margins,  
earnings and cash flows in the Indirect Business caused the Company to  
undertake a review of its long-lived assets in this business unit.  As a  
result of this review, which was based on estimated future cash flows of  
the business, it was determined that certain assets were impaired.  The  
Company determined that the carrying value of its goodwill relative to the  
Indirect Business will not be recovered from future operations.   
Accordingly, this goodwill, amounting to approximately $55.5 million, was  
written-off as of November 2, 1996.  This goodwill was recorded in 1988 and  
1989 with the acquisitions of Entre Computer Centers, Inc. ("Entre") and  
Connecting Point of America, Inc. ("CPA"), respectively.  Both Entre and CPA  
had substantial franchise operations when they were acquired.  
 
Also, as a result of this review it was determined that certain technology  
investments will not be fully recovered from estimated future cash flows.   
The Company's configuration software, primarily consisting of licenses  
purchased from a third party in 1994 for the use of this system, was  
written down to its estimated recoverable value.  This write-down,  
approximating $6 million, was due to a continuing trend of expenses  
exceeding revenues in this portion of the business and the introduction of  
competitive technology available through the use of the Internet. 
 
Amortization of intangibles increased for both the quarter and nine months  
ended November 2, 1996 compared to the same periods last year due to  
goodwill related to the acquisition of the Direct Business.   
 
Investment and other income (expense) declined for the quarter and nine  
months ended November 2, 1996 compared to the same periods last year.  This  
decline is primarily attributable to the use of available cash during  
fiscal 1995 for the payment of cash dividends, capital expenditures and the  
repayment of FNOW's bank and finance company debt following the acquisition  
in August 1995. Interest expense increased for the quarter and nine months  
ended November 2, 1996 as a result of the Company's more frequent use of  
its available financing arrangements for inventory financing and working  
capital purposes, higher average borrowing rates and the addition of  
$75 million of long-term debt in October 1995. 
 
The Company's effective tax rate was a 6.1% benefit for Q3 1996 compared to  
a 32.7% benefit for Q3 1995.  For the nine months ended November 2, 1996,  
the effective tax rate was a 6.2% benefit compared to a 12.6% benefit for  
the same period last year.  The effect of the non-deductible write-down of  
goodwill and goodwill amortization on the pre-tax loss and the recording of  
a reserve against the tax benefit of the charges recorded in the Direct  
Business in the current year were the primary reasons for the differences  
in the effective tax rate. 
 
Liquidity and Capital Resources 
------------------------------- 
The Company has financed its growth to date from stock offerings, bank and  
subordinated borrowings, inventory financing and internally generated  
funds.  The principal uses of its cash have been to fund its accounts  
receivable and inventory, make acquisitions, repurchase common stock, make  
investments in systems technology and pay cash dividends.   
 
During the nine months ended November 2, 1996, the Company's operating  
activities generated $12.3 million in cash primarily due to a reduction in  
inventory in both the Indirect and Direct Businesses.  At November 2, 1996,  
the Company had cash and cash equivalents totaling $58.8 million ($34.6  
million at February 3, 1996).  Working capital totaled $49.8 million at  
November 2, 1996 compared to $25.6 million at February 3, 1996.  The  
Company has a $225 million financing agreement with a finance company, of  
which approximately $21.5 million was available at November 2, 1996 after  
considering the borrowing base formula, working capital advances and trade  
payables outstanding to a vendor related to the finance company. 
 
In the fourth quarter of fiscal 1995, the Board of Directors suspended the  
Company's quarterly dividend.  There is no assurance that the quarterly  
dividend will be resumed.  Any resumption will depend upon the Company's  
financial performance, capital requirements, financial condition and other  
relevant factors.  
 
The Board of Directors had previously authorized the repurchase, in open- 
market transactions, of up to 13.6 million shares of the Company's Common  
Stock.  As of December 12, 1994, the Company had repurchased approximately  
8.3 million shares at a cost of approximately $105.7 million and no  
repurchases have been made since that date.  Approximately 3 million of the  
repurchased shares were reissued in connection with the acquisition of  
FNOW.  The Company currently has no plans to repurchase additional shares  
of its Common Stock. 
 
On October 16, 1996, the Company sold 5,000 shares of Preferred Stock and  
warrants to purchase 225,000 shares of its Common Stock in a private  
placement for $5 million (approximately $4.7 million, net of fees and  
expenses).  In addition, the investor has agreed, subject to satisfaction  
of certain conditions including the effectiveness of a registration  
statement covering the resale of the Common Stock issuable upon the  
conversion of the Preferred Stock, to purchase an additional 10,000 shares  
of Preferred Stock and warrants to purchase 225,000 shares of Common Stock,  
for $10 million.  Assuming the sale of the additional shares of Preferred  
Stock and warrants (but not assuming any exercise of the warrants), the net  
proceeds to the Company from the private placement will be approximately  
$14.3 million after fees and expenses.   
 
On October 17, 1996, XLConnect completed an initial public offering of  
3,330,000 shares of its common stock at $15 per share, raising  
approximately $45.3 million, net of offering costs.  As a result of this  
offering, the Company now owns 80.0% of XLConnect. The net proceeds were  
primarily used by XLConnect to repay intercompany obligations to the  
Company.  The Company repaid $20 million of its long-term debt and used the  
remainder for working capital purposes. 
 
Based on the Company's current level of operations and capital expenditures  
requirements, management believes that the Company's cash, internally- 
generated funds and available financing arrangements and opportunities will  
be sufficient to meet the Company's cash requirements at least for the next  
twelve months.  
 
Forward Looking Statements 
-------------------------- 
The matters discussed in this Form 10-Q that are forward looking statements  
are based on current management expectations that involve risks and  
uncertainties.  Potential risks and uncertainties include, without  
limitation: the impact of economic conditions generally and in the industry  
for microcomputer products and services; the potential decline in the level  
of demand for the Company's products and services; the potential  
termination or non-renewal of a supply agreement with a major vendor;  
continued competitive and pricing pressures in the industry; product supply  
shortages; open sourcing of products from vendors; rapid product  
improvement and technological change, short product life cycles and  
resulting obsolescence risks; legal proceedings; and the risk of  
unavailability of adequate capital or financing. 
 
 
Inflation and Seasonality 
------------------------- 
The Company believes that inflation has not had a material impact on its  
operations or liquidity to date.  The Company's financial performance does  
not exhibit significant seasonality, although certain computer product  
lines and the Direct business follow a seasonal pattern with peaks  
occurring near the end of the calendar year. 
 
 
 
 
 
                         Part II - Other Information 
 
Item 2. Changes in Securities 
        --------------------- 

B.

On October 16, 1996, the Company issued 5,000 shares of its Series B  
Convertible Preferred Stock  ("Preferred Stock"), stated value $1,000 per  
share ("Stated Value").  The Preferred Stock ranks prior to the Company's  
common stock, par value $.01 per share ("Common Stock") and prior to any  
class or series of capital stock of the Company thereafter created (unless,  
with the consent of the holders of the Preferred Stock, such class or  
series of capital stock specifically, by its terms, ranks senior to or on a  
par with the Preferred Stock).  The Series B Preferred Stock will bear no  
dividends, however, the Preferred Stock is subject to a premium as described 
below.  The holders of the Preferred Stock have no voting power, except as 
otherwise required by the Pennsylvania Business Corporation Law of 1988, as 
amended. 
      
The Preferred Stock is convertible into Common Stock at the option of any  
holder thereof at any time and from time to time (an "Optional  
Conversion"), into such number of shares of Common Stock as is determined  
by dividing (i) the sum of (A) the Stated Value thereof, plus (B) the Premium 
Amount (as defined below), unless the Company has timely redeemed such Premium 
Amount in cash as described below, by (ii) the then effective Conversion Price 
(as defined below).  The "Premium Amount" shall be the product of the Stated 
Value, multiplied by .06, multiplied by a fraction, the numerator of which is 
"N" and the denominator of which is 365 (where "N" equals the number of days 
elapsed from the date of issuance of the Preferred Stock to and including the 
conversion date).  The "Conversion Price" shall be the lesser of (i) the 
average of the closing bid prices for the Common Stock as reported by the 
Nasdaq National Market ("NASDAQ-NM"), or on the principal securities exchange 
or other securities market on which the Common Stock is then being traded, for 
the five consecutive Trading Days (as defined below) ending one Trading Day  
prior to the Conversion Date (as defined below) , and (ii) $9.175 (subject  
to equitable adjustments from time to time pursuant to the anti-dilution  
provisions contained in the Statement With Respect to Shares relating to  
the Preferred Stock filed with the Pennsylvania Secretary of State (the  
"Statement")).  "Trading Day" shall mean any day on which the Common Stock  
is traded for any period on NASDAQ-NM, or on the principal securities  
exchange or other securities market on which the Common Stock is then being  
traded.  Each share of Preferred Stock issued and outstanding on October  
15, 2001 automatically shall be converted into shares of Common Stock on such  
date at the then effective Conversion Price (the "Automatic Conversion").   
The Company shall have the right, in its sole discretion, in the event of  
an Optional Conversion or an Automatic Conversion to redeem all or any portion 
of the Premium Amount subject to such conversion for a sum of cash equal to the 
Premium Amount being so redeemed. 
      
Upon any liquidation, dissolution or winding up of the Company, no  
distribution shall be made to the holders of Common Stock unless prior  
thereto, the holders of Preferred Stock shall have received the Liquidation  
Preference with respect to each share of Preferred Stock.  The "Liquidation  
Preference" with respect to a share of Preferred Stock shall be equal to  
the sum of the Stated Value thereof plus an amount equal to six percent per  
annum of such Stated Value for the period beginning on the date of issuance  
of such share and ending on the date of final distribution to the holder  
thereof.  At the option of any holder of Preferred Stock, the sale,  
conveyance or disposition of all or substantially all of the assets of the  
Company, the effectuation of a transaction or series of related  
transactions approved by the Company's Board of Directors through either a  
resolution of the Board or a redemption of rights granted under the Rights  
Agreement dated as of March 22, 1996 by and between the Company and  
Chemical Mellon Shareholder Services L.L.C. or any successor agreement in  
which more than 50% of the voting power of the Company is disposed of, or  
the consolidation, merger or other business combination of the Company with  
or into any other person or entity when the Company is not the survivor  
shall either: (i) be deemed to be a liquidation, dissolution or winding up  
of the Company; or (ii) give each such holder the right to receive upon  
conversion of the Preferred Stock, in lieu of the shares of Common Stock  
immediately theretofore issuable upon conversion, such stock, securities or  
assets which the holders of Preferred Stock would have been entitled to  
receive in such transaction had the Preferred Stock been converted in full  
immediately prior to such transaction.   
      
The Statement contains certain protective provisions and also provides for  
the Company to pay certain penalties to the holders of  Preferred Stock in  
the event it is unable to, or otherwise does not, perform its obligations  
as required under the Statement under certain circumstances. 
      
The transaction in which the Preferred Stock was issued is described in the  
Company's Current Report on Form 8-K dated October 16, 1996 filed with the  
Securities and Exchange Commission, to which the Statement was filed as an  
exhibit.  The within summary description of the Preferred Stock does not  
purport to be a complete description of the terms of the Preferred Stock.   
A complete description of  the rights, preferences, designations and  
privileges of the Preferred Stock is contained in the Statement, which is  
incorporated herein by reference. 


C.  

On October 16, 1996, the Company raised $5,000,000 by the sale of 5,000 shares
of Preferred Stock and Warrants to purchase 225,000 shares of its Common
Stock in a private placement.  In addition, the investor has agreed, subject
to the satisfaction of certain conditions, to purchase an additional 10,000
shares of Preferred Stock and Warrants to purchase 225,000 shares of Common
Stock, for $10,000,000.  Included among the conditions is the effectiveness
of a registration statement to be filed with the Securities and Exchange
Commission to register the resale of the Common Stock issuable upon conversion
of the Preferred Stock and the exercise of the Warrants.  Assuming the sale
of the additional shares of Preferred Stock and Warrants (but not assuming
any exercise of the Warrants), the net proceeds to the Company from the
private placement will be approximately $14,330,000 after deduction of
placement fees and transaction expenses.  The placement agents in the
private placement were Susquehanna Financial Group, Inc. and Janney
Montgomery Scott, Inc.

The conversion, redemption, liquidation and other rights of the holders
of Preferred Stock are described above in response to Part II, Item 2(B)
of this Report.  The Warrants to be issued in connection with the issuance
of the additional 10,000 shares of Preferred Stock will have an exercise
price based on average trading prices of the Company's Common Stock prior
to the issuance of the Warrants.

<PAGE>
 
Item 4. Submission of Matters to a Vote of Security Holders      
        ---------------------------------------------------      
        The Annual Meeting of Shareholders of the Company was held on August  
22, 1996.  Shareholders voted on the following item:        
 
        (a) For the Election of Directors: 
 
<TABLE> 
<CAPTION>      
                                      Term             Votes              Votes        Broker 
                Director            Expiration          For              Withheld     Non-Votes 
          ---------------------     ----------       ----------          --------     --------- 
          <S>                          <C>           <C>                  <C>             <C> 
          Christopher T.G. Fish        1999          30,544,318           336,154         0 
          Gregory A. Pratt             1999          30,537,570           342,902         0      
          Richard D. Sanford           1999          30,538,238           342,234         0 
 
</TABLE> 
           
          Other directors whose term of office as a director continued after  
the meeting were as follows: 
           
          Barry M. Abelson 
          Roger J. Fritz 
          Arnold S. Hoffman 
          William E. Johnson 
          John A. Porter 
          William L. Rulon-Miller 
          Alex A.C. Wilson  (resigned effective September 12, 1996) 
 
 
Item 6. Exhibits and Reports on Form 8-K 
        -------------------------------- 
       (a)  Exhibits 
   
       * 3. Statement with Respect to Shares of the Company, filed with the  
Pennsylvania Secretary of State on October 16, 1996. (Exhibit 99.2 to  
the Company's Current Report on Form 8-K dated October 16, 1996.)  
 
       (b)  Reports on Form 8-K. 
 
            The Company's Report on Form 8-K dated October 16, 1996 reporting,  
under Item 5, the sale of 5,000 shares of Preferred Stock and  
Warrants and the initial public offering of shares of common stock of  
XLConnect Solutions, Inc., a subsidiary of the Company. 
 
 
 
 
 
 
____________________________________________________ 
*  Incorporated by reference 
 
<PAGE>
                  
                               SIGNATURES 
                               ---------- 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the  
Company has duly caused this report to be signed on its behalf by the  
undersigned thereunto duly authorized. 
 
 
 
 
                                           Intelligent Electronics, Inc. 
 
 
 
                                           /s/ Thomas J. Coffey        
                                           ------------------------------ 
                                           Thomas J. Coffey 
                                           Senior Vice President, Chief 
                                           Financial Officer and  
                                           Chief Accounting Officer 
 
 
 
 
 
Date:  December 17, 1996